-----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, Ko8pvdNC27fMDcvurVTi2vhTp8id1rKPUcO1pEE4k1GRKQ0bME/VYxc38SDNWI5z 3tz00cJDl/hAF824/o6v7A== 0000865722-06-000014.txt : 20060518 0000865722-06-000014.hdr.sgml : 20060518 20060518152122 ACCESSION NUMBER: 0000865722-06-000014 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060518 DATE AS OF CHANGE: 20060518 EFFECTIVENESS DATE: 20060518 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: 06851976 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 0000865722 S000008750 Emerging Markets Series C000023824 Advisor Class TEEMX 0000865722 S000008751 Foreign Equity Series C000023825 Advisor Class TFEQX 0000865722 S000008752 Foreign Smaller Companies Series C000023826 Advisor Class TFSCX 0000865722 S000008753 Franklin Templeton Non-U.S. Core Equity Series C000023827 Advisor Class N-CSR/A 1 tifi-ncsramd_1205.txt TIFI AMENDED N-CSR PE 12/31/05 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) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 --------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (954) 527-7500 -------------- Date of fiscal year end: 12/31 -------- Date of reporting period: 12/31/05 ----------- ITEM 1. REPORTS TO STOCKHOLDERS. FOREIGN EQUTIY SERIES ANNUAL REPORT 12/31/2005 - -------------------------------------------------------------------------------- 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 ....................................... 1 Performance Summary .............................................. 6 Your Fund's Expenses ............................................. 8 Financial Highlights and Statement of Investments ................ 10 Financial Statements ............................................. 16 Notes to Financial Statements .................................... 19 Report of Independent Registered Public Accounting Firm .......... 27 Tax Designation .................................................. 28 Board Members and Officers ....................................... 31 Shareholder Information .......................................... 38 - -------------------------------------------------------------------------------- ANNUAL REPORT TIFI FOREIGN EQUITY SERIES YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Foreign Equity Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in foreign (non-U.S.) equity securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Europe ................................................................. 62.0% Asia ................................................................... 23.6% North America .......................................................... 4.4% Australia & New Zealand ................................................ 2.5% Middle East & Africa ................................................... 1.8% Latin America .......................................................... 1.2% Short-Term Investments & Other Net Assets .............................. 4.5% - -------------------------------------------------------------------------------- This annual report for Templeton Institutional Funds, Inc. (TIFI) Foreign Equity Series (the Fund) covers the fiscal year ended December 31, 2005. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. Annual Report | 1 PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Financials 22.4% Consumer Discretionary 12.6% Industrials 12.2% Telecommunication Services 10.0% Materials 8.3% Information Technology 7.6% Energy 7.3% Health Care 6.3% Utilities 5.5% Consumer Staples 3.3% Short-Term Investments & Other Net Assets 4.5% PERFORMANCE OVERVIEW For the year under review, the Fund posted a +13.61% cumulative total return. The Fund underperformed its benchmarks, the Morgan Stanley Capital International (MSCI) All Country (AC) World ex US Index and the MSCI Europe, Australasia, Far East (EAFE) Index, which posted total returns of +17.11% and +14.02% for the same period.(1) Please note that index performance information is provided for reference and that we do not attempt to track an index, but rather undertake investments on the basis of fundamental research. You can find the Fund's long-term performance data in the Performance Summary beginning on page 6. ECONOMIC AND MARKET OVERVIEW The global economy overcame fears of derailment generated by higher energy costs and advanced at a solid clip during 2005, with signs of firming recoveries in Europe and Japan. Excluding the volatile energy and food sectors, inflation remained relatively subdued worldwide, and monetary policy remained fairly accommodative. The U.S. Federal Reserve Board raised the short-term federal funds target rate with eight quarter-point increases, bringing it to 4.25%. The European Central Bank (ECB) made one quarter-point rise in short-term rates, its first increase after keeping rates at historically low levels for more than two and a half years. Even after the increases, both rates remained at levels considered accommodative for economic growth. Strong demand for oil sustained high prices during most of the year, while prices for other commodities such as industrial metals were also high, led by copper, whose contract price rose 45.4% during 2005.(2) This contributed to economic growth in countries such as Australia and Canada, and emerging markets in Asia and Latin America that are tied to mining and industrial commodities. (1) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: New York Mercantile Exchange. 2 | Annual Report In this environment, global equity markets performed strongly, particularly outside the U.S. One-year total return for the MSCI AC World ex US Index was +17.11% in U.S. dollar terms.(3) By comparison the total return for the MSCI USA Index was +5.72%.(4) In terms of sectors, energy and materials led equity market performance, and telecommunication services and consumer-related sectors lagged. Among developed countries, the Japanese equity market performed well, returning +44.70% in local currency terms for the year under review.(4) However, this market benefited primarily from investors outside Japan, and the return was significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast, the conversion into dollars enhanced equity market returns in Brazil (+57.04%), Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the consensus of many analysts appeared to be that the U.S. dollar would decline in value relative to major currencies. In fact, for the year the dollar appreciated versus the yen, the euro, the pound and most other currencies. INVESTMENT STRATEGY We employ a bottom-up, value-oriented, long-term investment strategy. Our in-depth fundamental internal research evaluates a company's potential to grow earnings, asset value and/or cash flow over a five-year horizon. Stocks are selected for purchase or sale utilizing strict valuation parameters, reflecting our focus on individual companies rather than countries or sectors. MANAGER'S DISCUSSION During the year under review, the Fund continued to benefit from its geographical and sector diversification. Each major geographical area and industry group made a positive contribution to the Fund's total return. In 2005, a main focus of the equity markets was high energy costs. It was not surprising that energy stocks performed strongly. The energy sector was the best performer in the MSCI AC World ex US Index (the Index) with a 32% total return.(3) Although the Fund benefited on an absolute basis from its exposure to the energy sector, it lagged the Index in relative terms.(5) This was due to our underweighted position in exploration and production stocks, (3) Source: Standard & Poor's Micropal. Please see footnote 1 for a description of the MSCI AC World ex US Index. (4) Source: Standard & Poor's Micropal. Individual country market returns are measured by MSCI country-specific indexes. The MSCI USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in the U.S. (5) The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI. TOP 10 EQUITY HOLDINGS 12/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- Samsung Electronics Co. Ltd. 2.8% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA - -------------------------------------------------------------------------------- Atlas Copco AB, A 1.6% MACHINERY, SWEDEN - -------------------------------------------------------------------------------- Celesio AG 1.6% HEALTH CARE PROVIDERS & SERVICES, GERMANY - -------------------------------------------------------------------------------- Rolls-Royce Group PLC, ord. & B 1.6% AEROSPACE & DEFENSE, U.K - -------------------------------------------------------------------------------- E.ON AG 1.6% ELECTRIC UTILITIES, GERMANY - -------------------------------------------------------------------------------- Housing Development Finance Corp. Ltd. 1.6% THRIFTS & MORTGAGE FINANCE, INDIA - -------------------------------------------------------------------------------- Sanofi-Aventis, ord. & ADR 1.6% PHARMACEUTICALS, FRANCE - -------------------------------------------------------------------------------- Koninklijke Philips Electronics NV, ord. & N.Y. 1.5% HOUSEHOLD DURABLES, NETHERLANDS - -------------------------------------------------------------------------------- Royal Dutch Shell PLC, B, ADR 1.5% OIL, GAS & CONSUMABLE FUELS, U.K. - -------------------------------------------------------------------------------- Nordea Bank AB, FDR 1.4% COMMERCIAL BANKS, SWEDEN - -------------------------------------------------------------------------------- Annual Report | 3 which delivered strong performance. For the longer term, however, we remained comfortable with the Fund's exposure to mostly European integrated oil and gas companies. Despite concerns in energy costs, equity markets seemed to reflect confidence in a prolonged economic cycle (the current expansion is more than four years old). The markets favored sectors traditionally considered cyclical, such as materials and industrials.6 Along with energy, these two sectors provided the strongest returns in the Index during 2005. The Fund's results from these sectors were mixed, however. On the positive side, large industrials holdings such as Rolls-Royce Group (aircraft engines, U.K.) and Atlas Copco (construction and mining, Sweden) posted strong total returns, 60% and 61%. Komatsu (construction equipment, Japan) returned approximately 40% for the period we owned it and we sold our stake by period-end. The Fund was overweighted in the industrials sector relative to the Index, and these three holdings contributed to the Fund's strong sector performance. On the negative side, the Fund was underweighted in the strong performing metals and mining industry and overweighted in the weaker paper and forest products industry.(6) Although this hurt the Fund's near-term performance, during the year we deliberately reduced our exposure to certain mining stocks and increased our holdings in the paper industry. This was the result of our focus on valuation parameters such as price-to-earnings and price-to-cash flow ratios. While the first group of companies began to reach our target level, the second group appeared undervalued to us, particularly on the three- to five-year horizon. Thus, we felt comfortable adding to the paper companies, based on valuation and our longer-term investment horizon. From a sector perspective, the financials sector had the largest weighting in the Fund and the Index.(7) Combined with strong returns for the year, this made the financial holdings the strongest contributors to total returns for both the Index and the Fund. The Fund also benefited from its exposure to some financial companies in the emerging markets. Kookmin Bank, a retail-focused bank in South Korea; ICICI Bank, a commercial bank in India; and (6) The materials sector comprises chemicals, metals and mining, and paper and forest products in the SOI. The industrials sector comprises aerospace and defense, air freight and logistics, airlines, commercial services and supplies, electrical equipment, industrial conglomerates, and machinery in the SOI. (7) The financials sector comprises capital markets, commercial banks, insurance, real estate, and thrifts and mortgage finance in the SOI. 4 | Annual Report Housing Development Finance, India's premier housing finance company; were the top three contributors to performance among the Fund's financial holdings. It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar increases compared with a foreign currency, an investment traded in that foreign currency will decrease in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the year ended December 31, 2005, the U.S. dollar rose in value relative to most non-U.S. currencies. As a result, the Fund's performance was negatively affected by the portfolio's investment predominantly in securities with non-U.S. currency exposure. Thank you for your continued participation in the Fund. We look forward to serving your future investment needs. /s/ Gary P. Motyl [PHOTO] Gary P. Motyl, CFA President Templeton Investment Counsel, LLC Chief Investment Officer, Templeton Institutional Global Equities THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 PERFORMANCE SUMMARY AS OF 12/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- SYMBOL: TFEQX CHANGE 12/31/05 12/31/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.04 $22.31 $20.27 DISTRIBUTIONS (1/1/05-12/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.6603 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0388 - -------------------------------------------------------------------------------- TOTAL $0.6991 - -------------------------------------------------------------------------------- TIFI Foreign Equity Series paid distributions derived from long-term capital gains of 3.88 cents ($0.0388) per share in December 2005. The Fund designates such distributions as capital gain dividends per Internal Revenue Code Section 852(b)(3)(C). PERFORMANCE(1) - -------------------------------------------------------------------------------- 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------- Cumulative Total Return(2) +13.61% +47.10% +163.19% - -------------------------------------------------------------------------------- Average Annual Total Return(3) +13.61% +8.03% +10.16% - -------------------------------------------------------------------------------- Value of $1,000,000 Investment(4) $1,136,107 $1,471,016 $2,631,882 - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. 6 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. AVERAGE ANNUAL TOTAL RETURN - -------------------------------------------------- 12/31/05 - -------------------------------------------------- 1-Year +13.61% - -------------------------------------------------- 5-Year +8.03% - -------------------------------------------------- 10-Year +10.16% - -------------------------------------------------- 1/1/96-12/31/05 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
TIFI FOREIGN MSCI AC WORLD INCEPTION DATE EQUITY SERIES EX U.S. INDEX(5) MSCI EAFE INDEX(5) CPI(5) - -------------- ------------- ---------------------- ------------------ ------------- Dec-95 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 Jan-96 1,032,051.39 1,013,736.65 1,004,349.40 1,005,840.44 Feb-96 1,048,424.39 1,013,776.06 1,007,973.90 1,009,111.09 Mar-96 1,056,291.16 1,032,647.06 1,029,636.72 1,014,367.48 Apr-96 1,094,909.63 1,063,976.76 1,059,825.17 1,018,222.17 May-96 1,107,782.24 1,047,999.46 1,040,594.39 1,020,207.92 Jun-96 1,104,206.59 1,053,313.97 1,046,686.77 1,020,908.77 Jul-96 1,075,600.19 1,018,296.77 1,016,350.52 1,022,777.71 Aug-96 1,107,067.25 1,024,269.96 1,018,847.39 1,024,763.46 Sep-96 1,116,374.81 1,049,705.28 1,046,138.26 1,028,034.11 Oct-96 1,127,115.78 1,039,188.86 1,035,721.45 1,031,304.75 Nov-96 1,185,118.58 1,079,278.49 1,077,201.82 1,033,173.69 Dec-96 1,215,828.27 1,066,780.39 1,063,589.82 1,033,173.69 Jan-97 1,238,150.70 1,047,183.14 1,026,619.93 1,036,444.34 Feb-97 1,255,252.90 1,066,386.30 1,043,655.07 1,039,598.18 Mar-97 1,267,917.30 1,064,151.28 1,047,682.29 1,042,167.97 Apr-97 1,261,957.47 1,073,125.14 1,053,521.76 1,043,452.87 May-97 1,314,104.76 1,139,410.11 1,122,306.70 1,042,752.01 Jun-97 1,372,211.10 1,202,277.81 1,184,487.39 1,044,036.91 Jul-97 1,422,123.27 1,226,620.95 1,203,858.32 1,045,321.81 Aug-97 1,341,668.03 1,130,126.61 1,114,211.98 1,047,307.56 Sep-97 1,449,686.72 1,191,226.56 1,176,875.54 1,049,877.35 Oct-97 1,342,413.00 1,089,806.17 1,086,678.28 1,052,563.95 Nov-97 1,333,473.52 1,076,187.74 1,075,832.57 1,051,863.10 Dec-97 1,354,792.54 1,088,573.25 1,085,497.90 1,050,578.20 Jan-98 1,371,180.92 1,121,135.86 1,135,395.16 1,052,563.95 Feb-98 1,458,586.77 1,195,944.31 1,208,489.22 1,054,666.51 Mar-98 1,565,823.86 1,237,266.86 1,245,979.02 1,056,769.07 Apr-98 1,586,189.26 1,246,128.12 1,256,131.65 1,058,638.01 May-98 1,568,956.27 1,223,530.21 1,250,328.02 1,060,506.95 Jun-98 1,554,073.64 1,218,930.68 1,260,033.62 1,061,791.85 Jul-98 1,581,489.45 1,230,528.02 1,273,126.52 1,063,076.74 Aug-98 1,326,915.79 1,056,990.21 1,115,661.78 1,064,361.64 Sep-98 1,307,332.90 1,034,662.52 1,081,757.01 1,065,646.54 Oct-98 1,408,379.07 1,143,035.69 1,194,841.77 1,068,216.33 Nov-98 1,484,359.62 1,204,462.16 1,256,332.60 1,068,216.33 Dec-98 1,492,448.42 1,245,959.23 1,306,189.60 1,067,515.48 Jan-99 1,476,481.98 1,244,624.97 1,302,645.64 1,070,202.08 Feb-99 1,442,868.22 1,216,757.59 1,271,877.68 1,071,253.36 Mar-99 1,520,828.20 1,275,504.29 1,325,283.86 1,074,524.00 Apr-99 1,645,527.62 1,339,306.52 1,379,293.72 1,082,233.38 May-99 1,584,862.89 1,276,399.42 1,308,565.66 1,082,233.38 Jun-99 1,659,851.45 1,335,050.41 1,359,872.85 1,082,233.38 Jul-99 1,669,119.75 1,366,363.22 1,400,627.12 1,085,153.60 Aug-99 1,660,694.12 1,371,103.49 1,406,023.59 1,088,424.25 Sep-99 1,626,991.69 1,380,375.73 1,420,521.59 1,093,096.60 Oct-99 1,653,111.61 1,431,775.57 1,474,043.35 1,095,315.97 Nov-99 1,735,683.34 1,489,024.75 1,525,551.51 1,095,783.20 Dec-99 1,900,435.84 1,631,035.82 1,662,758.92 1,095,783.20 Jan-00 1,783,037.53 1,542,530.13 1,557,406.82 1,098,820.23 Feb-00 1,832,468.11 1,584,196.10 1,599,612.10 1,105,127.91 Mar-00 1,869,400.97 1,643,815.41 1,661,953.48 1,114,005.37 Apr-00 1,789,436.02 1,552,072.60 1,574,767.37 1,114,939.84 May-00 1,783,216.18 1,512,371.43 1,536,626.36 1,115,757.50 Jun-00 1,874,731.78 1,576,753.53 1,597,077.37 1,121,831.56 Jul-00 1,848,965.13 1,514,505.11 1,530,424.44 1,124,284.55 Aug-00 1,876,508.00 1,533,241.01 1,544,030.01 1,124,284.55 Sep-00 1,788,546.44 1,448,192.00 1,469,170.42 1,130,124.99 Oct-00 1,714,801.23 1,402,162.96 1,434,753.79 1,131,993.93 Nov-00 1,703,250.78 1,339,255.86 1,381,256.19 1,132,694.78 Dec-00 1,789,158.41 1,384,980.89 1,430,674.21 1,131,760.31 Jan-01 1,817,658.80 1,405,766.02 1,430,000.06 1,139,236.07 Feb-01 1,757,492.09 1,294,471.00 1,322,900.15 1,144,025.23 Mar-01 1,624,540.72 1,202,970.27 1,235,309.71 1,146,828.64 Apr-01 1,716,455.87 1,284,787.79 1,321,950.93 1,150,916.95 May-01 1,705,768.08 1,249,308.95 1,276,343.46 1,155,939.73 Jun-01 1,667,292.13 1,201,393.93 1,224,621.46 1,158,275.90 Jul-01 1,626,678.42 1,174,663.76 1,202,438.32 1,154,654.83 Aug-01 1,608,509.06 1,145,490.27 1,172,227.72 1,155,122.07 Sep-01 1,410,785.29 1,023,965.95 1,053,760.98 1,159,911.23 Oct-01 1,456,742.47 1,052,655.28 1,080,706.31 1,155,939.73 Nov-01 1,543,313.46 1,100,801.12 1,120,614.05 1,153,953.98 Dec-01 1,572,465.03 1,114,982.52 1,127,294.41 1,149,398.43 Jan-02 1,527,909.88 1,067,230.77 1,067,481.72 1,152,435.46 Feb-02 1,552,904.39 1,074,915.41 1,075,021.08 1,157,107.81 Mar-02 1,628,387.71 1,133,307.44 1,133,710.98 1,163,181.87 Apr-02 1,630,564.54 1,140,671.18 1,141,921.27 1,169,839.97 May-02 1,659,953.47 1,153,096.09 1,157,412.38 1,169,606.35 Jun-02 1,591,378.06 1,103,306.37 1,111,771.08 1,170,540.82 Jul-02 1,420,484.55 995,794.56 1,002,101.40 1,171,825.72 Aug-02 1,423,749.98 995,850.86 1,000,064.44 1,175,563.60 Sep-02 1,248,502.70 890,315.10 892,912.17 1,177,432.54 Oct-02 1,317,077.93 938,078.11 940,971.41 1,179,885.53 Nov-02 1,406,334.26 983,189.49 983,798.09 1,179,651.91 Dec-02 1,339,736.57 951,426.30 950,791.79 1,177,082.12 Jan-03 1,303,288.87 918,024.85 911,170.79 1,182,338.51 Feb-03 1,264,631.86 899,424.07 890,342.00 1,191,449.60 Mar-03 1,223,632.99 881,977.40 873,515.87 1,198,574.93 Apr-03 1,363,540.08 966,964.48 960,131.72 1,196,121.95 May-03 1,440,155.99 1,028,559.85 1,019,199.37 1,193,785.77 Jun-03 1,475,687.94 1,057,187.25 1,044,424.27 1,195,070.67 Jul-03 1,550,082.92 1,085,307.98 1,069,862.62 1,196,238.76 Aug-03 1,610,043.26 1,117,538.44 1,095,884.91 1,201,027.92 Sep-03 1,621,147.10 1,148,828.73 1,129,885.12 1,204,648.99 Oct-03 1,744,398.95 1,223,299.39 1,200,381.62 1,203,480.90 Nov-03 1,775,489.87 1,249,973.26 1,227,240.36 1,199,859.83 Dec-03 1,910,618.88 1,345,409.20 1,323,173.59 1,198,691.74 Jan-04 1,939,926.43 1,367,010.65 1,341,982.33 1,204,648.99 Feb-04 1,994,032.81 1,401,768.88 1,373,189.66 1,210,723.05 Mar-04 1,976,902.37 1,410,393.69 1,381,454.73 1,217,965.19 Apr-04 1,931,586.40 1,366,560.26 1,351,376.62 1,221,586.26 May-04 1,936,117.90 1,370,883.93 1,357,228.58 1,228,945.22 Jun-04 1,976,902.47 1,400,597.88 1,387,517.71 1,232,683.10 Jul-04 1,922,523.46 1,359,782.02 1,342,679.44 1,230,230.11 Aug-04 1,934,984.78 1,370,670.00 1,348,913.17 1,231,515.01 Sep-04 2,005,224.43 1,414,739.88 1,384,366.01 1,233,967.99 Oct-04 2,084,526.80 1,463,944.11 1,431,656.45 1,240,509.29 Nov-04 2,237,467.56 1,565,555.91 1,529,853.79 1,241,210.14 Dec-04 2,316,577.50 1,632,781.05 1,597,039.91 1,236,654.60 Jan-05 2,286,863.10 1,604,654.70 1,567,857.46 1,239,224.39 Feb-05 2,394,291.53 1,683,803.70 1,635,960.99 1,246,466.53 Mar-05 2,338,872.35 1,638,129.34 1,595,495.07 1,256,161.66 Apr-05 2,266,184.78 1,597,730.07 1,559,782.48 1,264,571.90 May-05 2,295,028.13 1,607,751.07 1,562,167.00 1,263,287.00 Jun-05 2,315,793.05 1,637,999.85 1,583,522.55 1,263,987.85 Jul-05 2,420,795.22 1,698,435.49 1,632,166.94 1,269,828.29 Aug-05 2,461,180.02 1,741,902.98 1,673,880.49 1,276,369.58 Sep-05 2,536,189.13 1,831,754.18 1,748,770.29 1,292,021.96 Oct-05 2,443,879.70 1,765,069.50 1,697,817.49 1,294,591.75 Nov-05 2,507,349.81 1,824,412.96 1,739,799.65 1,284,195.77 Dec-05 2,631,882.22 1,912,192.40 1,820,870.43 1,279,056.19
ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER LIQUIDITY. THESE AND OTHER RISK CONSIDERATIONS ARE DISCUSSED IN THE FUND'S PROSPECTUS. (1) Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. (2) Cumulative total return represents the change in value of an investment over the periods indicated. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. Annual Report | 7 YOUR FUND'S EXPENSES As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000 IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = $8.6 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50 In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------- BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/05 12/31/05 7/1/05-12/31/05 - ------------------------------------------------------------------------------------------------- Actual $1,000.00 $1,136.50 $4.36 - ------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,021.12 $4.13 - -------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 0.81%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 9 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL HIGHLIGHTS FOREIGN EQUITY SERIES
------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 20.27 $ 16.95 $ 12.13 $ 14.47 $ 16.95 ------------------------------------------------------------------------------ Income from investment operations: Net investment income(a) ..................... 0.42 0.33 0.25 0.23 0.25 Net realized and unrealized gains (losses) ... 2.32 3.25 4.87 (2.37) (2.28) ------------------------------------------------------------------------------ Total from investment operations ................ 2.74 3.58 5.12 (2.14) (2.03) ------------------------------------------------------------------------------ Less distributions from: Net investment income ........................ (0.66) (0.26) (0.30) (0.20) (0.28) Net realized gains ........................... (0.04) -- -- -- (0.17) ------------------------------------------------------------------------------ Total distributions ............................. (0.70) (0.26) (0.30) (0.20) (0.45) ------------------------------------------------------------------------------ Redemption fees ................................. --(b) --(b) -- -- -- ------------------------------------------------------------------------------ Net asset value, end of year .................... $ 22.31 $ 20.27 $ 16.95 $ 12.13 $ 14.47 ============================================================================== Total return .................................... 13.61% 21.25% 42.61% (14.80)% (12.11)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $ 6,245,721 $ 5,658,170 $ 4,642,764 $ 3,164,910 $ 3,551,516 Ratios to average net assets: Expenses ..................................... 0.81% 0.82% 0.83% 0.83% 0.84% Net investment income ........................ 2.01% 1.89% 1.85% 1.68% 1.62% Portfolio turnover rate ......................... 12.97% 18.25% 8.93% 16.26% 15.38%
(a) Based on average daily shares outstanding. (b) Amount is less than $0.01 per share. 10 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 95.5% AUSTRALIA 2.5% Alumina Ltd. .................................. Metals & Mining 9,790,288 $ 53,287,960 AMP Ltd. ...................................... Insurance 340,096 1,918,481 National Australia Bank Ltd. .................. Commercial Banks 2,903,680 69,011,820 Qantas Airways Ltd. ........................... Airlines 11,228,850 33,277,168 ------------- 157,495,429 ------------- BERMUDA 1.4% ACE Ltd. ...................................... Insurance 1,108,930 59,261,219 XL Capital Ltd., A ............................ Insurance 450,020 30,322,348 ------------- 89,583,567 ------------- CANADA 2.7% Alcan Inc. .................................... Metals & Mining 1,066,343 43,817,037 BCE Inc. ...................................... Diversified Telecommunication Services 2,469,060 59,203,908 BCE Inc. (USD Traded) ......................... Diversified Telecommunication Services 5,920 141,784 (a) Celestica Inc. ................................ Electronic Equipment & Instruments 9,815 103,646 Husky Energy Inc. ............................. Oil, Gas & Consumable Fuels 1,328,990 67,461,421 ------------- 170,727,796 ------------- CHINA 0.7% China Mobile (Hong Kong) Ltd. ................. Wireless Telecommunication Services 8,492,000 40,194,799 ------------- DENMARK 0.9% TDC AS ........................................ Diversified Telecommunication Services 531,490 31,835,596 (a) Vestas Wind Systems AS ........................ Electrical Equipment 111,445 18,252,790 (a),(b) Vestas Wind Systems AS, 144A .................. Electrical Equipment 340,168 5,586,435 ------------- 55,674,821 ------------- FINLAND 2.3% M-real OYJ, B ................................. Paper & Forest Products 2,306,820 11,524,520 (b) M-real OYJ, B, 144A ........................... Paper & Forest Products 1,922,350 9,603,766 Stora Enso OYJ, R (EUR/FIM Traded) ............ Paper & Forest Products 1,673,625 22,666,312 Stora Enso OYJ, R (SEK Traded) ................ Paper & Forest Products 2,814,636 38,081,099 UPM-Kymmene OYJ ............................... Paper & Forest Products 3,278,200 64,267,656 ------------- 146,143,353 ------------- FRANCE 7.5% Accor SA ...................................... Hotels, Restaurants & Leisure 494,470 27,196,676 AXA SA ........................................ Insurance 2,311,148 74,584,794 France Telecom SA ............................. Diversified Telecommunication Services 3,183,580 79,108,817 Michelin SA, B ................................ Auto Components 1,341,820 75,422,627 Sanofi-Aventis ................................ Pharmaceuticals 1,106,500 96,934,823 Sanofi-Aventis, ADR ........................... Pharmaceuticals 6,813 299,091 Suez SA ....................................... Multi-Utilities 2,075,810 64,630,874 Suez SA, ADR .................................. Multi-Utilities 7,250 226,490 Total SA, B ................................... Oil, Gas & Consumable Fuels 201,687 50,666,391 ------------- 469,070,583 ------------- GERMANY 8.8% BASF AG ....................................... Chemicals 534,020 40,922,279 BASF AG, ADR .................................. Chemicals 6,430 491,766 Bayer AG, Br. ................................. Chemicals 1,039,720 43,363,639 Bayerische Motoren Werke AG ................... Automobiles 1,389,960 60,883,654
Annual Report | 11 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) GERMANY (CONTINUED) Celesio AG .................................... Health Care Providers & Services 1,178,552 $ 101,126,184 Deutsche Post AG .............................. Air Freight & Logistics 3,524,380 85,616,362 E.ON AG ....................................... Electric Utilities 956,750 99,061,438 Merck KGaA .................................... Pharmaceuticals 81,272 6,739,781 Muenchener Rueckversicherungs- Gesellschaft AG ............................. Insurance 321,287 43,501,272 Siemens AG .................................... Industrial Conglomerates 815,230 69,845,014 ------------- 551,551,389 ------------- HONG KONG 2.0% Cheung Kong (Holdings) Ltd. ................... Real Estate 2,550,000 26,162,195 Cheung Kong (Holdings) Ltd., ADR .............. Real Estate 31,535 323,539 Hutchison Whampoa Ltd. ........................ Industrial Conglomerates 5,342,550 50,885,366 Hutchison Whampoa Ltd., ADR ................... Industrial Conglomerates 4,795 228,351 Swire Pacific Ltd., A ......................... Real Estate 5,440,500 48,836,200 Swire Pacific Ltd., B ......................... Real Estate 154,500 269,002 ------------- 126,704,653 ------------- INDIA 3.5% Housing Development Finance Corp. Ltd. ........ Thrifts & Mortgage Finance 3,668,470 98,272,926 ICICI Bank Ltd. ............................... Commercial Banks 4,935,848 64,140,245 Satyam Computer Services Ltd. ................. IT Services 3,347,536 54,890,812 Satyam Computer Services Ltd., ADR ............ IT Services 47,700 1,745,343 ------------- 219,049,326 ------------- ISRAEL 0.7% (a) Check Point Software Technologies Ltd. ........ Software 2,073,240 41,672,124 ------------- ITALY 1.7% Eni SpA ....................................... Oil, Gas & Consumable Fuels 2,433,040 67,486,704 UniCredito Italiano SpA ....................... Commercial Banks 5,363,030 36,951,315 ------------- 104,438,019 ------------- JAPAN 8.4% Fuji Photo Film Co. Ltd. ...................... Leisure Equipment & Products 1,053,900 34,823,435 Hitachi Ltd. .................................. Electronic Equipment & Instruments 6,516,000 43,889,011 Hitachi Ltd., ADR ............................. Electronic Equipment & Instruments 2,275 153,335 Mabuchi Motor Co. Ltd. ........................ Electronic Equipment & Instruments 650,600 36,104,634 NEC Corp. ..................................... Computers & Peripherals 3,873,000 24,085,250 NEC Corp., ADR ................................ Computers & Peripherals 14,625 90,529 Nintendo Co. Ltd. ............................. Software 416,100 50,236,592 Nippon Telegraph & Telephone Corp. ............ Diversified Telecommunication Services 10,115 45,934,424 Nippon Telegraph & Telephone Corp., ADR ....... Diversified Telecommunication Services 6,815 155,450 Nomura Holdings Inc. .......................... Capital Markets 2,770,700 53,052,461 Ono Pharmaceutical Co. Ltd. ................... Pharmaceuticals 977,000 44,119,377 Seiko Epson Corp. ............................. Computers & Peripherals 922,000 23,161,315 Sompo Japan Insurance Inc. .................... Insurance 6,208,000 83,891,892 SONY Corp. .................................... Household Durables 1,130,000 46,145,895 SONY Corp., ADR ............................... Household Durables 4,405 179,724 Takeda Pharmaceutical Co. Ltd. ................ Pharmaceuticals 763,500 41,270,270 ------------- 527,293,594 -------------
12 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) MEXICO 1.2% Telefonos de Mexico SA de CV (Telmex), L, ADR ............................ Diversified Telecommunication Services 2,933,954 $ 72,409,985 ------------- NETHERLANDS 6.0% Akzo Nobel NV, ADR ............................ Chemicals 5,290 243,763 ING Groep NV .................................. Capital Markets 2,548,410 88,396,202 ING Groep NV, ADR ............................. Capital Markets 12,965 451,441 Koninklijke Philips Electronics NV ............ Household Durables 2,954,061 91,800,585 Koninklijke Philips Electronics NV, (N.Y. shs.) ................................. Household Durables 11,935 371,178 SBM Offshore NV ............................... Energy Equipment & Services 603,625 48,771,550 Unilever NV ................................... Food Products 1,093,340 74,878,181 Unilever NV, (N.Y. shs.) ...................... Food Products 2,540 174,371 VNU NV ........................................ Media 1,211,760 40,181,524 Wolters Kluwer NV ............................. Media 1,499,375 30,317,600 ------------- 375,586,395 ------------- NORWAY 0.8% Telenor ASA ................................... Diversified Telecommunication Services 5,272,050 51,747,261 ------------- PORTUGAL 0.7% Portugal Telecom SGPS SA ...................... Diversified Telecommunication Services 4,496,290 45,511,077 ------------- SINGAPORE 0.9% DBS Group Holdings Ltd. ....................... Commercial Banks 5,624,185 55,803,874 DBS Group Holdings Ltd., ADR .................. Commercial Banks 7,605 301,831 ------------- 56,105,705 ------------- SOUTH AFRICA 1.1% Sappi Ltd. .................................... Paper & Forest Products 3,237,666 37,102,040 Sappi Ltd., ADR ............................... Paper & Forest Products 2,726,730 30,893,851 ------------- 67,995,891 ------------- SOUTH KOREA 7.3% Kookmin Bank .................................. Commercial Banks 900,573 68,380,977 Kookmin Bank, ADR ............................. Commercial Banks 216,498 16,174,566 Korea Electric Power Corp. .................... Electric Utilities 1,146,540 43,016,588 Korea Electric Power Corp., ADR ............... Electric Utilities 12,195 237,680 KT Corp., ADR ................................. Diversified Telecommunication Services 903,955 19,480,230 LG Electronics Inc. ........................... Household Durables 938,340 83,169,987 POSCO ......................................... Metals & Mining 224,020 44,915,176 POSCO, ADR .................................... Metals & Mining 4,080 202,001 Samsung Electronics Co. Ltd. .................. Semiconductors & Semiconductor Equipment 270,520 176,945,588 ------------- 452,522,793 ------------- SPAIN 5.0% Banco Santander Central Hispano SA ............ Commercial Banks 4,618,890 60,969,014 Endesa SA ..................................... Electric Utilities 1,635,640 43,025,751 Iberdrola SA, Br. ............................. Electric Utilities 2,011,074 54,972,902 Repsol YPF SA ................................. Oil, Gas & Consumable Fuels 2,520,610 73,615,877 Telefonica SA ................................. Diversified Telecommunication Services 5,433,139 81,750,995 Telefonica SA, ADR ............................ Diversified Telecommunication Services 8,892 400,318 ------------- 314,734,857 -------------
Annual Report | 13 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) SWEDEN 7.5% Atlas Copco AB, A ............................. Machinery 4,621,920 $ 102,961,405 Autoliv Inc. .................................. Auto Components 830,940 37,741,295 Autoliv Inc., IDR ............................. Auto Components 9,100 411,164 Electrolux AB, B .............................. Household Durables 2,311,080 60,063,938 ForeningsSparbanken AB (Swedbank), A .......... Commercial Banks 1,405,980 38,310,323 Nordea Bank AB, FDR ........................... Commercial Banks 8,593,898 89,835,416 Securitas AB, B ............................... Commercial Services & Supplies 1,926,540 32,005,950 Svenska Cellulosa AB, B ....................... Paper & Forest Products 1,294,903 48,403,019 Volvo AB, B ................................... Machinery 1,227,585 57,860,497 -------------- 467,593,007 -------------- SWITZERLAND 3.5% Adecco SA ..................................... Commercial Services & Supplies 1,031,040 47,559,295 Lonza Group AG ................................ Chemicals 420,110 25,710,252 Nestle SA ..................................... Food Products 267,320 79,967,087 Nestle SA, ADR ................................ Food Products 2,310 172,756 Swiss Reinsurance Co. ......................... Insurance 871,120 63,788,197 Swiss Reinsurance Co., ADR .................... Insurance 3,295 241,278 UBS AG ........................................ Capital Markets 4,755 452,438 -------------- 217,891,303 -------------- TAIWAN 0.8% Chunghwa Telecom Co. Ltd., ADR ................ Diversified Telecommunication Services 1,223,460 22,450,491 (b) Compal Electronics Inc., GDR, 144A ............ Computers & Peripherals 4,162,317 21,144,570 Compal Electronics Inc., GDR, Reg S ........... Computers & Peripherals 1,103,174 5,604,124 -------------- 49,199,185 -------------- UNITED KINGDOM 17.3% Amvescap PLC .................................. Capital Markets 3,236,560 24,612,060 BAE Systems PLC ............................... Aerospace & Defense 5,617,238 36,892,995 BP PLC ........................................ Oil, Gas & Consumable Fuels 4,940,110 52,610,122 (a) British Airways PLC ........................... Airlines 9,058,170 52,050,988 (a) British Airways PLC, ADR ...................... Airlines 8,225 472,937 British Sky Broadcasting Group PLC ............ Media 6,149,950 52,533,082 Cadbury Schweppes PLC ......................... Food Products 5,278,910 49,906,142 Compass Group PLC ............................. Hotels, Restaurants & Leisure 14,860,370 56,374,183 GlaxoSmithKline PLC ........................... Pharmaceuticals 2,786,240 70,417,785 HSBC Holdings PLC ............................. Commercial Banks 3,254,421 52,256,088 HSBC Holdings PLC, ADR ........................ Commercial Banks 3,790 304,981 National Grid PLC ............................. Electric Utilities 4,010,399 39,259,240 Pearson PLC ................................... Media 3,511,000 41,528,435 Rentokil Initial PLC .......................... Commercial Services & Supplies 6,043,130 16,998,936 (a) Rolls-Royce Group PLC ......................... Aerospace & Defense 13,555,704 99,701,166 (a) Rolls-Royce Group PLC, B ...................... Aerospace & Defense 452,760,513 798,425 Royal Bank of Scotland Group PLC .............. Commercial Banks 2,923,660 88,276,687 Royal Dutch Shell PLC, B, ADR ................. Oil, Gas & Consumable Fuels 1,415,307 91,329,761 Shire PLC ..................................... Pharmaceuticals 2,293,320 29,354,834 Shire PLC, ADR ................................ Pharmaceuticals 8,590 333,206
14 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN EQUITY SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) UNITED KINGDOM (CONTINUED) Smiths Group PLC .............................. Industrial Conglomerates 2,980,820 $ 53,642,558 Standard Chartered PLC ........................ Commercial Banks 2,715,610 60,503,320 Vodafone Group PLC ............................ Wireless Telecommunication Services 36,522,370 78,857,811 Yell Group PLC ................................ Media 3,309,540 30,547,762 -------------- 1,079,563,504 -------------- UNITED STATES 0.3% News Corp., A ................................. Media 1,089,919 16,948,240 -------------- TOTAL COMMON STOCKS (COST $3,771,905,956) ...................... 5,967,408,656 -------------- ---------------- SHARES/PRINCIPAL AMOUNT ---------------- SHORT TERM INVESTMENTS 4.7% UNITED STATES ( COST $125,724,058) 2.0% (c) U.S. Treasury Bills, 1/05/06 - 3/30/06 ........ 126,000,000 125,757,424 -------------- TOTAL INVESTMENTS BEFORE MONEY FUND (COST $3,897,630,014) ........... 6,093,166,080 -------------- UNITED STATES ( COST $165,798,478) 2.7% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio ..................... 165,798,478 165,798,478 -------------- TOTAL INVESTMENTS (COST $4,063,428,492) 100.2% ............... 6,258,964,558 OTHER ASSETS, LESS LIABILITIES (0.2)% ......... (13,244,008) -------------- NET ASSETS 100.0% ............................. $6,245,720,550 ==============
SELECTED CURRENCY ABBREVIATIONS EUR - Euro FIM - Finnish Markka SEK - Swedish Krona SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FDR - Foreign Depository Receipt GDR - Global Depository Receipt IDR - International Deposit Receipt (a) Non-income producing. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2005, the aggregate value of these securities was $36,334,771, representing 0.58% of net assets. (c) The security is traded on a discount basis with no stated coupon rate. (d) See Note 8 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. Annual Report | See notes to financial statements. | 15 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF ASSETS AND LIABILITIES December 31, 2005
---------------- FOREIGN EQUITY SERIES ---------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................................ $ 3,897,630,014 Cost - Sweep Money Fund (Note 8) ................................... 165,798,478 ---------------- Total cost of investments .......................................... 4,063,428,492 ================ Value - Unaffiliated issuers ....................................... 6,093,166,080 Value - Sweep Money Fund (Note 8) .................................. 165,798,478 ---------------- Total value of investments ......................................... 6,258,964,558 Cash .................................................................. 1,946,321 Foreign currency, at value (cost $779,222) ............................ 792,576 Receivables: Investment securities sold ......................................... 8,567,944 Capital shares sold ................................................ 2,574,097 Dividends .......................................................... 7,554,380 ---------------- Total assets .................................................... 6,280,399,876 ---------------- Liabilities: Payables: Investment securities purchased .................................... 2,546,080 Capital shares redeemed ............................................ 27,488,572 Affiliates ......................................................... 3,986,665 Accrued expenses and other liabilities ................................ 658,009 ---------------- Total liabilities ............................................... 34,679,326 ---------------- Net assets, at value ......................................... $ 6,245,720,550 ---------------- Net assets consist of: Paid-in capital ....................................................... $ 4,073,027,328 Distributions in excess of net investment income ...................... (61,250,841) Net unrealized appreciation (depreciation) ............................ 2,195,458,711 Accumulated net realized gain (loss) .................................. 38,485,352 ---------------- Net assets, at value ......................................... $ 6,245,720,550 ---------------- Shares outstanding .................................................... 279,921,788 ---------------- Net asset value per share(a) .......................................... $ 22.31 ----------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. 16| See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2005
---------------- FOREIGN EQUITY SERIES ---------------- Investment income: Dividends (net of foreign taxes of $14,682,522) Unaffiliated issuers ............................................... $ 152,700,060 Sweep Money Fund (Note 8) .......................................... 3,422,450 Interest .............................................................. 6,851,467 Other income (Note 9) ................................................. 295,011 ---------------- Total investment income ........................................... 163,268,988 ---------------- Expenses: Management fees (Note 3a) ............................................. 39,020,252 Administrative fees (Note 3b) ......................................... 4,770,205 Transfer agent fees (Note 3c) ......................................... 63,600 Custodian fees (Note 4) ............................................... 2,354,500 Reports to shareholders ............................................... 82,700 Registration and filing fees .......................................... 96,000 Professional fees ..................................................... 140,159 Directors' fees and expenses .......................................... 109,028 Other ................................................................. 137,900 ---------------- Total expenses .................................................. 46,774,344 Expense reductions (Note 4) ..................................... (137,236) ---------------- Net expenses ................................................. 46,637,108 ---------------- Net investment income ..................................... 116,631,880 ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................ 309,554,006 Foreign currency transactions ...................................... (985,061) ---------------- Net realized gain (loss) ........................................ 308,568,945 ---------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................ 328,671,930 Translation of assets and liabilities denominated in foreign currencies ....................................................... (302,364) Change in deferred taxes on unrealized appreciation ................... 332,213 ---------------- Net change in unrealized appreciation (depreciation) ............ 328,701,779 ---------------- Net realized and unrealized gain (loss) .................................. 637,270,724 ---------------- Net increase (decrease) in net assets resulting from operations .......... $ 753,902,604 ================
Annual Report | See notes to financial statements. | 17 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------- FOREIGN EQUITY SERIES YEAR ENDED DECEMBER 31, --------------------------------- 2005 2004 --------------------------------- Increase (decrease) in net assets: Operations: Net investment income .............................................................. $ 116,631,880 $ 92,898,790 Net realized gain (loss) from investments and foreign currency transactions ........ 308,568,945 98,531,192 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes .. 328,701,779 805,740,566 --------------------------------- Net increase (decrease) in net assets resulting from operations ................. 753,902,604 997,170,548 --------------------------------- Distributions to shareholders from: Net investment income .............................................................. (183,533,480) (72,392,703) Net realized gains ................................................................. (10,751,350) -- --------------------------------- Total distributions to shareholders ...................................................... (194,284,830) (72,392,703) --------------------------------- Capital share transactions (Note 2) ...................................................... 27,925,243 90,602,987 --------------------------------- Redemption fees .......................................................................... 7,845 24,434 --------------------------------- Net increase (decrease) in net assets ........................................... 587,550,862 1,015,405,266 Net assets: Beginning of year ..................................................................... 5,658,169,688 4,642,764,422 --------------------------------- End of year ........................................................................... $ 6,245,720,550 $ 5,658,169,688 ================================= Distributions in excess of net investment income/Undistributed net investment income included in net assets: End of year ........................................................................... $ (61,250,841) $ 6,273,524 =================================
18| See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of four separate series. The Foreign Equity Series (the Fund) included in this report is diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into Annual Report | 19 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. 20 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME TAXES AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund is subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. Foreign securities held by the Fund may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by TIFI are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Annual Report | 21 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2005, there were 1.14 billion shares authorized ($0.01 par value) for TIFI, of which 695 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2005 2004 ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- Shares sold ...................... 43,810,911 $ 915,696,969 47,051,626 $ 832,987,696 Shares issued in reinvestment of distributions .............. 7,621,447 166,418,307 3,305,980 62,226,817 Shares redeemed .................. (50,689,026) (1,054,190,033) (45,065,673) (804,611,526) ------------------------------------------------------------- Net increase (decrease) .......... 743,332 $ 27,925,243 5,291,933 $ 90,602,987 =============================================================
22 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries: - -------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.700% Up to and including $1 billion 0.680% Over $1 billion, up to and including $5 billion 0.660% Over $5 billion, up to and including $10 billion 0.640% Over $10 billion, up to and including $15 billion 0.620% Over $15 billion, up to and including $20 billion 0.600% In excess of $20 billion B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate average daily net assets of certain funds within TIFI as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% Over $1.2 billion C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $63,600, of which $17,290 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. Annual Report | 23 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 5. INCOME TAXES During the year ended December 31, 2005, the Fund utilized $259,639,339 of capital loss carryforwards. For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2005, the Fund deferred realized currency losses of $362,296. The tax character of distributions paid during the years ended December 31, 2005 and 2004, was as follows: --------------------------- 2005 2004 --------------------------- Distributions paid from: Ordinary income .......... $183,533,480 $ 72,392,703 Long term capital gain ... 10,751,350 -- --------------------------- $194,284,830 $ 72,392,703 =========================== Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At December 31, 2005, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments ....................................... $ 4,147,343,830 =============== Unrealized appreciation ................................... $ 2,241,939,513 Unrealized depreciation ................................... (130,318,785) --------------- Net unrealized appreciation (depreciation) ................ $ 2,111,620,728 =============== Undistributed ordinary income ............................. $ 22,349,090 Undistributed long term capital gains ..................... 39,163,054 =============== Distributable earnings .................................... $ 61,512,144 =============== 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2005, aggregated $733,996,468 and $712,407,023, respectively. 24 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Franklin Advisers Inc. (an affiliate of the Fund's investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 9. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds and are recorded as other income in the current period. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. Annual Report | 25 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 9. REGULATORY MATTERS (CONTINUED) In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. 26 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FOREIGN EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Equity Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 10, 2006 Annual Report | 27 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) FOREIGN EQUITY SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $49,914,404 as a capital gain dividend for the fiscal year ended December 31, 2005. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $148,351,567 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2005. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $10,273,917 as interest-related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 15, 2005. At December 31, 2005, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid as allowed, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 15, 2005, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund to shareholders of record. 28 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES Record Date: 12/15/2005 - -------------------------------------------------------------------------------- FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - -------------------------------------------------------------------------------- Australia ................ $ 0.0003 $ 0.0247 $ 0.0247 Bermuda .................. 0.0000 0.0050 0.0050 Canada ................... 0.0028 0.0140 0.0140 China .................... 0.0000 0.0026 0.0000 Denmark .................. 0.0006 0.0032 0.0032 Finland .................. 0.0035 0.0173 0.0121 France ................... 0.0054 0.0274 0.0274 Germany .................. 0.0054 0.0323 0.0320 Hong Kong ................ 0.0000 0.0134 0.0000 India .................... 0.0000 0.0074 0.0036 Italy .................... 0.0031 0.0152 0.0152 Japan .................... 0.0016 0.0165 0.0165 Mexico ................... 0.0000 0.0052 0.0052 Netherlands .............. 0.0054 0.0267 0.0267 New Zealand .............. 0.0000 0.0002 0.0002 Norway ................... 0.0013 0.0065 0.0065 Portugal ................. 0.0009 0.0053 0.0053 Singapore ................ 0.0000 0.0046 0.0000 South Africa ............. 0.0000 0.0026 0.0026 South Korea .............. 0.0047 0.0208 0.0208 Spain .................... 0.0050 0.0293 0.0292 Sweden ................... 0.0073 0.0498 0.0498 Switzerland .............. 0.0033 0.0110 0.0110 Taiwan ................... 0.0021 0.0072 0.0049 United Kingdom ........... 0.0000 0.0969 0.0948 ------------------------------------------------- TOTAL .................... $ 0.0527 $ 0.4451 $ 0.4107 ================================================= Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) Annual Report | 29 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES In January 2006, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2005 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. 30 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods 500 East Broward Blvd. (meat packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (1932) Director Since 1992 141 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 136 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad), and White Mountains Insurance Group, Ltd. (holding company). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (1928) Director Since 1993 140 Director, Martek Biosciences 500 East Broward Blvd. Corporation, MedImmune, Inc. Suite 2100 (biotechnology), and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding company) (1987-2004) and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation 500 East Broward Blvd. 2005 (assisted living). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 101 Director, White Mountains Insurance 500 East Broward Blvd. Group, Ltd. (holding company), Suite 2100 Amerada Hess Corporation (exploration Fort Lauderdale, FL 33394-3091 and refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly, Foundation Health) (integrated managed care), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly, Commonwealth Edison) and UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since October 16 None 500 East Broward Blvd. 2005 Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow of The Brookings Institute (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), and Weatherford International, Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003); and Total Logistics, Inc. (operating and investment business) (until 2005). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 None One Franklin Parkway President President since San Mateo, CA 94403-1906 and Chairman 1993 and of the Board Chairman of the Board since 1995 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (1945) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (1937) Vice President Since 2002 Not Applicable Not Applicable 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-2302 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional Suisse S.A., Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable 500 East Broward Blvd. Chief 2005 Suite 2100 Executive Fort Lauderdale, FL 33394-3091 Officer - Investment Management - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 14 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable One Franklin Parkway 2005 San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, FL 33394-3091 Chief Accounting Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of TIFI under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD., AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 37 TEMPLETON INSTITUTIONAL FUNDS, INC. SHAREHOLDER INFORMATION FOREIGN EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 38| Annual Report This page intentionally left blank. This page intentionally left blank. [LOGO](R) FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN EQUITY SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT454 A2005 02/06 EMERGING MARKETS SERIES ANNUAL REPORT 12 31 2005 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- -------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. -------------------------------------- Emerging Markets Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY CONTENTS TIFI Emerging Markets Series ............................................. 1 Performance Summary ...................................................... 6 Your Fund's Expenses ..................................................... 8 Financial Highlights and Statement of Investments ........................ 10 Financial Statements ..................................................... 17 Notes to Financial Statements ............................................ 20 Report of Independent Registered Public Accounting Firm .................. 28 Tax Designation .......................................................... 29 Board Members and Officers ............................................... 32 Shareholder Information .................................................. 39 - -------------------------------------------------------------------------------- ANNUAL REPORT TIFI EMERGING MARKETS SERIES YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Emerging Markets Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in securities issued by emerging market companies. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This annual report for Templeton Institutional Funds, Inc. (TIFI) Emerging Markets Series (the Fund) covers the fiscal year ended December 31, 2005. PERFORMANCE OVERVIEW TIFI Emerging Markets Series posted a +28.09% cumulative total return for the 12 months ended December 31, 2005. The Fund underperformed the Standard & Poor's/International Finance Corporation Investable (S&P/IFCI) Composite Index and the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index, which returned +35.19% and +34.54% during the same period.(1) ECONOMIC AND MARKET OVERVIEW During the year under review, most Asian economies recorded robust growth, particularly those of China and India, which attracted new investment. China had a record year with new equity issuance, while India experienced record foreign fund inflows in 2005. In Latin America, market sentiment was (1) Source: Standard & Poor's Micropal. The S&P/IFCI Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity performance in global emerging markets. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Asia ................................................. 60.1% Europe ............................................... 16.0% Latin America ........................................ 14.2% Middle East & Africa ................................. 9.1% North America ........................................ 0.4% Short-Term Investments & Other Net Assets ............ 0.2% positive as the region's risk profile improved, economies' financial positions improved, and governments reduced interest rates in light of subdued inflation and sustained economic recovery. Eastern Europe experienced greater integration with Western Europe, implemented reforms, and had benign inflation and falling interest rates, which contributed to a favorable investment environment. Russia's market was one of the strongest emerging markets performers as the MSCI Russia Index returned +73.77% in 2005.(2) High commodity prices, especially for oil, provided a boost to the Russian economy. In Turkey, European Union accession talks, robust gross domestic product growth, implementation of key reforms, and International Monetary Fund support provided investors with reasons to remain confident. In this environment, emerging markets had another strong year in 2005, as measured by the MSCI EM Index. Latin America and Eastern Europe led emerging markets performance, while emerging Asian markets, although experiencing double-digit returns, lagged the overall index. Rising U.S. interest rates seemed to lead investors to adopt a more cautious stance toward investing in Asia. However, in fourth quarter 2005, Asian markets experienced higher returns relative to Latin American and Eastern European markets largely due to the U.S. Federal Reserve Board's signaling a possible halt to raising interest rates in the near future. High commodity prices and market stability allowed South Africa's stock prices to continue their upward trend during the year, while positive developments in Turkey led the country's equity market to end 2005 up significantly. INVESTMENT STRATEGY Our investment strategy employs a bottom-up, value-oriented, long-term approach. We focus on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value and cash flow potential. As we look for investments, we focus on specific companies and undertake in-depth research to construct an "action list" from which we make our buy decisions. Before we make a purchase, we generally look at the company's price/earnings ratio, profit margins and liquidation value. During our analysis, we also consider the company's position in its sector, the economic framework and political environment. (2) Source: Standard & Poor's Micropal. The MSCI Russia Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in Russia. 2 | Annual Report MANAGER'S DISCUSSION In terms of performance relative to the MSCI EM Index, the Fund benefited from underweighted exposure to and stock selection in Taiwan and Malaysia. The Fund's exposure to South Korea, which was roughly in line with the index, also helped performance due to the Fund's overweighted positions in strong performing stocks such as Hyundai Development, Samsung Heavy Industries, and Daewoo Shipbuilding & Marine Engineering. On the other hand, the Fund's underweighted exposure to Mexico and Russia hindered results relative to the index. The Fund's U.K. holdings underperformed the index during the period, thus hurting relative performance. However, we believed those companies were well positioned in their respective areas to benefit from growing demand for financial and banking services in emerging markets. At the sector level, stock selection in the capital goods sector benefited performance relative to the MSCI EM Index.(3) We benefited from stock selection among banks, as well as underweighted allocations to the insurance and technology hardware and equipment sectors, which underperformed the overall index.(4) In contrast, the Fund's overweighted exposure to Taiwan Mobile hurt relative performance. In addition, our lack of holdings in America Movil and Orascom Telecom hindered the Fund's relative results. We did not own those two stocks due to expensive valuations and the availability of what we considered more attractively valued telecommunications stocks in other markets. Similarly, our stock selection and underweighted position in energy sector stocks and our stock selection in the food, beverage and tobacco sector hindered performance during the period.(5) During the year under review, the Fund's exposure to Asia increased as we found stocks trading at what we considered attractive valuations. We made the largest purchases in Taiwan, Thailand and China H shares (Hong Kong-listed companies), while also adding significant investments in Malaysia and Indonesia. Key purchases included initiating positions in Maxis Communications, one of Malaysia's prominent integrated telecommunication services providers, and China Construction Bank, a major commercial bank in China. We also added to existing positions in PetroChina, a dominant participant in China's oil and gas sector; Mega Financial Holding, a leading financial holding company in Taiwan; and Kasikornbank, one of Thailand's TOP 10 COUNTRIES 12/31/05 - -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS - -------------------------------------------------------------------------------- South Korea 20.5% - -------------------------------------------------------------------------------- Taiwan 13.6% - -------------------------------------------------------------------------------- Brazil 9.7% - -------------------------------------------------------------------------------- China 9.6% - -------------------------------------------------------------------------------- South Africa 9.1% - -------------------------------------------------------------------------------- Mexico 4.2% - -------------------------------------------------------------------------------- Singapore 4.1% - -------------------------------------------------------------------------------- Russia 4.0% - -------------------------------------------------------------------------------- Thailand 3.4% - -------------------------------------------------------------------------------- India 3.1% - -------------------------------------------------------------------------------- (3) The capital goods sector comprises aerospace and defense, building products, construction and engineering, electrical equipment, industrial conglomerates, and machinery in the SOI. (4) The bank sector comprises commercial banks in the SOI. The technology hardware and equipment sector comprises communications equipment, computers and peripherals, and electronic equipment and instruments in the SOI. (5) The food, beverage and tobacco sector comprises beverages, food products and tobacco in the SOI. Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- Samsung Electronics Co. Ltd. 4.3% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA - -------------------------------------------------------------------------------- Petroleo Brasileiro SA, ADR, pfd. 2.7% OIL, GAS & CONSUMABLE FUELS, BRAZIL - -------------------------------------------------------------------------------- China Mobile (Hong Kong) Ltd. 2.5% WIRELESS TELECOMMUNICATION SERVICES, CHINA - -------------------------------------------------------------------------------- Remgro Ltd. 2.2% DIVERSIFIED FINANCIAL SERVICES, SOUTH AFRICA - -------------------------------------------------------------------------------- PetroChina Co. Ltd., H, common & restricted 2.2% OIL, GAS & CONSUMABLE FUELS, CHINA - -------------------------------------------------------------------------------- Anglo American PLC 2.0% METALS & MINING, SOUTH AFRICA - -------------------------------------------------------------------------------- Banco Bradesco SA, ADR, pfd. 2.0% COMMERCIAL BANKS, BRAZIL - -------------------------------------------------------------------------------- Kimberly Clark de Mexico SA de CV, A 2.0% HOUSEHOLD PRODUCTS, MEXICO - -------------------------------------------------------------------------------- Companhia Vale do Rio Doce, ADR, pfd., A 1.7% METALS & MINING, BRAZIL - -------------------------------------------------------------------------------- Daewoo Shipbuilding & Marine Engineering Co. Ltd. 1.6% MACHINERY, SOUTH KOREA - -------------------------------------------------------------------------------- largest banks. Conversely, we reduced exposure to Singapore and Hong Kong as we sold some shares as selective stocks reached our sale price targets. In Latin America, we increased our allocations to Brazil and Mexico, while eliminating exposure to Argentina via the sale of Tenaris. Brazil and Mexico benefited from greater investor interest and fund inflows during 2005. Significant purchases included adding to Petroleo Brasileiro (Petrobras), Brazil's national oil and gas company with activities in the exploration, production, refining, transportation and distribution of oil and its byproducts; Companhia Vale do Rio Doce, a Brazilian producer of iron ore that is among the world's largest; and Telefonos de Mexico, Mexico's nationwide provider of fixed-line telephone services and the leading Internet and local and long-distance services provider. We also initiated exposure to Panama during the period. The Fund's largest sales were in Europe as some stock valuations grew increasingly expensive due to the region's strong market performances. Significant sales included stocks from Austria, Belgium, Greece, Hungary and Poland. As we searched for undervalued stocks in the region, in line with our strategy, we made selective purchases in Russia, Finland and the U.K. Key purchases included initiating positions in Mining and Metallurgical Co. Norilsk Nickel, one of the world's largest precious metals companies; Mobile Telesystems, one of Eastern Europe's and Russia's largest mobile telecommunication services providers; and Nokian Renkaat, a well-known Finnish tire manufacturer with significant exposure to Russia's market. We also added to our positions in HSBC Holdings, one of the world's largest banking and financial services organizations; and Provident Financial, a consumer finance company with exposure to Central and Eastern Europe, as well as Latin America. In addition, we trimmed our South African holdings during the period as we realized profits on selective stocks. 4 | Annual Report We thank you for your continued participation in the Fund and look forward to serving your future investment needs. [PHOTO] /s/ Mark Mobius Mark Mobius Managing Director Templeton Asset Management Ltd. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 PERFORMANCE SUMMARY AS OF 12/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- SYMBOL: TEEMX CHANGE 12/31/05 12/31/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.84 $ 18.93 $ 15.09 - -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/05-12/31/05) - -------------------------------------------------------------------------------- Dividend Income $ 0.3765 - -------------------------------------------------------------------------------- PERFORMANCE(1) - -------------------------------------------------------------------------------- 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------- Cumulative Total Return(2) +28.09% +141.27% +121.92% - -------------------------------------------------------------------------------- Average Annual Total Return(3) +28.09% +19.26% +8.30% - -------------------------------------------------------------------------------- Value of $1,000,000 Investment(4) $1,280,944 $2,412,749 $2,219,224 - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. 6 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. 1/1/96-12/31/05 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] TIFI Emerging S&P/IFCI MSCI EM Inception Date Markets Series Composite Index(5) Index(5) - -------------- -------------- ------------------- ----------------- 12/01/95 1000000.00 1000000.00 1000000.00 01/01/96 1095813.90 1083786.00 1071081.76 02/01/96 1078099.20 1059721.42 1054052.05 03/01/96 1091155.73 1075198.01 1062261.80 04/01/96 1120066.42 1118562.80 1104733.79 05/01/96 1138718.60 1108730.62 1099800.88 06/01/96 1140583.83 1121900.89 1106668.50 07/01/96 1088357.61 1048189.85 1031034.78 08/01/96 1110740.32 1080690.68 1057425.90 09/01/96 1131258.00 1096652.81 1066586.24 10/01/96 1128460.08 1073104.12 1038140.49 11/01/96 1164831.92 1088944.86 1055535.27 12/01/96 1188631.11 1093709.22 1060309.45 01/01/97 1276465.48 1170970.78 1132632.82 02/01/97 1325117.95 1228325.19 1181138.22 03/01/97 1298309.17 1197554.09 1150112.26 04/01/97 1310756.02 1177222.10 1152143.97 05/01/97 1372990.78 1217248.81 1185118.75 06/01/97 1422778.34 1269808.52 1248542.79 07/01/97 1487885.55 1282068.40 1267180.94 08/01/97 1355756.77 1118380.72 1105933.06 09/01/97 1418948.71 1154796.22 1136576.32 10/01/97 1154691.35 965314.24 950078.39 11/01/97 1069477.84 920371.44 915412.28 12/01/97 1054073.85 932540.28 937471.89 01/01/98 968691.10 871392.59 863945.72 02/01/98 1064238.99 960367.80 954120.66 03/01/98 1106017.57 998027.49 995525.64 04/01/98 1108058.17 1000728.31 984681.02 05/01/98 951950.76 875883.83 849739.60 06/01/98 860122.84 786119.62 760605.21 07/01/98 866244.77 817467.30 784721.23 08/01/98 665243.41 587655.15 557827.12 09/01/98 698913.68 615937.85 593212.81 10/01/98 804005.86 686674.96 655679.19 11/01/98 890732.32 738324.28 710210.95 12/01/98 864014.53 727308.59 699918.34 01/01/99 822425.45 710496.77 688625.75 02/01/99 822425.25 723151.15 695324.06 03/01/99 937388.56 806724.73 786961.05 04/01/99 1120496.79 916729.89 884324.59 05/01/99 1090325.63 900342.91 879180.05 06/01/99 1196445.21 998513.03 978959.77 07/01/99 1143385.66 984007.53 952365.84 08/01/99 1102810.36 994628.71 961030.60 09/01/99 1053912.27 966922.59 928507.31 10/01/99 1084083.56 983370.25 948277.72 11/01/99 1175637.46 1071768.88 1033304.59 12/01/99 1352905.58 1215428.03 1164720.49 01/01/00 1292077.46 1217157.77 1171662.18 02/01/00 1245931.90 1215974.27 1187136.36 03/01/00 1262251.30 1233757.17 1192929.92 04/01/00 1153128.85 1106120.84 1079848.82 05/01/00 1060794.51 1075319.39 1035205.79 06/01/00 1139488.29 1105756.68 1071670.82 07/01/00 1091222.61 1052590.05 1016555.29 08/01/00 1112207.60 1056565.41 1021553.45 09/01/00 1003085.25 962067.19 932355.57 10/01/00 919144.82 884168.36 864757.00 11/01/00 870878.91 806057.11 789147.97 12/01/00 919790.34 829393.38 808200.58 01/01/01 1023877.59 935908.72 919489.81 02/01/01 943156.96 863806.03 847492.72 03/01/01 855001.60 789397.02 764252.42 04/01/01 899610.43 836130.25 802015.49 05/01/01 931474.04 861439.02 811588.53 06/01/01 927225.59 845841.05 794929.18 07/01/01 873057.41 788031.44 744697.17 08/01/01 876243.78 777319.21 737351.61 09/01/01 766846.02 656814.25 623224.68 10/01/01 790212.49 697538.92 661901.31 11/01/01 838007.45 779261.37 731006.03 12/01/01 873838.18 844080.96 789029.80 01/01/02 919260.37 874214.79 815768.36 02/01/02 918178.80 891087.31 829170.26 03/01/02 973227.67 953175.74 879046.01 04/01/02 1005740.76 962006.49 884751.39 05/01/02 999238.28 946256.79 870654.61 06/01/02 936379.53 877977.73 805336.42 07/01/02 886525.92 822383.39 744079.90 08/01/02 884358.29 833034.93 755543.56 09/01/02 819331.78 740478.86 674033.39 10/01/02 841007.25 788031.44 717769.91 11/01/02 909284.98 842745.73 767176.54 12/01/02 890922.10 810851.82 741686.64 01/01/03 881022.88 811580.13 738457.41 02/01/03 879923.19 787545.90 718526.51 03/01/03 848077.13 758625.92 698152.94 04/01/03 936418.51 836069.55 760338.90 05/01/03 991631.85 894243.32 814930.63 06/01/03 1024759.81 949594.88 861354.93 07/01/03 1068930.72 1000637.27 915276.48 08/01/03 1119727.02 1072831.00 976734.06 09/01/03 1152855.08 1084544.65 983894.44 10/01/03 1242300.76 1172639.82 1067621.50 11/01/03 1267698.92 1187691.56 1080742.99 12/01/03 1370621.66 1274299.76 1159090.95 01/01/04 1414544.75 1317846.63 1200256.08 02/01/04 1466351.32 1381361.33 1255623.81 03/01/04 1464849.59 1407125.30 1271757.59 04/01/04 1382338.72 1300731.34 1167782.17 05/01/04 1365384.15 1283039.48 1144782.53 06/01/04 1393641.45 1283100.17 1150011.73 07/01/04 1372165.92 1256698.93 1129676.95 08/01/04 1418507.47 1312869.84 1176965.44 09/01/04 1491975.97 1388674.78 1244943.20 10/01/04 1536057.25 1428822.87 1274768.13 11/01/04 1653607.19 1552969.38 1392843.85 12/01/04 1732489.96 1632567.60 1459897.46 01/01/05 1719860.98 1636512.61 1464518.20 02/01/05 1853040.94 1773890.09 1593115.81 03/01/05 1764010.13 1663126.27 1488159.80 04/01/05 1709784.04 1625861.07 1448495.53 05/01/05 1777860.84 1686796.35 1499500.01 06/01/05 1835547.43 1743665.22 1551255.80 07/01/05 1939396.57 1864352.26 1661019.49 08/01/05 1930179.89 1880041.27 1675971.63 09/01/05 2085935.76 2055594.33 1832251.34 10/01/05 1969404.43 1921676.33 1712538.95 11/01/05 2121690.10 2077595.36 1854332.12 12/01/05 2219224.13 2207113.16 1964180.46 AVERAGE ANNUAL TOTAL RETURN - -------------------------------------------------- 12/31/05 - -------------------------------------------------- 1-Year +28.09% - -------------------------------------------------- 5-Year +19.26% - -------------------------------------------------- 10-Year +8.30% - -------------------------------------------------- ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1) Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. (2) Cumulative total return represents the change in value of an investment over the periods indicated. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5) Source: Standard & Poor's Micropal. The S&P/IFCI Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets. Annual Report | 7 YOUR FUND'S EXPENSES As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05 - ------------------------------------------------------------------------------------------------------- Actual $ 1,000.00 $ 1,209.00 $ 7.85 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000.00 $ 1,018.10 $ 7.17 - -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 1.41%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 9 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL HIGHLIGHTS EMERGING MARKETS SERIES
---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 15.09 $ 12.18 $ 8.10 $ 8.08 $ 8.66 ---------------------------------------------------------------------- Income from investment operations: Net investment income(a) ...................... 0.33 0.21 0.24 0.14 0.15 Net realized and unrealized gains (losses) .... 3.89 2.97 4.10 0.02 (0.58) ---------------------------------------------------------------------- Total from investment operations ................. 4.22 3.18 4.34 0.16 (0.43) ---------------------------------------------------------------------- Less distributions from net investment income .... (0.38) (0.27) (0.26) (0.14) (0.15) ---------------------------------------------------------------------- Redemption fees .................................. --(b) --(b) -- -- -- ---------------------------------------------------------------------- Net asset value, end of year ..................... $ 18.93 $ 15.09 $ 12.18 $ 8.10 $ 8.08 ====================================================================== Total return ..................................... 28.09% 26.40% 53.84% 1.96% (5.00)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $2,841,536 $2,063,532 $2,092,229 $1,234,595 $1,274,579 Ratios to average net assets: Expenses ...................................... 1.42% 1.45% 1.46% 1.49% 1.45% Net investment income ......................... 1.98% 1.62% 2.52% 1.67% 1.85% Portfolio turnover rate .......................... 36.42% 52.07% 46.83% 53.36% 64.92%
(a) Based on average daily shares outstanding. (b) Amount is less than $0.01 per share. 10 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 92.1% AUSTRIA 0.4% Wienerberger AG .............................. Building Products 299,150 $ 11,970,227 ------------- BRAZIL 2.0% Centrais Eletricas Brasileiras SA (Non Taxable) .............................. Electric Utilities 844,670,000 13,726,834 Centrais Eletricas Brasileiras SA (Taxable) .................................. Electric Utilities 523,418,000 8,506,128 Companhia de Bebidas das Americas (AmBev) .... Beverages 32,034,000 10,302,172 Embraer-Empresa Bras de Aeronautica SA ....... Aerospace & Defense 71,958 553,925 Souza Cruz SA (Non Taxable) .................. Tobacco 1,975,316 24,498,210 ------------- 57,587,269 ------------- CHINA 9.6% Aluminum Corp. of China Ltd., H .............. Metals & Mining 35,070,000 26,685,883 Anhui Conch Cement Co. Ltd., H ............... Construction Materials 8,854,000 10,905,277 (a) China Construction Bank, H ................... Commercial Banks 1,920,000 668,588 (a),(b) China Construction Bank, H, 144A ............. Commercial Banks 57,914,000 20,166,992 China International Marine Containers (Group), Co. Ltd., B ....................... Machinery 3,331,900 2,685,751 China Mobile (Hong Kong) Ltd. ................ Wireless Telecommunication Services 14,885,000 70,454,496 China Resources Enterprise Ltd. .............. Distributors 13,688,000 24,450,265 China Travel International Investment Hong Kong Ltd. ............................. Hotels, Restaurants & Leisure 16,246,000 3,897,205 Chongqing Changan Automobile Co. Ltd., B ................................ Automobiles 5,498,286 1,552,978 Denway Motors Ltd. ........................... Automobiles 46,005,000 15,278,337 GOME Electrical Appliances Holdings Ltd. ..... Specialty Retail 2,780,000 1,882,339 Huadian Power International Corp. Ltd., H .... Independent Power Producers & Energy Traders 20,920,000 5,342,206 Huaneng Power International, Inc., H ......... Independent Power Producers & Energy Traders 6,300,000 4,143,855 PetroChina Co. Ltd., H ....................... Oil, Gas & Consumable Fuels 58,852,000 48,197,971 (b) PetroChina Co. Ltd., H, 144A ................. Oil, Gas & Consumable Fuels 16,358,000 13,396,697 Shanghai Industrial Holdings Ltd. ............ Industrial Conglomerates 7,249,000 15,098,870 TCL Multimedia Technology Holdings Ltd. ...... Household Durables 3,586,000 517,991 Travelsky Technology Ltd., H ................. IT Services 7,810,000 7,201,963 ------------- 272,527,664 ------------- CROATIA 0.7% Pliva d.d., GDR, Reg S ....................... Pharmaceuticals 1,453,900 18,944,317 ------------- CZECH REPUBLIC 0.1% Philip Morris CR AS .......................... Tobacco 2,043 1,517,429 ------------- FINLAND 0.4% Nokian Renkaat OYJ ........................... Auto Components 800,670 10,094,850 -------------
Annual Report | 11 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) HONG KONG 2.2% Cheung Kong (Holdings) Ltd. .................. Real Estate 3,165,000 $ 32,471,900 Cheung Kong Infrastructure Holdings Ltd. .............................. Electric Utilities 2,382,000 7,495,928 Dairy Farm International Holdings Ltd. ....... Food & Staples Retailing 3,187,519 11,538,819 MTR Corp. Ltd. ............................... Road & Rail 6,240,564 12,274,039 ------------- 63,780,686 ------------- HUNGARY 2.4% BorsodChem Rt. ............................... Chemicals 508,584 5,482,229 Gedeon Richter Ltd. .......................... Pharmaceuticals 105,988 19,032,339 Magyar Telekom Ltd. .......................... Diversified Telecommunication Services 4,927,393 22,053,992 MOL Magyar Olaj-es Gazipari Rt. .............. Oil, Gas & Consumable Fuels 139,904 13,080,962 OTP Bank ..................................... Commercial Banks 300,355 9,807,252 ------------- 69,456,774 ------------- INDIA 3.1% Bharat Petroleum Corp. Ltd. .................. Oil, Gas & Consumable Fuels 126,496 1,220,682 Gail India Ltd. .............................. Gas Utilities 1,927,980 11,389,201 (a),(b) Himatsingka Seide Ltd., GDR, 144A ............ Textiles Apparel & Luxury Goods 1,664,000 4,762,368 Hindalco Industries Inc. ..................... Metals & Mining 8,000 25,496 Hindustan Lever Ltd. ......................... Household Products 5,945,800 26,065,319 Hindustan Petroleum Corp. Ltd. ............... Oil, Gas & Consumable Fuels 3,308,489 24,173,036 Indian Oil Corp. Ltd. ........................ Oil, Gas & Consumable Fuels 153,591 1,900,815 National Aluminum Co. Ltd. ................... Metals & Mining 204,800 1,000,445 Oil & Natural Gas Corp. Ltd. ................. Oil, Gas & Consumable Fuels 214,000 5,588,161 Ranbaxy Laboratories Ltd. .................... Pharmaceuticals 80,000 644,249 Tata Tea Ltd. ................................ Food Products 517,712 10,911,705 ------------- 87,681,477 ------------- INDONESIA 0.5% PT Astra International Tbk ................... Automobiles 10,347,000 10,736,460 PT Bank Danamon Indonesia Tbk ................ Commercial Banks 7,368,500 3,560,567 ------------- 14,297,027 ------------- MALAYSIA 1.9% Kuala Lumpur Kepong Bhd. ..................... Food Products 1,494,486 3,321,519 Maxis Communications Bhd. .................... Wireless Telecommunication Services 8,084,000 17,966,821 Resorts World Bhd. ........................... Hotels, Restaurants & Leisure 3,836,000 11,367,430 Sime Darby Bhd. .............................. Industrial Conglomerates 7,259,300 11,812,328 Tanjong PLC .................................. Hotels, Restaurants & Leisure 1,197,200 4,593,041 YTL Corp. Bhd. ............................... Multi-Utilities 175,293 248,133 YTL Power International Bhd. ................. Water Utilities 8,677,656 5,142,995 ------------- 54,452,267 ------------- MEXICO 4.2% Fomento Economico Mexicano SA de CV (FEMSA), ADR ............................... Beverages 330,606 23,972,241 Grupo Bimbo SA de CV, A ...................... Food Products 1,513,034 5,267,679 (a) Grupo Televisa SA ............................ Media 1,156,366 4,624,376 Kimberly Clark de Mexico SA de CV, A ......... Household Products 15,955,381 57,050,527
12 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) MEXICO (CONTINUED) Telefonos de Mexico SA de CV (Telmex), L, ADR ........................... Diversified Telecommunication Services 1,120,658 $ 27,657,840 ------------- 118,572,663 ------------- PANAMA 0.3% Banco Latinoamericano de Exportaciones SA, E ...................................... Commercial Banks 470,100 8,602,830 ------------- PHILIPPINES 1.2% San Miguel Corp., B .......................... Beverages 20,989,098 35,028,006 ------------- POLAND 1.7% Polski Koncern Naftowy Orlen SA .............. Oil, Gas & Consumable Fuels 1,118,171 21,582,060 Telekomunikacja Polska SA .................... Diversified Telecommunication Services 3,653,893 26,320,177 ------------- 47,902,237 ------------- PORTUGAL 0.2% (a) Jeronimo Martins SGPS SA ..................... Food & Staples Retailing 358,881 5,395,738 ------------- RUSSIA 4.0% Lukoil Holdings, ADR ......................... Oil, Gas & Consumable Fuels 712,520 42,323,688 Mining and Metallurgical Co. Norilsk Nickel .. Metals & Mining 375,900 33,304,740 Mobile Telesystems, ADR ...................... Wireless Telecommunication Services 575,600 20,146,000 (b) Novolipetsk Steel, 144A ...................... Metals & Mining 3,402,000 4,864,860 Unified Energy Systems ....................... Electric Utilities 33,176,500 14,066,836 ------------- 114,706,124 ------------- SINGAPORE 4.1% ComfortDelGro Corp. Ltd. ..................... Road & Rail 16,213,000 15,599,266 DBS Group Holdings Ltd. ...................... Commercial Banks 840,000 8,334,586 Fraser and Neave Ltd. ........................ Industrial Conglomerates 3,946,318 43,902,031 Keppel Corp. Ltd. ............................ Industrial Conglomerates 1,623,053 10,736,091 Singapore Press Holdings Ltd. ................ Media 2,384,500 6,165,760 Singapore Technologies Engineering Ltd. ...... Aerospace & Defense 3,928,000 6,755,513 Singapore Telecommunications Ltd. ............ Diversified Telecommunication Services 15,977,428 25,076,573 ------------- 116,569,820 ------------- SOUTH AFRICA 9.1% Anglo American PLC ........................... Metals & Mining 1,699,616 57,401,492 Edgars Consolidated Stores Ltd. .............. Specialty Retail 1,314,350 7,303,445 (a) Imperial Holdings Ltd. ....................... Air Freight & Logistics 722,811 16,061,197 JD Group Ltd. ................................ Specialty Retail 96,519 1,169,211 Nampak Ltd. .................................. Containers & Packaging 1,385,910 3,688,459 Nedbank Group Ltd. ........................... Commercial Banks 2,166,957 34,246,654 (b) Nedbank Group Ltd., 144A ..................... Commercial Banks 254,187 4,017,179 Old Mutual PLC ............................... Insurance 14,449,770 40,957,024 Remgro Ltd. .................................. Diversified Financial Services 3,286,244 63,361,797 SABMiller PLC ................................ Beverages 531,896 9,898,183 Sappi Ltd. ................................... Paper & Forest Products 1,629,594 18,674,336 (a) Steinhoff International Holdings Ltd. ........ Household Durables 565,000 1,674,239 ------------- 258,453,216 -------------
Annual Report | 13 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) SOUTH KOREA 20.5% CJ Corp. ..................................... Food Products 387,490 $ 40,191,271 (a) Daewoo Shipbuilding & Marine Engineering Co. Ltd. ....................... Machinery 1,667,110 45,586,978 Hana Financial Group Inc. .................... Commercial Banks 920,716 42,220,426 (a) Hite Brewery Co. Ltd. ........................ Beverages 104,809 14,980,145 (a) Hyundai Development Co. ...................... Construction & Engineering 840,260 38,197,427 (a) Kangwon Land Inc. ............................ Hotels, Restaurants & Leisure 1,762,897 35,957,850 Korea Gas Corp. .............................. Gas Utilities 325,370 10,705,723 (a) LG Card Co. Ltd. ............................. Consumer Finance 448,090 22,460,094 LG Chem Ltd. ................................. Chemicals 461,590 26,114,769 (a) LG Corp. ..................................... Industrial Conglomerates 941,000 29,514,243 LG Electronics Inc. .......................... Household Durables 258,740 22,933,481 LG Household & Health Care Ltd. .............. Household Products 61,930 3,380,794 (a) LG Petrochemical Co. Ltd. .................... Chemicals 318,370 7,963,200 (a) LG Philips LCD Co. Ltd. ...................... Electronic Equipment & Instruments 156,760 6,682,722 POSCO ........................................ Metals & Mining 79,400 15,919,404 Samsung Electronics Co. Ltd. ................. Semiconductors & Semiconductor Equipment 187,210 122,452,993 Samsung Fine Chemicals Co. Ltd. .............. Chemicals 703,670 23,222,856 Samsung Heavy Industries Co. Ltd. ............ Machinery 747,750 13,173,759 (a) Shinhan Financial Group Co. Ltd. ............. Commercial Banks 401,000 16,338,511 SK Corp. ..................................... Oil, Gas & Consumable Fuels 417,910 21,611,028 SK Telecom Co. Ltd. .......................... Wireless Telecommunication Services 131,819 23,681,627 ------------- 583,289,301 ------------- SWEDEN 0.8% Oriflame Cosmetics SA, SDR ................... Personal Products 781,400 22,520,999 ------------- TAIWAN 13.6% Acer Inc. .................................... Computers & Peripherals 4,211,268 10,583,815 (a) AU Optronics Corp. ........................... Electronic Equipment & Instruments 1,594,000 2,379,358 BenQ Corp. ................................... Computers & Peripherals 7,106,000 6,872,969 Chinatrust Financial Holding Co. Ltd. ........ Commercial Banks 13,734,059 10,877,965 Chunghwa Telecom Co. Ltd. .................... Diversified Telecommunication Services 12,123,000 20,976,540 D-Link Corp. ................................. Communications Equipment 17,660,036 20,228,089 Delta Electronics Inc. ....................... Electronic Equipment & Instruments 4,479,917 9,184,604 Lite-On Technology Corp. ..................... Computers & Peripherals 19,220,880 26,202,440 MediaTek Inc. ................................ Semiconductors & Semiconductor Equipment 3,291,200 38,800,798 Mega Financial Holding Co. Ltd. .............. Commercial Banks 54,408,032 35,386,395 Premier Image Technology Corp. ............... Leisure Equipment & Products 12,086,020 16,218,274 President Chain Store Corp. .................. Food & Staples Retailing 7,844,010 16,440,007 Realtek Semiconductor Corp. .................. Semiconductors & Semiconductor Equipment 16,815,450 19,670,488 Siliconware Precision Industries Co. Ltd. .... Semiconductors & Semiconductor Equipment 7,831,237 10,985,895 Sunplus Technology Co. Ltd. .................. Semiconductors & Semiconductor Equipment 12,015,260 15,226,564 Synnex Technology International Corp. ........ Electronic Equipment & Instruments 9,323,130 11,488,298 Taiwan Mobile Co. Ltd. ....................... Wireless Telecommunication Services 40,388,878 35,311,739 Taiwan Semiconductor Manufacturing Co. Ltd. ..................... Semiconductors & Semiconductor Equipment 21,058,056 40,093,476 Uni-President Enterprises Corp. .............. Food Products 54,962,180 26,119,447 Yang Ming Marine Transport Corp. ............. Marine 2,764,000 1,797,676 Yuanta Core Pacific Securities Co. ........... Capital Markets 17,572,704 12,232,077 ------------- 387,076,914 -------------
14 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) THAILAND 3.4% Bangkok Bank Public Co. Ltd., fgn. ........... Commercial Banks 2,939,500 $ 8,239,915 BEC World Public Co. Ltd., fgn. .............. Media 8,464,300 2,826,591 Kasikornbank Public Co. Ltd., fgn. ........... Commercial Banks 13,333,200 24,375,137 Land and House Public Co. Ltd., fgn. ......... Household Durables 22,311,831 4,840,348 Shin Corp. Public Co. Ltd., fgn. ............. Wireless Telecommunication Services 10,526,900 10,841,231 Siam Cement Public Co. Ltd., fgn. ............ Construction Materials 2,509,436 16,148,473 Siam Commercial Bank Public Co. Ltd., fgn. ...................... Commercial Banks 8,003,100 10,144,088 Siam Makro Public Co. Ltd., fgn. ............. Food & Staples Retailing 388,600 700,001 (a) Thai Airways International Public Co. Ltd., fgn. ...................... Airlines 3,898,200 4,180,885 (a) TMB Bank Public Co. Ltd., fgn. ............... Commercial Banks 126,962,200 13,307,434 (a) True Corp. Public Co. Ltd., rts., 3/28/08 .... Diversified Telecommunication Services 2,088,420 -- -------------- 95,604,103 -------------- TURKEY 3.1% Arcelik AS, Br. .............................. Household Durables 4,183,860 29,121,277 KOC Holding AS ............................... Industrial Conglomerates 3,193,700 15,016,657 Migros Turk TAS .............................. Food & Staples Retailing 1,410,402 13,681,056 (a) Petkim Petrokimya Holding AS ................. Chemicals 452,300 2,629,067 Tupras-Turkiye Petrol Rafineleri AS .......... Oil, Gas & Consumable Fuels 946,600 17,382,954 Turkiye Is Bankasi, C ........................ Commercial Banks 1,107,874 9,598,020 -------------- 87,429,031 -------------- UNITED KINGDOM 2.2% HSBC Holdings PLC ............................ Commercial Banks 2,666,858 42,821,616 Provident Financial PLC ...................... Consumer Finance 2,168,230 20,423,563 -------------- 63,245,179 -------------- UNITED STATES 0.4% Avon Products Inc. ........................... Personal Products 376,000 10,734,800 -------------- TOTAL COMMON STOCKS (COST $1,788,548,711) ...................... 2,617,440,948 -------------- PREFERRED STOCKS 7.7% BRAZIL 7.7% Banco Bradesco SA, ADR, pfd. ................. Commercial Banks 1,964,352 57,260,861 Companhia Vale do Rio Doce, ADR, pfd., A ..... Metals & Mining 1,364,350 49,457,687 Klabin SA, pfd. .............................. Containers & Packaging 42,035 74,603 Petroleo Brasileiro SA, ADR, pfd. ............ Oil, Gas & Consumable Fuels 1,202,535 77,407,178 Suzano Bahia Sul Papel e Celulose SA, pfd., A ....................... Paper & Forest Products 960,237 4,833,422 Unibanco Uniao de Bancos Brasileiros SA, GDR, pfd. .................. Commercial Banks 228,000 14,493,960 Usinas Siderurgicas de Minas Gerais SA, pfd., A ................... Metals & Mining 507,202 12,060,228 Votorantim Celulose e Papel SA, ADR, pfd. .... Paper & Forest Products 59,500 731,255 -------------- TOTAL PREFERRED STOCKS (COST $129,383,221) ... 216,319,194 --------------
Annual Report | 15 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ EMERGING MARKETS SERIES INDUSTRY PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS (COST $20,915,713) 0.7% UNITED STATES 0.7% (c) U.S. Treasury Bills, 1/05/06 - 3/23/06 ....... United States $ 21,030,000 $ 20,920,733 --------------- TOTAL INVESTMENTS (COST $1,938,847,645) 100.5% ............... 2,854,680,875 OTHER ASSETS, LESS LIABILITIES (0.5)% ........ (13,144,422) --------------- NET ASSETS 100.0% ............................ $2,841,536,453 ===============
SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt GDR - Global Depository Receipt SDR - Swedish Depository Receipt (a) Non-income producing. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2005, the aggregate value of these securities was $47,208,096, representing 1.66% of net assets. (c) The security is traded on a discount basis with no stated coupon rate. 16 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2005
--------------- EMERGING MARKETS SERIES --------------- Assets: Investments in securities: Cost .................................................................... $ 1,938,847,645 --------------- Value ................................................................... $ 2,854,680,875 Foreign currency, at value (cost $1,338,137) ............................... 1,309,122 Receivables: Investment securities sold .............................................. 3,904,002 Capital shares sold ..................................................... 2,000,753 Dividends ............................................................... 4,543,817 Foreign income tax ...................................................... 1,196,587 --------------- Total assets ......................................................... 2,867,635,156 =============== Liabilities: Payables: Investment securities purchased ......................................... 16,217 Capital shares redeemed ................................................. 22,111,039 Affiliates .............................................................. 3,102,348 Deferred taxes ............................................................. 172,369 Funds advanced by custodian ................................................ 41,310 Accrued expenses and other liabilities ..................................... 655,420 --------------- Total liabilities .................................................... 26,098,703 --------------- Net assets, at value .............................................. $ 2,841,536,453 =============== Net assets consist of: Paid-in capital ............................................................ $ 1,990,285,401 Distributions in excess of net investment income ........................... (35,986,193) Net unrealized appreciation (depreciation) ................................. 915,630,626 Accumulated net realized gain (loss) ....................................... (28,393,381) --------------- Net assets, at value .............................................. $ 2,841,536,453 =============== Shares outstanding ............................................................ 150,136,201 =============== Net asset value per share(a) .................................................. $ 18.93 ===============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | See notes to financial statements. | 17 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2005
-------------- EMERGING MARKETS SERIES -------------- Investment income: Dividends (net of foreign taxes of $6,069,643) ........................... $ 77,719,597 Interest (net of foreign taxes of $191) .................................. 2,558,319 Other income (Note 8) .................................................... 305,837 -------------- Total investment income ............................................... 80,583,753 -------------- Expenses: Management fees (Note 3a) ................................................... 28,989,228 Administrative fees (Note 3b) ............................................... 1,954,710 Transfer agent fees (Note 3c) ............................................... 21,500 Custodian fees (Note 4) ..................................................... 2,342,842 Reports to shareholders ..................................................... 26,500 Registration and filing fees ................................................ 105,600 Professional fees ........................................................... 96,393 Directors' fees and expenses ................................................ 43,600 Other ....................................................................... 60,300 -------------- Total expenses ........................................................... 33,640,673 Expense reductions (Note 4) .............................................. (5,971) -------------- Net expenses .......................................................... 33,634,702 -------------- Net investment income .............................................. 46,949,051 -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments (net of foreign taxes of $183,885) ........................... 329,182,608 Foreign currency transactions ............................................ (2,597,244) -------------- Net realized gain (loss) .............................................. 326,585,364 Net change in unrealized appreciation (depreciation) on: Investments .............................................................. 246,054,052 Translation of assets and liabilities denominated in foreign currencies .. (136,934) Change in deferred taxes on unrealized appreciation ......................... 651,321 -------------- Net change in unrealized appreciation (depreciation) .................. 246,568,439 -------------- Net realized and unrealized gain (loss) ........................................ 573,153,803 -------------- Net increase (decrease) in net assets resulting from operations ................ $ 620,102,854 ==============
18 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------- EMERGING MARKETS SERIES YEAR ENDED DECEMBER 31, ----------------------------------- 2005 2004 ----------------------------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................... $ 46,949,051 $ 31,730,390 Net realized gain (loss) from investments and foreign currency transactions ......... 326,585,364 272,225,999 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes .. 246,568,439 151,684,428 ----------------------------------- Net increase (decrease) in net assets resulting from operations .................. 620,102,854 455,640,817 ----------------------------------- Distributions to shareholders from net investment income .................................. (55,791,328) (39,319,998) ----------------------------------- Capital share transactions (Note 2) ....................................................... 213,692,478 (445,018,905) ----------------------------------- Redemption fees ........................................................................... 712 913 ----------------------------------- Net increase (decrease) in net assets ............................................ 778,004,716 (28,697,173) Net assets: Beginning of year ................................................................... 2,063,531,737 2,092,228,910 ----------------------------------- End of year ......................................................................... $ 2,841,536,453 $ 2,063,531,737 =================================== Distributions in excess of net investment income included in net assets: End of year ......................................................................... $ (35,986,193) $ (24,856,992) ===================================
Annual Report | See notes to financial statements. | 19 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of four separate series. The Emerging Markets Series (the Fund) included in this report is diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into 20 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. Annual Report | 21 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund is subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. Foreign securities held by the Fund may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by TIFI are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. 22 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2005, there were 1.14 billion shares authorized ($0.01 par value) for TIFI, of which 325 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
---------------------------------------------------------- YEAR ENDED DECEMBER 31, 2005 2004 ---------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------- Shares sold ...................................... 33,273,305 $ 537,595,503 38,933,946 $ 502,321,321 Shares issued in reinvestment of distributions ... 2,750,866 49,329,161 2,567,946 35,813,965 Shares redeemed .................................. (22,672,825) (373,232,186) (76,560,769) (983,154,191) ---------------------------------------------------------- Net increase (decrease) .......................... 13,351,346 $ 213,692,478 (35,058,877) $(445,018,905) ==========================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries:
- -------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------------------- Templeton Asset Management Ltd. (TAML) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Annual Report | 23 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows: - -------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate average daily net assets of certain funds within TIFI as follows: - ---------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ---------------------------------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $21,500, of which $4,728 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At December 31, 2005, the Fund had tax basis capital losses of $25,624,201 expiring on December 31, 2010 which may be carried over to offset future capital gains, if any. During the year ended December 31, 2005, the Fund utilized $327,970,519 of capital loss carryforwards. 24 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 5. INCOME TAXES (CONTINUED) For tax purposes, realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2005, the Fund deferred realized currency losses of $602,812. The tax character of distributions paid during the years ended December 31, 2005 and 2004, was as follows: ------------------------- 2005 2004 ------------------------- Distributions paid from - ordinary income ... $55,791,328 $39,319,998 Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares and foreign taxes paid on net realized gains. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions and foreign taxes paid on net realized gains. At December 31, 2005, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows: Cost of investments .......................... $1,985,953,537 ============== Unrealized appreciation ...................... $ 889,427,359 Unrealized depreciation ...................... (20,700,021) -------------- Net unrealized appreciation (depreciation) ... $ 868,727,338 ============== Distributable earnings - ordinary income ..... $ 8,953,331 ============== 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2005, aggregated $1,030,525,159 and $833,406,915, respectively. Annual Report | 25 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds and are recorded as other income in the current period. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. 26 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 8. REGULATORY MATTERS (CONTINUED) The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. Annual Report | 27 TEMPLETON INSTITUTIONAL FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - EMERGING MARKETS SERIES: In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Emerging Markets Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 10, 2006 28 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) EMERGING MARKET SERIES Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $32,940,041 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2005. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $2,556,795 as interest-related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2005. At December 31, 2005, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid as allowed, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 15, 2005, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income and foreign qualified dividends as designated by the Fund to shareholders of record. Annual Report | 29 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES Record Date: 12/15/2005 - ----------------------------------------------------------------------- FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - ----------------------------------------------------------------------- Austria .......... 0.0010 0.0039 0.0039 Belgium .......... 0.0003 0.0012 0.0012 Bermuda .......... 0.0000 0.0001 0.0000 Brazil ........... 0.0031 0.0422 0.0009 China ............ 0.0000 0.0205 0.0083 Croatia .......... 0.0000 0.0022 0.0000 Greece ........... 0.0000 0.0009 0.0009 Hong Kong ........ 0.0000 0.0191 0.0000 Hungary .......... 0.0011 0.0074 0.0073 India ............ 0.0012 0.0087 0.0087 Indonesia ........ 0.0001 0.0004 0.0004 Malaysia ......... 0.0000 0.0050 0.0000 Mexico ........... 0.0000 0.0164 0.0164 Panama ........... 0.0000 0.0017 0.0017 Philippines ...... 0.0009 0.0022 0.0022 Poland ........... 0.0013 0.0053 0.0053 Russia ........... 0.0015 0.0080 0.0080 Singapore ........ 0.0000 0.0257 0.0000 South Africa ..... 0.0010 0.0398 0.0075 South Korea ...... 0.0115 0.0427 0.0425 Sweden ........... 0.0000 0.0021 0.0000 Taiwan ........... 0.0178 0.0649 0.0000 Thailand ......... 0.0009 0.0052 0.0052 Turkey ........... 0.0000 0.0144 0.0144 United Kingdom ... 0.0000 0.0035 0.0000 ================================================= TOTAL ............ $ 0.0417 $ 0.3435 $ 0.1348 ================================================= Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) 30 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) EMERGING MARKETS SERIES Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) In January 2006, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2005 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. Annual Report | 31 TEMPLETON INSTITUTIONAL FUNDS, INC. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods 500 East Broward Blvd. (meat packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (1932) Director Since 1992 141 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 136 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad), and White Mountains Insurance Group, Ltd. (holding company). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (1928) Director Since 1993 140 Director, Martek Biosciences 500 East Broward Blvd. Corporation, MedImmune, Inc. Suite 2100 (biotechnology), and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding company) (1987-2004) and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation 500 East Broward Blvd. 2005 (assisted living). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 101 Director, White Mountains Insurance 500 East Broward Blvd. Group, Ltd. (holding company), Suite 2100 Amerada Hess Corporation (exploration Fort Lauderdale, FL 33394-3091 and refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly, Foundation Health) (integrated managed care), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly, Commonwealth Edison) and UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since October 16 None 500 East Broward Blvd. 2005 Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow of the Brookings Institute (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas) and Weatherford International, Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003) and Total Logistics, Inc. (operating and investment business) (until 2005). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 None One Franklin Parkway President President since San Mateo, CA 94403-1906 and Chairman 1993 and of the Board Chairman of the Board since 1995 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (1945) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (1937) Vice President Since 2002 Not Applicable Not Applicable 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-2302 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional Suisse S.A., Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable 500 East Broward Blvd. Chief 2005 Suite 2100 Executive Fort Lauderdale, FL 33394-3091 Officer - Investment Management - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 14 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable One Franklin Parkway 2005 San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, FL 33394-3091 Chief Accounting Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's adviser and distributor. Nicholas F. Brady is considered to be an interested person of the Fund under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD., AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE INDEPENDENT TRUSTEES AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. 38 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. SHAREHOLDER INFORMATION EMERGING MARKETS SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 39 This page intentionally left blank. [LOGO](R) FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. EMERGING MARKETS SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT456 A2005 02/06 FOREIGN SMALLER COMPANIES SERIES ANNUAL REPORT 12/31/2005 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- -------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. -------------------------------------- Foreign Smaller Companies Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL FRANKLIN o TEMPLETON o FIDUCIARY CONTENTS ANNUAL REPORT TIFI Foreign Smaller Companies Series ...................................... 1 Performance Summary ........................................................ 7 Your Fund's Expenses ....................................................... 9 Financial Highlights and Statement of Investments .......................... 11 Financial Statements ....................................................... 17 Notes to Financial Statements .............................................. 20 Report of Independent Registered Public Accounting Firm .................... 28 Tax Designation ............................................................ 29 Board Members and Officers ................................................. 32 Shareholder Information .................................................... 39 - -------------------------------------------------------------------------------- ANNUAL REPORT TIFI FOREIGN SMALLER COMPANIES SERIES YOUR FUND'S GOAL AND MAIN INVESTMENTS: The Fund's investment goal is long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of smaller companies located outside the U.S., including emerging markets. - -------------------------------------------------------------------------------- ASSET ALLOCATION Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Equity ............................................................... 92.4% Short-Term Investments & Other Net Assets ............................ 7.6% - -------------------------------------------------------------------------------- This annual report for Templeton Institutional Funds, Inc. (TIFI) Foreign Smaller Companies Series' (the Fund) covers the fiscal year ended December 31, 2005. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 12. Annual Report | 1 - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- PERFORMANCE OVERVIEW The Fund posted a +12.28% cumulative total return for the 12-month period ended December 31, 2005. The Fund underperformed its benchmark, the S&P/Citigroup Global ex-U.S. less than $2 Billion Index, which returned +25.24% during the same period.(1) Please note that index performance information is provided for reference and that we do not attempt to track the index, but rather undertake investments on the basis of fundamental research. You can find more of the Fund's performance data in the Performance Summary beginning on page 7. ECONOMIC AND MARKET OVERVIEW The global economy overcame fears of derailment generated by higher energy costs and advanced at a solid clip during 2005, with Europe surpassing expectations. Excluding the volatile energy and food sectors, inflation remained relatively subdued worldwide, and monetary policy remained fairly accommodative. The U.S. Federal Reserve Board raised the short-term federal funds target rate with eight quarter-point increases, bringing it to 4.25%. The European Central Bank (ECB) made one quarter-point rise in short-term rates, its first increase after keeping rates at historically low levels for more than two and a half years. Even after the increases, both rates remained at levels considered accommodative for economic growth. Strong demand for oil sustained high prices during most of the year, while prices for other commodities such as industrial metals were also high, led by copper, whose contract price rose 45.4% during 2005.(2) This contributed to economic growth in countries such as Australia and Canada, and emerging markets in Asia and Latin America that are tied to mining and industrial commodities. In this environment, global equity markets performed strongly, particularly outside the U.S. One-year total return for the Morgan Stanley Capital International (MSCI) All Country (AC) World ex US Index was +17.11% in U.S. dollar terms.(3) By comparison the total return for the MSCI USA Index (1) Source: Standard & Poor's Micropal. The S&P/Citigroup Global ex-U.S. less than $2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of global developed and emerging market equity securities, excluding the U.S., with market capitalizations less than $2 billion. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: New York Mercantile Exchange. (3) Source: Standard & Poor's Micropal. The MSCI AC World ex US Index is a free float-adjusted market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. 2 | Annual Report was +5.72%.(4) In terms of sectors, energy and materials led equity market performance, and telecommunication services and consumer-related sectors lagged. Among developed countries, the Japanese equity market performed well, returning +44.70% in local currency terms for the year under review.(4) However, this market benefited primarily from investors outside Japan, and the return was significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast, the conversion into dollars enhanced equity market returns in Brazil (+57.04%), Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the consensus of many analysts appeared to be that the U.S. dollar would decline in value relative to major currencies. In fact, for the year the dollar appreciated versus the yen, the euro, the pound and most other currencies. INVESTMENT STRATEGY When choosing equity investments, we apply a bottom-up, value-oriented, long-term approach, focusing on the market price of a company's securities relative to our evaluation of the company's potential long-term (typically five years) earnings, asset value and cash flow potential. We also consider a company's price/earnings ratio, profit margins and liquidation value. MANAGER'S DISCUSSION During the year under review, the Fund benefited from the strong performance of several stocks. For example, we owned Precision Drilling Trust. Based in Canada, Precision Drilling provides integrated oilfield drilling and energy services to the oil and gas industry, including oilfield rentals, well services, catering services and drilling services. At year-end, Precision was Canada's largest driller and the world's third-largest land driller. The company performed well during the period due to increased demand for oil services given historically high oil prices. As a result, operating margins reached 35% at the company's fiscal year-end. This was a record high, as drilling activity in Canadian oilfields and pricing continued to move higher. Precision's international drilling business has expanded, especially in the Middle East, a market we believe has solid long-term growth prospects. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Asia ................................................. 36.3% Europe ............................................... 36.2% North America ........................................ 11.2% Australia & New Zealand .............................. 5.7% Latin America ........................................ 2.0% Middle East & Africa ................................. 1.0% Short-Term Investments & Other Net Assets ............ 7.6% (4) Source: Standard & Poor's Micropal. Individual country market returns are measured by MSCI country-specific indexes. The MSCI USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in the U.S. Annual Report | 3 PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Industrials ......................................... 25.6% Consumer Discretionary .............................. 19.1% Financials .......................................... 11.9% Information Technology .............................. 11.3% Materials ........................................... 8.7% Health Care ......................................... 5.5% Energy .............................................. 4.9% Telecommunication Services .......................... 2.0% Utilities ........................................... 1.9% Consumer Staples .................................... 1.5% Short-Term Investments & Other Net Assets ........... 7.6% Also performing well during the period were holdings in Bank of Pusan and Daegu Bank. Both companies have been highly profitable small-cap South Korean regional banks. Pusan and Daegu also experienced solid financial improvement due to a strong export environment, and a slow but steady recovery in domestic demand. They also maintained a 24%-33% dividend payout ratio over the past three years. These banks performed well during the period, and traded at a significant discount to larger South Korean banks. The Fund also benefited from its holding in CAE. Based in Canada, the company operates through two segments, Civil Simulation and Training and Military Simulation and Training. The civil segment supplies civil flight simulators and visual systems, and provides business and civil aviation training with nearly 500 full-flight simulators installed in more than 100 centers worldwide. The military segment supplies military flight and land-based simulators, visual and training systems to more than 30 countries. It also provides naval training systems and designs and manufactures power plant training simulators and systems. CAE performed well as the company is the leading manufacturer of commercial and military flight simulators and the second-largest training provider. CAE undertook a major initiative to divest non-core operations, reduce costs through consolidation, improve productivity, increase integration, expand military operations and services with greater emphasis on the U.S. defense market, and aggressively enter the commercial flight training market. Some holdings detracted from performance during the year under review. For example, one hindrance to the Fund's overall results was our investment in AcBel Polytech, a manufacturer of standard and custom switching power supplies and power system products. The company's products include personal computer power supplies, web server power supplies, telecom power supplies, low voltage switching regulators and direct current converters. AcBel's growth was expected to exceed its peer group's, as the company is a low-cost manufacturer with its manufacturing base centered in China. Moreover, increasing processor speeds in the personal computer market are apt to place greater demands on power supplies. We believe the company's shares represented value as AcBel had solid growth prospects that were not reflected in its low price-to-earnings (P/E) valuation of 5.5 times 2004 earnings as of December 31, 2005, and an attractive dividend yield that exceeded 9%. Furthermore, AcBel is well capitalized with more than half its market value accounted for by the net cash it carries on its balance sheet. 4 | Annual Report Also hindering performance during the period was China Pharmaceutical Group. The company is a leading global supplier of bulk vitamin C, penicillin and cephalosporin. During the period, the company suffered from margin pressure as a result of weaker product prices and higher raw materials and energy costs. We continued to hold the shares because the company is the most efficient producer of vitamin C and penicillin in China, and we expect it to gain market share from higher cost European competitors. We believe China Pharmaceutical's competitiveness should be sustainable going forward, given high barriers to entry in terms of capacity, technological expertise and the integrated nature of production. Because of the company's leading market position, we believe it should continue to benefit from China's focus on being a global manufacturing base for bulk pharmaceuticals. A number of Chinese drug producers recently gained market share in the global pharmaceutical market because of lower labor and utility costs. At 7.5 times the estimate of 2005 earnings as of December 31, 2005, China Pharmaceutical's share price did not reflect any of the growth potential we see for the company. Ngai Lik, a consumer electronics company, manufactures mini hi-fi systems, CD players, DVDs and digital cameras in Hong Kong. Its low-priced, value-for-money products are designed and developed in-house and sold directly under customers' private labels or through trading agents. Shares were under pressure during the period due in part to pricing pressure from the company's top customer, Wal-Mart, a weaker consumer spending outlook, profit margin pressure from higher energy prices and uncertainty over the intended change in its product mix to concentrate on low plastic content MP3 and portable DVD players. We believed the company's shares represented value as Ngai Lik had solid growth prospects that were not reflected in the shares' low valuation of 0.8 times price-to-book and 5 times the average fiscal year earnings-per-share from 2001-2005 as of year-end 2005. It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar increases compared with a foreign currency, an investment traded in that foreign currency will decrease in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the year ended December 31, 2005, the U.S. dollar rose in value relative to most non-U.S. currencies. As a result, the Fund's performance was TOP 10 EQUITY HOLDINGS 12/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- Hansol Paper Co. Ltd. 2.1% PAPER & FOREST PRODUCTS, SOUTH KOREA - -------------------------------------------------------------------------------- Daegu Bank Co. Ltd. 1.9% COMMERCIAL BANKS, SOUTH KOREA - -------------------------------------------------------------------------------- Bank of Pusan 1.9% COMMERCIAL BANKS, SOUTH KOREA - -------------------------------------------------------------------------------- D-Link Corp. 1.7% COMMUNICATIONS EQUIPMENT, TAIWAN - -------------------------------------------------------------------------------- Amer Sports Corp. Ltd. 1.5% LEISURE EQUIPMENT & PRODUCTS, FINLAND - -------------------------------------------------------------------------------- MDS Inc. 1.5% HEALTH CARE PROVIDERS & SERVICES, CANADA - -------------------------------------------------------------------------------- Sohgo Security Services Co. Ltd. 1.5% COMMERCIAL SERVICES & SUPPLIES, JAPAN - -------------------------------------------------------------------------------- Vedior NV 1.5% COMMERCIAL SERVICES & SUPPLIES, NETHERLANDS - -------------------------------------------------------------------------------- CAE Inc. 1.5% AEROSPACE & DEFENSE, CANADA - -------------------------------------------------------------------------------- Aalberts Industries NV 1.4% INDUSTRIAL CONGLOMERATES, NETHERLANDS - -------------------------------------------------------------------------------- Annual Report | 5 negatively affected by the portfolio's investment predominantly in securities with non-U.S. currency exposure. We thank you for your continued participation in the Fund and look forward to serving your investment needs. /s/ Tucker Scott [PHOTO] Tucker Scott, CFA /s/ Cindy L. Sweeting [PHOTO] Cindy L. Sweeting, CFA Portfolio Management Team TIFI Foreign Smaller Companies Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Annual Report PERFORMANCE SUMMARY AS OF 12/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- SYMBOL: TFSCX CHANGE 12/31/05 12/31/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.73 $18.18 $17.45 - -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/05-12/31/05) Dividend Income $0.3613 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.4434 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.5853 - -------------------------------------------------------------------------------- TOTAL $1.3900 - -------------------------------------------------------------------------------- TIFI FOREIGN SMALLER COMPANIES SERIES PAID DISTRIBUTIONS DERIVED FROM LONG-TERM CAPITAL GAINS OF 58.53 CENTS ($0.5853) PER SHARE IN DECEMBER 2005. THE FUND DESIGNATES SUCH DISTRIBUTIONS AS CAPITAL GAIN DIVIDENDS PER INTERNAL REVENUE CODE SECTION 852(B)(3)(C). PERFORMANCE(1)
- -------------------------------------------------------------------------------------------- 1-YEAR 3-YEAR INCEPTION (10/21/02) - -------------------------------------------------------------------------------------------- Cumulative Total Return(2) +12.28% +105.91% +107.97% Average Annual Total Return(3) +12.28% +27.22% +25.76% Value of $1,000,000 Investment(4) $1,122,775 $2,059,057 $2,079,647
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. Annual Report | 7 PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - -------------------------------------------------- 12/31/05 - -------------------------------------------------- 1-Year +12.28% - -------------------------------------------------- 3-Year +27.22% - -------------------------------------------------- Since Inception (10/21/02) +25.76% - -------------------------------------------------- 10/21/02-12/31/05 $ Millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] Tifi Foreign S&P/Citigroup Smaller Companies Global ex-U.S. less than Date Series $2 Billion Index(5) ----- ----------------- ------------------------ 10/02 1000000 1000000 1012070 1002689 1032000 1039233 1010000 1034511 979000 1035387 946000 1024301 950000 1011659 1022000 1085277 1107000 1178455 1153000 1238669 1218000 1285780 1287000 1366070 1317000 1435073 1412000 1540403 1431000 1547557 12/03 1527200 1646986 1580250 1711255 1624117 1773390 1603945 1842141 1566860 1766101 1569950 1740644 1619397 1805172 1575101 1744466 1572011 1768307 1622488 1835434 1662664 1890958 1779071 2039434 1852238 2140641 1852238 2165408 1931847 2266644 1892013 2211030 1812423 2149636 1833936 2158960 1882336 2218225 1973756 2315093 1981284 2370042 2043667 2485123 1951160 2398178 2008168 2500888 12/2005 2079647 2680778 ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS CARRY SPECIAL RISKS AS SUCH STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGE-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. ADDITIONALLY, SMALLER COMPANIES OFTEN HAVE RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND SMALL MARKET SHARE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1) The Fund's manager and administrator agreed in advance to assume as their own certain expenses otherwise payable by the Fund. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. This agreement may be ended after 5/1/06 upon notice to the Board of Directors. (2) Cumulative total return represents the change in value of an investment over the periods indicated. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5) Source: Standard & Poor's Micropal. The S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of global developed and emerging market equity securities, excluding the U.S., with market capitalizations less than $2 billion. 8 | Annual Report YOUR FUND'S EXPENSES As a Fund Shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000 IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50 In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 9 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------ BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05 - ------------------------------------------------------------------------------------------------------------ Actual $1,000.00 $1,104.80 $5.04 - ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000.00 $1,020.42 $4.84 - ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, of 0.95%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 10 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL HIGHLIGHTS FOREIGN SMALLER COMPANIES SERIES
------------------------------------------------------- YEAR ENDED DECEMBER 31, 2005 2004 2003 2002(d) ------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 17.45 $ 14.97 $ 10.10 $ 10.00 Income from investment operations: Net investment income (loss)(a) ........................ 0.38 0.21 0.17 (0.01) Net realized and unrealized gains (losses) ............. 1.74 2.93 4.99 0.11 ------------------------------------------------------- Total from investment operations ........................ 2.12 3.14 5.16 0.10 ------------------------------------------------------- Less distributions from: Net investment income .................................. (0.36) (0.16) (0.13) -- Net realized gains ..................................... (1.03) (0.50) (0.16) -- ------------------------------------------------------- Total distributions ..................................... (1.39) (0.66) (0.29) -- ------------------------------------------------------- Redemption fees ......................................... --(c) -- -- -- ------------------------------------------------------- Net asset value, end of year ............................ $ 18.18 $ 17.45 $ 14.97 $ 10.10 ======================================================= Total return(b) ......................................... 12.28% 21.28% 51.21 1.00% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $131,567 $ 97,495 $ 33,583 $ 6,195 Ratios to average net assets: Expenses ............................................... 1.07% 1.16% 1.58% 7.71%(e) Expenses net of waiver and payments by affiliate ....... 0.95% 0.95% 0.95% 0.95%(e) Net investment income (loss) ........................... 2.12% 1.34% 1.40% (0.55)%(e) Portfolio turnover rate ................................. 24.59% 27.51% 12.58% --
(a) Based on average daily shares outstanding. (b) Total return is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) For the period October 21, 2002 (commencement of operations) to December 31, 2002. (e) Annualized. Annual Report | See notes to financial statements. | 11 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 91.2% AUSTRALIA 5.7% Billabong International Ltd. .................. Textiles Apparel & Luxury Goods 87,656 $ 933,637 Downer EDI Ltd. ............................... Commercial Services & Supplies 347,038 1,827,810 Iluka Resources Ltd. .......................... Metals & Mining 266,395 1,532,046 (a) Mayne Pharma Ltd. ............................. Pharmaceuticals 239,900 446,986 PaperlinX Ltd. ................................ Paper & Forest Products 513,273 1,445,804 Promina Group Ltd. ............................ Insurance 187,159 664,486 Symbion Health Ltd. ........................... Health Care Providers & Services 239,900 621,205 ------------- 7,471,974 ------------- BAHAMAS 0.6% (a) Steiner Leisure Ltd. .......................... Diversified Consumer Services 21,090 749,960 ------------- BELGIUM 1.1% Barco NV ...................................... Electronic Equipment & Instruments 18,480 1,389,224 ------------- BERMUDA 0.3% (a) Weatherford International Ltd. ................ Energy Equipment & Services 11,732 424,698 ------------- BRAZIL 0.8% (b) Lojas Renner SA, 144A ......................... Multiline Retail 32,400 1,039,078 ------------- CANADA 10.3% CAE Inc. ...................................... Aerospace & Defense 261,920 1,919,951 Domtar Inc. ................................... Paper & Forest Products 103,950 600,107 (a) GSI Group Inc. ................................ Electronic Equipment & Instruments 151,050 1,640,403 Legacy Hotels ................................. Real Estate 204,730 1,409,137 Linamar Corp. ................................. Auto Components 106,490 1,073,787 MDS Inc. ...................................... Health Care Providers & Services 115,390 1,996,466 North West Company Fund ....................... Diversified Financial Services 54,150 1,677,192 (a) Open Text Corp. ............................... Internet Software & Services 61,600 871,823 Precision Drilling Trust ...................... Energy Equipment & Services 28,080 927,222 Quebecor World Inc. ........................... Commercial Services & Supplies 70,980 959,998 Transcontinental Inc., B ...................... Commercial Services & Supplies 25,630 429,997 ------------- 13,506,083 ------------- CHINA 4.7% BYD Co. Ltd., H ............................... Electrical Equipment 8,000 12,330 China Oilfield Services Ltd. .................. Energy Equipment & Services 3,454,000 1,392,086 (a) China Pharmaceutical Group Ltd. ............... Pharmaceuticals 3,168,000 490,298 China Power International Development Ltd. .... Independent Power Producers & Energy Traders 338,000 111,161 China Resources Power Co. Ltd. ................ Independent Power Producers & Energy Traders 2,036,000 1,148,814 People's Food Holdings Ltd. ................... Food Products 1,948,000 1,253,411 TCL Multimedia Technology Holdings Ltd. ....... Household Durables 4,116,000 594,548 Travelsky Technology Ltd., H .................. IT Services 599,000 552,366 Weiqiao Textile Co. Ltd. ...................... Textiles Apparel & Luxury Goods 488,500 667,827 ------------- 6,222,841 ------------- DENMARK 1.0% (a) Vestas Wind Systems AS ........................ Electrical Equipment 68,440 1,123,961 (a),(b) Vestas Wind Systems AS, 144A .................. Electrical Equipment 14,740 242,069 ------------- 1,366,030 -------------
12 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) FINLAND 3.6% Amer Sports Corp. Ltd. ........................ Leisure Equipment & Products 109,180 $ 2,033,146 Huhtamaki OYJ ................................. Containers & Packaging 67,870 1,117,639 KCI Konecranes OYJ ............................ Machinery 10,390 511,934 Metso OYJ ..................................... Machinery 38,740 1,060,338 ------------- 4,723,057 ------------- GERMANY 2.2% Celesio AG .................................... Health Care Providers & Services 5,490 471,072 (a) Jenoptik AG ................................... Semiconductors & Semiconductor Equipment 118,490 1,071,696 Vossloh AG .................................... Machinery 28,030 1,370,803 ------------- 2,913,571 ------------- HONG KONG 6.8% Asia Satellite Telecommunications Holdings Ltd. Diversified Telecommunication Services 318,000 563,928 Dah Sing Financial Holdings Ltd. .............. Commercial Banks 137,600 956,535 Fountain Set Holdings Ltd. .................... Textiles Apparel & Luxury Goods 1,400,000 645,503 Giordano International Ltd. ................... Specialty Retail 1,694,000 950,378 Hang Lung Group Ltd. .......................... Real Estate 355,000 753,161 Hopewell Holdings Ltd. ........................ Transportation Infrastructure 384,000 963,263 Lerado Group Holdings Co. Ltd. ................ Leisure Equipment & Products 3,815,186 228,804 Ngai Lik Industrial Holding Ltd. .............. Household Durables 2,832,000 372,552 Techtronic Industries Co. Ltd. ................ Household Durables 680,000 1,618,077 Texwinca Holdings Ltd. ........................ Textiles Apparel & Luxury Goods 667,000 481,734 Yue Yuen Industrial Holdings Ltd. ............. Textiles Apparel & Luxury Goods 501,000 1,398,909 ------------- 8,932,844 ------------- INDIA 1.7% Satyam Computer Services Ltd. ................. IT Services 48,680 798,224 Tata Motors Ltd., ADR ......................... Machinery 96,770 1,390,585 ------------- 2,188,809 ------------- INDONESIA 0.5% PT Indosat Tbk ................................ Diversified Telecommunication Services 1,215,400 686,213 ------------- ISRAEL 1.0% (a) Orbotech Ltd. ................................. Electronic Equipment & Instruments 54,930 1,316,672 ------------- JAPAN 5.8% Japan Airport Terminal Co. Ltd. ............... Transportation Infrastructure 80,000 753,029 MEITEC Corp. .................................. Commercial Services & Supplies 51,500 1,666,780 Nichii Gakkan Co. ............................. Health Care Providers & Services 26,900 683,724 Sangetsu Co. Ltd. ............................. Household Durables 29,300 781,962 Sohgo Security Services Co. Ltd. .............. Commercial Services & Supplies 130,100 1,989,583 Tokyo Individualized Educational Institute Inc. Diversified Consumer Services 168,840 1,808,132 ------------- 7,683,210 ------------- LUXEMBOURG 0.4% (a) Thiel Logistik AG ............................. IT Services 149,260 515,968 ------------- MEXICO 0.8% Grupo Aeroportuario del Sureste SA de CV, ADR . Transportation Infrastructure 31,810 1,028,735 -------------
Annual Report | 13 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) NETHERLANDS 8.1% Aalberts Industries NV ........................ Industrial Conglomerates 34,657 $ 1,840,137 Arcadis NV .................................... Construction & Engineering 17,400 552,053 (a) Draka Holding NV .............................. Electrical Equipment 88,180 1,381,105 (a),(b) Draka Holding NV, 144A ........................ Electrical Equipment 15,715 246,133 Imtech NV ..................................... Construction & Engineering 38,000 1,237,123 Oce NV ........................................ Office Electronics 49,460 713,764 OPG Groep NV .................................. Health Care Providers & Services 24,110 1,721,120 SBM Offshore NV ............................... Energy Equipment & Services 12,950 1,046,331 Vedior NV ..................................... Commercial Services & Supplies 132,640 1,965,964 ------------- 10,703,730 ------------- NORWAY 1.1% Prosafe ASA ................................... Energy Equipment & Services 33,920 1,439,801 ------------- RUSSIA 0.4% (a),(b) Pyaterochka Holding NV, GDR, 144A ............. Food & Staples Retailing 36,528 529,656 ------------- SINGAPORE 2.2% Huan Hsin Holdings Ltd. ....................... Electronic Equipment & Instruments 1,516,000 606,236 OSIM International Ltd. ....................... Specialty Retail 977,800 934,906 Venture Corp. Ltd. ............................ Electronic Equipment & Instruments 131,000 1,087,104 Want Want Holdings Ltd. ....................... Food Products 226,000 224,870 ------------- 2,853,116 ------------- SOUTH KOREA 7.0% Bank of Pusan ................................. Commercial Banks 186,080 2,447,206 (a) Dae Duck Electronics Co. Ltd. ................. Electronic Equipment & Instruments 7,700 69,548 Daegu Bank Co. Ltd. ........................... Commercial Banks 163,580 2,484,143 Halla Climate Control Co. Ltd. ................ Auto Components 118,420 1,445,723 Hansol Paper Co. Ltd. ......................... Paper & Forest Products 158,770 2,765,671 ------------- 9,212,291 ------------- SPAIN 1.8% Sol Melia SA .................................. Hotels, Restaurants & Leisure 91,738 1,166,408 Transportes Azkar SA .......................... Air Freight & Logistics 137,090 1,267,516 ------------- 2,433,924 ------------- SWEDEN 2.3% D. Carnegie & Co. AB .......................... Capital Markets 115,310 1,697,976 Kungsleden AB ................................. Real Estate 45,840 1,326,940 ------------- 3,024,916 ------------- SWITZERLAND 4.2% Gurit Heberlein AG, Br. ....................... Chemicals 1,340 1,325,975 (a) Kuoni Reisen Holding AG, B .................... Hotels, Restaurants & Leisure 2,590 1,072,472 SIG Holding AG ................................ Machinery 4,010 876,019 Verwaltungs-und Privat-Bank AG ................ Capital Markets 6,130 1,026,061 Vontobel Holding AG ........................... Capital Markets 40,680 1,254,074 ------------- 5,554,601 -------------
14 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) TAIWAN 5.3% AcBel Polytech Inc. ........................... Electrical Equipment 1,779,988 $ 970,612 D-Link Corp. .................................. Communications Equipment 1,932,200 2,213,173 Fu Sheng Industrial Co. Ltd. .................. Industrial Conglomerates 880,200 1,120,813 Giant Manufacturing Co. ....................... Leisure Equipment & Products 515,000 996,222 KYE Systems Corp. ............................. Computers & Peripherals 1,234,840 1,040,115 Taiwan Fu Hsing ............................... Building Products 617,110 695,568 ------------- 7,036,503 ------------- THAILAND 2.3% BEC World Public Co. Ltd., fgn. ............... Media 1,658,200 553,744 Glow Energy Public Co. Ltd., fgn. ............. Independent Power Producers & Energy Traders 708,000 402,106 (b) Glow Energy Public Co. Ltd., fgn., 144A ....... Independent Power Producers & Energy Traders 1,271,300 722,030 (a) Total Access Communication Public Co. Ltd. .... Wireless Telecommunication Services 410,000 1,328,400 ------------- 3,006,280 ------------- UNITED KINGDOM 9.2% Bodycote International PLC .................... Machinery 441,480 1,686,188 (b) Bodycote International PLC, 144A .............. Machinery 35,200 134,443 Burberry Group PLC ............................ Textiles Apparel & Luxury Goods 156,510 1,157,178 (a) Cambridge Antibody Technology Group PLC ....... Biotechnology 66,350 797,351 DS Smith PLC .................................. Containers & Packaging 360,250 1,028,855 DX Services PLC ............................... Air Freight & Logistics 174,330 1,022,748 Electrocomponents PLC ......................... Electronic Equipment & Instruments 209,920 1,014,851 Game Group PLC ................................ Specialty Retail 1,122,180 1,380,418 Homeserve PLC ................................. Commercial Services & Supplies 69,716 1,452,508 John Wood Group PLC ........................... Energy Equipment & Services 353,390 1,240,299 Yule Catto & Company PLC ...................... Chemicals 251,110 1,136,218 ------------- 12,051,057 ------------- TOTAL COMMON STOCKS (COST $95,169,291) ........ 120,004,842 ------------- PREFERRED STOCKS 1.2% BRAZIL 0.4% Aracruz Celulose SA, ADR, pfd. ................ Paper & Forest Products 13,370 534,934 ------------- GERMANY 0.8% Hugo Boss AG, pfd. ............................ Textiles Apparel & Luxury Goods 29,430 1,036,162 ------------- TOTAL PREFERRED STOCKS (COST $847,627) ........ 1,571,096 -------------
Annual Report | 15 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN SMALLER COMPANIES SERIES PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS (COST $9,499,757) 7.2% UNITED STATES 7.2% (c) U.S. Treasury Bills, 1/12/06 - 3/30/06 ........ United States $ 9,572,000 $ 9,502,623 ------------- TOTAL INVESTMENTS (COST $105,516,675) 99.6% ................... 131,078,561 OTHER ASSETS, LESS LIABILITIES 0.4% ........... 488,487 ------------- NET ASSETS 100.0% ............................. $ 131,567,048 =============
SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt GDR - Global Depository Receipt (a) Non-income producing. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2005, the aggregate value of these securities was $2,913,409, representing 2.21% of net assets. (c) The security is traded on a discount basis with no stated coupon rate. 16 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2005
---------------- FOREIGN SMALLER COMPANIES SERIES ---------------- Assets: Investments in securities: Cost .................................................................. $ 105,516,675 ================ Value ................................................................. $ 131,078,561 Cash ................................................................... 7,828 Foreign currency, at value (cost $473,709) ............................. 456,913 Receivables: Investment securities sold ............................................ 4,993 Capital shares sold ................................................... 7,000 Dividends ............................................................. 160,443 ---------------- Total assets ...................................................... 131,715,738 ---------------- Liabilities: Payables: Investment securities purchased ....................................... 5,679 Capital shares redeemed ............................................... 140 Affiliates ............................................................ 115,298 Accrued expenses and other liabilities ................................. 27,573 ---------------- Total liabilities ................................................. 148,690 ---------------- Net assets, at value ............................................ $ 131,567,048 ================ Net assets consist of: Paid-in capital ........................................................ $ 105,475,709 Distributions in excess of net investment income ....................... (15,899) Net unrealized appreciation (depreciation) ............................. 25,543,064 Accumulated net realized gain (loss) ................................... 564,174 ---------------- Net assets, at value ............................................ $ 131,567,048 ================ Shares Outstanding ...................................................... 7,238,369 ================ Net asset value per share(a) ............................................ $ 18.18 ================
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | See notes to financial statements. | 17 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2005
---------------- FOREIGN SMALLER COMPANIES SERIES ---------------- Investment income: Dividends (net of foreign taxes of $316,372) ........................... $ 3,303,381 Interest (net of foreign taxes of $66) ................................. 272,112 Other income (Note 8) .................................................. 31 ---------------- Total investment income ........................................... 3,575,524 ---------------- Expenses: Management fees (Note 3a) .............................................. 873,615 Administrative fees (Note 3b) .......................................... 232,965 Transfer agent fees (Note 3c) .......................................... 13,800 Custodian fees (Note 4) ................................................ 49,842 Reports to shareholders ................................................ 20,200 Registration and filing fees ........................................... 19,250 Professional fees ...................................................... 26,715 Directors' fees and expenses ........................................... 6,100 Other .................................................................. 7,500 ---------------- Total expenses .................................................... 1,249,987 Expense reductions (Note 4) ....................................... (2,165) Expenses waived/paid by affiliates (Note 3d) ...................... (142,054) ---------------- Net expenses .................................................... 1,105,768 ---------------- Net investment income ......................................... 2,469,756 ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................... 6,108,227 Foreign currency transactions ......................................... 23,509 ---------------- Net realized gain (loss) ........................................ 6,131,736 ---------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................... 5,924,625 Translation of assets and liabilities denominated in foreign currencies (39,817) Change in deferred taxes on unrealized appreciation .................... 3,698 ---------------- Net change in unrealized appreciation (depreciation) ............ 5,888,506 ---------------- Net realized and unrealized gain (loss) ................................. 12,020,242 ---------------- Net increase (decrease) in net assets resulting from operations ......... $ 14,489,998 ================
18 | See notes to financial statements. | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------- FOREIGN SMALLER COMPANIES SERIES YEAR ENDED DECEMBER 31, -------------------------------- 2005 2004 -------------------------------- Increase (decrease) in net assets: Operations: Net investment income ............................................................ $ 2,469,756 $ 711,332 Net realized gain (loss) from investments and foreign currency transactions ....... 6,131,736 3,073,095 Net change in unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes .... 5,888,506 10,403,294 -------------------------------- Net increase (decrease) in net assets resulting from operations ................ 14,489,998 14,187,721 -------------------------------- Distributions to shareholders from: Net investment income ............................................................. (2,471,905) (752,060) Net realized gains ................................................................ (6,793,091) (2,184,958) -------------------------------- Total distributions to shareholders ................................................ (9,264,996) (2,937,018) -------------------------------- Capital share transactions (Note 2) ................................................ 28,847,120 52,661,504 -------------------------------- Redemption fees .................................................................... 3 -- -------------------------------- Net increase (decrease) in net assets .......................................... 34,072,125 63,912,207 Net assets: Beginning of year .................................................................. 97,494,923 33,582,716 -------------------------------- End of year ........................................................................ $ 131,567,048 $ 97,494,923 ================================ Distributions in excess of net investment income included in net assets: End of year ........................................................................ $ (15,899) $ (36,766) ================================
Annual Report | See notes to financial statements. | 19 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of four separate series. The Foreign Smaller Companies Series (the Fund) included in this report is diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into 20 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. Annual Report | 21 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME TAXES AND DEFERRED TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund is subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. Foreign securities held by the Fund may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by TIFI are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. 22 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2005, there were 1.14 billion shares authorized ($0.01 par value) for TIFI, of which 60 million have been classified as Fund shares. Transactions in the Fund's shares were as follows:
---------------------------------------------------- YEAR ENDED DECEMBER 31, 2005 2004 ---------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------- Shares sold ................... 1,496,864 $ 25,920,894 3,247,849 $ 51,064,194 Shares issued in reinvestment of distributions ............. 447,719 8,097,280 149,768 2,467,773 Shares redeemed ............... (292,789) (5,171,054) (54,830) (870,463) ---------------------------------------------------- Net increase (decrease) ....... 1,651,794 $ 28,847,120 3,342,787 $ 52,661,504 ====================================================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries: Annual Report | 23 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
- -------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Investment Management Limited (FTIML) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.750% Up to and including $1 billion 0.730% Over $1 billion, up to and including $5 billion 0.710% Over $5 billion, up to and including $10 billion 0.690% Over $10 billion, up to and including $15 billion 0.670% Over $15 billion, up to and including $20 billion 0.650% In excess of $20 billion Under a subadvisory agreement effective October 18, 2005, FTIML, an affiliate of TIC, provides subadvisory services to the Fund and receives from TIC fees based on the average daily net assets of the Fund. Prior to July 20, 2005, Franklin Templeton Investments (Asia) Limited, an affiliate of TIC, provided subadvisory services to the Fund and received from TIC fees based on the average daily net assets of the Fund B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the Fund's average daily net assets. C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $13,800, of which $8,651 was retained by Investor Services. D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENT FT Services agreed in advance to voluntarily waive a portion of administrative fees through April 30, 2006, as noted in the Statement of Operations. Additionally, TIC agreed in advance to voluntarily waive a portion of management fees through April 30, 2006, as noted in the Statement of Operations. Total expenses waived by FT Services and TIC are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. 24 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES The tax character of distributions paid during the years ended December 31, 2005 and 2004, was as follows: ----------------------------- 2005 2004 ----------------------------- Distributions paid from: Ordinary income.................. $ 5,361,453 $ 1,758,770 Long term capital gain........... 3,903,543 1,178,248 ----------------------------- $ 9,264,996 $ 2,937,018 ============================= Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares and organizational costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At December 31, 2005, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments................................ $ 105,850,734 ============= Unrealized appreciation ........................... $ 30,172,924 Unrealized depreciation ........................... (4,945,097) ------------- Net unrealized appreciation (depreciation) ........ $ 25,227,827 ============= Undistributed ordinary income ..................... $ 293,293 Undistributed long term capital gains ............. 589,325 ------------- Distributable earnings ............................ $ 882,618 ============= 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2005, aggregated $53,231,100 and $26,133,638, respectively. Annual Report | 25 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds and are recorded as other income in the current period. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. 26 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 8. REGULATORY MATTERS (CONTINUED) The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. Annual Report | 27 TEMPLETON INSTITUTIONAL FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS, INC. - FOREIGN SMALLER COMPANIES SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Smaller Companies Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 10, 2006 28 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) FOREIGN SMALLER COMPANIES SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $3,933,360 as a capital gain dividend for the fiscal year ended December 31, 2005. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $2,473,428 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2005. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $271,847 as interest-related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2005. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $2,175,434 as a short-term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2005. At December 31, 2005, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid as allowed, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 15, 2005, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund to shareholders of record. Annual Report | 29 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES Record Date: 12/15/2005 - -------------------------------------------------------------------------------- FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - -------------------------------------------------------------------------------- Australia.................. $ 0.0024 $ 0.0360 $ 0.0360 Belgium.................... 0.0009 0.0048 0.0048 Brazil..................... 0.0003 0.0051 0.0000 Canada..................... 0.0059 0.0947 0.0788 China...................... 0.0000 0.0201 0.0000 Denmark.................... 0.0002 0.0012 0.0012 Finland.................... 0.0038 0.0207 0.0207 Germany.................... 0.0017 0.0094 0.0037 Hong Kong.................. 0.0000 0.0357 0.0000 India...................... 0.0000 0.0041 0.0041 Indonesia.................. 0.0004 0.0023 0.0023 Japan...................... 0.0012 0.0139 0.0139 Mexico..................... 0.0000 0.0027 0.0027 Netherlands................ 0.0042 0.0230 0.0230 Norway..................... 0.0017 0.0091 0.0091 Singapore.................. 0.0000 0.0080 0.0000 South Korea................ 0.0038 0.0188 0.0188 Spain...................... 0.0008 0.0044 0.0044 Sweden..................... 0.0031 0.0171 0.0171 Switzerland................ 0.0017 0.0175 0.0175 Taiwan..................... 0.0130 0.0458 0.0000 Thailand................... 0.0005 0.0044 0.0044 United Kingdom............. 0.0000 0.0311 0.0311 ------------------------------------------------- TOTAL...................... $ 0.0456 $ 0.4299 $ 0.2936 ================================================= Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) 30 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES In January 2006, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2005 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. Annual Report | 31 TEMPLETON INSTITUTIONAL FUNDS, INC. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods 500 East Broward Blvd. (meat packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (1932) Director Since 1992 141 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 136 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad), and White Mountains Insurance Group, Ltd. (holding company). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (1928) Director Since 1993 140 Director, Martek Biosciences 500 East Broward Blvd. Corporation, MedImmune, Inc. Suite 2100 (biotechnology), and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding company) (1987-2004) and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation 500 East Broward Blvd. 2005 (assisted living). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); and Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 103 Director, White Mountains Insurance 500 East Broward Blvd. Group, Ltd. (holding company), Suite 2100 Amerada Hess Corporation (exploration Fort Lauderdale, FL 33394-3091 and refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly, Foundation Health) (integrated managed care), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly, Commonwealth Edison) and UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since October 16 None 500 East Broward Blvd. 2005 Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow of the Brookings Institute (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), and Weatherford International, Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003); and Total Logistics, Inc. (operating and investment business) (until 2005). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 None One Franklin Parkway President President since San Mateo, CA 94403-1906 and Chairman 1993 and of the Board Chairman of the Board since 1995 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (1945) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (1937) Vice President Since 2002 Not Applicable Not Applicable 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-2302 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional Suisse S.A., Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable 500 East Broward Blvd. Chief 2005 Suite 2100 Executive Fort Lauderdale, FL 33394-3091 Officer - Investment Management - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 14 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable One Franklin Parkway 2005 San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Financial Suite 2100 Officer and Fort Lauderdale, FL 33394-3091 Chief Accounting Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of TIFI under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD., AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. OLSON AND NIEMIEC ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. 38 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. SHAREHOLDER INFORMATION FOREIGN SMALLER COMPANIES SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Annual Report | 39 This page intentionally left blank. [LOGO](R) FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FOREIGN SMALLER COMPANIES SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT458 A2005 02/06 FRANKLINT TEMPLETON NON-U.S. CORE EQUITY SERIES ANNUAL REPORT | 12 2005 - -------------------------------------------------------------------------------- THE EXPERTISE OF MANY. THE STRENGTH OF ONE. - -------------------------------------------------------------------------------- -------------------------------------- TEMPLETON INSTITUTIONAL FUNDS, INC. -------------------------------------- Franklin Templeton Non-U.S. Core Equity Series [LOGO](R) FRANKLIN(R) TEMPLETON(R) INSTITUTIONAL CONTENTS TIFI Franklin Templeton Non-U.S. Core Equity Series ................ 1 Performance Summary ................................................ 6 Your Fund's Expenses ............................................... 8 Financial Highlights and Statement of Investments .................. 10 Financial Statements ............................................... 16 Notes to Financial Statements ...................................... 19 Report of Independent Registered Public Accounting Firm ............ 25 Tax Designation .................................................... 26 Board Members and Officers ......................................... 29 Shareholder Information ............................................ 36 - -------------------------------------------------------------------------------- ANNUAL REPORT TIFI FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIFI Franklin Templeton Non-U.S. Core Equity Series seeks long-term capital growth. The Fund invests primarily in the equity securities of companies located outside the U.S., including emerging markets. Under normal conditions, the Fund will invest at least 80% of its net assets in foreign (non-U.S.) equity securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETONINSTITUTIONAL.COM OR CALL 1-800/321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GEOGRAPHIC BREAKDOWN* Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Europe ............................................... 64.3% Asia ................................................. 22% Australia & New Zealand .............................. 5.2% North America ........................................ 4.5% Latin America ........................................ 3.2% Middle East & Africa ................................. 2.3% * Short-term investments and other net assets equal -1.5%. - -------------------------------------------------------------------------------- This annual report for Templeton Institutional Funds, Inc. (TIFI) Franklin Templeton Non-U.S. Core Equity Series (the "Fund") covers the fiscal year ended December 31, 2005. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. ------------------------------------------------------- NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE ------------------------------------------------------- Not part of the annual report | 1 PORTFOLIO BREAKDOWN* Based on Total Net Assets as of 12/31/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.] Financials .......................................... 26.3% Consumer Discretionary .............................. 13.8% Telecomunication Services ........................... 11.5% Health Care ......................................... 11.0% Industrials ......................................... 9.9% Energy .............................................. 8.8% Information Technology .............................. 7.0% Materials ........................................... 6.1% Consumer Staples .................................... 3.9% Utilities ........................................... 3.2% * Short-term investments and other net assets equal -1.5%. PERFORMANCE OVERVIEW The Fund posted a +13.90% cumulative total return for the 12-month period ended December 31, 2005. The Fund underperformed its benchmark, the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index, which returned +14.02%. In addition, the MSCI All Country (AC) World ex US Index returned +17.11% during the same period.(1) ECONOMIC AND MARKET OVERVIEW The global economy overcame fears of derailment generated by higher energy costs and advanced at a solid clip during 2005, with signs of firming recoveries in Europe and Japan. Excluding the volatile energy and food sectors, inflation remained relatively subdued worldwide, and monetary policy remained fairly accommodative. The U.S. Federal Reserve Board raised the short-term federal funds target rate with eight quarter-point increases, bringing it to 4.25%. The European Central Bank (ECB) made one quarter-point rise in short-term rates, its first increase after keeping rates at historically low levels for more than two and a half years. Even after the increases, both rates remained at levels considered accommodative for economic growth. Strong demand for oil sustained high prices during most of the year, while prices for other commodities such as industrial metals were also high, led by copper, whose contract price rose 45.4% during 2005.(2) This contributed to economic growth in countries such as Australia and Canada, and emerging markets in Asia and Latin America that are tied to mining and industrial commodities. In this environment, global equity markets performed strongly, particularly outside the U.S. One-year total return for the Morgan Stanley Capital International (MSCI) All Country (AC) World ex US Index was +17.11% in (1) Source: Standard & Poor's Micropal. The MSCI EAFE Index is a free float-adjusted, capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada. The MSCI AC World ex US Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: New York Mercantile Exchange. 2 | Annual Report U.S. dollar terms.(3) By comparison the total return for the MSCI USA Index was +5.72%.4 In terms of sectors, energy and materials led equity market performance, and telecommunication services and consumer-related sectors lagged. Among developed countries, the Japanese equity market performed well, returning +44.70% in local currency terms for the year under review.(4) However, this market benefited primarily from investors outside Japan, and the return was significantly less (+25.62%) after conversion into U.S. dollars.(4) In contrast, the conversion into dollars enhanced equity market returns in Brazil (+57.04%), Mexico (+49.11%) and South Korea (+58.00%).(4) At the beginning of the year, the consensus of many analysts appeared to be that the U.S. dollar would decline in value relative to major currencies. In fact, for the year the dollar appreciated versus the yen, the euro, the pound and most other currencies. INVESTMENT STRATEGY At least 65% of the Fund's total assets will be invested in issuers located in at least three countries. The Fund pursues a disciplined "blend" of growth and value strategies by allocating approximately 50% of the portfolio to each strategy. The growth and value allocations are rebalanced whenever changes in market values cause one strategy to comprise more than 55% of the portfolio. The value manager focuses on bottom-up valuation analysis of the equity securities, while the growth manager utilizes both a top-down evaluation of equity market sectors and an in-depth qualitative and quantitative analysis of individual equity securities. MANAGER'S DISCUSSION During the year under review, value and growth stock outperformance frequently alternated and no clear leader emerged. The MSCI EAFE Growth Index returned +13.64% for the 12 months ended December 31, 2005, while the MSCI EAFE Value Index returned +14.39% for the same period, a difference of less than 80 basis points.5 As a result, we did not change the Fund's allocation between growth and value positions. TOP 10 EQUITY HOLDINGS 12/31/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- SBM Offshore NV 2.5% ENERGY EQUIPMENT & SERVICES, NETHERLANDS - -------------------------------------------------------------------------------- Mitsui Fudosan Co., Ltd. 2.1% REAL ESTATE, JAPAN - -------------------------------------------------------------------------------- Atlas Copco AB, A 2.1% MACHINERY, SWEDEN - -------------------------------------------------------------------------------- Next PLC 1.6% MULTI-LINE RETAIL, UK - -------------------------------------------------------------------------------- Tesco PLC 1.6% FOOD & STAPLES RETAILING, UK - -------------------------------------------------------------------------------- BAE Systems PLC 1.5% AEROSPACE & DEFENSE, UK - -------------------------------------------------------------------------------- Roche Holding AG 1.5% PHARMACEUTICALS, SWITZERLAND - -------------------------------------------------------------------------------- ING Groep NV 1.5% CAPITAL MARKETS, NETHERLANDS - -------------------------------------------------------------------------------- Samsung Electronics Co. Ltd., GDR, 144A 1.5% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA - -------------------------------------------------------------------------------- Esprit Holdings Ltd. 1.5% SPECIALTY RETAIL, HONG KONG - -------------------------------------------------------------------------------- (3) Source: Standard & Poor's Micropal. See footnote 1 for a description of the MSCI AC World ex US Index. (4) Source: Standard & Poor's Micropal. Individual country market returns are measured by MSCI country-specific indexes. The MSCI USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in the U.S. (5) Source: Standard & Poor's Micropal. The MSCI EAFE Growth Index is a free float-adjusted market capitalization-weighted index designed to measure the performance of growth-oriented equity securities from global developed markets, excluding the U.S. and Canada. The MSCI EAFE Value Index is a free float-adjusted market capitalization-weighted index designed to measure the performance of value-oriented equity securities from global developed markets, excluding the U.S. and Canada. Annual Report | 3 Our energy sector holdings were among the strongest contributors to Fund performance during the year. Energy prices rose significantly with crude oil spot prices reaching a record of almost $70 per barrel in August. Natural gas prices rose from $6.01 at the end of 2004 to $9.52 by period-end, after hitting a high of more than $15 in December. As a result of Hurricanes Katrina and Rita, energy prices spiked higher due to concerns that the U.S. would face shortages in energy supplies. Higher energy prices were considered positive for energy companies, which resulted in higher stock prices. Although the overall portfolio had a similar energy sector weighting to that of the MSCI EAFE Index, strong stock selection in the value portion of the portfolio drove the Fund's relative performance. In this sector, Encana, Lukoil, and Saipem contributed the most to Fund performance. The Fund also benefited from its overweighted allocation and stock selection in the telecomunication services sector. The sector was one of the worst performing areas in the MSCI EAFE Index, but telecommunication services holdings outperformed those in the index. Top performing holdings included China Mobile, TDC, America Movil and Telenor. The Fund had several detractors from performance such as our investments in the materials sector. Stock selection was the primary detractor of relative performance in the sector, as several of our paper and forest products industry investments, such as Norske Skogindustrier and Stora Enso, underperformed. Because of stock selection, two other areas that hindered relative performance were the information technology and consumer discretionary sectors. It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2005, the U.S. dollar rose in value relative to most non-U.S. currencies. As a result, the Fund's performance was negatively affected by the portfolio's investment primarily in securities with non-U.S. currency exposure. 4 | Annual Report We thank you for your continued participation in the Fund and look forward to serving your investment needs. Canyon A. Chan, CFA Gary P. Motyl, CFA John P. Remmert Portfolio Managers TIFI Franklin Templeton Non-U.S. Core Equity Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 PERFORMANCE SUMMARY AS OF 12/31/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- SYMBOL: N/A CHANGE 12/31/05 12/31/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.45 $14.68 $14.23 - -------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/05-12/31/05) - -------------------------------------------------------------------------------- Dividend Income $0.2344 - -------------------------------------------------------------------------------- Short-term Capital Gain $0.0985 - -------------------------------------------------------------------------------- Long-term Capital Gain $1.1725 - -------------------------------------------------------------------------------- TOTAL $1.5054 - -------------------------------------------------------------------------------- Franklin Templeton Non-U.S. Core Equity Series paid distributions derived from long-term capital gains totaling $1.1725 per share in March and December 2005. The Fund designates such distributions as capital gain dividends per Internal Revenue Code Section 852(b)(3)(C). PERFORMANCE(1)
- ------------------------------------------------------------------------------------------ 1-YEAR 3-YEAR INCEPTION (9/3/02) - ------------------------------------------------------------------------------------------ Cumulative Total Return(2) +13.90% +82.47% +73.25% - ------------------------------------------------------------------------------------------ Average Annual Total Return(3) +13.90% +22.20% +17.97% - ------------------------------------------------------------------------------------------ Value of $1,000,000 Investment(4) $1,139,003 $1,824,719 $1,732,551 - ------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800/321-8563. 6 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - -------------------------------------------------- 12/31/05 - -------------------------------------------------- 1-Year +13.90% - -------------------------------------------------- 3-Year +22.20% - -------------------------------------------------- Since Inception (9/3/02) +17.97% - -------------------------------------------------- [PLOT POINTS TO COME] ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. INVESTING IN A FUND THAT FOCUSES IN ONE OR MORE SECTORS INVOLVES SPECIAL RISKS, INCLUDING GREATER SENSITIVITY TO ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS IN THAT SECTOR. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1) The Fund's manager and administrator agreed in advance to assume as their own certain expenses otherwise payable by the Fund. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. This agreement may be ended after 5/1/06 upon notice to the Board of Directors. (2) Cumulative total return represents the change in value of an investment over the periods indicated. (3) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5) Source: Standard & Poor's Micropal. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets, excluding the U.S. and Canada. The MSCI AC World Index ex US is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. Annual Report | 7 YOUR FUND'S EXPENSES As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------ BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/05 VALUE 12/31/05 PERIOD* 7/1/05-12/31/05 - ------------------------------------------------------------------------------------------------------------ Actual $1,000.00 $1,153,50 $4.56 - ------------------------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000.00 $1,020.97 $4.28 - ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, of 0.84% multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 9 Templeton Institutional Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES
YEAR ENDED DECEMBER 31, 2005 2004 2003 2002/C ------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................... $ 14.23 $ 12.46 $ 9.45 $10.00 -------------------------------------------- Income from investment operations: Net investment income/a .............................. 0.25 0.19 0.19 0.01 Net realized and unrealized gains (losses) ........... 1.70 2.12 3.09 (0.51) -------------------------------------------- Total from investment operations ...................... 1.95 2.31 3.28 (.50) -------------------------------------------- Less distributions from: Net investment income ................................ (0.23) (0.17) (0.27) (0.05) Net realized gains ................................... (1.27) (0.37) -- -- -------------------------------------------- Total distributions ................................... (1.50) (0.54) (0.27) (0.05) -------------------------------------------- Net asset value, end of year .......................... $ 14.68 $ 14.23 $12.46 $ 9.45 ============================================ Total return/b ........................................ 13.90% 18.77% 34.89% (5.05)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $ 2,936 $ 2,846 $2,493 $2,942 Ratios to average net assets: Expenses .............................................. 2.68% 2.53% 5.31% 5.47%/d Expenses, net of waiver and payments by affiliate ..... 0.84% 0.84% 0.84% 0.84%/d Net investment income ................................ 1.72% 1.45% 1.87% 0.28%/d Portfolio turnover rate ................................ 31.36% 24.45% 39.97% 6.36%
a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c For the period September 3, 2002 (commencement date) to December 31, 2002. d Annualized. See notes to financial statements. 10 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 101.5% AUSTRALIA 5.2% Aristocrat Leisure Ltd. ........................ Hotels, Restaurants & Leisure 2,000 $ 18,075 CSL Ltd. ....................................... Biotechnology 600 18,705 Macquarie Bank Ltd. ............................ Capital Markets 600 29,995 Qantas Airways Ltd. ............................ Airlines 4,970 14,729 QBE Insurance Group Ltd. ....................... Insurance 1,000 14,377 Sonic Healthcare Ltd. .......................... Health Care Providers & Services 2,200 23,884 St. George Bank Ltd. ........................... Commercial Banks 1,500 32,636 ------------ 152,401 ------------ AUSTRIA 1.1% Erste Bank der Oester Sparkassen AG ............ Commercial Banks 600 33,420 ------------ BERMUDA 0.6% ACE Ltd. ....................................... Insurance 350 18,704 ------------ BRAZIL 0.5% Companhia Siderurgica Nacional SA, ADR ......... Metals & Mining 700 14,980 ------------ CANADA 3.9% Alcan Inc. ..................................... Metals & Mining 300 12,327 BCE Inc. ....................................... Diversified Telecommunication Services 1,060 25,417 Cameco Corp. ................................... Oil, Gas & Consumable Fuels 500 31,743 (a) Cognos Inc. .................................... Software 600 20,933 Encana Corp. ................................... Oil, Gas & Consumable Fuels 200 9,044 Talisman Energy Inc. ........................... Oil, Gas & Consumable Fuels 300 15,900 ------------ 115,364 ------------ CHINA 1.0% China Mobile (Hong Kong) Ltd. .................. Wireless Telecommunication Services 4,450 21,063 Huaneng Power International, Inc., H ........... Independent Power Producers & Energy Traders 15,000 9,866 ------------ 30,929 ------------ DENMARK 0.6% TDC AS ......................................... Diversified Telecommunication Services 140 8,386 (a) Vestas Wind Systems AS ......................... Electrical Equipment 370 6,076 (a),(b) Vestas Wind Systems AS, 144A ................... Electrical Equipment 123 2,020 ------------ 16,482 ------------ FINLAND 0.8% Stora Enso OYJ, R (EUR/FIM Traded) ............. Paper & Forest Products 1,820 24,649 ------------ FRANCE 5.5% Accor SA ....................................... Hotels, Restaurants & Leisure 140 7,700 AXA SA ......................................... Insurance 610 19,686 Essilor International SA ....................... Health Care Equipment & Supplies 200 16,148 France Telecom SA .............................. Diversified Telecommunication Services 870 21,619 Michelin SA, B ................................. Auto Components 530 29,791 Sanofi-Aventis ................................. Pharmaceuticals 330 28,909 Suez SA ........................................ Multi-Utilities 1,190 37,051 ------------ 160,904 ------------
Annual Report | 11 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES/WARRANTS VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) GERMANY 7.8% BASF AG ........................................ Chemicals 140 $ 10,728 Bayer AG, Br. .................................. Chemicals 280 11,678 Bayerische Motoren Werke AG .................... Automobiles 460 20,149 Celesio AG ..................................... Health Care Providers & Services 460 39,470 Deutsche Post AG ............................... Air Freight & Logistics 1,520 36,925 E.ON AG ........................................ Electric Utilities 260 26,920 Puma AG Rudolf Dassler Sport ................... Textiles Apparel & Luxury Goods 100 29,206 SAP AG ......................................... Software 200 36,268 Siemens AG ..................................... Industrial Conglomerates 220 18,849 ------------ 230,193 ------------ GREECE 1.2% National Bank of Greece SA ..................... Commercial Banks 800 34,095 ------------ HONG KONG 4.2% Esprit Holdings Ltd. ........................... Specialty Retail 6,000 42,638 Noble Group Ltd. ............................... Trading Companies & Distributors 10,000 7,697 Sun Hung Kai Properties Ltd. ................... Real Estate 3,000 29,212 Swire Pacific Ltd., A .......................... Real Estate 3,000 26,929 Television Broadcasts Ltd. ..................... Media 3,000 15,941 ------------ 122,417 ------------ IRISH REPUBLIC 1.0% Anglo Irish Bancorp PLC ........................ Commercial Banks 2,000 30,378 ------------ ISRAEL 2.0% (a) Check Point Software Technologies Ltd. ......... Software 1,160 23,316 Teva Pharmaceutical Industries Ltd., ADR ....... Pharmaceuticals 800 34,408 ------------ 57,724 ------------ ITALY 2.7% Eni SpA ........................................ Oil, Gas & Consumable Fuels 652 18,085 Luxottica Group SpA, ADR ....................... Textiles Apparel & Luxury Goods 700 17,717 Saipem SpA ..................................... Energy Equipment & Services 2,000 32,816 UniCredito Italiano SpA ........................ Commercial Banks 1,432 9,867 ------------ 78,485 ------------ JAPAN 10.9% Aiful Corp. .................................... Consumer Finance 500 41,727 Asahi Glass Co. Ltd. ........................... Building Products 3,000 38,711 Fast Retailing Co. Ltd. ........................ Specialty Retail 400 39,075 Fuji Photo Film Co. Ltd. ....................... Leisure Equipment & Products 300 9,913 Mabuchi Motor Co. Ltd. ......................... Electronic Equipment & Instruments 100 5,550 Mitsui Fudosan Co. Ltd. ........................ Real Estate 3,000 60,874 Nintendo Co. Ltd. .............................. Software 100 12,073 Nippon Telegraph & Telephone Corp. ............. Diversified Telecommunication Services 6 27,247 Seiko Epson Corp. .............................. Computers & Peripherals 400 10,048 Sompo Japan Insurance Inc. ..................... Insurance 2,000 27,027 SONY Corp. ..................................... Household Durables 900 36,753 Takeda Pharmaceutical Co. Ltd. ................. Pharmaceuticals 200 10,811 ------------ 319,809 ------------
12 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) MEXICO 2.7% America Movil SA de CV, L, ADR ................. Wireless Telecommunication Services 1,000 $ 29,260 Grupo Financiero Banorte SA de CV, O ........... Commercial Banks 8,000 16,576 Telefonos de Mexico SA de CV (Telmex), L, ADR .. Diversified Telecommunication Services 1,300 32,084 ------------ 77,920 ------------ NETHERLANDS 6.6% ............................... Akzo Nobel NV .................................. Chemicals 630 29,199 ING Groep NV ................................... Capital Markets 1,290 44,746 Koninklijke Philips Electronics NV ............. Household Durables 1,130 35,116 SBM Offshore NV ................................ Energy Equipment & Services 910 73,526 VNU NV ......................................... Media 320 10,611 ------------ 193,198 ------------ NORWAY 2.1% Norske Skogindustrier ASA ...................... Paper & Forest Products 1,340 21,292 Telenor ASA .................................... Diversified Telecommunication Services 4,080 40,047 ------------ 61,339 ------------ PORTUGAL 0.8% Portugal Telecom SGPS SA ....................... Diversified Telecommunication Services 2,310 23,382 ------------ RUSSIA 0.6% Lukoil Holdings, ADR ........................... Oil, Gas & Consumable Fuels 300 17,820 ------------ SINGAPORE 1.0% DBS Group Holdings Ltd. ........................ Commercial Banks 2,000 19,844 SembCorp Marine Ltd. ........................... Machinery 5,000 8,299 ------------ 28,143 ------------ SOUTH AFRICA 0.3% Sappi Ltd. ..................................... Paper & Forest Products 872 9,993 ------------ SOUTH KOREA 3.2% Kookmin Bank, ADR .............................. Commercial Banks 370 27,643 KT Corp., ADR .................................. Diversified Telecommunication Services 1,100 23,705 Samsung Electronics Co. Ltd., GDR, 144A ........ Semiconductors & Semiconductor Equipment 130 42,802 ------------ 94,150 ------------ SPAIN 2.6% Banco Bilbao Vizcaya Argentaria SA ............. Commercial Banks 900 16,067 Banco Santander Central Hispano SA ............. Commercial Banks 650 8,580 Telefonica Moviles SA .......................... Wireless Telecommunication Services 2,000 21,001 Telefonica SA .................................. Diversified Telecommunication Services 2,048 30,816 ------------ 76,464 ------------ SWEDEN 4.3% Atlas Copco AB, A .............................. Machinery 2,730 60,816 Getinge AB, B .................................. Health Care Equipment & Supplies 1,200 16,538 Nordea Bank AB, FDR ............................ Commercial Banks 2,260 23,625 Securitas AB, B ................................ Commercial Services & Supplies 480 7,974 Volvo AB, B .................................... Machinery 340 16,025 ------------ 124,978 ------------
Annual Report | 13 TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) SWITZERLAND 5.8% Credit Suisse Group ............................ Capital Markets 400 $ 20,399 Lonza Group AG ................................. Chemicals 110 6,732 Roche Holding AG ............................... Pharmaceuticals 300 45,054 Swiss Reinsurance Co. .......................... Insurance 340 24,897 (a) Syngenta AG .................................... Chemicals 300 37,336 Synthes Inc. ................................... Health Care Equipment & Supplies 100 11,235 UBS AG ......................................... Capital Markets 250 23,806 ------------ 169,459 ------------ TAIWAN 1.7% Chunghwa Telecom Co. Ltd., ADR ................. Diversified Telecommunication Services 700 12,845 (b) Compal Electronics Inc., GDR, 144A ............. Computers & Peripherals 415 2,108 Compal Electronics Inc., GDR, Reg S ............ Computers & Peripherals 1,039 5,278 Taiwan Semiconductor Manufacturing Co. Ltd., ADR ......................................... Semiconductors & Semiconductor Equipment 2,999 29,720 ------------ 49,951 ------------ UNITED KINGDOM 20.8% BAE Systems PLC ................................ Aerospace & Defense 6,900 45,318 BG Group PLC ................................... Oil, Gas & Consumable Fuels 1,800 17,791 BP PLC ......................................... Oil, Gas & Consumable Fuels 1,560 16,613 British Sky Broadcasting Group PLC ............. Media 1,660 14,180 Cadbury Schweppes PLC .......................... Food Products 3,700 34,979 Compass Group PLC .............................. Hotels, Restaurants & Leisure 3,970 15,061 GlaxoSmithKline PLC ............................ Pharmaceuticals 500 12,637 HBOS PLC ....................................... Commercial Banks 1,500 25,613 HSBC Holdings PLC .............................. Commercial Banks 1,200 19,268 Man Group PLC .................................. Capital Markets 900 29,575 National Grid PLC .............................. Electric Utilities 2,062 20,186 Next PLC ....................................... Multiline Retail 1,800 47,536 Pearson PLC .................................... Media 920 10,882 Reckitt Benckiser PLC .......................... Household Products 1,000 33,033 Rentokil Initial PLC ........................... Commercial Services & Supplies 1,570 4,416 Royal Bank of Scotland Group PLC ............... Commercial Banks 780 23,551 Royal Dutch Shell PLC, B ....................... Oil, Gas & Consumable Fuels 801 25,605 Sage Group PLC ................................. Software 4,000 17,755 Shire PLC ...................................... Pharmaceuticals 2,870 36,736 Smith & Nephew PLC ............................. Health Care Equipment & Supplies 3,000 27,639 Smiths Group PLC ............................... Industrial Conglomerates 1,290 23,215 Standard Chartered PLC ......................... Commercial Banks 1,630 36,316 Tesco PLC ...................................... Food & Staples Retailing 8,000 45,626 Vodafone Group PLC ............................. Wireless Telecommunication Services 9,940 21,462 Yell Group PLC ................................. Media 670 6,184 ------------ 611,177 ------------
14 | Annual Report TEMPLETON INSTITUTIONAL FUNDS, INC. STATEMENT OF INVESTMENTS, DECEMBER 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INDUSTRY SHARES/ WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (COST $2,002,395) 101.5% .................... $ 2,978,908 OTHER ASSETS, LESS LIABILITIES (1.5)% .......... (42,765) ------------ NET ASSETS 100.0% .............................. $ 2,936,143 ============
CURRENCY ABBREVIATIONS EUR - Euro FIM - Finnish Markka SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FDR - Foreign Depository Receipt GDR - Global Depository Receipt (a) Non-income producing. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At December 31, 2005, the aggregate value of these securities was $46,930, representing 1.60% of net assets. Annual Report | See notes to financial statements. | 15 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES ------------------ Assets: Investments in securities: Cost ................................................ $2,002,395 ------------------ Value ............................................... $2,978,908 Foreign currency, at value (cost $13,229) ............ 12,837 Receivables: Investment securities sold .......................... 70,721 Dividends ........................................... 5,143 Affiliates .......................................... 29,071 ------------------ Total assets .................................... 3,096,680 ------------------ Liabilities: Payables: Fund advance by custodian .......................... 155,527 Investment securities purchased..................... - Accrued expenses and other liabilities ............... 5,010 ------------------ Total liabilities................................ 160,537 ------------------ Net assets, at value ........................... $2,936,143 ------------------ Net assets consist of: Paid-in Capital ...................................... $1,912,477 Undistributed net investment income .................. 5,202 Net unrealized appreciation (depreciation) ........... 976,035 Accumulated net realized gain (loss) ................. 42,429 ------------------ Net assets, at value ........................... $2,936,143 ================== Shares outstanding .................................... 200,000 ================== Net asset value per share/a ........................... $14.68 ================== a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. See notes to financial statements. 16 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES ------------------ Investment income: Dividends (net of foreign taxes of $5,634) ................... $ 72,341 Interest ..................................................... 1,555 -------------- Total investment income ................................. 73,896 -------------- Expenses: Management fees (Note 3a)..................................... 20,227 Administrative fees (Note 3b)................................. 5,779 Transfer agent fees (Note 3c)................................. 205 Custodian fees (Note 4) ...................................... 900 Registration and filing fees ................................. 11,100 Professional fees ............................................ 20,100 Directors' fees and expenses ................................. 5,220 Reports to Shareholders ...................................... 7,150 Other ........................................................ 6,700 -------------- Total expenses .......................................... 77,381 Expenses waived/paid by affiliate (Note 3d).............. (52,652) Expense reductions (Note 4) ............................. (488) -------------- Net expenses ........................................ 24,241 -------------- Net investment income ............................. 49,655 -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................. 287,893 Foreign currency transactions ............................... 489 -------------- Net realized gain (loss) ................................ 288,382 Net change in unrealized appreciation (depreciation) on: Investments ................................................. 55,200 Translation of assets and liabilities denominated in foreign currencies ........................................ (1,978) -------------- Net change in unrealized appreciation (depreciation) .... 53,222 -------------- Net realized and unrealized gain (loss) ....................... 341,604 -------------- Net increase (decrease) in net assets resulting from operations. $391,259 -------------- See notes to financial statements. 17 TEMPLETON INSTITUTIONAL FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES ------------------------------- YEAR ENDED DECEMBER 31, 2005 2004 ------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................... $ 49,655 $ 37,466 Net realized gain (loss) from investments and foreign currency transactions ..................................... 288,382 123,700 Net unrealized appreciation (depreciation) on investments and translation of asset and liabilities denominated in foreign currencies ........................................ 53,222 300,082 ------------------------------- Net increase (decrease) in net assets resulting from operations ............................................ 391,259 461,248 Distributions to shareholders from: Net investment income ...................................... (46,880) (34,900) Net realized gains ......................................... (254,200) (73,360) ------------------------------- Total distributions to shareholders ......................... (301,080) (108,260) ------------------------------- Net increase (decrease) in net assets ................... 90,179 352,988 Net assets: Beginning of year ........................................... 2,845,964 2,492,976 ------------------------------- End of year ................................................ $2,936,143 $2,845,964 =============================== Undistributed net investment income included in net assets: End of year ................................................. $ 5,202 $ 1,938 ===============================
See notes to financial statements. 18 TEMPLETON INSTITUTIONAL FUNDS, INC. NOTES TO FINANCIAL STATEMENTS FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds, Inc. (TIFI) is registered under the Investment Company Act of 1940 as an open-end investment company, consisting of four separate series. The Non-U.S. Core Equity Series (the Fund) included in this report is diversified. The financial statements of the remaining funds in the series are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. 19 TEMPLETON INSTITUTIONAL FUNDS, INC. Notes to Financial Statements (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Foreign securities held by the Fund may be subject to foreign taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. 20 TEMPLETON INSTITUTIONAL FUNDS, INC. Notes to Financial Statements (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Common expenses incurred by TIFI are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of TIFI. Fund specific expenses are charged directly to the fund that incurred the expense. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Prior to March 1, 2005, the redemption fee was 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital. There were no redemption fees for the year. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK At December 31, 2005, there were 1.14 billion shares authorized ($0.01 par value) for TIFI, of which 60 million have been classified as Fund shares. During the years ended December 31, 2005 and 2004, there were no share transactions. 21 TEMPLETON INSTITUTIONAL FUNDS, INC. Notes to Financial Statements (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ------------------------------------------------------------------------------------------------- Franklin Templeton Alternative Strategies Inc. (Alternative Strategies) Investment manager Fiduciary International Inc. (Fiduciary) Investment manager Templeton Investment Counsel LLC (TIC) Investment manager Franklin Templeton Services LLC (FT Services) Administrative manager Franklin Templeton Distributors Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to Alternative Strategies based on the average daily net assets of the Fund as follows: - ------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ------------------------------------------------------------------------------- 0.700% Up to and including $1 billion 0.680% Over $1 billion, up to and including $5 billion 0.660% Over $5 billion, up to and including $10 billion 0.640% Over $10 billion, up to and including $15 billion 0.620% Over $15 billion, up to and including $20 billion 0.600% In excess of $20 billion Under a subadvisory agreement, Fiduciary, an affiliate of Alternative Strategies, provides subadvisory services to the Fund and receives from Alternative Strategies fees based on the average daily net assets of the Fund. Under a subadvisory agreement, TIC, and affiliate of Alternative Strategies, provides subadvisory services to the Fund and receives from Alternative Strategies fees based on the average daily net assets of the Fund. B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the Fund's average daily net assets. C. TRANSFER AGENT FEES The Fund paid transfer agent fees of $205, of which $24 was retained by Investor Services. D. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS FT Services agreed in advance to voluntarily waive administrative fees through April 30, 2006, as noted in the Statement of Operations. Additionally, Alternative Strategies agreed in advance to voluntarily waive management fees through April 30, 2006, as noted in the Statement of Operations. Total expenses waived by FT Services and Alternative Strategies are not subject to reimbursement by the Fund subsequent to the Fund's fiscal year end. 22 TEMPLETON INSTITUTIONAL FUNDS, INC. Notes to Financial Statements (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES E. OTHER AFFILIATED TRANSACTIONS At December 31, 2005, Franklin Advisers (an affiliate of the Fund's investment manager) owned 100% of the Fund. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES The tax character of distributions paid during the years ended December 31, 2005 and 2004, was as follows: 2005 2004 ----------- ----------- Distributions paid from: Ordinary income..................... $ 66,580 $ 34,900 Long term capital gain.............. 234,500 73,360 ----------- ----------- $ 301,080 $108,260 ======================== Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and organizational costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At December 31, 2005, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments $ 2,011,894 ----------------- Unrealized appreciation $ 980,346 Unrealized depreciation (13,332) ----------------- Net unrealized appreciation $ 967,014 ================= Undistributed ordinary income $ 9,760 Undistributed long term capital gains 47,617 ----------------- Distributable earnings $ 57,377 ================= 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2005, aggregated $871,147 and $1,039,125, respectively. 23 TEMPLETON INSTITUTIONAL FUNDS, INC. Notes to Financial Statements (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds. The Fund did not participate in the CAGO settlement. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. 24 TEMPLETON INSTITUTIONAL FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE TEMPLETON INSTITUTIONAL FUNDS, INC. - FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Templeton Non-U.S. Core Equity Series (one of the funds constituting the Templeton Institutional Funds, Inc., hereafter referred to as the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 10, 2006 25 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $264,503 as a capital gain dividend for the fiscal year ended December 31, 2005 . Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $68,858 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2005. In January 2006, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2005. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $1,556 as interest-related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31,2005. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $24,011 as a short-term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31,2005. At December 31, 2005, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid as allowed, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 15, 2005, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund to shareholders of record. 26 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES RECORD DATE: 12/15/2005 FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS COUNTRY PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------------- Australia 0.0003 0.0177 0.0177 Austria 0.0003 0.0015 0.0015 Bermuda 0.0000 0.0022 0.0022 Brazil 0.0000 0.0069 0.0069 Canada 0.0012 0.0063 0.0063 China 0.0000 0.0043 0.0023 Denmark 0.0002 0.0012 0.0012 Finland 0.0008 0.0041 0.0041 France 0.0026 0.0151 0.0151 Germany 0.0032 0.0199 0.0199 Hong Kong 0.0000 0.0173 0.0000 Ireland 0.0000 0.0014 0.0014 Israel 0.0003 0.0009 0.0009 Italy 0.0036 0.0188 0.0188 Japan 0.0012 0.0137 0.0131 Mexico 0.0000 0.0070 0.0070 Netherlands 0.0031 0.0158 0.0158 Norway 0.0011 0.0058 0.0058 Portugal 0.0000 0.0034 0.0034 Russia 0.0007 0.0034 0.0034 Singapore 0.0000 0.0017 0.0000 South Africa 0.0000 0.0010 0.0010 South Korea 0.0021 0.0097 0.0097 Spain 0.0014 0.0106 0.0106 Sweden 0.0022 0.0207 0.0207 Switzerland 0.0014 0.0100 0.0081 Taiwan 0.0023 0.0086 0.0077 United Kingdom 0.0000 0.0702 0.0597 ---------------------------------------------------------- TOTAL $0.0280 $0.2992 $0.2643 ---------------------------------------------------------- 27 TEMPLETON INSTITUTIONAL FUNDS, INC. TAX DESIGNATION (UNAUDITED) (CONTINUED) FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or as a tax deduction. Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income./1 Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund./1 In January 2006, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2005. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2005 individual income tax returns. - --------------------- 1. Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax brackets). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. 28 TEMPLETON INSTITUTIONAL FUNDS, INC. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (1932) Director Since 1992 140 Director, Bar-S Foods 500 East Broward Blvd. (meat packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (1944) Director Since 1990 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; Director, Provo Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (1932) Director Since 1992 141 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (1952) Director Since 1996 136 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad), and White Mountains Insurance Group, Ltd. (holding company). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (1928) Director Since 1993 140 Director, Martek Biosciences 500 East Broward Blvd. Corporation, MedImmune, Inc. Suite 2100 (biotechnology), and Overstock.com Fort Lauderdale, FL 33394-3091 (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding company) (1987-2004) and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ DAVID W. NIEMIEC (1949) Director Since October 17 Director, Emeritus Corporation 500 East Broward Blvd. 2005 (assisted living). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director, Saratoga Partners (1998-2001); Managing Director, SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since 2003 101 Director, White Mountains Insurance 500 East Broward Blvd. Group, Ltd. (holding company), Suite 2100 Amerada Hess Corporation (exploration Fort Lauderdale, FL 33394-3091 and refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly, Foundation Health) (integrated managed care), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly, Commonwealth Edison) and UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ LARRY D. THOMPSON (1945) Director Since October 16 None 500 East Broward Blvd. 2005 Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp (1997-2001); Senior Fellow, Brookings Institute (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS Director Since 1990 20 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (1930) Director Since 1993 15 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas), and Weatherford International, Fort Lauderdale, FL 33394-3091 Ltd (oilfield products and servicing) (2004-present); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988; 1993-2003) and Total Logistics, Inc. (operating and investment business) (until 2005). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co. Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982- December 1982). - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Vice Director and Vice 140 None One Franklin Parkway President President since San Mateo, CA 94403-1906 and Chairman 1993 and of the Board Chairman of the Board since 1995 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (1945) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (1964) Vice President Since 2001 Not Applicable Not Applicable PO Box N-7759 Lyford Cay, Nassau, Bahamas - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; and officer of 14 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President and Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (1937) Vice President Since 2002 Not Applicable Not Applicable 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-2302 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional Suisse S.A., Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong Kong - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ GARY P. MOTYL (1952) President and Since October Not Applicable Not Applicable 500 East Broward Blvd. Chief Executive 2005 Suite 2100 Officer - Fort Lauderdale, FL 33394-3091 Investment Management - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; and officer and/or director of other subsidiaries of Franklin Resources, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 14 of the investment companies in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America (1997-2001). - ------------------------------------------------------------------------------------------------------------------------------------ GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). - ------------------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable One Franklin Parkway 2005 San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of TIFI under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of TIFI'S advisers and distributor. Nicholas F. Brady is considered to be an interested person of TIFI under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD., AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. OLSON AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT 1-800/321-8563 TO REQUEST THE SAI. Annual Report | 35 TEMPLETON INSTITUTIONAL FUNDS, INC. SHAREHOLDER INFORMATION FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 36 | Annual Report This page intentionally left blank. [LOGO](R) FRANKLIN(R) TEMPLETON(R) FRANKLIN TEMPLETON INSTITUTIONAL INSTITUTIONAL 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS, INC. FRANKLIN TEMPLETON NON-U.S. CORE EQUITY SERIES INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES 1-800/321-8563 franklintempletoninstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges, and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded, and accessed. These calls can be identified by the presence of a regular beeping tone. ZT459 A2005 02/06 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are David W. Niemiec and Frank A. Olson and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $215,505 for the fiscal year ended December 31, 2005 and $208,478 for the fiscal year ended December 31, 2004. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements were $0 for the fiscal year ended December 31, 2005 and $48,579 for the fiscal year ended December 31, 2004. The services for which these fees were paid included attestation services. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $22,571 for the fiscal year ended December 31, 2005 and $0 for the fiscal year ended December 31, 2004. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended December 31, 2005 and $4,683 for the fiscal year ended December 31, 2004. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $4,789 for the fiscal year ended December 31, 2005 and $155,317 for the fiscal year ended December 31, 2004. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and the review of the ICI transfer agent survey. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $27,360 for the fiscal year ended December 31, 2005 and $208,579 for the fiscal year ended December 31, 2004. (h) The registrant's audit committee of the board of trustees has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (A)(1) Code of Ethics (A)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON INSTITUTIONAL FUNDS, INC. By/s/JIMMY D. GAMBILL ------------------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: May 17, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By/s/JIMMY D. GAMBILL ------------------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: May 17, 2006 By/s/GALEN G. VETTER ----------------------------- Galen G. Vetter Chief Financial Officer Date: May 17, 2006 EX-99.CODE ETH 2 ncsr-code1205.txt CODE OF ETHICS DTD 12/05 Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 2005 - ------------------------------------------------------------------------------- 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 December 2005 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. 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 and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman 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 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 DECEMBER 2005 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 c/o Maria Abbott within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Maria Abbott, Manager, Code of Ethics, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Abbott, Maria (internal address); mabbott@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 tifi302-1205amdncsr.txt 302 CERTIFICATIONS Exhibit 12(a)(2) 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. May 17, 2006 /s/JIMMY D. GAMBILL - ----------------------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration PAGE 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. May 17, 2006 /s/GALEN G. VETTER - --------------------------------- Galen G. Vetter Chief Financial Officer EX-99.906CERT 4 tifi906-1205amdncsr.txt SECTION 906 CERTIFICATIONS EXHIBIT 12 (B) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT 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 12/31/05 (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: May 17, 2006 /s/JIMMY D. GAMBILL ------------------------------------------ Jimmy D. Gambill Chief Executive Officer - Finance and Administration PAGE CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT 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 12/31/05 (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: May 17, 2006 /s/GALEN G. VETTER ------------------------------------ Galen G. Vetter Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----