-----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, A186bqWPFqkO+XcSACDcLDQnTec/mOV2Ww+elxJIQnZE2mtdfHrMPMYEFRq//EYg rj+BaElyp4zcMh7+X0yysw== 0000865722-09-000005.txt : 20090227 0000865722-09-000005.hdr.sgml : 20090227 20090227090223 ACCESSION NUMBER: 0000865722-09-000005 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090227 DATE AS OF CHANGE: 20090227 EFFECTIVENESS DATE: 20090227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON INSTITUTIONAL FUNDS CENTRAL INDEX KEY: 0000865722 IRS NUMBER: 593020895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06135 FILM NUMBER: 09639808 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 FUNDS INC DATE OF NAME CHANGE: 19940602 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 C000037509 Service Shares Class A 0000865722 S000008752 Foreign Smaller Companies Series C000023826 Advisor Class TFSCX 0000865722 S000021022 Global Equity Series C000059765 Advisor N-CSR 1 tifi_ncsr-annual1208.txt TIFI NCSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06135 --------- TEMPLETON INSTITUTIONAL FUNDS ------------------------------------- (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: 12/31/08 -------- ITEM 1. REPORTS TO STOCKHOLDERS. DECEMBER 31, 2008 Emerging Markets Series ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) Contents ANNUAL REPORT TIF Emerging Markets Series ............................................... 1 Performance Summary ....................................................... 6 Your Fund's Expenses ...................................................... 8 Financial Highlights and Statement of Investments ......................... 10 Financial Statements ...................................................... 17 Notes to Financial Statements ............................................. 20 Report of Independent Registered Public Accounting Firm ................... 29 Tax Designation ........................................................... 30 Board Members and Officers ................................................ 32 Shareholder Information ................................................... 37
Annual Report TIF Emerging Markets Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF Emerging Markets Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in securities issued by emerging market companies. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FTINSTITUTIONAL.COM OR CALL A FRANKLIN TEMPLETON INSTITUTIONAL SERVICES REPRESENTATIVE AT (800) 321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Templeton Institutional Funds (TIF) Emerging Markets Series (Fund) covers the fiscal year ended December 31, 2008. PERFORMANCE OVERVIEW TIF Emerging Markets Series had a -54.10% cumulative total return for the 12 months ended December 31, 2008. The Fund performed comparably to the Standard & Poor's/International Finance Corporation Investable (S&P/IFCI) Composite Index and the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index, which had total returns of -53.74% and -53.18% during the same period.(1) (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P/IFCI Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity performance of global emerging markets. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/08 (PERFORMANCE GRAPH) Asia 41.2% Latin America & Caribbean 24.9% Europe 19.9% Middle East & Africa 13.4% Short-Term Investments & Other Net Assets 0.6%
ECONOMIC AND MARKET OVERVIEW The year 2008 marked the end of a long bull run in emerging markets that started in 2003. After surging close to 400% in the previous five-year period, the MSCI EM Index declined 53.18% in U.S. dollar terms in 2008.(1) Our experience has led us to believe the recent fall is part of a natural bull and bear market cycle. In emerging markets we have found, in the past, that bull markets have lasted longer than bear markets and bull markets have tended to more than recover the losses of the previous bear markets. Please remember, historical performance is no guarantee of future results. Global financial markets this past year experienced some of the worst volatility since the 1930s. The current crisis began in the U.S. with the unraveling of the highly leveraged derivative structure of subprime mortgages. Extreme risk aversion and the resulting lack of liquidity were detrimental to companies that relied on borrowing and eventually led to a series of major financial firm collapses in the U.S. and Europe. Investor anxiety surged and market volatility in developed and emerging markets reached historic levels. Recognizing the severity of the credit crunch, governments around the world implemented fiscal stimuli and loosened monetary policies to support their domestic economies and ease liquidity conditions. Thus far, more than US$1 trillion in total has been pledged globally by countries including China, the U.S., Germany, the U.K., Taiwan, Spain, Japan, South Korea, Russia, France, Australia, Hong Kong, Singapore and Malaysia. Government measures, coupled with stocks trading at distress-level valuations, brought bargain hunters back to the market. As a result, the MSCI EM Index rebounded and ended the year 25% above its 2008 low in October.(1) INVESTMENT STRATEGY Our investment strategy employs a bottom-up, value-oriented, long-term approach. We focus on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value and cash flow potential. Before we make a purchase, we generally look at the company's price/earnings ratio, profit margins and liquidation value. During our analysis, we also consider the company's position in its sector, the economic framework and political environment. 2 | Annual Report TOP 10 COUNTRIES 12/31/08
% OF TOTAL NET ASSETS ---------- China 22.1% Brazil 13.3% South Africa 10.9% Mexico 8.9% Russia 6.1% Taiwan 5.7% Turkey 5.5% U.K. 4.2% India 4.0% Chile 2.1%
MANAGER'S DISCUSSION During the year under review, the most significant detractors from the Fund's absolute performance included Turkey's Akbank, one of the country's largest commercial banks, Russia's Gazprom, the world's largest natural gas producer, and Chalco (Aluminum Corp. of China), the country's leading alumina and aluminum products manufacturer. All three stocks significantly declined in value and underperformed many of their emerging markets peers in 2008. Investor risk aversion rose toward emerging markets such as Turkey amid the global financial crisis, and shares of Akbank suffered. Commodity price corrections drove investors to reduce exposure to energy stocks. Although we trimmed the Fund's holdings in these stocks to meet funding requirements, we believed that these companies were well positioned to benefit from continued demand for their products and services over the longer term. On the other hand, the most significant contributors to Fund performance included Zijin Mining Group, a Chinese mining conglomerate primarily engaged in gold production, and China Coal Energy and China Shenhua Energy, the country's largest coal producers. We added shares of Zijin Mining Group to the portfolio in December after price corrections brought the shares down to attractive levels in our view. As one of China's largest gold miners, Zijin Mining Group has proven reserves and benefits from economies of scale and cost advantages. We believe expectations for gold prices to remain relatively high could lead to higher revenues. We initiated a position in China Coal Energy and added to our existing position in China Shenhua Energy as price corrections brought valuations down to what we considered attractive levels. China Coal Energy is the country's largest thermal coal exporter, and also engages in the coking business and mining equipment manufacturing. As an integrated coal-based energy company, China Shenhua Energy owns one of the two dedicated coal freight rail lines in the country. Based on our analysis, we believe these companies could benefit from proven reserves, resilient coal prices in the medium term and long-term demand from industries such as power generation and steel. It is also important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2008, the U.S. dollar increased in value relative to most non-U.S. currencies. As a result, the Fund's performance was Annual Report | 3 negatively affected by the portfolio's predominant investment in securities with non-U.S. currency exposure. (PERFORMANCE GRAPH) TOP 10 EQUITY HOLDINGS 12/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- China Mobile Ltd. 5.7% WIRELESS TELECOMMUNICATION SERVICES, CHINA ICBC (Industrial and Commercial Bank of 2.4% China Ltd.), H COMMERCIAL BANKS, CHINA America Movil SAB de CV, L, ADR 2.3% WIRELESS TELECOMMUNICATION SERVICES, MEXICO China Construction Bank Corp., H 2.3% COMMERCIAL BANKS, CHINA PetroChina Co. Ltd., H 2.2% OIL, GAS & CONSUMABLE FUELS, CHINA President Chain Store Corp. 2.1% FOOD & STAPLES RETAILING, TAIWAN Vale (Companhia Vale do Rio Doce), ADR, pfd., A 2.0% METALS & MINING, BRAZIL Petrobras (Petroleo Brasileiro SA), ADR, pfd. 2.0% OIL, GAS & CONSUMABLE FUELS, BRAZIL TSMC (Taiwan Semiconductor Manufacturing Co. Ltd.) 1.9% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, TAIWAN Tupras-Turkiye Petrol Rafinerileri AS 1.8% OIL, GAS & CONSUMABLE FUELS, TURKEY
During the reporting period, we increased the Fund's holdings in South Africa, Taiwan and Chile as we continued to search for attractive investment opportunities. We also increased the Fund's exposure to select frontier markets, which we believe have the potential to grow at a relatively fast pace and offer investors the opportunity to invest in a younger generation of emerging markets. We made select purchases in Qatar, United Arab Emirates, Kuwait and Oman. In addition, we made significant purchases in banks. In our view, the continued liberalization of the financial sector in emerging markets could unlock hidden value and allow banks to benefit from the growing financial needs of consumers in these markets. Major additions in this sector included ICBC (Industrial and Commercial Bank of China) and China Construction Bank, two leading Chinese commercial banks, HSBC Holdings, one of the world's premier banking and financial services organizations, and Banco Itau Holding Financeira, a major financial conglomerate in Brazil. We also made key purchases in consumer-related sectors that included broadcasting and cable television, life and health insurance, and brewing companies. Some key investments were China Life Insurance, the country's leading life insurance company, Brazil's Ambev (Companhia de Bebidas das Americas), one of the world's largest beer and soft drink producers, and Grupo Televisa, a premier Mexican media company. We believe the long-term outlook for consumerism remained attractive due to relatively higher per-capita income growth and continued demand for consumer goods and services in emerging markets. To raise funds for redemptions during the reporting period, we sold a number of holdings. We sold some other stocks as they reached sale price targets. As a result, the Fund's exposure to diversified metals and mining, oil and gas, telecommunication services and electric utilities companies fell. Major sales included all or part of Vale (Companhia Vale do Rio Doce), one of the world's 4 | Annual Report largest iron ore producers, Petrobras (Petroleo Brasileiro), Brazil's national oil and gas company, and China Telecom, the country's leading integrated telecommunication services provider. We also sold some spin-offs of UES (Unified Energy System), a Russian electricity production group that was split into individual companies due to restructuring in the country's power sector. Geographically, the Fund's investments fell in countries such as Brazil, Russia and South Korea. We thank you for your continued participation in the Fund and look forward to serving your future investment needs. (Photo of Mark Mobius) /s/ Mark Mobius Mark Mobius Executive Chairman Templeton Asset Management Ltd. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/08 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
SYMBOL: TEEMX CHANGE 12/31/08 12/31/07 - ------------- ------- -------- -------- Net Asset Value (NAV) -$12.83 $8.40 $21.23 DISTRIBUTIONS (1/1/08-12/31/08) Dividend Income $0.5031 Short-Term Capital Gain $0.1591 Long-Term Capital Gain $1.0183 TOTAL $1.6805
PERFORMANCE(1)
1-YEAR 5-YEAR 10-YEAR -------- ---------- ---------- Cumulative Total Return(2) -54.10% +24.80% +97.97% Average Annual Total Return(3) -54.10% +4.53% +7.07% Value of $1,000,000 Investment(4) $458,994 $1,247,978 $1,979,719 Total Annual Operating Expenses(5) 1.41%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, VISIT FTINSTITUTIONAL.COM OR CALL (800) 321-8563. 6 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. (PERFORMANCE GRAPH)
USD USD USD TIF EMERGING IFC INVESTABLE MSCI EMERGING MARKETS SERIES COMPOSITE INDEX MARKETS INDEX INCEPTION DATE 3-MAY-93 3-MAY-93 3-MAY-93 CALENDAR MONTH NET 540 GROSS BM0300 GROSS BM0119 - -------------- -------------- --------------- ------------- Dec-98 1,000,000.00 1,000,000.00 1,000,000.00 Jan-99 951,865.30 976,884.88 983,865.85 Feb-99 951,865.07 994,283.81 993,435.97 Mar-99 1,084,922.22 1,109,191.81 1,124,361.24 Apr-99 1,296,849.48 1,260,441.44 1,263,468.23 May-99 1,261,929.74 1,237,910.46 1,256,118.03 Jun-99 1,384,751.26 1,372,887.72 1,398,677.12 Jul-99 1,323,340.78 1,352,943.63 1,360,681.35 Aug-99 1,276,379.41 1,367,547.04 1,373,061.03 Sep-99 1,219,785.35 1,329,453.00 1,326,593.76 Oct-99 1,254,705.24 1,352,067.43 1,354,840.50 Nov-99 1,360,668.62 1,473,609.55 1,476,321.62 Dec-99 1,565,836.61 1,671,131.14 1,664,080.53 Jan-00 1,495,434.87 1,673,509.41 1,673,998.39 Feb-00 1,442,026.56 1,671,882.17 1,696,106.94 Mar-00 1,460,914.44 1,696,332.46 1,704,384.42 Apr-00 1,334,617.42 1,520,841.16 1,542,821.15 May-00 1,227,750.78 1,478,491.26 1,479,037.95 Jun-00 1,318,830.00 1,520,340.47 1,531,136.92 Jul-00 1,262,967.89 1,447,239.95 1,452,391.27 Aug-00 1,287,255.66 1,452,705.80 1,459,532.33 Sep-00 1,160,958.77 1,322,777.15 1,332,091.92 Oct-00 1,063,807.13 1,215,671.55 1,235,511.26 Nov-00 1,007,944.75 1,108,273.88 1,127,485.76 Dec-00 1,064,554.25 1,140,359.66 1,154,706.95 Jan-01 1,185,023.58 1,286,811.03 1,313,710.12 Feb-01 1,091,598.49 1,187,674.72 1,210,845.13 Mar-01 989,568.54 1,085,367.38 1,091,916.54 Apr-01 1,041,198.26 1,149,622.40 1,145,870.08 May-01 1,078,076.82 1,184,420.24 1,159,547.45 Jun-01 1,073,159.72 1,162,974.09 1,135,745.60 Jul-01 1,010,466.12 1,083,489.80 1,063,977.22 Aug-01 1,014,153.98 1,068,761.21 1,053,482.34 Sep-01 887,538.34 903,075.06 890,424.83 Oct-01 914,582.40 959,068.72 945,683.62 Nov-01 969,899.72 1,071,431.55 1,044,416.17 Dec-01 1,011,369.78 1,160,554.10 1,127,316.94 Jan-02 1,063,940.87 1,201,986.06 1,165,519.33 Feb-02 1,062,689.07 1,225,184.63 1,184,667.14 Mar-02 1,126,401.97 1,310,552.01 1,255,926.52 Apr-02 1,164,032.23 1,322,693.70 1,264,078.01 May-02 1,156,506.34 1,301,038.93 1,243,937.41 Jun-02 1,083,754.38 1,207,159.84 1,150,614.83 Jul-02 1,026,054.41 1,130,721.41 1,063,102.86 Aug-02 1,023,545.62 1,145,366.55 1,079,483.95 Sep-02 948,284.72 1,018,108.23 963,017.18 Oct-02 973,371.65 1,083,489.80 1,025,505.22 Nov-02 1,052,395.47 1,158,718.24 1,096,094.34 Dec-02 1,031,142.50 1,114,866.27 1,059,675.96 Jan-03 1,019,685.25 1,115,867.65 1,055,062.24 Feb-03 1,018,412.48 1,082,822.21 1,026,586.20 Mar-03 981,554.25 1,043,059.21 997,477.70 Apr-03 1,083,799.49 1,149,538.95 1,086,325.15 May-03 1,147,702.74 1,229,523.93 1,164,292.19 Jun-03 1,186,044.64 1,305,628.57 1,230,650.61 Jul-03 1,237,167.52 1,375,808.40 1,307,723.13 Aug-03 1,295,958.55 1,475,069.89 1,395,497.15 Sep-03 1,334,300.57 1,491,175.37 1,405,727.46 Oct-03 1,437,823.92 1,612,300.25 1,525,351.51 Nov-03 1,467,219.44 1,632,995.37 1,544,098.67 Dec-03 1,586,340.99 1,752,075.77 1,656,037.39 Jan-04 1,637,177.03 1,811,949.76 1,714,851.58 Feb-04 1,697,137.34 1,899,278.17 1,793,957.57 Mar-04 1,695,399.25 1,934,701.88 1,817,008.52 Apr-04 1,599,902.16 1,788,417.41 1,668,454.87 May-04 1,580,279.14 1,764,092.29 1,635,594.42 Jun-04 1,612,983.81 1,764,175.74 1,643,065.56 Jul-04 1,588,128.29 1,727,875.83 1,614,012.50 Aug-04 1,641,763.44 1,805,107.02 1,681,575.37 Sep-04 1,726,795.00 1,909,333.67 1,778,697.78 Oct-04 1,777,814.14 1,964,534.57 1,821,309.78 Nov-04 1,913,865.02 2,135,227.60 1,990,009.07 Dec-04 2,005,162.98 2,244,669.75 2,085,811.12 Jan-05 1,990,546.35 2,250,093.88 2,092,412.94 Feb-05 2,144,687.24 2,438,978.60 2,276,145.24 Mar-05 2,041,644.05 2,286,685.86 2,126,190.60 Apr-05 1,978,883.43 2,235,448.74 2,069,520.74 May-05 2,057,674.70 2,319,230.61 2,142,385.22 Jun-05 2,124,440.46 2,397,421.45 2,216,338.26 Jul-05 2,244,634.21 2,563,357.95 2,373,161.82 Aug-05 2,233,966.93 2,584,929.28 2,394,524.52 Sep-05 2,414,236.89 2,826,302.83 2,617,807.29 Oct-05 2,279,364.94 2,642,174.66 2,446,769.64 Nov-05 2,455,618.54 2,856,552.76 2,649,354.94 Dec-05 2,568,503.25 3,034,630.95 2,806,299.45 Jan-06 2,827,657.48 3,360,287.06 3,121,443.33 Feb-06 2,834,435.23 3,362,498.44 3,118,469.99 Mar-06 2,856,164.43 3,402,177.99 3,146,424.43 Apr-06 3,049,376.61 3,690,866.61 3,370,939.37 May-06 2,758,185.19 3,325,489.21 3,018,522.90 Jun-06 2,728,253.77 3,311,428.21 3,012,127.70 Jul-06 2,797,654.96 3,353,819.84 3,057,176.33 Aug-06 2,849,344.05 3,452,872.70 3,136,597.29 Sep-06 2,849,344.23 3,483,080.90 3,162,961.75 Oct-06 2,985,401.20 3,639,087.08 3,313,317.04 Nov-06 3,152,769.56 3,921,391.91 3,560,134.56 Dec-06 3,315,178.63 4,100,221.14 3,720,770.55 Jan-07 3,272,270.25 4,053,156.42 3,682,225.47 Feb-07 3,240,478.76 4,044,603.00 3,660,898.05 Mar-07 3,368,331.67 4,211,999.83 3,808,083.46 Apr-07 3,540,675.18 4,423,874.49 3,984,924.15 May-07 3,696,611.07 4,651,020.15 4,183,331.65 Jun-07 3,813,176.61 4,872,491.34 4,381,202.44 Jul-07 3,905,090.56 5,119,581.09 4,614,637.40 Aug-07 3,780,356.28 5,005,924.81 4,518,081.94 Sep-07 4,239,969.80 5,503,567.41 5,017,381.44 Oct-07 4,699,600.38 6,139,233.11 5,577,314.42 Nov-07 4,312,213.86 5,717,403.10 5,182,303.58 Dec-07 4,313,165.73 5,751,658.53 5,200,816.41 Jan-08 3,675,234.96 5,012,600.66 4,553,310.99 Feb-08 3,973,903.36 5,373,555.31 4,891,054.78 Mar-08 3,652,896.76 5,103,559.06 4,632,666.43 Apr-08 3,957,635.75 5,501,481.20 5,009,371.06 May-08 4,040,933.69 5,607,835.77 5,103,756.99 Jun-08 3,602,092.74 5,046,271.96 4,595,555.11 Jul-08 3,518,795.50 4,868,986.52 4,425,845.39 Aug-08 3,268,896.68 4,479,359.12 4,073,776.65 Sep-08 2,837,245.22 3,690,219.89 3,361,291.14 Oct-08 2,056,845.47 2,674,907.16 2,441,868.67 Nov-08 1,898,626.83 2,464,776.57 2,258,224.56 Dec-08 1,979,719.32 2,660,850.34 2,434,974.55
AVERAGE ANNUAL TOTAL RETURN
12/31/08 -------- 1-Year -54.10% 5-Year +4.53% 10-Year +7.07%
ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1.) Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: (C) 2009 Morningstar. The S&P/IFCI Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity performance of global emerging markets. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global and emerging markets. Annual Report | 7 Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08 ----------------- -------------- ----------------------- Actual $1,000 $ 549.60 $5.38 Hypothetical (5% return before expenses) $1,000 $1,018.20 $7.00
* Expenses are calculated using the most recent six-month annualized expense ratio of 1.38%, multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. Annual Report | 9 Templeton Institutional Funds FINANCIAL HIGHLIGHTS EMERGING MARKETS SERIES
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2008 2007 2006 2005 2004 ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 21.23 $ 20.86 $ 18.93 $ 15.09 $ 12.18 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ...................... 0.28 0.50 0.44 0.33 0.21 Net realized and unrealized gains (losses) .... (11.43) 5.31 4.96 3.89 2.97 ---------- ---------- ---------- ---------- ---------- Total from investment operations ................. (11.15) 5.81 5.40 4.22 3.18 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ......................... (0.50) (0.79) (0.54) (0.38) (0.27) Net realized gains ............................ (1.18) (4.65) (2.93) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions .............................. (1.68) (5.44) (3.47) (0.38) (0.27) ---------- ---------- ---------- ---------- ---------- Redemption fees(c,d) ............................. -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ..................... $ 8.40 $ 21.23 $ 20.86 $ 18.93 $ 15.09 ========== ========== ========== ========== ========== Total return ..................................... (54.10)% 30.10% 29.07% 28.09% 26.40% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 1.40% 1.41% 1.42% 1.42% 1.45% Net investment income ............................ 1.79% 2.18% 2.09% 1.98% 1.62% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $1,120,378 $3,184,512 $3,209,602 $2,841,536 $2,063,532 Portfolio turnover rate .......................... 77.61% 87.26% 40.84% 36.42% 52.07%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 10 | Annual report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE ----------------------- -------------------------------------------- ------------- -------------- COMMON STOCKS 91.3% ARGENTINA 0.3% Tenaris SA, ADR .............................. Energy Equipment & Services 159,000 $ 3,335,820 -------------- AUSTRIA 0.6% OMV AG ....................................... Oil, Gas & Consumable Fuels 269,829 7,063,092 -------------- BRAZIL 6.1% AES Tiete SA ................................. Independent Power Producers & Energy Traders 1,335,408 7,379,507 American Banknote SA ......................... Commercial Services & Supplies 199,775 927,881 Banco Itau Holding Financeira SA, ADR ........ Commercial Banks 1,054,905 12,236,898 Companhia de Bebidas das Americas (AmBev) .... Beverages 413,138 15,135,006 Companhia Energetica de Minas Gerais ......... Electric Utilities 200,128 2,166,000 Natura Cosmeticos SA ......................... Personal Products 1,593,811 13,076,894 Souza Cruz SA ................................ Tobacco 905,191 17,247,320 -------------- 68,169,506 -------------- CHILE 1.2% Banco Santander Chile SA, ADR ................ Commercial Banks 96,600 3,383,898 Cia Cervecerias Unidas SA, ADR ............... Beverages 219,000 5,726,850 Empresa Nacional de Telecomunicaciones SA .... Diversified Telecommunication Services 168,253 1,829,817 Lan Airlines SA, ADR Airlines 349,868 2,816,438 -------------- 13,757,003 -------------- CHINA 22.1% Aluminum Corp. of China Ltd., H .............. Metals & Mining 14,171,000 7,460,153 Anta Sports Products Ltd. .................... Textiles, Apparel & Luxury Goods 1,534,000 698,694 Bank of China Ltd., H ........................ Commercial Banks 34,995,000 9,572,579 China Coal Energy Co., H ..................... Oil, Gas & Consumable Fuels 13,787,000 10,975,948 China Construction Bank Corp., H ............. Commercial Banks 46,490,000 25,493,859 China Life Insurance Co. Ltd., H ............. Insurance 4,108,000 12,482,697 China Mobile Ltd. ............................ Wireless Telecommunication Services 6,312,500 63,367,720 China Molybdenum Co. Ltd., H ................. Metals & Mining 8,113,000 3,684,777 China Petroleum and Chemical Corp., H ........ Oil, Gas & Consumable Fuels 6,114,000 3,699,861 China Shenhua Energy Co. Ltd., H ............. Oil, Gas & Consumable Fuels 5,888,500 12,460,504 China Shipping Development Co. Ltd., H ....... Marine 3,572,000 3,548,863 CNOOC Ltd. ................................... Oil, Gas & Consumable Fuels 13,952,000 13,033,532 Denway Motors Ltd. ........................... Automobiles 29,559,858 9,191,925 Hidili Industry International Development Ltd. ...................................... Metals & Mining 12,467,000 3,924,993 Industrial and Commercial Bank of China Ltd., H ................................... Commercial Banks 50,967,000 26,830,967 Lonking Holdings Ltd. ........................ Machinery 1,865,000 955,337 PetroChina Co. Ltd., H ....................... Oil, Gas & Consumable Fuels 27,588,000 24,170,024 (a) Shanda Interactive Entertainment Ltd., ADR ... Software 34,917 1,129,914 Shanghai Industrial Holdings Ltd. ............ Industrial Conglomerates 676,000 1,543,857 Tencent Holdings Ltd. ........................ Internet Software & Services 509,800 3,288,947
Annual Report | 11 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES/RIGHTS VALUE ----------------------- -------------------------------------------- ------------- -------------- COMMON STOCKS (CONTINUED) CHINA (CONTINUED) Yantai Changyu Pioneer Wine Co. Ltd.,B ....... Beverages 350,700 $ 1,230,812 Zijin Mining Group Co. Ltd., H ............... Metals & Mining 13,884,000 8,419,757 -------------- 247,165,720 -------------- EGYPT 0.2% Egyptian Financial Group-Hermes Holding ...... Capital Markets 264,612 826,305 El Ezz Aldekhela Steel Alexa Co. ............. Metals & Mining 1,333 193,495 Telecom Egypt ................................ Diversified Telecommunication Services 425,087 1,234,092 -------------- 2,253,892 -------------- HONG KONG 1.3% Dairy Farm International Holdings Ltd. ....... Food & Staples Retailing 2,339,019 9,987,611 VTech Holdings Ltd. .......................... Communications Equipment 1,093,000 4,625,739 -------------- 14,613,350 -------------- HUNGARY 1.9% Magyar Telekom PLC ........................... Diversified Telecommunication Services 1,504,119 4,251,451 MOL Hungarian Oil and Gas Nyrt. .............. Oil, Gas & Consumable Fuels 207,389 10,774,163 (a) OTP Bank Ltd. ................................ Commercial Banks 386,200 5,844,277 -------------- 20,869,891 -------------- INDIA 4.0% (a) Bharti Airtel Ltd. ........................... Wireless Telecommunication Services 129,241 1,900,869 GAIL India Ltd. .............................. Gas Utilities 2,226,538 9,433,707 Grasim Industries Ltd. ....................... Construction Materials 20,709 518,768 Great Eastern Shipping Co. Ltd. .............. Oil, Gas & Consumable Fuels 122,200 509,963 Infosys Technologies Ltd. .................... IT Services 244,083 5,611,851 National Aluminium Co. Ltd. .................. Metals & Mining 755,329 2,949,387 Oil & Natural Gas Corp. Ltd. ................. Oil, Gas & Consumable Fuels 823,946 11,314,429 Shipping Corp. of India Ltd. ................. Marine 89,360 146,115 Steel Authority of India Ltd. ................ Metals & Mining 2,462,000 3,921,882 Tata Consultancy Services Ltd. ............... IT Services 883,072 8,683,602 Union Bank of India Ltd. ..................... Commercial Banks 20,000 67,051 -------------- 45,057,624 -------------- INDONESIA 1.7% PT Astra International Tbk ................... Automobiles 4,495,000 4,350,665 (b) PT Bank Central Asia Tbk ..................... Commercial Banks 18,231,000 5,435,849 PT Telekomunikasi Indonesia, B ............... Diversified Telecommunication Services 13,945,000 8,827,569 -------------- 18,614,083 -------------- ISRAEL 0.5% (a) Taro Pharmaceutical Industries Ltd. .......... Pharmaceuticals 759,075 5,844,877 -------------- KUWAIT 0.2% Kuwait Projects Co. (Holding) KSC (KIPCO) .... Diversified Financial Services 560,000 993,339 National Mobile Telecommunications Co. ....... Wireless Telecommunication Services 195,000 1,327,107 -------------- 2,320,446 --------------
12 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE ----------------------- -------------------------------------------- ------------- -------------- COMMON STOCKS (CONTINUED) LUXEMBOURG 0.1% (a) Reinet Investments SCA, GDR .................. Textiles, Apparel & Luxury Goods 826,287 $852,658 -------------- MALAYSIA 0.1% British American Tobacco Malaysia Bhd. ....... Tobacco 95,100 1,225,764 -------------- MEXICO 8.9% Alfa SAB de CV ............................... Industrial Conglomerates 262,221 564,019 America Movil SAB de CV, L, ADR .............. Wireless Telecommunication Services 848,578 26,297,432 Fomento Economico Mexicano SAB de CV, ADR .... Beverages 124,766 3,759,200 Grupo Televisa SA ............................ Media 6,704,904 19,994,938 Kimberly Clark de Mexico SAB de CV, A ........ Household Products 5,895,939 19,774,932 Telefonos de Mexico SAB de CV, L, ADR ........ Diversified Telecommunication Services 904,158 18,933,068 Wal-Mart de Mexico SAB de CV, V .............. Food & Staples Retailing 3,872,160 10,446,221 -------------- 99,769,810 -------------- OMAN 0.1% Oman International Bank ...................... Commercial Banks 1,313,240 750,403 -------------- PAKISTAN 1.3% Fauji Fertilizer Co. Ltd. .................... Chemicals 1,254,911 942,075 MCB Bank Ltd. ................................ Commercial Banks 3,357,543 5,338,546 Oil & Gas Development Co. Ltd. ............... Oil, Gas & Consumable Fuels 5,679,400 3,588,161 (a) Pakistan Telecommunications Corp., A ......... Diversified Telecommunication Services 20,361,133 4,346,282 -------------- 14,215,064 -------------- PERU 0.3% Credicorp Ltd. ............................... Commercial Banks 63,000 3,147,480 -------------- PHILIPPINES 1.0% Bank of the Philippine Islands ............... Commercial Banks 771,100 645,270 Globe Telecom Inc. ........................... Wireless Telecommunication Services 60,639 990,385 Philippine Long Distance Telephone Co., ADR .. Wireless Telecommunication Services 199,922 9,386,338 -------------- 11,021,993 -------------- POLAND 0.4% Polski Koncern Naftowy Orlen SA .............. Oil, Gas & Consumable Fuels 544,012 4,718,738 -------------- QATAR 1.1% Industries Qatar ............................. Industrial Conglomerates 70,270 1,942,940 Qatar National Bank .......................... Commercial Banks 220,980 10,320,895 -------------- 12,263,835 -------------- RUSSIA 6.1% Bank of Moscow ............................... Commercial Banks 24,128 518,752 (a,c) Centenergoholding ............................ Electric Utilities 161,838 -- (a) Federal Grid Co. ............................. Electric Utilities 284,876,557 1,210,725 Gazprom, ADR ................................. Oil, Gas & Consumable Fuels 834,700 11,894,475 Gazprom, ADR (London Exchange) ............... Oil, Gas & Consumable Fuels 590,600 8,374,708 (a) Holiding MRSK OAO ............................ Electric Utilities 29,782,700 923,264 (a) Inter Rao Ues OAO ............................ Electric Utilities 1,221,833,345 274,913
Annual Report | 13 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE ----------------------- -------------------------------------------- ------------- -------------- COMMON STOCKS (CONTINUED) RUSSIA (CONTINUED) (a,c) Intergenerasiya Holding Co. .................. Electric Utilities 542,583 $ -- (a) Kuzbassenergo ................................ Electric Utilities 14,100,516 35,251 LUKOIL, ADR .................................. Oil, Gas & Consumable Fuels 202,570 6,705,067 LUKOIL, ADR (London Exchange) ................ Oil, Gas & Consumable Fuels 229,250 7,297,028 Mechel OAO, ADR .............................. Metals & Mining 177,483 709,932 Mining and Metallurgical Co. Norilsk Nickel ....................................... Metals & Mining 148,386 9,719,283 Mobile TeleSystems ........................... Wireless Telecommunication Services 609,400 2,334,002 Mobile TeleSystems, ADR ...................... Wireless Telecommunication Services 172,700 4,607,636 (a) RAO Energy System of East OAO ................ Electric Utilities 25,782,700 55,433 (a) RusHydro ..................................... Electric Utilities 27,736,834 579,700 Sberbank RF .................................. Commercial Banks 4,715,680 3,489,603 (a,c) Sibenergyholding JSC ......................... Electric Utilities 149,072 -- (a) TGK-2 ........................................ Electric Utilities 385,310,076 105,960 (a) TGK-4 ........................................ Electric Utilities 470,860,819 211,887 (a) TGK-9 ........................................ Electric Utilities 800,469,615 36,021 TNK-BP ....................................... Oil, Gas & Consumable Fuels 12,656,073 8,226,447 (a) Wimm-Bill-Dann Foods ......................... Food Products 107,050 1,391,650 -------------- 68,701,737 -------------- SINGAPORE 1.0% ComfortDelGro Corp. Ltd. ..................... Road & Rail 1,861,306 1,884,044 Fraser and Neave Ltd. ........................ Industrial Conglomerates 3,586,139 7,385,068 Keppel Corp. Ltd. ............................ Industrial Conglomerates 794,388 2,401,187 -------------- 11,670,299 -------------- SOUTH AFRICA 10.9% ABSA Group Ltd. .............................. Commercial Banks 567,600 6,530,419 Foschini Ltd. ................................ Specialty Retail 2,997,139 15,304,540 Impala Platinum Holdings Ltd. ................ Metals & Mining 305,153 4,382,516 Kersaf Investments Ltd. ...................... Hotels, Restaurants & Leisure 24,800 246,285 Lewis Group Ltd. ............................. Specialty Retail 2,052,297 10,479,814 Massmart Holdings Ltd. ....................... Food & Staples Retailing 467,059 4,201,544 MTN Group Ltd. ............................... Wireless Telecommunication Services 1,406,771 16,237,729 Naspers Ltd., N .............................. Media 628,431 11,114,538 Pretoria Portland Cement Co. Ltd. ............ Construction Materials 519,662 1,733,128 Remgro Ltd. .................................. Diversified Financial Services 1,297,201 10,548,728 Sasol ........................................ Oil, Gas & Consumable Fuels 232,680 6,931,389 Standard Bank Group Ltd. ..................... Commercial Banks 1,746,237 15,418,901 Telkom South Africa Ltd. ..................... Diversified Telecommunication Services 628,570 7,656,518 The Spar Group Ltd. .......................... Food & Staples Retailing 419,612 2,544,456 Tiger Brands Ltd. ............................ Food Products 440,387 6,720,118 Truworths International Ltd. ................. Specialty Retail 664,719 2,411,374 -------------- 122,461,997 --------------
14 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE ----------------------- -------------------------------------------- ------------- -------------- COMMON STOCKS (CONTINUED) SOUTH KOREA 2.0% Kangwon Land Inc. ............................ Hotels, Restaurants & Leisure 971,788 $ 10,502,697 (a) S1 Corp. ..................................... Commercial Services & Supplies 61,759 2,640,527 SK Telecom Co. Ltd. .......................... Wireless Telecommunication Services 53,315 8,822,514 -------------- 21,965,738 -------------- SWEDEN 1.0% Oriflame Cosmetics SA, SDR ................... Personal Products 384,603 11,091,952 -------------- TAIWAN 5.7% MediaTek Inc. ................................ Semiconductors & Semiconductor Equipment 1,738,610 11,696,827 President Chain Store Corp. .................. Food & Staples Retailing 9,787,010 23,411,185 Taiwan Mobile Co. Ltd. ....................... Wireless Telecommunication Services 4,555,000 6,768,223 Taiwan Semiconductor Manufacturing Co. Ltd. .. Semiconductors & Semiconductor Equipment 15,874,355 21,504,847 -------------- 63,381,082 -------------- THAILAND 1.1% Siam Cement Public Co. Ltd., fgn. ............ Construction Materials 1,147,524 3,595,806 Thai Beverages Co. Ltd., fgn. ................ Beverages 68,147,000 9,276,555 -------------- 12,872,361 -------------- TURKEY 5.5% Akbank TAS ................................... Commercial Banks 4,877,907 15,135,602 Anadolu Efes Biracilik Ve Malt Sanayii AS .... Beverages 1,151,781 7,700,970 Tekfen Holding AS ............................ Diversified Financial Services 123,500 234,093 Tupras-Turkiye Petrol Rafinerileri AS ........ Oil, Gas & Consumable Fuels 1,937,395 20,373,774 Turkcell Iletisim Hizmetleri AS .............. Wireless Telecommunication Services 3,256,383 18,496,171 -------------- 61,940,610 -------------- UNITED ARAB EMIRATES 0.4% Abu Dhabi Commercial Bank .................... Commercial Banks 1,043,442 505,649 First Gulf Bank .............................. Commercial Banks 674,898 1,657,319 National Bank of Abu Dhabi ................... Commercial Banks 138,572 337,645 Union National Bank .......................... Commercial Banks 2,561,112 1,547,900 -------------- 4,048,513 -------------- UNITED KINGDOM 4.2% Anglo American PLC ........................... Metals & Mining 683,406 15,339,557 (a) British American Tobacco PLC ................. Tobacco 526,733 13,743,248 HSBC Holdings PLC ............................ Commercial Banks 1,921,658 18,273,876 -------------- 47,356,681 -------------- TOTAL COMMON STOCKS (COST 1,255,781,718) ...................... 1,022,522,019 -------------- PREFERRED STOCKS 8.1% BRAZIL 7.2% Banco Bradesco SA, ADR, pfd. ................. Commercial Banks 1,228,206 12,122,393 Companhia Energetica de Minas Gerais, ADR, pfd. ...................................... Electric Utilities 472,050 6,485,967
Annual Report | 15 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
EMERGING MARKETS SERIES INDUSTRY SHARES VALUE ----------------------- -------------------------------------------- ------------- -------------- PREFERRED STOCKS (CONTINUED) BRAZIL (CONTINUED) Companhia Vale do Rio Doce, ADR, pfd., A ..... Metals & Mining 2,117,580 $ 22,552,227 Itausa - Investimentos Itau SA, pfd. ......... Commercial Banks 2,350,890 8,135,938 Petroleo Brasileiro SA, ADR, pfd. ............ Oil, Gas & Consumable Fuels 1,099,440 22,439,571 Unibanco - Uniao de Bancos Brasileiros SA, GDR, pfd. ................................. Commercial Banks 99,500 6,429,690 Usinas Siderurgicas de Minas Gerais SA, pfd., A ......................................... Metals & Mining 258,111 2,957,487 -------------- 81,123,273 -------------- CHILE 0.9% Embotelladora Andina SA, pfd., A ............. Beverages 3,648,322 6,719,088 Sociedad Quimica y Minera de Chile SA, B, ADR, pfd. ...................................... Chemicals 117,409 2,863,606 -------------- 9,582,694 -------------- TOTAL PREFERRED STOCKS (COST $65,709,804) ........................ 90,705,967 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,321,491,522) .................. 1,113,227,986 -------------- SHORT TERM INVESTMENTS (COST $4,929,741) 0.4% MONEY MARKET FUNDS 0.4% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.55% ............. 4,929,741 4,929,741 -------------- TOTAL INVESTMENTS (COST $1,326,421,263) 99.8% ............... 1,118,157,727 OTHER ASSETS, LESS LIABILITIES 0.2% 2,220,037 -------------- NET ASSETS 100.0% ............................ $1,120,377,764 ==============
See Abbreviations on page 28. (a) Non-income producing for the twelve months ended December 31, 2008. (b) A portion or all of the security purchased on a delayed delivery basis. See Note 1(c). (c) Security has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2008, the value of these securities was $0. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 16 | Annual Report Templeton Institutional Funds FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2008
EMERGING MARKETS SERIES -------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................. $1,321,491,522 Cost - Sweep Money Fund (Note 7) ........................ 4,929,741 -------------- Total cost of investments ............................... $1,326,421,263 -------------- Value - Unaffiliated issuers ............................ $1,113,227,986 Value - Sweep Money Fund (Note 7) ....................... 4,929,741 -------------- Total value of investments .............................. 1,118,157,727 Cash ....................................................... 104,212 Foreign currency, at value (cost $5,179) ................... 5,208 Receivables: Investment securities sold .............................. 1,549,813 Capital shares sold ..................................... 803,322 Dividends ............................................... 4,876,151 Foreign tax ............................................. 117,945 -------------- Total assets ......................................... 1,125,614,378 -------------- Liabilities: Payables: Investment securities purchased ......................... 494,718 Capital shares redeemed ................................. 3,082,401 Affiliates .............................................. 1,237,605 Custodian fees .......................................... 310,795 Accrued expenses and other liabilities ..................... 111,095 -------------- Total liabilities .................................... 5,236,614 -------------- Net assets, at value .............................. $1,120,377,764 -------------- Net assets consist of: Paid-in capital ............................................ $1,615,282,849 Distributions in excess of net investment income ........... (17,167,773) Net unrealized appreciation (depreciation) ................. (208,285,077) Accumulated net realized gain (loss) ....................... (269,452,235) -------------- Net assets, at value .............................. $1,120,377,764 -------------- Shares outstanding ............................................ 133,379,697 -------------- Net asset value per share(a) .................................. $ 8.40 --------------
(a) Redemption price is equal to net asset value less redemption fees retained by the Fund. The accompanying notes are an integral part of these financial statements. Annual Report | 17 Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2008
EMERGING MARKETS SERIES --------------- Investment income: Dividends: (net of foreign taxes of $6,928,402) Unaffiliated issuers ......................................... $ 71,161,106 Sweep Money Fund (Note 7) .................................... 777,945 Interest (net of foreign taxes of $1,255) ....................... 1,121,507 --------------- Total investment income ................................... 73,060,558 --------------- Expenses: Management fees (Note 3a) ....................................... 27,932,744 Administrative fees (Note 3b) ................................... 1,842,000 Transfer agent fees (Note 3c) ................................... 3,210 Custodian fees (Note 4) ......................................... 1,867,907 Reports to shareholders ......................................... 71,692 Registration and filing fees .................................... 55,643 Professional fees ............................................... 145,249 Trustees' fees and expenses ..................................... 69,308 Other ........................................................... 84,433 --------------- Total expenses ............................................ 32,072,186 Expense reductions (Note 4) ............................... (20,798) --------------- Net expenses ........................................... 32,051,388 --------------- Net investment income ............................... 41,009,170 --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .................................................. (173,359,159) Foreign currency transactions ................................ (2,169,553) --------------- Net realized gain (loss) ............................... (175,528,712) --------------- Net change in unrealized appreciation (depreciation) on: Investments .................................................. (1,450,377,519) Translation of other assets and liabilities denominated in foreign currencies ......................... (403,943) Change in deferred taxes on unrealized appreciation (depreciation) ............................................... 1,661,836 --------------- Net change in unrealized appreciation (depreciation) ... (1,449,119,626) --------------- Net realized and unrealized gain (loss) ............................ (1,624,648,338) --------------- Net increase (decrease) in net assets resulting from operations .... $(1,583,639,168) ---------------
The accompanying notes are an integral part of these financial statements. 18 | Annual Report Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
EMERGING MARKETS SERIES YEAR ENDED DECEMBER 31, -------------------------------- 2008 2007 --------------- -------------- Increase (decrease) in net assets: Operations: Net investment income .................................................... $ 41,009,170 $ 71,536,151 Net realized gain (loss) from investments and foreign currency transactions and swap agreements ...................................... (175,528,712) 664,392,365 Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes ......................................... (1,449,119,626) 105,503,414 --------------- -------------- Net increase (decrease) in net assets resulting from operations .... (1,583,639,168) 841,431,930 --------------- -------------- Distributions to shareholders from: Net investment income .................................................... (63,309,942) (101,637,203) Net realized gains ....................................................... (154,527,211) (587,388,696) --------------- -------------- Total distributions to shareholders ............................................ (217,837,153) (689,025,899) --------------- -------------- Capital share transactions (Note 2) ............................................ (262,665,982) (177,501,570) --------------- -------------- Redemption fees ................................................................ 8,076 5,283 --------------- -------------- Net increase (decrease) in net assets .............................. (2,064,134,227) (25,090,256) Net assets: Beginning of year ........................................................... 3,184,511,991 3,209,602,247 --------------- -------------- End of year ................................................................. $ 1,120,377,764 $3,184,511,991 --------------- -------------- Distributions in excess of net investment income included in net assets: End of year ................................................................. $ (17,167,773) $ (25,601,137) --------------- --------------
The accompanying notes are an integral part of these financial statements. Annual Report | 19 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of four separate funds. The Emerging Market Series (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. At December 31, 2008, a portion of the securities held by the Fund were fair valued. All security valuation procedures are approved by the Trust's Board of Trustees. 20 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS The Fund may purchase securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. Annual Report | 21 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of December 31, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 22 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. H. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any Fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. I. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At December 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 2008 2007 --------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- --------------- Shares sold .................... 23,018,745 $ 396,764,787 11,076,340 $ 251,491,312 Shares issued in reinvestment of distributions ............ 18,691,046 206,756,226 32,231,074 647,171,797 Shares redeemed ................ (58,338,281) (866,186,995) (47,192,244) (1,076,164,679) ----------- ------------- ----------- --------------- Net increase (decrease) ........ (16,628,490) $(262,665,982) (3,884,830) $ (177,501,570) =========== ============= =========== ===============
Annual Report | 23 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Templeton Asset Management Ltd. (TAML) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES Effective March 1, 2008, the Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $7.5 billion 1.125% Over $7.5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion
Prior to March 1, 2008, the Fund paid fees to TAML based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion
B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate average net assets of certain funds within the Trust as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion
24 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. TRANSFER AGENT FEES For the year ended December 31, 2008, the Fund paid transfer agent fees of $3,210, of which $1,799 was retained by Investor Services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2008, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $255,281,400 and $69,240, respectively. The tax character of distributions paid during the years ended December 31, 2008 and 2007, was as follows:
2008 2007 ------------ ------------ Distributions paid from: Ordinary income ........... $ 85,229,983 $171,493,747 Long term capital gain .... 132,607,170 517,532,152 ------------ ------------ $217,837,153 $689,025,899 ============ ============
At December 31, 2008, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows: Cost of investments ........................... $1,361,848,914 ============== Unrealized appreciation ....................... $ 135,769,061 Unrealized depreciation ....................... (379,460,248) -------------- Net unrealized appreciation (depreciation) .... $ (243,691,187) ============== Undistributed ordinary income ................. $ 2,859,536 Undistributed long term capital gains ......... 1,372,355 -------------- Distributable earnings ........................ $ 4,231,891 ==============
Annual Report | 25 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 5. INCOME TAXES (CONTINUED) Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, and foreign capital gains tax. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and passive foreign investment company shares. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2008, aggregated $1,728,487,454 and $2,149,941,789, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 9. FAIR VALUE MEASUREMENTS The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund has determined that the implementation of SFAS 157 did not have a material impact on the Fund's financial statements. 26 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 9. FAIR VALUE MEASUREMENTS (CONTINUED) SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - - Level 1 - quoted prices in active markets for identical securities - - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of December 31, 2008, in valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------- ---------- ------- -------------- ASSETS: Investments in Securities ..... $1,116,522,072 $1,635,655 $-- $1,118,157,727
10. NEW ACCOUNTING PRONOUNCEMENT In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. 11. SUBSEQUENT EVENT On January 23, 2009, the Fund entered into, along with certain other funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), a $725 million senior unsecured syndicated global line of credit (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes and to meet future unanticipated or unusually large redemption requests. Annual Report | 27 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) EMERGING MARKETS SERIES 11. SUBSEQUENT EVENT (CONTINUED) Under the terms of the Global Credit Facility, each Borrower has agreed to pay its proportionate share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility. ABBREVIATIONS SELECTED PORTFOLIO ADR - American Depository Receipt GDR - Global Depository Receipt SDR - Swedish Depository Receipt 28 | Annual Report Templeton Institutional Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS - EMERGING MARKETS SERIES: In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Emerging Markets Series (one of the funds constituting Templeton Institutional Funds, hereafter referred to as the "Fund") at December 31, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2009 Annual Report | 29 Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) EMERGING MARKETS SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $132,607,170 as a long term capital gain dividend for the fiscal year ended December 31, 2008. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $21,928,772 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $80,703,535 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2008. Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $1,284,877 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. At December 31, 2008, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 16, 2008, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund, to shareholders of record. Record Date: 12/16/2008
FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED DIVIDENDS PER SHARE PER SHARE PER SHARE ---------------- --------------------- --------------------------- Fund Shares .... $0.0566 $0.7950 $0.4966
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. 30 | Annual Report Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) (continued) EMERGING MARKETS SERIES Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) Foreign Qualified Dividends Per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) In January 2009, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2008. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2008 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax bracket). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. Annual Report | 31 Templeton Institutional Funds BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ----------------------- ---------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1992 138 Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) and 500 East Broward Blvd. Allied Capital Corporation Suite 2100 (financial services). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995). FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding 500 East Broward Blvd. company), Victory Nickel Inc. Suite 2100 (mineral exploration) and ABACO Fort Lauderdale, FL 33394-3091 Markets Limited (retail distributors). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Vice Chairman, Caribbean Utilities Company, Ltd.and director of various other private business and nonprofit organizations. EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Suite 2100 Trustee Independent Heinz Company (processed foods and Fort Lauderdale, FL 33394-3091 Trustee since 2007 allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
32 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ----------------------- ---------------------------------- DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation (assisted 500 East Broward Blvd. living) and OSI Pharmaceuticals, Suite 2100 Inc. (pharmaceutical products). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). FRANK A. OLSON (1932) Trustee Since 2003 138 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Suite 2100 Sentient Jet (private jet Fort Lauderdale, FL 33394-3091 service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2005 145 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). CONSTANTINE D. TSERETOPOULOS Trustee Since 1990 23 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). ROBERT E. WADE (1946) Trustee Since 2007 37 El Oro and Exploration Co., p.l.c. 500 East Broward Blvd. (investments). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired, former practicing attorney.
Annual Report | 33 INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ----------------------- ---------------------------------- **CHARLES B. JOHNSON (1933) Trustee, Trustee and Vice 138 None One Franklin Parkway Chairman of President since San Mateo, CA 94403-1906 the Board and 1993 and Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. **GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments. JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable One Franklin Parkway Executive December 2008 San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director,Templeton Global Advisors Limited; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance Compliance since 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable One Franklin Parkway Officer and February 2008 San Mateo, CA 94403-1906 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
34 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ----------------------- ---------------------------------- JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable 500 East Broward Blvd. February 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central, Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). GARY P. MOTYL (1952) President and Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. Chief Executive Suite 2100 Officer - Fort Lauderdale, FL 33394-3091 Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments.
Annual Report | 35
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ----------------------- ---------------------------------- ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008. SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL FRANKLIN TEMPLETON INSTITUTIONAL SERVICES AT (800) 321-8563 TO REQUEST THE SAI. 36 | Annual Report Templeton Institutional Funds SHAREHOLDER INFORMATION EMERGING MARKETS SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Annual Report | 37 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS Emerging Markets Series INVESTMENT MANAGER Templeton Asset Management Ltd. DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES (800) 321-8563 ftinstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the investment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. ZT456 A2008 02/09 DECEMBER 31, 2008 Foreign Smaller Companies Series ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS (FRANKLIN TEMPLETON INSTITUTIONAL (R) LOGO) Contents ANNUAL REPORT TIF Foreign Smaller Companies Series ..................................... 1 Performance Summary ...................................................... 6 Your Fund's Expenses ..................................................... 8 Financial Highlights and Statement of Investments ........................ 10 Financial Statements ..................................................... 15 Notes to Financial Statements ............................................ 18 Report of Independent Registered Public Accounting Firm .................. 26 Tax Designation .......................................................... 27 Board Members and Officers ............................................... 29 Shareholder Information .................................................. 34
Annual Report TIF Foreign Smaller Companies Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF Foreign Smaller Companies Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of smaller companies located outside the U.S., including emerging markets. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE CALL A FRANKLIN TEMPLETON INSTITUTIONAL SERVICES REPRESENTATIVE AT (800) 321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Templeton Institutional Funds (TIF) Foreign Smaller Companies Series (Fund) covers the year ended December 31, 2008. PERFORMANCE OVERVIEW The Fund had a -47.28% cumulative total return for the year ended December 31, 2008. The Fund performed comparably to its benchmark, the S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index, which had a -49.15% total return during the same period.(1) Please note that index performance information is provided for reference and we do not attempt to track the index but rather undertake investments on the basis of fundamental research. You can find the Fund's long-term performance data in the Performance Summary beginning on page 6. (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of global developed and emerging market equity securities, excluding the U.S., with market capitalizations less than $2 billion. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/08 (PERFORMANCE GRAPH) Asia 40.5% Europe 29.6% North America 8.6% Australia & New Zealand 4.2% Latin America & Caribbean 4.3% Middle East & Africa 1.8% Short-Term Investments & Other Net Assets 11.0%
ECONOMIC AND MARKET OVERVIEW The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as housing prices declined, consumer demand softened, and a credit crisis originally related to U.S. subprime loan losses intensified and spread globally. Although GDP growth rebounded in the second quarter of 2008, largely due to fiscal stimulus, the domestic economy contracted in the third and fourth quarters. Fear of recession spanned the entire period, and in the summer most economists agreed that a recession had already begun. By then, the faltering U.S. economy -- which is the world's largest and accounts for roughly 25% of global GDP -- had negatively impacted growth prospects around the world. Although signs of a global slowdown surfaced in the latter half of the reporting period, in the first half growth remained robust in developing economies, particularly in Asia. The China-led demand for oil, natural gas, and industrial and agricultural commodities propelled commodity prices and those of related equities to higher levels. The steep rise in the price of oil, which peaked at $145 per barrel in early July, was one of the most extreme market trends during the year. As a result, oil was a major focus of attention due to its impact on everything from inflation to corporate earnings to consumer spending. The price boom for commodities in general was broadly based and included natural gas, precious metals and most agricultural and industrial commodities, all of which added to global inflationary pressures. In this environment, the world's monetary authorities faced the choice of lowering short-term interest rates to stimulate growth or raising them to fight rising inflation. Stimulus provided through fiscal and monetary policies implemented around the globe sought to restore financial market stability and reignite economic growth. The U.S. Treasury and the Federal Reserve Board took unprecedented steps, including lowering short-term rates to near 0% from 4.25%. The eurozone had made controlling inflation its main goal and kept rates steady at 4.00% until July, when the European Central Bank (ECB) joined many of the world's central banks whose concerns about inflation had led them to raise rates. The potential for global recession, however, exacerbated by the virtual freeze in the global financial system in September and October, trumped inflationary concerns, and the world's monetary authorities, including the ECB and the Bank of England, cut interest rates aggressively. The U.S. dollar, which had declined earlier in the period versus many of the world's 2 | Annual Report currencies, regained ground quickly toward period-end as a flight to the relative safety of U.S. Treasuries prevailed. The greenback appreciated 8.6% relative to most currencies during the year under review.(2) In this challenging economic time, volatility came to define global equity markets. Virtually all local indexes ended the 12-month period with marked losses. Despite negative economic data and an outlook for decelerating corporate earnings and profit margins globally, many companies outside the financials sector retained relatively strong balance sheets. INVESTMENT STRATEGY When choosing equity investments, we apply a bottom-up, value-oriented, long-term approach, focusing on the market price of a company's securities relative to our evaluation of the company's potential long-term (typically five years) earnings, asset value and cash flow. We also consider a company's price/earnings ratio, profit margins, liquidation value and other factors. MANAGER'S DISCUSSION During the year, the Fund held some poor performers. U.K.-based chemicals manufacturer Yule Catto was a significant detractor from Fund results. The company historically has earned relatively high profit margins as an industry leader serving various niche markets. However, as Yule Catto was focused on controlling costs and asset utilization, the company's share price declined, we believe, largely due to several non-recurring charges related to restructuring. At period-end, we believed the company remained attractively valued due to plant closures and other restructuring efforts, and its solid dividend. Finnish sporting goods company Amer Sports produces and markets golf, racquet and team sports equipment under the Wilson brand name, and skis and snowboards under the Atomic and Oxygen brands. The company's stock price declined during the period, largely due to weak demand. However, the company has strong cash flow and a solid balance sheet. In addition, we think recent acquisitions in the fitness, team sports and winter sports areas complement the company's product lineup and should strengthen its long-term competitive position. PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/08 (PERFORMANCE GRAPH) Textiles, Apparel & Luxury Goods 9.3% Commercial Services & Supplies 4.9% Food Products 4.3% Electronic Equipment, Instruments & Components 4.1% Machinery 4.0% Food & Staples Retailing 3.8% Communications Equipment 3.8% Commercial Banks 3.7% Household Durables 3.5% Real Estate Management & Development 3.1% Specialty Retail 3.1% Capital Markets 3.0% Leisure Equipment & Products 2.8% Health Care Providers & Services 2.7% Computers & Peripherals 2.1% Other 30.8% Short-Term Investments & Other Net Assets 11.0%
(2.) Source: Federal Reserve H10 report. Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- Dorel Industries Inc., B HOUSEHOLD DURABLES, CANADA 2.0% Iluka Resources Ltd. METALS & MINING, AUSTRALIA 1.9% Descente Ltd. TEXTILES, APPAREL & LUXURY GOODS, JAPAN 1.8% Massmart Holdings Ltd. FOOD & STAPLES RETAILING,SOUTH AFRICA 1.8% Binggrae Co. Ltd. FOOD PRODUCTS, SOUTH KOREA 1.7% Giant Manufacturing Co. Ltd. LEISURE EQUIPMENT & PRODUCTS, TAIWAN 1.7% North West Company Fund FOOD & STAPLES RETAILING, CANADA 1.7% Steiner Leisure Ltd. DIVERSIFIED CONSUMER SERVICES, BAHAMAS 1.7% Sinotrans Ltd., H AIR FREIGHT & LOGISTICS, CHINA 1.6% Imtech NV CONSTRUCTION & ENGINEERING, NETHERLANDS 1.6%
Sweden-based Niscayah Group, formerly known as Securitas Systems, was another key detractor. The company, which designs and installs corporate security systems, struggled from reduced banking-sector investment due to the credit crisis. Over the longer term, however, we continue to believe Niscayah could show strong potential for profit margin expansion if it expands its installed security base and associated service contracts. On a more positive note, several holdings performed well for the Fund. U.K.-based FKI (sold during the period), a leading international engineering conglomerate, was among the Fund's top contributors during the reporting period. Its largest division, FKI Logistex, manufactures automated sorting and material handling equipment for top delivery companies and airport baggage handling systems. During the period, FKI was acquired by another U.K.-based engineering company, Melrose, an industry leader that designs, develops and manufactures specialist components for various markets worldwide. Canadian drilling and well-servicing contractor Saxon Energy (sold by period-end) also performed well during the year. The company provides technology, equipment and personnel to oil and gas producers and has a strong Latin American presence. Saxon's stock price rose after U.S. energy company Schlumberger, which sought to expand operations in the region, made a takeover offer for the company. Binggrae, based in South Korea, a leading producer of dairy beverage and ice cream products, also contributed to performance for the time we held it. Binggrae's profitability and balance sheet improved significantly over the past five years as the company has strong brand power and efficient cost management. 4 | Annual Report Thank you for your continued participation in TIF Foreign Smaller Companies Series. We look forward to serving your future investment needs. (PHOTO OF HARLAN B. HODES) /s/ Harlan B. Hodes Harlan B. Hodes, CPA (PHOTO OF CYNTHIA L. SWEETING) /s/ Cynthia L. Sweeting Cynthia L. Sweeting, CFA Portfolio Management Team TIF Foreign Smaller Companies Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/08 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
SYMBOL: TFSCX CHANGE 12/31/08 12/31/07 - ------------- ------- -------- -------- Net Asset Value (NAV) -$11.39 $8.81 $20.20 DISTRIBUTIONS (1/1/08-12/31/08) Dividend Income $0.4803 Short-term Capital Gain $0.0512 Long-term Capital Gain $1.4497 TOTAL $1.9812
PERFORMANCE(1)
INCEPTION 1-YEAR 5-YEAR (10/21/02) -------- ---------- ----------- Cumulative Total Return(2) -47.28% +6.41% +62.52% Average Annual Total Return(3) -47.28% +1.25% +8.15% Value of $1,000,000 Investment(4) $527,242 $1,064,098 $1,625,091 Total Annual Operating Expenses(5) Without Waiver 1.07% With Waiver 0.95%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL (800) 321-8563. THE ADMINISTRATOR HAS CONTRACTUALLY AGREED TO WAIVE OR LIMIT ITS FEES SO THAT TOTAL FUND ANNUAL OPERATING EXPENSES, EXCLUDING ACQUIRED FUND FEES AND EXPENSES, DO NOT EXCEED 0.95% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/09. 6 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. 10/21/02-12/31/08 $ Millions (PLOT POINTS TO COME) AVERAGE ANNUAL TOTAL RETURN
12/31/08 -------- 1-Year -47.28% 5-Year +1.25% Since Inception (10/21/02) +8.15%
ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS CARRY SPECIAL RISKS AS SUCH STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGE-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. ADDITIONALLY, SMALLER COMPANIES OFTEN HAVE RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND SMALL MARKET SHARE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1.) If the administrator had not waived fees, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: (C) 2009 Morningstar. The S&P/Citigroup Global Equity ex-U.S. less than $2 Billion Index is a free float-adjusted, market capitalization-weighted index designed to measure performance of global developed and emerging market equity securities, excluding the U.S., with market capitalizations less than $2 billion. Annual Report | 7 Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases, if applicable, and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08 ----------------- -------------- ----------------------- Actual $1,000 $ 590.70 $3.80 Hypothetical (5% return before expenses) $1,000 $1,020.36 $4.82
* Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waiver, of 0.95% multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. Annual Report | 9 Templeton Institutional Funds FINANCIAL HIGHLIGHTS FOREIGN SMALLER COMPANIES SERIES
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2008 2007 2006 2005 2004 ------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 20.20 $ 22.42 $ 18.18 $ 17.45 $ 14.97 ------- -------- -------- -------- ------- Income from investment operations(a): Net investment income(b) .................... 0.42 0.33 0.30 0.38 0.21 Net realized and unrealized gains (losses) .. (9.83) 2.81 4.89 1.74 2.93 ------- -------- -------- -------- ------- Total from investment operations ............... (9.41) 3.14 5.19 2.12 3.14 ------- -------- -------- -------- ------- Less distributions from: Net investment income ....................... (0.48) (0.39) (0.33) (0.36) (0.16) Net realized gains .......................... (1.50) (4.97) (0.62) (1.03) (0.50) ------- -------- -------- -------- ------- Total distributions ............................ (1.98) (5.36) (0.95) (1.39) (0.66) ------- -------- -------- -------- ------- Redemption fees(c) ............................. --(d) --(d) --(d) --(d) -- ------- -------- -------- -------- ------- Net asset value, end of year ................... $ 8.81 $ 20.20 $ 22.42 $ 18.18 $ 17.45 ======= ======== ======== ======== ======= Total return ................................... (47.28)% 15.09% 28.78% 12.28% 21.28% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates .................................. 1.09% 1.07% 1.07% 1.07% 1.16% Expenses net of waiver and payments by affiliates(e) ............................... 0.95% 0.95% 0.95% 0.95% 0.95% Net investment income .......................... 2.60% 1.34% 1.45% 2.12% 1.34% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $63,617 $135,730 $170,757 $131,567 $97,495 Portfolio turnover rate ........................ 23.01% 20.95% 17.30% 24.59% 27.51%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 10 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE ------------------------------------------------ ---------------------------------------------- ------------ ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS 88.4% AUSTRALIA 4.2% Billabong International Ltd. ................... Textiles, Apparel & Luxury Goods 130,665 $ 726,518 Downer EDI Ltd. ................................ Commercial Services & Supplies 169,732 460,447 (a) Iluka Resources Ltd. ........................... Metals & Mining 365,061 1,199,778 PaperlinX Ltd. ................................. Paper & Forest Products 608,161 301,532 ----------- 2,688,275 ----------- BAHAMAS 1.7% (a) Steiner Leisure Ltd. ........................... Diversified Consumer Services 37,040 1,093,421 ----------- BELGIUM 0.9% Barco NV ....................................... Electronic Equipment, Instruments & Components 21,690 542,891 ----------- BRAZIL 2.1% Companhia de Saneamento de Minas Gerais ........ Water Utilities 86,500 702,988 Lojas Renner SA ................................ Multiline Retail 90,500 612,717 ----------- 1,315,705 ----------- CANADA 6.9% Canaccord Capital Inc. ......................... Capital Markets 108,300 359,576 Dorel Industries Inc., B ....................... Household Durables 54,900 1,263,313 Linamar Corp. .................................. Auto Components 57,890 176,030 (a) MDS Inc. ....................................... Life Sciences Tools & Services 84,390 523,623 (a) Mega Brands Inc. ............................... Leisure Equipment & Products 67,800 20,059 North West Company Fund (Trust Units) .......... Food & Staples Retailing 78,750 1,093,750 (a) Open Text Corp. ................................ Internet Software & Services 32,100 975,821 ----------- 4,412,172 ----------- CAYMAN ISLANDS 2.2% (a) Ju Teng International Holdings Ltd. ............ Electronic Equipment, Instruments & Components 2,910,000 608,268 Stella International Holdings Ltd. ............. Textiles, Apparel & Luxury Goods 952,500 774,270 ----------- 1,382,538 ----------- CHINA 4.5% (a) AAC Acoustic Technologies Holdings Inc. ........ Communications Equipment 1,238,000 555,887 People's Food Holdings Ltd. .................... Food Products 1,424,000 690,876 Sinotrans Ltd., H .............................. Air Freight & Logistics 5,228,000 1,011,845 Travelsky Technology Ltd., H ................... IT Services 1,423,000 624,268 ----------- 2,882,876 ----------- DENMARK 1.0% (a) Vestas Wind Systems AS ......................... Electrical Equipment 11,230 640,310 ----------- FINLAND 3.2% Amer Sports OYJ ................................ Leisure Equipment & Products 90,200 676,039 Huhtamaki OYJ .................................. Containers & Packaging 141,800 872,427 Konecranes OYJ ................................. Machinery 30,370 512,994 ----------- 2,061,460 ----------- FRANCE 1.1% Sperian Protection ............................. Commercial Services & Supplies 11,330 708,567 -----------
Annual Report | 11 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE ------------------------------------------------ ---------------------------------------------- ------------ ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) GERMANY 4.1% Celesio AG ..................................... Health Care Providers & Services 30,750 $ 829,856 (a) Jenoptik AG .................................... Electronic Equipment, Instruments & Components 124,770 868,840 Rational AG .................................... Household Durables 7,770 931,765 ----------- 2,630,461 ----------- HONG KONG 6.3% Dah Sing Financial Group ....................... Commercial Banks 100,400 257,535 Hang Lung Group Ltd. ........................... Real Estate Management & Development 259,000 783,664 Hopewell Holdings Ltd. ......................... Real Estate Management & Development 280,000 921,266 Texwinca Holdings Ltd. ......................... Textiles, Apparel & Luxury Goods 1,063,000 452,621 VTech Holdings Ltd. ............................ Communications Equipment 212,000 897,216 Yue Yuen Industrial Holdings Ltd. .............. Textiles, Apparel & Luxury Goods 366,000 723,481 ----------- 4,035,783 ----------- INDIA 0.9% HCL Infosystems Ltd. ........................... IT Services 292,426 544,916 ----------- INDONESIA 0.7% PT Indosat Tbk ................................. Diversified Telecommunication Services 887,900 468,388 ----------- JAPAN 7.0% Asics Corp. .................................... Textiles, Apparel & Luxury Goods 49,000 396,719 Descente Ltd. .................................. Textiles, Apparel & Luxury Goods 246,900 1,167,409 Japan Airport Terminal Co. Ltd. ................ Transportation Infrastructure 48,400 654,251 MEITEC Corp. ................................... Professional Services 15,100 260,720 Sohgo Security Services Co. Ltd. ............... Commercial Services & Supplies 73,400 764,005 Takuma Co. Ltd. ................................ Machinery 318,000 552,766 USS Co. Ltd. ................................... Specialty Retail 12,750 676,009 ----------- 4,471,879 ----------- NETHERLANDS 6.8% Aalberts Industries NV ......................... Machinery 88,078 623,187 Draka Holding NV ............................... Electrical Equipment 33,535 306,673 Imtech NV ...................................... Construction & Engineering 59,220 993,688 OPG Groep NV ................................... Health Care Providers & Services 70,470 915,420 Randstad Holding NV ............................ Professional Services 28,793 585,801 SBM Offshore NV ................................ Energy Equipment & Services 37,860 494,933 USG People NV .................................. Professional Services 30,390 391,798 ----------- 4,311,500 ----------- NORWAY 1.8% Schibsted ASA .................................. Media 48,580 579,759 Tomra Systems ASA .............................. Commercial Services & Supplies 175,930 596,986 ----------- 1,176,745 ----------- RUSSIA 0.4% (a, b) X 5 Retail Group NV, GDR, Reg S ................ Food & Staples Retailing 26,698 226,399 ----------- SINGAPORE 1.5% Cerebos Pacific Ltd. ........................... Food Products 433,358 922,682 ----------- SOUTH AFRICA 1.8% Massmart Holdings Ltd. ......................... Food & Staples Retailing 124,297 1,118,144 -----------
12 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE ------------------------------------------------ ---------------------------------------------- ------------ ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) SOUTH KOREA 7.8% Bank of Pusan .................................. Commercial Banks 135,980 $ 626,606 (a) Binggrae Co. Ltd. .............................. Food Products 32,120 1,107,543 Daegu Bank Co. Ltd. ............................ Commercial Banks 91,770 486,824 Halla Climate Control Corp. .................... Auto Components 86,930 499,005 INTOPS Co. Ltd. ................................ Electronic Equipment, Instruments & Components 25,195 281,274 People & Telecommunication Inc. ................ Communications Equipment 114,426 366,471 Sindo Ricoh Co. ................................ Office Electronics 15,588 672,641 Youngone Corp. ................................. Textiles, Apparel & Luxury Goods 184,030 910,679 ----------- 4,951,043 ----------- SPAIN 0.7% Sol Melia SA ................................... Hotels, Restaurants & Leisure 74,738 445,196 ----------- SWEDEN 1.0% (c) D. Carnegie & Co. AB ........................... Capital Markets 148,750 -- Niscayah Group AB .............................. Commercial Services & Supplies 710,580 604,343 ----------- 604,343 ----------- SWITZERLAND 2.4% Verwaltungs- und Privat-Bank AG ................ Capital Markets 6,890 903,913 Vontobel Holding AG ............................ Capital Markets 29,730 612,473 ----------- 1,516,386 ----------- TAIWAN 8.3% D-Link Corp. ................................... Communications Equipment 836,245 585,563 Giant Manufacturing Co. Ltd. ................... Leisure Equipment & Products 497,400 1,106,345 KYE Systems Corp. .............................. Computers & Peripherals 970,633 487,167 Pihsiang Machinery Manufacturing Co. Ltd. ...... Health Care Equipment & Supplies 702,000 957,419 Simplo Technology Co. Ltd. ..................... Computers & Peripherals 340,350 824,525 (a) Ta Chong Bank Ltd. ............................. Commercial Banks 2,947,000 399,227 Test-Rite International Co. Ltd. ............... Distributors 1,939,972 893,778 ----------- 5,254,024 ----------- THAILAND 3.5% Bank of Ayudhya Public Co. Ltd., NVDR .......... Commercial Banks 2,081,900 556,610 Glow Energy Public Co. Ltd., fgn. .............. Independent Power Producers & Energy Traders 1,071,600 693,143 Preuksa Real Estate Co. Ltd., fgn. ............. Real Estate Management & Development 2,312,600 291,194 Total Access Communication Public Co. Ltd., fgn. ........................................ Wireless Telecommunication Services 812,800 715,264 ----------- 2,256,211 ----------- UNITED KINGDOM 5.6% Bodycote PLC ................................... Machinery 241,897 434,562 Burberry Group PLC ............................. Textiles, Apparel & Luxury Goods 114,380 370,451 Electrocomponents PLC .......................... Electronic Equipment, Instruments & Components 153,410 316,489 Future PLC ..................................... Media 952,620 253,921 GAME Group PLC ................................. Specialty Retail 391,400 726,007 John Wood Group PLC ............................ Energy Equipment & Services 78,920 216,990 Kingfisher PLC ................................. Specialty Retail 299,740 591,010 Melrose PLC .................................... Machinery 313,092 394,410
Annual Report | 13 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN SMALLER COMPANIES SERIES INDUSTRY SHARES/UNITS VALUE ------------------------------------------------ ---------------------------------------------- ------------ ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) UNITED KINGDOM (CONTINUED) New Star Asset Management Group Ltd. ........... Capital Markets 295,952 $ 8,126 Yule Catto & Co. PLC ........................... Chemicals 315,020 257,657 ----------- 3,569,623 ----------- TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $79,638,412) ................ 56,231,938 ----------- PREFERRED STOCKS (COST $296,797) 0.6% GERMANY 0.6% Hugo Boss AG, pfd. ............................. Textiles, Apparel & Luxury Goods 21,430 416,222 ----------- TOTAL INVESTMENTS (COST $79,935,209) 89.0% .................... 56,648,160 OTHER ASSETS, LESS LIABILITIES 11.0% ........... 6,969,100 ----------- NET ASSETS 100.0% .............................. $63,617,260 ===========
See Abbreviations on page 25. (a) Non-income producing for the twelve months ended December 31, 2008. (b) Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. This security has been deemed liquid under guidelines approved by the Trust's Board of Trustees. At December 31, 2008, the value of this security was $226,399, representing 0.36% of net assets. (c) Security has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2008, the value of this security was $0. The accompanying notes are an integral part of these financial statements. 14 | Annual Report Templeton Institutional Funds FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2008
FOREIGN SMALLER COMPANIES SERIES ---------------- Assets: Investments in securities: Cost ...................................... $ 79,935,209 ============ Value ..................................... $ 56,648,160 Cash ......................................... 7,490,125 Foreign currency, at value (cost $1,256) ..... 1,642 Receivables: Investment securities sold ................ 262,125 Capital shares sold ....................... 40,440 Dividends ................................. 149,838 ------------ Total assets ........................... 64,592,330 ------------ Liabilities: Payables: Capital shares redeemed ................... 885,270 Affiliates ................................ 38,446 Accrued expenses and other liabilities ....... 51,354 ------------ Total liabilities ...................... 975,070 ------------ Net assets, at value ................ $ 63,617,260 ============ Net assets consist of: Paid-in capital .............................. $ 92,660,534 Undistributed net investment income .......... 91,688 Net unrealized appreciation (depreciation) ... (23,296,027) Accumulated net realized gain (loss) ......... (5,838,935) ------------ Net assets, at value ................ $ 63,617,260 ============ Shares outstanding ........................... 7,219,803 ============ Net asset value per share(a) ................. $ 8.81 ============
(a) Redemption price is equal to net asset value less redemption fees retained by the Fund. The accompanying notes are an integral part of these financial statements. Annual Report | 15 Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2008
FOREIGN SMALLER COMPANIES SERIES ---------------- Investment income: Dividends (net of foreign taxes of $369,933)........... $ 3,676,092 Interest............................................... 135,764 ------------ Total investment income....................... 3,811,856 ------------ Expenses: Management fees (Note 3a).............................. 806,616 Administrative fees (Note 3b).......................... 215,097 Transfer agent fees (Note 3c).......................... 16,594 Custodian fees (Note 4)................................ 39,697 Reports to shareholders................................ 14,990 Registration and filing fees........................... 28,302 Professional fees...................................... 30,212 Trustees' fees and expenses............................ 10,011 Other.................................................. 16,897 ------------ Total expenses...................................... 1,178,416 Expense reductions (Note 4)......................... (5,096) Expenses waived/paid by affiliates (Note 3d)........ (151,428) ------------ Net expenses..................................... 1,021,892 ------------ Net investment income......................... 2,789,964 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments......................................... 1,748,060 Foreign currency transactions....................... (167,582) ------------ Net realized gain (loss)......................... 1,580,478 ------------ Net change in unrealized appreciation (depreciation) on: Investments............................................ (67,517,868) Translation of other assets and liabilities denominated in foreign currencies................ (13,138) ------------ Net change in unrealized appreciation (depreciation)................................... (67,531,006) ------------ Net realized and unrealized gain (loss)................... (65,950,528) ------------ Net increase (decrease) in net assets resulting from operations............................................. $(63,160,564) ============
The accompanying notes are an integral part of these financial statements. 16 | Annual Report Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FOREIGN SMALLER COMPANIES SERIES YEAR ENDED DECEMBER 31, -------------------------------- 2008 2007 -------------- --------------- Increase (decrease) in net assets: Operations: Net investment income...................................... $ 2,789,964 $ 2,005,398 Net realized gain (loss) from investments and foreign currency transactions................................... 1,580,478 30,293,153 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies....................... (67,531,006) (12,858,499) ------------ ------------ Net increase (decrease) in net assets resulting from operations................................... (63,160,564) 19,440,052 ------------ ------------ Distributions to shareholders from: Net investment income...................................... (3,045,712) (2,190,031) Net realized gains......................................... (9,591,312) (27,624,200) ------------ ------------ Total distributions to shareholders........................... (12,637,024) (29,814,231) ------------ ------------ Capital share transactions: (Note 2).......................... 3,684,900 (24,652,937) ------------ ------------ Redemption fees............................................... 99 10 ------------ ------------ Net increase (decrease) in net assets................... (72,112,589) (35,027,106) Net assets: Beginning of year............................................. 135,729,849 170,756,955 ------------ ------------ End of year................................................... $ 63,617,260 $135,729,849 ============ ============ Undistributed net investment income included in net assets: End of year................................................... $ 91,688 $ 309,079 ============ ============
The accompanying notes are an integral part of these financial statements. Annual Report | 17 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of four separate funds. The Foreign Smaller Companies Series (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. At December 31, 2008, a portion of the securities held by the Fund were fair valued. All security valuation procedures are approved by the Trust's Board of Trustees. 18 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. Annual Report | 19 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME AND DEFERRED TAXES (CONTINUED) The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of December 31, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. 20 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any Fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. H. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At December 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2008 2007 ------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ Shares sold ................. 2,570,880 $ 28,792,534 417,004 $ 10,235,055 Shares issued in reinvestment of distributions ......... 982,160 9,601,409 1,265,199 24,546,890 Shares redeemed ............. (3,051,880) (34,709,043) (2,581,541) (59,434,882) ---------- ------------ ---------- ------------ Net increase (decrease) ..... 501,160 $ 3,684,900 (899,338) $(24,652,937) ========== ============ ========== ============
Annual Report | 21 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ---------- ------------------------------------------------- 0.750% Up to and including $1 billion 0.730% Over $1 billion, up to and including $5 billion 0.710% Over $5 billion, up to and including $10 billion 0.690% Over $10 billion, up to and including $15 billion 0.670% Over $15 billion, up to and including $20 billion 0.650% In excess of $20 billion
B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the Fund. C. TRANSFER AGENT FEES For the year ended December 31, 2008, the Fund paid transfer agent fees of $16,594, of which $9,547 was retained by Investor Services. D. WAIVERS AND EXPENSE REIMBURSEMENTS FT Services and TIC have agreed in advance to waive a portion of their respective fees and to assume payment of other expenses through April 30, 2009. Total expenses waived are not subject to reimbursement by the Fund. After April 30, 2009, FT Services and TIC may discontinue this waiver at any time upon notice to the Trust's Board of Trustees. 22 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended December 31, 2008, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, realized capital losses and realized currency losses, occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $5,531,195 and $206,945 respectively. The tax character of distributions paid during the years ended December 31, 2008 and 2007, was as follows:
2008 2007 ----------- ----------- Distributions paid from: Ordinary income ......... $ 3,368,790 $ 3,862,682 Long term capital gain .. 9,268,234 25,951,549 ----------- ----------- $12,637,024 $29,814,231 =========== ===========
At December 31, 2008, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows: Cost of investments ..................................... $ 80,036,004 ============ Unrealized appreciation ................................. $ 6,418,607 Unrealized depreciation ................................. (29,806,451) ------------ Net unrealized appreciation (depreciation) .............. $(23,387,844) ============ Distributable earnings - undistributed ordinary income .. $ 91,876 ============
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. Annual Report | 23 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2008, aggregated $23,236,154 and $33,416,695, respectively. 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. FAIR VALUE MEASUREMENTS The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund has determined that the implementation of SFAS 157 did not have a material impact on the Fund's financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - - Level 1 - quoted prices in active markets for identical securities - - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of December 31, 2008, in valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ----------- ---------- ------- ----------- ASSETS: Investments in Securities $52,176,281 $4,471,879 $-- $56,648,160
24 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN SMALLER COMPANIES SERIES 9. NEW ACCOUNTING PRONOUNCEMENT In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. 10. SUBSEQUENT EVENT On January 23, 2009, the Fund entered into, along with certain other funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), a $725 million senior unsecured syndicated global line of credit (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes and to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, each Borrower has agreed to pay its proportionate share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility. ABBREVIATIONS SELECTED PORTFOLIO GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt Annual Report | 25 Templeton Institutional Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS - FOREIGN SMALLER COMPANIES SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Smaller Companies Series (one of the funds constituting Templeton Institutional Funds, hereafter referred to as the "Fund") at December 31, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2008 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2009 26 | Annual Report Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) FOREIGN SMALLER COMPANIES SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $9,268,234 as a long term capital gain dividend for the fiscal year ended December 31, 2008. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $323,078 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $2,124,940 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2008. Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $92,248 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. At December 31, 2008, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 16, 2008, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following tables provide a detailed analysis of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund, to shareholders of record. Record Date: 12/16/08
FOREIGN TAX FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS PER SHARE PER SHARE PER SHARE ----------- ------------- ------------------- Fund Shares ... $0.0586 $0.4862 $0.2546
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. Annual Report | 27 Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN SMALLER COMPANIES SERIES Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) Foreign Qualified Dividends Per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) In January 2009, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2008. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2008 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax bracket). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. 28 | Annual Report Templeton Institutional Funds BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ------------------ ----------------------------- HARRIS J. ASHTON (1932) Trustee Since 1992 138 Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) 500 East Broward Blvd. and Allied Capital Suite 2100 Corporation (financial Fort Lauderdale, FL 33394-3091 services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995). FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding 500 East Broward Blvd. company), Victory Nickel Inc. Suite 2100 (mineral exploration) and Fort Lauderdale, FL 33394-3091 ABACO Markets Limited (retail distributors). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Vice Chairman, Caribbean Utilities Company, Ltd. and director of various other private business and nonprofit organizations. EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration 500 East Broward Blvd. Independent 1996 and Lead and refining of oil and gas), Suite 2100 Trustee Independent H.J. Heinz Company (processed Fort Lauderdale, FL 33394-3091 Trustee since 2007 foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 29
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ------------------ ----------------------------- DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation 500 East Broward Blvd. (assisted living) and OSI Suite 2100 Pharmaceuticals, Inc. Fort Lauderdale, FL 33394-3091 (pharmaceutical products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). FRANK A. OLSON (1932) Trustee Since 2003 138 Hess Corporation (exploration 500 East Broward Blvd. and refining of oil and gas) Suite 2100 and Sentient Jet (private jet Fort Lauderdale, FL 33394-3091 service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2005 145 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). CONSTANTINE D. TSERETOPOULOS Trustee Since 1990 23 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). El Oro and Exploration Co., ROBERT E. WADE (1946) Trustee Since 2007 37 p.l.c. (investments). 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired, former practicing attorney.
30 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ------------------ ----------------------------- **CHARLES B. JOHNSON Trustee, Trustee and Vice 138 None (1933) Chairman of President since One Franklin Parkway the Board and 1993 and San Mateo, CA 94403-1906 Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. **GREGORY E. JOHNSON Trustee Since 2007 92 None (1961) One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments. JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable One Franklin Parkway Executive December 2008 San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance Compliance since 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable One Franklin Parkway Officer and February 2008 San Mateo, CA 94403-1906 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
Annual Report | 31
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ------------------ ----------------------------- JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable 500 East Broward Blvd. February 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. RUPERT H. JOHNSON, JR. Vice President Since 1996 Not Applicable Not Applicable (1940) One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central, Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). GARY P. MOTYL (1952) President and Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. Chief Executive Suite 2100 Officer - Fort Lauderdale, FL 33394-3091 Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments.
32 | Annual Report
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ------------------ ------------------ ----------------------------- ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008. SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) 321-8563 TO REQUEST THE SAI. Annual Report | 33 Templeton Institutional Funds SHAREHOLDER INFORMATION FOREIGN SMALLER COMPANIES SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 34 | Annual Report This page intentionally left blank. This page intentionally left blank. (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS Foreign Smaller Companies Series INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES (800) 321-8563 ftinstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and its investors are not protected from such losses by the investment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. ZT458 A2008 02/09 DECEMBER 31, 2008 (GRAPHIC) Global Equity Series ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) Contents ANNUAL REPORT TIF Global Equity Series ................................................. 1 Performance Summary ...................................................... 6 Your Fund's Expenses ..................................................... 8 Financial Highlights and Statement of Investments ........................ 10 Financial Statements ..................................................... 16 Notes to Financial Statements ............................................ 19 Report of Independent Registered Public Accounting Firm .................. 27 Tax Designation .......................................................... 28 Board Members and Officers ............................................... 30 Shareholder Information .................................................. 35
Annual Report TIF Global Equity Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF Global Equity Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of companies located anywhere in the world, including emerging markets. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FTINSTITUTIONAL.COM OR CALL (800) 321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. This inaugural annual report for Templeton Institutional Funds (TIF) Global Equity Series (Fund) covers the period since inception on March 31, 2008, through December 31, 2008. PERFORMANCE OVERVIEW For the period under review, the Fund had a -31.75% cumulative total return. The Fund performed better than its benchmark, the Morgan Stanley Capital International (MSCI) All Country (AC) World Index, which had a - 35.97% total return for the same period.(1) Please note that index performance information is provided for reference and that we do not attempt to track an index but (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The MSCI AC World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Annual Report | 1 GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/08 (BAR CHART) Europe 43.0% North America 33.2% Asia 11.8% Latin America & Caribbean 2.0% Middle East & Africa 0.6% Australia & New Zealand 0.2% Short-Term Investments & Other Net Assets 9.2%
rather undertake investments on the basis of fundamental research. You can find the Fund's performance data in the Performance Summary beginning on page 6. ECONOMIC AND MARKET OVERVIEW The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as housing prices declined, consumer demand softened, and a credit crisis originally related to U.S. subprime loan losses intensified and spread globally. Although GDP growth rebounded in the second quarter of 2008, largely due to fiscal stimulus, the domestic economy contracted in the third and fourth quarters. Fear of recession spanned the entire period, and in the summer most economists agreed that a recession had already begun. By then, the faltering U.S. economy -- which is the world's largest and accounts for roughly 25% of global GDP -- had negatively impacted growth prospects around the world. Although signs of a global slowdown surfaced in the latter half of the reporting period, in the first half growth remained robust in developing economies, particularly in Asia. The China-led demand for oil, natural gas, and industrial and agricultural commodities propelled commodity prices and those of related equities to higher levels. The steep rise in the price of oil, which peaked at $145 per barrel in early July, was one of the most extreme market trends during the period. As a result, oil was a major focus of attention due to its impact on everything from inflation to corporate earnings to consumer spending. The price boom for commodities in general was broadly based and included natural gas, precious metals and most agricultural and industrial commodities, all of which added to global inflationary pressures. In this environment, the world's monetary authorities faced the choice of lowering short-term interest rates to stimulate growth or raising them to fight rising inflation. Stimulus provided through fiscal and monetary policies implemented around the globe sought to restore financial market stability and reignite economic growth. The U.S. Treasury and the Federal Reserve Board took unprecedented steps, including lowering short-term rates to a target range of 0% to 0.25% from 4.25%. The eurozone had made controlling inflation its main goal and kept rates steady at 4.00% until July, when the European Central Bank (ECB) joined many of the world's central banks whose concerns about inflation had led them to raise rates. The potential for global recession, however, exacerbated by the virtual freeze in the global financial system in September and October, trumped inflationary concerns, and the world's monetary authorities, including the ECB and the Bank of England, cut interest rates aggressively. The U.S. dollar, which had declined earlier in the period versus many of the world's 2 | Annual Report currencies, regained ground quickly toward period-end as a flight to the relative safety of U.S. Treasuries prevailed. The greenback appreciated 12.95% relative to most currencies during the period under review.(2) In this challenging economic time, volatility came to define global equity markets. Virtually all local indexes ended the period under review with marked losses. Despite negative economic data and an outlook for decelerating corporate earnings and profit margins globally, many companies outside the financials sector retained relatively strong balance sheets. INVESTMENT STRATEGY We employ a bottom-up, value-oriented, long-term investment strategy. Our in-depth, fundamental, internal research evaluates a company's potential to grow earnings, asset value and/or cash flow. We also consider a company's price/earnings ratio, profit margins and liquidation value. MANAGER'S DISCUSSION The global financial sector, the epicenter of the market and credit crises, declined by almost 50% during the reporting period. Yet, the materials sector performed worse. Materials and energy-related stocks provided positive returns during the earlier part of the period. However, materials and energy stocks, along with the underlying commodities, experienced a sharp downturn in the period's second half. Most sectors were negatively impacted by the global market downturn; however, the health care, consumer staples and utilities sectors declined less and lived up to their "defensive" reputations. Because consumer staples held up better than the benchmark index, the Fund's underweighted allocation in the sector negatively impacted relative performance.(3) The Fund was underweighted in this sector as we did not find valuations attractive and, in our analysis, we believed fundamentals were beginning to deteriorate. Another area that detracted from relative Fund performance was the telecommunication services sector.(4) We continued to hold an overweighted position in telecommunications because we found opportunities to purchase businesses with what we believed were solid balance sheets, desirable products and growing global presence at largely discounted prices to future value potential. PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/08 (BAR CHART) Pharmaceuticals 14.1% Diversified Telecommunication Services 8.2% Oil, Gas & Consumable Fuels 7.3% Software 6.0% Insurance 5.6% Multi-Utilities 5.1% Food Products 4.1% Wireless Telecommunication Services 3.5% Electric Utilities 3.0% Commercial Banks 2.8% Food & Staples Retailing 2.7% Health Care Providers & Services 2.6% Capital Markets 2.3% Semiconductors & Semiconductor Equipment 2.3% Health Care Equipment & Supplies 2.2% Other 19.0% Short-Term Investments & Other Net Assets 9.2%
(2.) Source: Federal Reserve H10 report. (3.) The consumer staples sector comprises beverages, food and staples retailing, and food products in the SOI. (4.) The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- Quest Diagnostics Inc. 2.2% HEALTH CARE PROVIDERS & SERVICES, U.S. Telefonica SA, ADR 2.2% DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN France Telecom SA 2.2% DIVERSIFIED TELECOMMUNICATION SERVICES, FRANCE Microsoft Corp. 2.1% SOFTWARE, U.S. PG&E Corp. 2.1% MULTI-UTILITIES, U.S. Sanofi-Aventis 2.0% PHARMACEUTICALS, FRANCE Novartis AG 2.0% PHARMACEUTICALS, SWITZERLAND GlaxoSmithKline PLC 1.8% PHARMACEUTICALS, U.K. Nestle SA 1.8% FOOD PRODUCTS, SWITZERLAND Taiwan Semiconductor Manufacturing Co. Ltd. 1.7% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, TAIWAN
It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the period ended December 31, 2008, the U.S. dollar appreciated in value relative to most non-U.S. currencies. As a result, the Fund's performance was negatively affected by the portfolio's substantial investment in securities with non-U.S. currency exposure. We continued to favor the health care sector, which performed better than most sectors during the period under review.(5) Thus, the Fund's overweighted position and stock selection in health care benefited relative performance. The Fund's overweighting reflects our contrarian view relative to a market that has largely focused on the negatives facing pharmaceutical companies: challenging pricing, political headwinds and insurmountable competition from cheaper generics. In our analysis, health care stocks were attractive based on bargain valuations, high free cash-flow yields and revenue growth potential from an aging global population. The Fund's valuation philosophy led us away from investment banks and brokerages, the financials sector's most leveraged industries, which we believed had high multiples, balance sheet opacity and uncertain earnings.(6) Thus, our stock selection and underweighted exposure in financials boosted relative Fund performance. We remained cautious of the sector overall despite buying some of what we considered well-capitalized financial firms we believed could profit from industry consolidation. Our bottom-up research did not uncover many opportunities in the materials sector, contributing to the Fund's underweighting in the sector.(7) Although our underweighted position hurt the Fund when materials stock prices rose earlier in the period, the materials sector allocation helped relative performance for the period as these stocks declined sharply. We monitored the situation closely and sought proper re-entry points, but we did not find compelling valuations in the materials sector by period-end. (5.) The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, and pharmaceuticals in the SOI. (6.) The financials sector comprises capital markets, commercial banks, consumer finance, diversified financial services, insurance, real estate management and development, and thrifts and mortgage finance in the SOI. (7.) The materials sector comprises chemicals, containers and packaging, and metals and mining in the SOI. 4 | Annual Report Thank you for your participation in TIF Global Equity Series. We look forward to serving your future investment needs. (PHOTO OF NEIL DEVLIN) /s/ Neil Devlin - ------------------------------------- Neil Devlin, CFA Portfolio Manager TIF Global Equity Series THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/08 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE INFORMATION
SYMBOL: TGESX CHANGE 12/31/08 3/31/08 - ------------- ------ -------- ------- Net Asset Value (NAV) -$3.27 $6.73 $10.00 DISTRIBUTIONS (3/31/08-12/31/08) Dividend Income $0.0955
PERFORMANCE(1)
INCEPTION (3/31/08) --------- Cumulative Total Return(2) -31.75% Aggregate Total Return(3) -31.75% Value of $1,000,000 Investment(4) $682,539 Total Annual Operating Expenses(5) Without waiver 1.18% With waiver 0.81%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, VISIT FTINSTITUTIONAL.COM OR CALL (800) 321-8563. THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES OTHERWISE PAYABLE BY THE FUND SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES, EXCLUDING ACQUIRED FUND FEES AND EXPENSES, DO NOT EXCEED 0.81% (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 4/30/09. 6 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $1,000,000 INVESTMENT(1) Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. 3/31/08-12/31/08 $ Millions (PERFORMANCE GRAPH)
USD USD TIF GLOBAL EQUITY SERIES MSCI ALL COUNTRY WORLD INDEX 31-MAR-08 31-MAR-08 INCEPTION DATE NET GROSS CALENDAR MONTH 12332 BM0045 - -------------- ------------------------ ---------------------------- Mar-08 1,000,000.00 1,000,000.00 Apr-08 1,009,998.71 1,056,517.21 May-08 1,020,000.73 1,074,229.62 Jun-08 941,000.13 986,384.88 Jul-08 920,000.19 961,078.35 Aug-08 909,001.68 940,786.02 Sep-08 820,003.26 823,578.80 Oct-08 684,002.97 660,589.34 Nov-08 650,001.43 617,608.14 Dec-08 682,538.77 640,297.00
AGGREGATE TOTAL RETURN
12/31/08 -------- Since Inception (3/31/08) -31.75%
ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THESE MARKETS' SMALLER SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1.) If the manager had not waived fees, the Fund's total return would have been lower. (2.) Cumulative total return represents the change in value of an investment over the period indicated. (3.) Aggregate total return represents the change in value of an investment over the period indicated. Because the Fund has existed for less than one year, average annual total returns are not available. (4.) This figure represents the value of a hypothetical $1,000,000 investment in the Fund over the period indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: (C) 2009 Morningstar. The MSCI AC World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets. Annual Report | 7 Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the Fund's actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES, IF APPLICABLE. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08 ----------------- -------------- ----------------------- Actual $1,000 $ 725.30 $3.51 Hypothetical (5% return before expenses) $1,000 $1,021.06 $4.12
* Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waiver, of 0.81%, multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. Annual Report | 9 Templeton Institutional Funds FINANCIAL HIGHLIGHTS GLOBAL EQUITY SERIES
PERIOD ENDED DECEMBER 31, 2008(a) -------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................... $ 10.00 ------- Income from investment operations(b): Net investment income(c) ............................. 0.14 Net realized and unrealized gains (losses) ........... (3.31) ------- Total from investment operations ........................ (3.17) ------- Less distributions from net investment income ........... (0.10) ------- Net asset value, end of period .......................... $ 6.73 ======= Total return(d) ......................................... (31.75)% RATIOS TO AVERAGE NET ASSETS(e) Expenses before waiver and payments by affiliates ....... 1.05% Expenses net of waiver and payments by affiliates(f) .... 0.81% Net investment income ................................... 2.26% SUPPLEMENTAL DATA Net assets, end of period (000's) ....................... $95,152 Portfolio turnover rate ................................. 21.68%
(a) For the period March 31, 2008 (commencement of operations) to December 31, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 10 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE - -------------------- ---------------------------------------------- ------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS 89.6% AUSTRALIA 0.2% Alumina Ltd. ................................... Metals & Mining 207,960 $ 204,744 ------------ AUSTRIA 1.3% Telekom Austria AG ............................. Diversified Telecommunication Services 86,420 1,244,663 ------------ BRAZIL 0.9% Companhia Vale do Rio Doce, ADR ................ Metals & Mining 68,470 829,172 ------------ CANADA 1.5% George Weston Ltd. ............................. Food & Staples Retailing 6,000 295,611 Loblaw Cos. Ltd. ............................... Food & Staples Retailing 38,200 1,097,842 ------------ 1,393,453 ------------ CHINA 1.3% China Telecom Corp. Ltd., H .................... Diversified Telecommunication Services 2,012,000 750,262 (a) Shanghai Electric Group Co. Ltd. ............... Electrical Equipment 1,164,000 471,596 ------------ 1,221,858 ------------ FRANCE 9.4% AXA SA ......................................... Insurance 56,060 1,242,069 Compagnie Generale des Etablissements Michelin, B ................................. Auto Components 9,140 480,162 Electricite de France .......................... Electric Utilities 18,580 1,078,187 France Telecom SA .............................. Diversified Telecommunication Services 74,100 2,068,136 GDF Suez ....................................... Multi-Utilities 9,219 455,372 Sanofi-Aventis ................................. Pharmaceuticals 30,260 1,920,990 (a) Suez Environnement SA .......................... Multi-Utilities 2,417 40,726 Total SA, B .................................... Oil, Gas & Consumable Fuels 12,200 663,776 Vivendi SA ..................................... Media 30,050 977,570 ------------ 8,926,988 ------------ GERMANY 6.4% Bayerische Motoren Werke AG .................... Automobiles 5,770 177,258 Celesio AG ..................................... Health Care Providers & Services 12,790 345,166 Deutsche Post AG ............................... Air Freight & Logistics 62,520 1,032,014 E.ON AG ........................................ Electric Utilities 21,020 823,571 (a) Infineon Technologies AG ....................... Semiconductors & Semiconductor Equipment 154,470 205,412 Merck KGaA ..................................... Pharmaceuticals 12,890 1,162,914 Muenchener Rueckversicherungs- Gesellschaft AG ............................. Insurance 4,630 709,241 SAP AG ......................................... Software 31,930 1,118,202 Siemens AG ..................................... Industrial Conglomerates 7,240 534,430 ------------ 6,108,208 ------------ HONG KONG 0.6% Cheung Kong (Holdings) Ltd. ........................ Real Estate Management & Development 62,000 586,385 ------------
Annual Report | 11 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE - -------------------- ---------------------------------------------- ------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) INDIA 1.2% Housing Development Finance Corp. Ltd. ......... Thrifts & Mortgage Finance 6,117 $ 187,152 ICICI Bank Ltd., ADR ........................... Commercial Banks 35,910 691,268 Satyam Computer Services Ltd. .................. IT Services 80,273 280,922 ------------ 1,159,342 ------------ ISRAEL 0.6% (a) Check Point Software Technologies Ltd. ......... Software 28,080 533,239 ------------ ITALY 0.8% Eni SpA ........................................ Oil, Gas & Consumable Fuels 28,053 656,652 UniCredit SpA .................................. Commercial Banks 38,900 94,917 ------------ 751,569 ------------ JAPAN 4.2% EBARA Corp. .................................... Machinery 301,000 699,798 FUJIFILM Holdings Corp. ........................ Electronic Equipment, Instruments & Components 17,600 392,579 Mitsubishi UFJ Financial Group Inc. ............ Commercial Banks 6,400 40,192 Nintendo Co. Ltd. .............................. Software 1,400 534,570 Nomura Holdings Inc. ........................... Capital Markets 23,800 198,003 Olympus Corp. .................................. Health Care Equipment & Supplies 40,000 800,081 Takeda Pharmaceutical Co. Ltd. ................. Pharmaceuticals 19,000 989,504 Toyota Motor Corp. ............................. Automobiles 11,400 376,553 ------------ 4,031,280 ------------ NETHERLANDS 1.6% ING Groep NV ................................... Diversified Financial Services 3,070 31,466 Koninklijke Philips Electronics NV ............. Industrial Conglomerates 21,240 410,750 SBM Offshore NV ................................ Energy Equipment & Services 20,100 262,761 Unilever NV .................................... Food Products 34,430 834,808 ------------ 1,539,785 ------------ NORWAY 1.3% Aker Solutions ASA ............................. Energy Equipment & Services 18,730 121,189 Telenor ASA .................................... Diversified Telecommunication Services 166,160 1,106,164 ------------ 1,227,353 ------------ PORTUGAL 0.7% Banco Espirito Santo SA ........................ Commercial Banks 75,660 707,771 ------------ RUSSIA 0.9% Gazprom, ADR ................................... Oil, Gas & Consumable Fuels 64,040 908,087 ------------ SINGAPORE 1.2% DBS Group Holdings Ltd. ........................ Commercial Banks 65,000 382,060 (a) DBS Group Holdings Ltd., rts., 1/20/09 ......... Commercial Banks 32,500 68,063 (a) Flextronics International Ltd. ................. Electronic Equipment, Instruments & Components 34,420 88,115 Singapore Telecommunications Ltd. .............. Diversified Telecommunication Services 336,004 598,122 ------------ 1,136,360 ------------
12 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE - -------------------- ---------------------------------------------- ------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) SOUTH KOREA 1.4% (b) Hyundai Motor Co., GDR, 144A ................... Automobiles 5,800 $ 90,697 Samsung Electronics Co. Ltd. ................... Semiconductors & Semiconductor Equipment 1,060 378,511 SK Telecom Co. Ltd., ADR ....................... Wireless Telecommunication Services 48,240 877,003 ------------ 1,346,211 ------------ SPAIN 3.0% Iberdrola SA, Br. .............................. Electric Utilities 21,208 193,945 Repsol YPF SA .................................. Oil, Gas & Consumable Fuels 26,847 566,856 Telefonica SA, ADR ............................. Diversified Telecommunication Services 31,030 2,091,112 ------------ 2,851,913 ------------ SWITZERLAND 6.5% Adecco SA ...................................... Professional Services 2,770 92,809 Lonza Group AG ................................. Life Sciences Tools & Services 7,370 673,231 Nestle SA ...................................... Food Products 44,150 1,719,862 Novartis AG .................................... Pharmaceuticals 38,590 1,904,385 Roche Holding AG ............................... Pharmaceuticals 4,370 664,973 Swiss Reinsurance Co. .......................... Insurance 23,380 1,101,240 ------------ 6,156,500 ------------ TAIWAN 1.8% Compal Electronics Inc. ........................ Computers & Peripherals 309,540 162,916 Taiwan Semiconductor Manufacturing Co. Ltd. .... Semiconductors & Semiconductor Equipment 1,159,818 1,571,195 ------------ 1,734,111 ------------ TURKEY 1.1% Turkcell Iletisim Hizmetleri AS, ADR ........... Wireless Telecommunication Services 69,190 1,008,790 ------------ UNITED KINGDOM 9.9% BAE Systems PLC ................................ Aerospace & Defense 106,720 587,240 BG Group PLC ................................... Oil, Gas & Consumable Fuels 16,220 226,714 BP PLC ......................................... Oil, Gas & Consumable Fuels 82,670 635,111 Cadbury PLC .................................... Food Products 95,019 840,313 GlaxoSmithKline PLC ............................ Pharmaceuticals 93,440 1,753,006 Premier Foods PLC .............................. Food Products 75,280 33,810 Rexam PLC ...................................... Containers & Packaging 77,070 395,101 Royal Bank of Scotland Group PLC ............... Commercial Banks 742,570 535,773 Royal Dutch Shell PLC, B, ADR .................. Oil, Gas & Consumable Fuels 27,970 1,438,497 Tesco PLC ...................................... Food & Staples Retailing 221,230 1,163,223 Unilever PLC ................................... Food Products 19,050 439,333 Vodafone Group PLC ............................. Wireless Telecommunication Services 696,840 1,414,700 ------------ 9,462,821 ------------ UNITED STATES 31.8% Accenture Ltd., A .............................. IT Services 26,800 878,772 ACE Ltd. ....................................... Insurance 16,300 862,596 American Express Co. ........................... Consumer Finance 27,370 507,714 (a) Amgen Inc. ..................................... Biotechnology 22,690 1,310,348 Bank of America Corp. .......................... Diversified Financial Services 9,670 136,154 The Bank of New York Mellon Corp. .............. Capital Markets 42,570 1,206,008
Annual Report | 13 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE - -------------------- ---------------------------------------------- ------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) UNITED STATES (CONTINUED) Bristol-Myers Squibb Co. ....................... Pharmaceuticals 34,540 $ 803,055 (a) Cisco Systems Inc. ............................. Communications Equipment 49,150 801,145 CMS Energy Corp. ............................... Multi-Utilities 109,200 1,104,012 Comcast Corp., A ............................... Media 30,050 485,308 The Cooper Cos. Inc. ........................... Health Care Equipment & Supplies 21,470 352,108 Covidien Ltd. .................................. Health Care Equipment & Supplies 25,000 906,000 Cytec Industries Inc. .......................... Chemicals 6,700 142,174 (a) Dr. Pepper Snapple Group Inc. .................. Beverages 59,433 965,786 E. I. du Pont de Nemours and Co. ............... Chemicals 7,800 197,340 El Paso Corp. .................................. Oil, Gas & Consumable Fuels 115,230 902,251 General Electric Co. ........................... Industrial Conglomerates 23,880 386,856 Great Plains Energy Inc. ....................... Electric Utilities 39,534 764,192 Invesco Ltd. ................................... Capital Markets 16,920 244,325 JPMorgan Chase & Co. ........................... Diversified Financial Services 2,910 91,752 Legg Mason Inc. ................................ Capital Markets 24,100 528,031 Merck & Co. Inc. ............................... Pharmaceuticals 38,930 1,183,472 Microsoft Corp. ................................ Software 104,740 2,036,146 News Corp., A .................................. Media 11,770 106,989 NiSource Inc. .................................. Multi-Utilities 113,650 1,246,741 (a) Oracle Corp. ................................... Software 86,080 1,526,198 Pfizer Inc. .................................... Pharmaceuticals 88,470 1,566,804 PG&E Corp. ..................................... Multi-Utilities 52,150 2,018,726 Progressive Corp. .............................. Insurance 58,810 870,976 Quest Diagnostics Inc. ......................... Health Care Providers & Services 40,750 2,115,332 Seagate Technology ............................. Computers & Peripherals 43,810 194,078 Target Corp. ................................... Multiline Retail 29,740 1,026,922 Torchmark Corp. ................................ Insurance 12,310 550,257 Tyco Electronics Ltd. .......................... Electronic Equipment, Instruments & Components 10,480 169,881 United Parcel Service Inc., B .................. Air Freight & Logistics 9,950 548,842 (a) Watson Pharmaceuticals Inc. .................... Pharmaceuticals 56,470 1,500,408 ------------ 30,237,699 ------------ TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $115,451,172) ......................... 85,308,302 ------------ PREFERRED STOCKS 1.2% BRAZIL 1.2% Banco Bradesco SA, ADR, pfd. ................... Commercial Banks 17,420 171,935 Petroleo Brasileiro SA, ADR, pfd. .............. Oil, Gas & Consumable Fuels 46,990 959,066 ------------ TOTAL PREFERRED STOCKS (COST $1,307,322) ........................... 1,131,001 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $116,758,494) ......................... 86,439,303 ------------
14 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
GLOBAL EQUITY SERIES PRINCIPAL AMOUNT VALUE - -------------------- ---------------- ------------ SHORT TERM INVESTMENTS 7.9% TIME DEPOSITS 7.9% UNITED STATES 7.9% Dresdner Bank AG, 0.01%, 1/02/09 ............... $ 4,000,000 $ 4,000,000 Paribas Corp., 0.01%, 1/02/09 .................. 3,470,000 3,470,000 ------------ TOTAL TIME DEPOSITS (COST $7,470,000) ........................... 7,470,000 ------------ TOTAL INVESTMENTS (COST $124,228,494) 98.7% ................... 93,909,303 OTHER ASSETS, LESS LIABILITIES 1.3% ............ 1,243,086 ------------ NET ASSETS 100.0% .............................. $ 95,152,389 ------------
See Abbreviations on page 26. (a) Non-income producing for the twelve months ended December 31, 2008. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Fund's Board of Trustees. At December 31, 2008, the value of this security was $90,697, representing 0.10% of net assets. The accompanying notes are an integral part of these financial statements. Annual Report | 15 Templeton Institutional Funds FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2008
GLOBAL EQUITY SERIES ------------- Assets: Investments in securities: Cost ..................................................... $124,228,494 ============ Value .................................................... $ 93,909,303 Cash ........................................................ 4,079 Receivables: Capital shares sold ...................................... 1,200,000 Dividends ................................................ 175,793 Offering costs .............................................. 8,670 ------------ Total assets .......................................... 95,297,845 ------------ Liabilities: Payables: Investment securities purchased .......................... 9,559 Affiliates ............................................... 85,888 Custodian fees ........................................... 8,650 Reports to shareholders .................................. 7,914 Professional fees ........................................ 30,475 Accrued expenses and other liabilities ...................... 2,970 ------------ Total liabilities ..................................... 145,456 ------------ Net assets, at value ............................... $ 95,152,389 ============ Net assets consist of: Paid-in capital ............................................. $133,934,667 Undistributed net investment income ......................... 141,706 Net unrealized appreciation (depreciation) .................. (30,321,484) Accumulated net realized gain (loss) ........................ (8,602,500) ------------ Net assets, at value ............................... $ 95,152,389 ============ Shares outstanding .......................................... 14,130,028 ============ Net asset value per share(a) ................................ $ 6.73 ============
(a) Redemption price is equal to net asset value less redemption fees retained by the Fund. The accompanying notes are an integral part of these financial statements. 16 | Annual Report Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the period March 31, 2008 (commencement of operations) to December 31, 2008
GLOBAL EQUITY SERIES ------------- Investment income: Dividends (net of foreign taxes of $190,992) ................ $ 2,015,552 Interest .................................................... 101,542 ------------ Total investment income ............................... 2,117,094 ------------ Expenses: Management fees (Note 3a) ................................... 480,968 Administrative fees (Note 3b) ............................... 137,419 Transfer agent fees (Note 3c) ............................... 790 Custodian fees (Note 4) ..................................... 8,800 Reports to shareholders ..................................... 13,534 Registration and filing fees ................................ 4,621 Professional fees ........................................... 37,867 Trustees' fees and expenses ................................. 3,662 Amortization of offering costs .............................. 26,491 Other ....................................................... 6,618 ------------ Total expenses ........................................ 720,770 Expense reductions (Note 4) ........................... (150) Expenses waived/paid by affiliates (Note 3d) .......... (163,020) ------------ Net expenses ....................................... 557,600 ------------ Net investment income ........................... 1,559,494 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .............................................. (8,480,014) Foreign currency transactions ............................ (252,239) ------------ Net realized gain (loss) ........................... (8,732,253) ------------ Net change in unrealized appreciation (depreciation) on: Investments .............................................. (30,319,191) Translation of other assets and liabilities denominated in foreign currencies ................................. (2,293) ------------ Net change in unrealized appreciation (depreciation) .................................. (30,321,484) ------------ Net realized and unrealized gain (loss) ........................ (39,053,737) ------------ Net increase (decrease) in net assets resulting from operations .................................................. $(37,494,243) ============
The accompanying notes are an integral part of these financial statements. Annual Report | 17 Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF CHANGES IN NET ASSETS
GLOBAL EQUITY SERIES ------------- PERIOD ENDED DECEMBER 31, 2008(a) ------------- Increase (decrease) in net assets: Operations: Net investment income .................................... $ 1,559,494 Net realized gain (loss) from investments and foreign currency transactions ................................. (8,732,253) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ......... (30,321,484) ------------ Net increase (decrease) in net assets resulting from operations ......................................... (37,494,243) ------------ Distributions to shareholders from net investment income .... (1,314,526) Capital share transactions (Note 2) ......................... 133,961,158 ------------ Net increase (decrease) in net assets ................. 95,152,389 Net assets: Beginning of period ......................................... -- ------------ End of period ............................................... $ 95,152,389 ============ Undistributed net investment income included in net assets: End of period ............................................... $ 141,706 ============
(a) For the period March 31, 2008 (commencement of operations) to December 31, 2008. The accompanying notes are an integral part of these financial statements. 18 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS GLOBAL EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of four separate funds. The Global Equity Series (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund commenced operations effective March 31, 2008. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Time deposits are valued at cost. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. At December 31, 2008, a portion of the securities held by the Fund were fair valued. All security valuation procedures are approved by the Trust's Board of Trustees. Annual Report | 19 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Fund has reviewed the tax positions as of December 31, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. 20 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. F. OFFERING COSTS Offering costs are amortized on a straight line basis over twelve months. G. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. H. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any Fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. Annual Report | 21 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At December 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
PERIOD ENDED DECEMBER 31, 2008(a) ------------------------- SHARES AMOUNT ---------- ------------ Shares sold ........................................... 14,141,844 $134,378,229 Shares issued in reinvestment of distributions ........ 187,949 1,266,776 Shares redeemed ....................................... (199,765) (1,683,847) ---------- ------------ Net increase (decrease) ............................... 14,130,028 $133,961,158 ========== ============
(a) For the period March 31, 2008 (commencement of operations) to December 31, 2008. 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
22 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ------------------------------------------------- 0.700% Up to and including $1 billion 0.680% Over $1 billion, up to and including $5 billion 0.660% Over $5 billion, up to and including $10 billion 0.640% Over $10 billion, up to and including $15 billion 0.620% Over $15 billion, up to and including $20 billion 0.600% In excess of $20 billion
B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the Fund. C. TRANSFER AGENT FEES For the period ended December 31, 2008, the Fund paid transfer agent fees of $790, of which $128 was retained by Investor Services. D. WAIVERS AND EXPENSE REIMBURSEMENTS FT Services and TIC have agreed in advance to waive a portion of their respective fees and to assume payment of other expenses through April 30, 2009. Total expenses waived are not subject to reimbursement by the Fund. After April 30, 2009, FT Services and TIC may discontinue this waiver at any time upon notice to the Trust's Board of Trustees. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended December 31, 2008, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $5,295,647 expiring in 2016. Annual Report | 23 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 5. INCOME TAXES (CONTINUED) For tax purposes, realized capital losses and realized currency losses, occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $2,776,941 and $57,167, respectively. The tax character of distributions paid during the period ended December 31, 2008 was as follows:
2008 ---------- Distributions paid from - ordinary income ........ $1,314,526
At December 31, 2008, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows: Cost of investments ........................................ $124,701,239 ============ Unrealized appreciation .................................... 1,928,166 Unrealized depreciation .................................... (32,720,102) ------------ Net unrealized appreciation (depreciation) ................. $(30,791,936) ============ Distributable earnings - undistributed ordinary income ..... $ 141,706 ============
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and offering costs. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions and passive foreign investment company shares. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended December 31, 2008, aggregated $143,077,824 and $19,561,029, respectively. 7. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 24 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 8. FAIR VALUE MEASUREMENTS Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement", establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - - Level 1 - quoted prices in active markets for identical securities - - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of December 31, 2008, in valuing the Fund's assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ----------- ---------- ------- ----------- ASSETS: Investments in Securities ........... $89,878,023 $4,031,280 $-- $93,909,303
9. NEW ACCOUNTING PRONOUNCEMENT In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. Annual Report | 25 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) GLOBAL EQUITY SERIES 10. SUBSEQUENT EVENT On January 23, 2009, the Fund entered into, along with certain other funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), a $725 million senior unsecured syndicated global line of credit (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes and to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, each Borrower has agreed to pay its proportionate share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility. ABBREVIATIONS SELECTED PORTFOLIO ADR - American Depository Receipt GDR - Global Depository Receipt 26 | Annual Report Templeton Institutional Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS - GLOBAL EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Global Equity Series (one of the Funds constituting Templeton Institutional Funds, hereafter referred to as the "Fund") at December 31, 2008, and the results of its operations, the changes in its net assets and the financial highlights for the period March 31, 2008 (commencement of operations) through December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2008 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2009 Annual Report | 27 Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) GLOBAL EQUITY SERIES Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates 37.98% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2008. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $1,912,690 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2008. Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $63,479 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. At December 31, 2008, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 16, 2008, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund, to shareholders of record. Record Date: 12/16/2008
FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED PER SHARE PER SHARE DIVIDENDS PER SHARE ---------------- --------------------- ------------------- Fund Shares ........ $0.0137 $0.0948 $0.0777
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) 28 | Annual Report Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) (CONTINUED) GLOBAL EQUITY SERIES Foreign Qualified Dividends Per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) In January 2009, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2008. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2008 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax bracket). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. Annual Report | 29 Templeton Institutional Funds BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ------------------ --------------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1992 138 Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) and 500 East Broward Blvd. Allied Capital Corporation (financial Suite 2100 services). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995). FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding company), 500 East Broward Blvd. Victory Nickel Inc. (mineral Suite 2100 exploration) and ABACO Markets Fort Lauderdale, FL 33394-3091 Limited (retail distributors). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Vice Chairman, Caribbean Utilities Company, Ltd. and director of various other private business and nonprofit organizations. EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Heinz Suite 2100 Trustee Independent Company (processed foods and allied Fort Lauderdale, FL 33394-3091 Trustee since products), RTI International Metals, 2007 Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
30 | Annual Report
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ------------------ --------------------------------------- DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation (assisted living) 500 East Broward Blvd. and OSI Pharmaceuticals, Inc. Suite 2100 (pharmaceutical products). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). FRANK A. OLSON (1932) Trustee Since 2003 138 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Sentient Suite 2100 Jet (private jet service). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2005 145 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). CONSTANTINE D. TSERETOPOULOS Trustee Since 1990 23 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). ROBERT E. WADE (1946) Trustee Since 2007 37 El Oro and Exploration Co., p.l.c. 500 East Broward Blvd. (investments). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired, former practicing attorney.
Annual Report | 31 INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ------------------ --------------------------------------- **CHARLES B. JOHNSON (1933) Trustee, Trustee and Vice 138 None One Franklin Parkway Chairman of President since San Mateo, CA 94403-1906 the Board and 1993 and Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. **GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments. JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable One Franklin Parkway Executive December 2008 San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since San Mateo, CA 94403-1906 Officer and 2004 and Vice Vice President President - AML - AML Compliance Compliance since 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable One Franklin Parkway Officer and February 2008 San Mateo, CA 94403-1906 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
32 | Annual Report
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ------------------ --------------------------------------- JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable 500 East Broward Blvd. February 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central Hong, Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). GARY P. MOTYL (1952) President and Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. Chief Executive Suite 2100 Officer - Fort Lauderdale, FL 33394-3091 Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments.
Annual Report | 33
NUMBER OF PORTFOLIOS IN FUND NAME, YEAR OF BIRTH LENGTH OF COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- ---------------- ------------------ --------------------------------------- ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008. SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) 321-8563 TO REQUEST THE SAI. 34 | Annual Report Templeton Institutional Funds SHAREHOLDER INFORMATION GLOBAL EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. Annual Report | 35 This page intentionally left blank. (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS Global Equity Series INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES (800) 321-8563 ftinstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the investment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. ZT442 A2008 02/09 DECEMBER 31, 2008 Foreign Equity Series ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) Contents ANNUAL REPORT TIF Foreign Equity Series ................................................. 1 Performance Summary ....................................................... 6 Your Fund's Expenses ...................................................... 9 Financial Highlights and Statement of Investments ......................... 11 Financial Statements ...................................................... 18 Notes to Financial Statements ............................................. 21 Report of Independent Registered Public Accounting Firm ................... 30 Tax Designation ........................................................... 31 Board Members and Officers ................................................ 33 Shareholder Information ................................................... 38
Annual Report TIF Foreign Equity Series YOUR FUND'S GOAL AND MAIN INVESTMENTS: TIF Foreign Equity Series seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in foreign (non-U.S.) equity securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT ftinstitutional.com OR CALL A FRANKLIN TEMPLETON INSTITUTIONAL SERVICES REPRESENTATIVE AT (800) 321-8563 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Templeton Institutional Funds (TIF) Foreign Equity Series (Fund) covers the fiscal year ended December 31, 2008. PERFORMANCE OVERVIEW For the 12 months under review, the Fund's Primary Shares had a -42.15% cumulative total return. The Fund performed better than the Morgan Stanley Capital International (MSCI) All Country (AC) World ex USA Index's -45.24% return, and performed comparably to the MSCI Europe, Australasia, Far East (EAFE) Index's -43.06% return for the same period.(1) Please note that index (1.) Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The MSCI AC World ex USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets, excluding the U.S. and Canada. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 13. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Annual Report | 1 performance information is provided for reference and that we do not attempt to track an index but rather undertake investments on the basis of fundamental research. You can find the Fund's long-term performance data in the Performance Summary beginning on page 6. GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 12/31/08 (BARCHART) Europe 66.6% Asia 19.8% North America 2.6% Latin America 2.5% Middle East & Africa 1.0% Australia & New Zealand 1.0% Short-Term Investments & Other Net Assets 6.5%
ECONOMIC AND MARKET OVERVIEW The U.S. experienced a marked slowdown in gross domestic product (GDP) growth as housing prices declined, consumer demand softened, and a credit crisis originally related to U.S. subprime loan losses intensified and spread globally. Although GDP growth rebounded in the second quarter of 2008, largely due to fiscal stimulus, the domestic economy contracted in the third and fourth quarters. Fear of recession spanned the entire period, and in the summer most economists agreed that a recession had already begun. By then, the faltering U.S. economy -- which is the world's largest and accounts for roughly 25% of global GDP -- had negatively impacted growth prospects around the world. Although signs of a global slowdown surfaced in the latter half of the reporting period, in the first half growth remained robust in developing economies, particularly in Asia. The China-led demand for oil, natural gas, and industrial and agricultural commodities propelled commodity prices and those of related equities to higher levels. The steep rise in the price of oil, which peaked at $145 per barrel in early July, was one of the most extreme market trends during the year. As a result, oil was a major focus of attention due to its impact on everything from inflation to corporate earnings to consumer spending. The price boom for commodities in general was broadly based and included natural gas, precious metals and most agricultural and industrial commodities, all of which added to global inflationary pressures. In this environment, the world's monetary authorities faced the choice of lowering short-term interest rates to stimulate growth or raising them to fight rising inflation. Stimulus provided through fiscal and monetary policies implemented around the globe sought to restore financial market stability and reignite economic growth. The U.S. Treasury and the Federal Reserve Board took unprecedented steps, including lowering short-term rates to near 0% from 4.25%. The eurozone had made controlling inflation its main goal and kept rates steady at 4.00% until July, when the European Central Bank (ECB) joined many of the world's central banks whose concerns about inflation had led them to raise rates. The potential for global recession, however, exacerbated by the virtual freeze in 2 | Annual Report the global financial system in September and October, trumped inflationary concerns, and the world's monetary authorities, including the ECB and the Bank of England, cut interest rates aggressively. The U.S. dollar, which had declined earlier in the period versus many of the world's currencies, regained ground quickly toward period-end as a flight to the relative safety of U.S. Treasuries prevailed. The greenback appreciated 8.6% relative to most currencies during the year under review.(2) In this challenging economic time, volatility came to define global equity markets. Virtually all local indexes ended the 12-month period with marked losses. Despite negative economic data and an outlook for decelerating corporate earnings and profit margins globally, many companies outside the financials sector retained relatively strong balance sheets. INVESTMENT STRATEGY We employ a bottom-up, value-oriented, long-term investment strategy. Our in-depth fundamental internal research evaluates a company's potential to grow earnings, asset value and/or cash flow. We also consider a company's price/earnings ratio, profit margins and liquidation value. MANAGER'S DISCUSSION The year 2008 was unusually difficult for most investors. At period-end, all major gauges of stock market performance had registered double-digit negative returns. No main region, country or sector was spared in the dramatic stock market sell-off triggered by the global financial crisis and slowing economic growth or recessionary environments. The financials sector suffered most, erasing more than half of its entire market capitalization during the year. But financials were not alone; they were followed closely by materials-related stocks. The materials and energy sectors, which were among the only sectors to have positive returns during the first half of the year, experienced an abrupt reversal. With virtually no safe haven in the global market downturn, the health care, utilities and consumer staples sectors lived up to their "defensive" reputations and declined less in value than other sectors. PORTFOLIO BREAKDOWN Based on Total Net Assets as of 12/31/08 (BAR CHART) Diversified Telecommunication Services 11.0% Commercial Banks 9.7% Oil, Gas & Consumable Fuels 9.1% Pharmaceuticals 8.9% Insurance 5.6% Food Products 5.2% Industrial Conglomerates 4.0% Software 3.6% Aerospace & Defense 3.5% Wireless Telecommunication Services 3.0% Media 3.0% Electric Utilities 2.5% Semiconductors & Semiconductor Equipment 2.3% Other 22.1% Short-Term Investments & Other Net Assets 6.5%
(2.) Source: Federal Reserve H10 report. Annual Report | 3 TOP 10 EQUITY HOLDINGS 12/31/08
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- Telefonica SA, ord. & ADR 2.7% DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN France Telecom SA 2.5% DIVERSIFIED TELECOMMUNICATION SERVICES, FRANCE Novartis AG 2.5% PHARMACEUTICALS, SWITZERLAND Nestle SA, ord. & ADR 2.3% FOOD PRODUCTS, SWITZERLAND Sanofi-Aventis, ord. & ADR 2.2% PHARMACEUTICALS, FRANCE GlaxoSmithKline PLC 2.1% PHARMACEUTICALS, U.K. Unilever NV 2.0% FOOD PRODUCTS, NETHERLANDS E.ON AG, ord. & ADR 1.9% ELECTRIC UTILITIES, GERMANY Siemens AG 1.7% INDUSTRIAL CONGLOMERATES, GERMANY Royal Dutch Shell PLC 1.6% OIL, GAS & CONSUMABLE FUELS, U.K.
For the Fund, our underweighting in consumer staples compared to the benchmark MSCI AC World ex USA Index hurt relative performance.(3) Also, underweighting and stock selection in utilities and stock selection in health care were detrimental to relative results.(4) It is important to recognize the effect of currency movements on the Fund's performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2008, the U.S. dollar appreciated in value relative to most non-U.S. currencies. As a result, the Fund's performance was negatively affected by the portfolio's investment primarily in securities with non-U.S. currency exposure. During the review period, our research indicated most chemicals companies were overvalued as were many in the metals and mining industry. As a result, the Fund maintained little or no exposure to these areas and was significantly underweighted in the materials sector relative to the benchmark. Although the Fund's underweighted exposure to materials stocks hurt relative Fund performance during the first half of the year, the sector was a key contributor in 2008 due to a sharp correction in the second half of the year. We believe that the Fund's relatively better performance in the financials sector was an affirmation of our investment philosophy.(5) We steered away from the most leveraged segments of the investment bank and brokerage industry because, in our view, many of these companies were trading at high multiples and had opaque balance sheets and unsustainable earnings. Despite absolute losses from our sector holdings, our underweighted exposure helped relative Fund performance. One area of continued conviction for us where our investment strategy had yet to be realized is the health care sector, which hurt relative results. The Fund's overweighted allocation to health care evolved over a time when the consensus view was that pharmaceutical companies faced a difficult pricing environment, political headwinds and insurmountable competition from (3.) The consumer staples sector comprises food and staples retailing and food products in the SOI. (4.) The utilities sector comprises electric utilities and multi-utilities in the SOI; the health care sector comprises health care equipment and supplies, health care providers and services, life sciences tools and services, and pharmaceuticals. (5.) The financials sector comprises capital markets, commercial banks, consumer finance, diversified financial services, insurance, and thrifts and mortgage finance in the SOI. 4 | Annual Report cheaper generics. However, we saw bargain valuations, high free cash-flow yields, and the implications of aging global demographics for revenue growth. Our overweighted telecommunication services sector position was another contrarian call.(6) By buying telecommunication stocks when they were out of favor in the wake of the technology, media and telecommunications bubble, we were able to invest in companies that we believed had solid balance sheets, desirable products, and a growing global presence at largely discounted prices. Although the Fund's telecommunication services holdings, like most everything else, were down in absolute terms in 2008, our bottom-up-based decision to overweight the sector contributed to the Fund's relative performance during the year. While we invested in some financial company stocks we saw as well-capitalized, we remained cautious of the sector. In addition, we continued to monitor the materials sector closely, seeking proper re-entry points, but as of period-end we had yet to find compelling valuations in the materials sector, in general. Looking beyond the turbulence of 2008, we continue to manage the Fund as always - -- with a focus on the longer term. Thank you for your continued participation in TIF Foreign Equity Series. We look forward to serving your future investment needs. (PHOTO OF GARY P. MOTYL) /s/ Gary P. Motyl Gary P. Motyl, CFA Chief Investment Officer - Templeton Global Equity Group President - Templeton Investment Counsel, LLC THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. (6.) The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. Annual Report | 5 Performance Summary as of 12/31/08 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses on the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
PRIMARY SHARES (SYMBOL: TFEQX) CHANGE 12/31/08 12/31/07 - ------------------------------ ------- -------- -------- Net Asset Value (NAV) -$13.78 $14.82 $28.60 DISTRIBUTIONS (1/1/08-12/31/08) Dividend Income $0.3893 Short-term Capital Gain $0.0328 Long-term Capital Gain $1.5038 Return of Capital $0.0202 TOTAL $1.9461
SERVICE SHARES (SYMBOL: TFESX) CHANGE 12/31/08 12/31/07 - ------------------------------ ------- -------- -------- Net Asset Value (NAV) -$13.77 $14.81 $28.58 DISTRIBUTIONS (1/1/08-12/31/08) Dividend Income $0.3144 Short-term Capital Gain $0.0328 Long-Term Capital Gain $1.5038 Return of Capital $0.0202 TOTAL $1.8712
PERFORMANCE
PRIMARY SHARES(1) 1-YEAR 5-YEAR 10-YEAR - ----------------- -------- ---------- ---------- Cumulative Total Return(2) -42.15% +21.81% +55.94% Average Annual Total Return(3) -42.15% +4.03% +4.54% Value of $1,000,000 Investment(4) $578,526 $1,218,132 $1,559,442 Total Annual Operating Expenses(5) 0.80%
SERVICE SHARES 1-YEAR INCEPTION (9/18/06) - -------------- --------- ------------------- Cumulative Total Return(2) -42.41% -22.62% Average Annual Total Return(3) -42.41% -10.62% Value of $1,000,000 Investment(4) $575,848 $773,752 Total Annual Operating Expenses(5) 0.95%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, VISIT ftinstitutional.com OR CALL (800) 321-8563. 6 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $1,000,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
PRIMARY SHARES(1) 12/31/08 - ----------------- -------- 1-Year -42.15% 5-Year +4.03% 10-Year +4.54%
PRIMARY SHARES (1/1/99-12/31/08)(1) $ Millions (PERFORMANCE GRAPH)
USD USD USD USD TIF FOREIGN EQUITY SERIES (P) MSCI ALL COUNTRY WORLD EX U.S. INDEX MSCI EAFE INDEX CPI UNADJUSTED INDEX INCEPTION DATE 18-OCT-90 18-OCT-90 18-OCT-90 18-OCT-90 CALENDAR MONTH NET 243 GROSS BM0047 GROSS BM0002 GROSS BM0152 - -------------- ----------------------------- ------------------------------------ --------------- -------------------- Dec-98 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 Jan-99 989,301.85 998,929.13 997,273.24 1,002,440.51 Feb-99 966,779.29 976,562.92 973,736.32 1,003,660.77 Mar-99 1,019,015.59 1,023,712.70 1,014,617.93 1,006,711.41 Apr-99 1,102,569.18 1,074,920.02 1,055,962.31 1,014,032.95 May-99 1,061,921.39 1,024,431.13 1,001,812.90 1,014,032.95 Jun-99 1,112,166.72 1,071,504.09 1,041,101.74 1,014,032.95 Jul-99 1,118,376.84 1,096,635.58 1,072,286.46 1,017,083.59 Aug-99 1,112,731.34 1,100,440.09 1,076,441.96 1,019,524.10 Sep-99 1,090,149.36 1,107,881.94 1,087,517.02 1,024,405.13 Oct-99 1,107,650.75 1,149,135.17 1,128,488.65 1,026,235.51 Nov-99 1,162,977.10 1,195,083.05 1,167,930.10 1,026,845.64 Dec-99 1,273,367.86 1,309,060.35 1,272,982.64 1,026,845.64 Jan-00 1,194,706.30 1,238,026.17 1,192,320.75 1,029,896.28 Feb-00 1,227,826.76 1,271,467.04 1,224,643.16 1,035,997.56 Mar-00 1,252,573.25 1,319,317.18 1,272,351.52 1,044,539.35 Apr-00 1,198,993.55 1,245,684.90 1,205,625.55 1,045,149.48 May-00 1,194,826.01 1,213,820.96 1,176,416.52 1,046,369.74 Jun-00 1,256,145.11 1,265,493.68 1,222,699.22 1,051,860.89 Jul-00 1,238,880.43 1,215,533.45 1,171,676.77 1,054,301.40 Aug-00 1,257,335.25 1,230,570.77 1,182,086.78 1,054,301.40 Sep-00 1,198,397.49 1,162,310.90 1,124,762.94 1,059,792.56 Oct-00 1,148,985.26 1,125,368.25 1,098,422.50 1,061,622.94 Nov-00 1,141,245.99 1,074,879.36 1,057,466.28 1,062,233.07 Dec-00 1,198,807.54 1,111,578.02 1,095,299.55 1,061,622.94 Jan-01 1,217,903.93 1,128,260.04 1,094,783.12 1,068,334.35 Feb-01 1,177,589.84 1,038,935.28 1,012,789.30 1,072,605.25 Mar-01 1,088,507.12 965,497.30 945,731.89 1,075,045.76 Apr-01 1,150,093.94 1,031,163.59 1,012,062.59 1,079,316.66 May-01 1,142,932.69 1,002,688.46 977,146.31 1,084,197.68 Jun-01 1,117,152.26 964,232.14 937,549.77 1,086,028.07 Jul-01 1,089,939.46 942,778.65 920,565.82 1,082,977.43 Aug-01 1,077,765.26 919,364.17 897,437.11 1,082,977.43 Sep-01 945,282.45 821,829.42 806,741.04 1,087,858.45 Oct-01 976,075.59 844,855.32 827,369.92 1,084,197.68 Nov-01 1,034,081.61 883,496.90 857,922.59 1,082,367.30 Dec-01 1,053,614.32 894,878.82 863,036.95 1,078,096.40 Jan-02 1,023,760.60 856,553.53 817,245.40 1,080,536.91 Feb-02 1,040,507.91 862,721.18 823,017.41 1,084,807.81 Mar-02 1,091,084.75 909,586.29 867,949.37 1,090,909.09 Apr-02 1,092,543.31 915,496.39 874,235.03 1,097,010.37 May-02 1,112,235.07 925,468.56 886,094.75 1,097,010.37 Jun-02 1,066,286.81 885,507.60 851,152.57 1,097,620.50 Jul-02 951,781.34 799,219.22 767,191.68 1,098,840.76 Aug-02 953,969.30 799,264.40 765,631.90 1,102,501.53 Sep-02 836,546.64 714,561.98 683,598.00 1,104,331.91 Oct-02 882,494.77 752,896.31 720,391.32 1,106,162.29 Nov-02 942,300.08 789,102.46 753,178.67 1,106,162.29 Dec-02 897,676.97 763,609.50 727,909.63 1,103,721.78 Jan-03 873,255.56 736,801.68 697,576.47 1,108,602.81 Feb-03 847,353.81 721,872.80 681,630.32 1,117,144.60 Mar-03 819,882.94 707,870.19 668,748.53 1,123,856.01 Apr-03 913,626.27 776,080.36 735,060.11 1,121,415.50 May-03 964,961.98 825,516.46 780,281.28 1,119,585.11 Jun-03 988,769.81 848,492.65 799,593.02 1,120,805.37 Jul-03 1,038,617.41 871,062.19 819,068.17 1,122,025.63 Aug-03 1,078,793.24 896,930.18 838,990.39 1,126,296.52 Sep-03 1,086,233.25 922,043.59 865,020.36 1,129,957.29 Oct-03 1,168,816.91 981,813.33 918,991.25 1,128,737.03 Nov-03 1,189,649.07 1,003,221.64 939,553.83 1,125,686.39 Dec-03 1,280,190.90 1,079,818.00 1,012,998.64 1,124,466.14 Jan-04 1,299,828.13 1,097,155.20 1,027,398.28 1,129,957.29 Feb-04 1,336,081.56 1,125,051.96 1,051,290.08 1,136,058.57 Mar-04 1,324,603.48 1,131,974.19 1,057,617.67 1,143,380.11 Apr-04 1,294,239.97 1,096,793.72 1,034,590.39 1,147,040.88 May-04 1,297,276.26 1,100,263.88 1,039,070.55 1,153,752.29 Jun-04 1,324,603.55 1,124,112.13 1,062,259.38 1,157,413.06 Jul-04 1,288,167.44 1,091,353.54 1,027,931.98 1,155,582.67 Aug-04 1,296,517.02 1,100,092.18 1,032,704.42 1,156,192.80 Sep-04 1,343,580.39 1,135,462.42 1,059,846.49 1,158,633.31 Oct-04 1,396,716.14 1,174,953.46 1,096,051.23 1,164,734.59 Nov-04 1,499,192.56 1,256,506.53 1,171,229.40 1,165,344.72 Dec-04 1,552,199.38 1,310,461.06 1,222,665.92 1,161,073.83 Jan-05 1,532,289.54 1,287,887.00 1,200,324.35 1,163,514.34 Feb-05 1,604,270.88 1,351,411.56 1,252,463.22 1,170,225.75 Mar-05 1,567,137.82 1,314,753.57 1,221,483.22 1,179,377.67 Apr-05 1,518,430.42 1,282,329.34 1,194,142.29 1,187,309.33 May-05 1,537,758.87 1,290,372.14 1,195,969.06 1,186,089.08 Jun-05 1,551,675.28 1,314,649.64 1,212,317.26 1,186,699.21 Jul-05 1,622,030.20 1,363,154.95 1,249,558.57 1,192,190.36 Aug-05 1,649,089.33 1,398,041.71 1,281,493.73 1,198,291.64 Sep-05 1,699,342.98 1,470,155.80 1,338,828.06 1,212,934.72 Oct-05 1,637,492.48 1,416,635.04 1,299,819.48 1,215,375.23 Nov-05 1,680,014.86 1,464,263.77 1,331,960.29 1,205,613.18 Dec-05 1,763,481.40 1,534,715.07 1,394,026.67 1,200,732.15 Jan-06 1,866,239.70 1,641,720.44 1,479,715.98 1,209,884.08 Feb-06 1,855,173.75 1,636,980.61 1,476,685.22 1,212,324.59 Mar-06 1,900,969.80 1,684,528.01 1,526,078.53 1,219,036.00 Apr-06 1,981,539.61 1,771,385.71 1,600,091.88 1,229,408.18 May-06 1,904,958.08 1,689,719.68 1,539,877.88 1,235,509.46 Jun-06 1,905,755.64 1,688,034.30 1,540,442.40 1,237,949.97 Jul-06 1,942,450.79 1,705,303.73 1,555,867.81 1,241,610.74 Aug-06 1,997,493.80 1,753,637.33 1,599,071.97 1,244,051.25 Sep-06 2,034,986.76 1,754,775.98 1,601,854.53 1,237,949.97 Oct-06 2,118,747.39 1,826,230.37 1,664,299.82 1,231,238.56 Nov-06 2,194,531.35 1,892,533.75 1,714,499.38 1,229,408.18 Dec-06 2,275,627.21 1,951,512.77 1,768,427.11 1,231,238.56 Jan-07 2,300,372.00 1,958,800.99 1,780,529.16 1,234,996.95 Feb-07 2,284,160.50 1,970,770.30 1,795,155.41 1,241,604.64 Mar-07 2,359,505.82 2,026,297.24 1,841,764.00 1,252,910.31 Apr-07 2,486,721.14 2,120,262.43 1,925,236.52 1,261,049.42 May-07 2,556,345.92 2,178,378.43 1,961,578.46 1,268,755.34 Jun-07 2,570,942.94 2,196,931.08 1,964,604.90 1,271,214.15 Jul-07 2,535,687.04 2,190,668.55 1,935,881.78 1,270,890.79 Aug-07 2,510,773.87 2,157,033.38 1,906,092.19 1,268,560.10 Sep-07 2,654,327.54 2,299,874.39 2,008,431.85 1,272,056.13 Oct-07 2,786,687.14 2,428,251.91 2,087,569.74 1,274,777.30 Nov-07 2,696,448.66 2,319,140.96 2,019,463.13 1,282,348.99 Dec-07 2,695,544.91 2,285,618.75 1,974,126.04 1,281,488.71 Jan-08 2,466,516.68 2,064,464.39 1,791,952.93 1,287,858.45 Feb-08 2,452,387.74 2,124,292.87 1,818,181.45 1,291,598.54 Mar-08 2,406,196.36 2,078,485.06 1,799,924.77 1,302,794.39 Apr-08 2,554,146.68 2,206,397.19 1,899,933.56 1,310,695.55 May-08 2,554,170.61 2,244,632.11 1,922,046.05 1,321,732.76 Jun-08 2,303,467.85 2,060,650.83 1,765,237.87 1,335,051.86 Jul-08 2,245,967.49 1,986,955.30 1,708,727.68 1,342,062.23 Aug-08 2,191,307.38 1,894,544.45 1,639,932.29 1,336,705.31 Sep-08 1,953,233.21 1,610,543.30 1,403,382.24 1,334,856.62 Oct-08 1,543,156.89 1,256,086.32 1,120,270.15 1,321,372.79 Nov-08 1,455,698.22 1,183,940.61 1,060,243.60 1,296,064.67 Dec-08 1,559,441.98 1,251,626.63 1,124,104.07 1,282,660.16
AVERAGE ANNUAL TOTAL RETURN
SERVICE SHARES 12/31/08 - -------------- -------- 1-Year -42.41% Since Inception (9/18/06) -10.62%
SERVICE SHARES (9/18/06-12/31/08) $ Millions (PERFORMANCE GRAPH)
USD USD USD USD TIF FOREIGN EQUITY SERIES (S) MSCI ALL COUNTRY WORLD EX U.S. INDEX MSCI EAFE INDEX CPI UNADJUSTED INDEX INCEPTION DATE 18-SEP-06 18-SEP-06 18-SEP-06 18-SEP-06 CALENDAR MONTH NET 243 GROSS BM0047 GROSS BM0002 GROSS BM0152 - -------------- ----------------------------- ------------------------------------ --------------- -------------------- Sep-06 1,013,121.36 1,010,904.00 1,014,140.64 998,032.46 Oct-06 1,054,870.84 1,052,067.96 1,053,675.01 992,621.74 Nov-06 1,092,644.18 1,090,264.49 1,085,456.55 991,146.09 Dec-06 1,133,066.30 1,124,241.55 1,119,598.42 992,621.74 Jan-07 1,145,400.75 1,128,440.20 1,127,260.28 995,651.75 Feb-07 1,138,595.76 1,135,335.57 1,136,520.22 1,000,978.85 Mar-07 1,176,157.36 1,167,323.93 1,166,028.31 1,010,093.46 Apr-07 1,239,571.12 1,221,456.07 1,218,875.10 1,016,655.19 May-07 1,274,277.19 1,254,935.95 1,241,883.33 1,022,867.68 Jun-07 1,281,126.49 1,265,623.90 1,243,799.38 1,024,849.98 Jul-07 1,263,982.22 1,262,016.13 1,225,614.66 1,024,589.28 Aug-07 1,251,563.57 1,242,639.35 1,206,754.74 1,022,710.28 Sep-07 1,323,121.53 1,324,928.22 1,271,546.40 1,025,528.78 Oct-07 1,389,101.96 1,398,884.87 1,321,648.92 1,027,722.58 Nov-07 1,344,124.43 1,336,027.45 1,278,530.35 1,033,826.86 Dec-07 1,343,673.92 1,316,715.73 1,249,827.25 1,033,133.30 Jan-08 1,229,505.44 1,189,311.53 1,134,492.71 1,038,268.57 Feb-08 1,221,051.92 1,223,777.95 1,151,098.10 1,041,283.82 Mar-08 1,198,034.17 1,197,388.66 1,139,539.72 1,050,309.89 Apr-08 1,271,800.40 1,271,077.20 1,202,855.69 1,056,679.78 May-08 1,268,510.68 1,293,103.85 1,216,855.20 1,065,577.96 Jun-08 1,144,004.19 1,187,114.59 1,117,579.30 1,076,315.79 Jul-08 1,115,343.84 1,144,659.54 1,081,802.47 1,081,967.54 Aug-08 1,088,087.44 1,091,422.83 1,038,247.83 1,077,648.79 Sep-08 969,670.90 927,813.40 888,487.02 1,076,158.39 Oct-08 765,962.21 723,615.27 709,247.60 1,065,287.75 Nov-08 722,414.63 682,053.04 671,244.55 1,044,884.41 Dec-08 773,752.12 721,046.10 711,674.87 1,034,077.72
Annual Report | 7 Performance Summary (CONTINUED) ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THESE MARKETS' SMALLER SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. (1.) Past expense reductions by the Fund's manager and administrator increased the Fund's total returns. If the manager and administrator had not taken this action, the Fund's total returns would have been lower. (2.) Cumulative total return represents the change in value of an investment over the periods indicated. (3.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (4.) These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Source: (C) 2009 Morningstar. The MSCI AC World ex USA Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets excluding the U.S. The MSCI EAFE Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets, excluding the U.S. and Canada. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. 8 | Annual Report Your Fund's Expenses As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, if applicable, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) of the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) of the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 9 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 7/1/08 VALUE 12/31/08 PERIOD* 7/1/08-12/31/08 ----------------- -------------- ----------------------- PRIMARY SHARES Actual $1,000 $ 677.00 $3.37 Hypothetical (5% return before expenses) $1,000 $1,021.11 $4.06 SERVICE SHARES Actual $1,000 $ 676.40 $4.00 Hypothetical (5% return before expenses) $1,000 $1,020.36 $4.82
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (Primary Shares: 0.80% and Service Shares: 0.95%), multiplied by the average account value over the period, multiplied by 184/366 for to reflect the one-half year period. 10 | Annual Report Templeton Institutional Funds FINANCIAL HIGHLIGHTS FOREIGN EQUITY SERIES
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- PRIMARY SHARES 2008 2007 2006 2005 2004 - -------------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 28.60 $ 26.67 $ 22.31 $ 20.27 $ 16.95 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ..................... 0.66 0.72 0.55 0.42 0.33 Net realized and unrealized gains (losses) ... (12.49) 4.08 5.86 2.32 3.25 ---------- ---------- ---------- ---------- ---------- Total from investment operations ................ (11.83) 4.80 6.41 2.74 3.58 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ........................ (0.39) (1.16) (0.74) (0.66) (0.26) Net realized gains ........................... (1.54) (1.71) (1.31) (0.04) -- Tax return of capital ........................ (0.02) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total distributions ............................. (1.95) (2.87) (2.05) (0.70) (0.26) ---------- ---------- ---------- ---------- ---------- Redemption fees(c,d) ............................ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year .................... $ 14.82 $ 28.60 $ 26.67 $ 22.31 $ 20.27 ========== ========== ========== ========== ========== Total return .................................... (42.15)% 18.45% 29.04% 13.61% 21.25% RATIOS TO AVERAGE NET ASSETS Expenses(e) ..................................... 0.80% 0.78% 0.80% 0.81% 0.82% Net investment income ........................... 2.88% 2.46% 2.25% 2.01% 1.89% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $4,687,747 $9,081,511 $7,311,236 $6,245,721 $5,658,170 Portfolio turnover rate ......................... 6.66%(f) 16.74% 7.59% 12.97% 18.25%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Excludes the value of portfolio securities delivered as a result of redemptions in-kind. See Note 9. The accompanying notes are an integral part of these financial statements. Annual Report | 11 Templeton Institutional Funds FINANCIAL HIGHLIGHTS (CONTINUED) FOREIGN EQUITY SERIES
YEAR ENDED DECEMBER 31, ------------------------------- SERVICE SHARES 2008 2007 2006(a) - -------------- ------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 28.58 $ 26.67 $25.15 ------- -------- ------ Income from investment operations(b): Net investment income(c) ..................... 0.65 0.36 0.05 Net realized and unrealized gains (losses) ... (12.55) 4.42 3.31 ------- -------- ------ Total from investment operations ................ (11.90) 4.78 3.36 ------- -------- ------ Less distributions from: Net investment income ........................ (0.31) (1.16) (0.66) Net realized gains ........................... (1.54) (1.71) (1.18) Tax return of capital ........................ (0.02) -- -- ------- -------- ------ Total distributions ............................. (1.87) (2.87) (1.84) ------- -------- ------ Redemption fees(d,e) ............................ -- -- -- ------- -------- ------ Net asset value, end of year .................... $ 14.81 $ 28.58 $26.67 ======= ======== ====== Total return(f) ................................. (42.41)% 18.37% 13.31% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) ..................................... 0.95% 0.92% 0.80% Net investment income ........................... 2.73% 2.32% 2.25% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $30,349 $173,247 $ 11 Portfolio turnover rate ......................... 6.66%(i) 16.74% 7.59%
(a) For the period September 18, 2006 (effective date) to December 31, 2006. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (f) Total return is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. (i) Excludes the value of portfolio securities delivered as a result of redemptions in-kind. See Note 9. The accompanying notes are an integral part of these financial statements. 12 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE --------------------- ---------------------------------------------- ------------- -------------- COMMON STOCKS AND OTHER EQUITY INTERESTS 92.6% AUSTRALIA 1.0% Alumina Ltd. ....................... Metals & Mining 17,863 $ 17,587 National Australia Bank Ltd. ....... Commercial Banks 3,010,754 44,505,632 -------------- 44,523,219 -------------- AUSTRIA 0.9% Telekom Austria AG ................. Diversified Telecommunication Services 2,953,740 42,541,212 -------------- BRAZIL 0.7% Embraer-Empresa Brasileira de Aeronautica SA, ADR ............. Aerospace & Defense 2,007,570 32,542,710 -------------- CANADA 0.6% Husky Energy Inc. .................. Oil, Gas & Consumable Fuels 1,147,780 29,118,975 Loblaw Cos. Ltd. ................... Food & Staples Retailing 8,300 238,536 -------------- 29,357,511 -------------- CHINA 2.8% China Mobile Ltd. .................. Wireless Telecommunication Services 6,954,000 69,807,385 China Telecom Corp. Ltd., H ........ Diversified Telecommunication Services 121,768,000 45,406,508 (a) Shanghai Electric Group Co. Ltd. ... Electrical Equipment 39,708,000 16,087,729 -------------- 131,301,622 -------------- DENMARK 0.7% (a) Vestas Wind Systems AS ............. Electrical Equipment 584,043 33,300,842 -------------- FRANCE 10.5% Accor SA ........................... Hotels, Restaurants & Leisure 513,030 25,186,856 AXA SA ............................. Insurance 2,603,448 57,682,161 (b) AXA SA, 144A ....................... Insurance 11,854 262,638 Compagnie Generale des Etablissements Michelin, B ..................... Auto Components 972,567 51,092,963 France Telecom SA .................. Diversified Telecommunication Services 4,259,495 118,882,798 GDF Suez ........................... Multi-Utilities 737,087 36,408,375 Sanofi-Aventis ..................... Pharmaceuticals 1,599,988 101,571,752 Sanofi-Aventis, ADR ................ Pharmaceuticals 7,073 227,468 Total SA, B ........................ Oil, Gas & Consumable Fuels 1,185,713 64,512,100 Valeo SA ........................... Auto Components 2,862 42,270 Vivendi SA ......................... Media 1,257,159 40,897,206 -------------- 496,766,587 -------------- GERMANY 11.5% Bayerische Motoren Werke AG ........ Automobiles 2,143,322 65,844,248 Celesio AG ......................... Health Care Providers & Services 2,431,865 65,629,204 Deutsche Post AG ................... Air Freight & Logistics 3,960,630 65,377,849 E.ON AG ............................ Electric Utilities 2,284,780 89,518,519 E.ON AG, ADR ....................... Electric Utilities 4,820 196,415 (a) Infineon Technologies AG ........... Semiconductors & Semiconductor Equipment 6,982,654 9,285,417 Merck KGaA ......................... Pharmaceuticals 689,639 62,218,071 Muenchener Rueckversicherungs- Gesellschaft AG ................. Insurance 331,473 50,776,283 SAP AG ............................. Software 1,569,901 54,978,599
Annual Report | 13 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE --------------------- ---------------------------------------------- ------------- -------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) GERMANY (CONTINUED) Siemens AG ......................... Industrial Conglomerates 1,081,990 $ 79,868,454 -------------- 543,693,059 -------------- HONG KONG 1.8% Cheung Kong (Holdings) Ltd. ........ Real Estate Management & Development 2,642,500 24,992,290 Cheung Kong (Holdings) Ltd., ADR ... Real Estate Management & Development 32,635 308,727 Hutchison Whampoa Ltd. ............. Industrial Conglomerates 4,099,350 20,549,114 Hutchison Whampoa Ltd., ADR ........ Industrial Conglomerates 4,895 123,403 Swire Pacific Ltd., A .............. Real Estate Management & Development 5,640,400 38,826,784 Swire Pacific Ltd., B .............. Real Estate Management & Development 159,500 211,564 -------------- 85,011,882 -------------- INDIA 3.7% Bharat Petroleum Corp. Ltd. ........ Oil, Gas & Consumable Fuels 3,599,933 27,836,174 Housing Development Finance Corp. Ltd. ............................ Thrifts & Mortgage Finance 2,473,824 75,687,719 ICICI Bank Ltd. .................... Commercial Banks 5,134,600 47,348,785 Satyam Computer Services Ltd. ...... IT Services 6,695,072 23,429,998 Satyam Computer Services Ltd., ADR ............................. IT Services 94,800 856,992 -------------- 175,159,668 -------------- ISRAEL 1.0% (a) Check Point Software Technologies Ltd. ............................ Software 2,539,220 48,219,788 -------------- ITALY 2.5% Eni SpA ............................ Oil, Gas & Consumable Fuels 2,523,780 59,075,488 Intesa Sanpaolo SpA ................ Commercial Banks 9,383,357 33,293,899 UniCredit SpA ...................... Commercial Banks 9,634,630 23,508,820 -------------- 115,878,207 -------------- JAPAN 4.0% Aiful Corp. ........................ Consumer Finance 12,850 36,956 FUJIFILM Holdings Corp. ............ Electronic Equipment, Instruments & Components 1,098,200 24,496,049 NGK Spark Plug Co. Ltd. ............ Auto Components 2,538,000 20,373,593 Nintendo Co. Ltd. .................. Software 178,000 67,966,759 Olympus Corp. ...................... Health Care Equipment & Supplies 4,000 80,008 Promise Co. Ltd. ................... Consumer Finance 7,150 181,210 Sony Corp. ......................... Household Durables 1,597,800 34,918,022 Sony Corp., ADR .................... Household Durables 7,525 164,572 Takeda Pharmaceutical Co. Ltd. ..... Pharmaceuticals 792,400 41,267,547 -------------- 189,484,716 -------------- MEXICO 0.9% Telefonos de Mexico SAB de CV, L, ADR ............................. Diversified Telecommunication Services 1,346,714 28,200,191 Telmex Internacional SAB de CV, ADR ............................. Diversified Telecommunication Services 1,346,714 15,298,671 -------------- 43,498,862 -------------- NETHERLANDS 4.8% ING Groep NV ....................... Diversified Financial Services 2,646,110 27,121,408 ING Groep NV, ADR .................. Diversified Financial Services 13,475 149,573 Koninklijke Philips Electronics NV .............................. Industrial Conglomerates 3,063,680 59,246,943 Koninklijke Philips Electronics NV, N.Y. shs. ....................... Industrial Conglomerates 12,405 246,487 Randstad Holding NV ................ Professional Services 555,605 11,303,931
14 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE --------------------- ---------------------------------------------- ------------- -------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) NETHERLANDS (CONTINUED) Royal Dutch Shell PLC, A, ADR ...... Oil, Gas & Consumable Fuels 6,990 $ 370,051 SBM Offshore NV .................... Energy Equipment & Services 2,381,320 31,130,299 Unilever NV ........................ Food Products 3,917,963 94,996,978 Unilever NV, N.Y. shs. ............. Food Products 19,310 474,060 -------------- 225,039,730 -------------- NORWAY 0.9% Telenor ASA ........................ Diversified Telecommunication Services 6,431,788 42,817,859 -------------- PORTUGAL 1.2% Portugal Telecom SGPS SA ........... Diversified Telecommunication Services 6,650,947 56,451,118 -------------- RUSSIA 0.0%(c) Gazprom, ADR ....................... Oil, Gas & Consumable Fuels 7,100 101,175 -------------- SINGAPORE 2.3% DBS Group Holdings Ltd. ............ Commercial Banks 7,148,185 42,015,859 DBS Group Holdings Ltd., ADR ....... Commercial Banks 7,805 209,564 (a) DBS Group Holdings Ltd., rts., 1/20/09 ......................... Commercial Banks 3,574,092 7,485,009 (a) Flextronics International Ltd. ..... Electronic Equipment, Instruments & Components 5,093,850 13,040,256 Singapore Telecommunications Ltd. .. Diversified Telecommunication Services 25,046,000 44,584,503 -------------- 107,335,191 -------------- SOUTH KOREA 3.2% (a) KB Financial Group Inc. ............ Commercial Banks 936,835 24,997,102 (a) KB Financial Group Inc., ADR ....... Commercial Banks 229,338 6,008,656 Korea Electric Power Corp. ......... Electric Utilities 1,192,700 27,952,431 Korea Electric Power Corp., ADR .... Electric Utilities 12,395 143,906 LG Electronics Inc. ................ Household Durables 562,263 33,299,503 Samsung Electronics Co. Ltd. ....... Semiconductors & Semiconductor Equipment 161,786 57,771,564 SK Telecom Co. Ltd., ADR ........... Wireless Telecommunication Services 12,830 233,249 -------------- 150,406,411 -------------- SPAIN 4.8% Banco Santander SA ................. Commercial Banks 4,778,907 45,105,834 Repsol YPF SA ...................... Oil, Gas & Consumable Fuels 2,600,571 54,909,316 Telefonica SA ...................... Diversified Telecommunication Services 5,632,394 124,831,061 Telefonica SA, ADR ................. Diversified Telecommunication Services 9,232 622,144 -------------- 225,468,355 -------------- SWEDEN 2.3% Atlas Copco AB, A .................. Machinery 6,476,400 55,288,362 Niscayah Group AB .................. Commercial Services & Supplies 1,351,050 1,149,058 Nordea Bank AB, FDR ................ Commercial Banks 7,508,228 53,228,690 -------------- 109,666,110 -------------- SWITZERLAND 8.5% Adecco SA .......................... Professional Services 1,063,741 35,640,653 Lonza Group AG ..................... Life Sciences Tools & Services 708,078 64,681,158 Nestle SA .......................... Food Products 2,768,116 107,831,843 Nestle SA, ADR ..................... Food Products 5,775 229,268 Novartis AG ........................ Pharmaceuticals 2,368,754 116,896,091 Swiss Reinsurance Co. .............. Insurance 1,087,340 51,215,659
Annual Report | 15 Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE --------------------- ---------------------------------------------- ------------- -------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) SWITZERLAND (CONTINUED) Swiss Reinsurance Co., ADR ......... Insurance 3,295 $ 157,501 (a) UBS AG ............................. Capital Markets 11,121 154,542 (a) UBS AG ............................. Capital Markets 1,631,663 23,332,781 -------------- 400,139,496 -------------- TAIWAN 2.0% Chinatrust Financial Holding Co. Ltd. ............................ Commercial Banks 87,652,268 37,173,655 Chunghwa Telecom Co. Ltd., ADR ..... Diversified Telecommunication Services 6,281 97,984 (b) Compal Electronics Inc., GDR, 144A ............................ Computers & Peripherals 4,456,055 11,726,460 (d) Compal Electronics Inc., GDR, Reg S ........................... Computers & Peripherals 1,137,622 2,980,570 Taiwan Semiconductor Manufacturing Co. Ltd. ......................... Semiconductors & Semiconductor Equipment 31,172,333 42,228,881 -------------- 94,207,550 -------------- THAILAND 0.0%(c) Advanced Info Service Public Co. Ltd., fgn. ...................... Wireless Telecommunication Services 46,300 104,486 -------------- UNITED KINGDOM 18.0% Aviva PLC .......................... Insurance 7,540,909 42,954,110 BAE Systems PLC .................... Aerospace & Defense 11,721,971 64,501,575 BP PLC ............................. Oil, Gas & Consumable Fuels 9,532,367 73,232,341 BP PLC, ADR ........................ Oil, Gas & Consumable Fuels 11,290 527,695 British Energy Group PLC ........... Electric Utilities 29,041 327,874 British Sky Broadcasting Group PLC ............................. Media 6,375,534 44,696,573 Cadbury PLC ........................ Food Products 4,977,616 44,020,194 Cadbury PLC, ADR ................... Food Products 1,120 39,950 Compass Group PLC .................. Hotels, Restaurants & Leisure 8,212,658 41,262,791 GKN PLC ............................ Auto Components 32,056 45,415 GlaxoSmithKline PLC ................ Pharmaceuticals 5,285,319 99,156,624 HSBC Holdings PLC .................. Commercial Banks 5,074,103 48,255,995 HSBC Holdings PLC, ADR ............. Commercial Banks 3,930 191,273 Kingfisher PLC ..................... Specialty Retail 6,182,965 12,191,215 National Grid PLC .................. Multi-Utilities 4,137,614 41,365,649 Pearson PLC ........................ Media 4,890,579 45,786,213 Premier Foods PLC .................. Food Products 72,600 32,606 Rentokil Initial PLC ............... Commercial Services & Supplies 129,400 83,158 Rexam PLC .......................... Containers & Packaging 11,357 58,222 (a) Rolls-Royce Group PLC .............. Aerospace & Defense 14,036,722 68,781,975 Royal Bank of Scotland Group PLC ... Commercial Banks 14,623,041 10,550,695 Royal Dutch Shell PLC, B ........... Oil, Gas & Consumable Fuels 13,237 333,499 Royal Dutch Shell PLC, B, ADR ...... Oil, Gas & Consumable Fuels 1,477,427 75,984,071 Smiths Group PLC ................... Industrial Conglomerates 2,062,397 26,658,270 Standard Chartered PLC ............. Commercial Banks 2,801,748 35,805,813 Unilever PLC, ADR .................. Food Products 3,165 72,858 Vodafone Group PLC ................. Wireless Telecommunication Services 35,894,999 72,872,751 Wolseley PLC ....................... Trading Companies & Distributors 6,518 36,556 -------------- 849,825,961 -------------- UNITED STATES 2.0% ACE Ltd. ........................... Insurance 1,151,300 60,926,796 Invesco Ltd. ....................... Capital Markets 1,670,880 24,127,507
16 | Annual Report Templeton Institutional Funds STATEMENT OF INVESTMENTS, DECEMBER 31, 2008 (CONTINUED)
FOREIGN EQUITY SERIES INDUSTRY SHARES/RIGHTS VALUE --------------------- ---------------------------------------------- ------------- -------------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) UNITED STATES 2.0% News Corp., A ...................... Media 1,124,699 $ 10,223,514 -------------- 95,277,817 -------------- TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $4,456,244,182) ........... 4,368,121,144 -------------- PREFERRED STOCKS (COST $33,662,007) 0.9% BRAZIL 0.9% Petroleo Brasileiro SA, ADR, pfd. .. Oil, Gas & Consumable Fuels 2,133,760 43,550,041 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $4,489,906,189) ........... 4,411,671,185 --------------
PRINCIPAL AMOUNT ------------- SHORT TERM INVESTMENTS 8.3% U.S. GOVERNMENT AND AGENCY SECURITIES 3.6% FHLB, 2.56%, 2/13/09 .................. $ 24,810,000 24,874,184 (e) 3/12/09 ......................... 25,000,000 24,998,520 (e) 6/22/09 ......................... 100,000,000 99,869,400 (e) FHLMC, 2/02/09 ..................... 20,000,000 20,000,260 -------------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $169,576,543) .. 169,742,364 -------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUND (COST $4,659,482,732) ................. 4,581,413,549 --------------
SHARES ------------- MONEY MARKET FUNDS (COST $221,909,924) 4.7% (f) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.55% ........................... 221,909,924 221,909,924 -------------- TOTAL INVESTMENTS (COST $4,881,392,656) 101.8% .... 4,803,323,473 OTHER ASSETS, LESS LIABILITIES (1.8)% .......................... (85,227,621) -------------- NET ASSETS 100.0% .................. $4,718,095,852 ==============
See Abbreviations on page 29. (a) Non-income producing for the twelve months ended December 31, 2008. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Trustees. At December 31, 2008, the aggregate value of these securities was $11,989,098, representing 0.25% of net assets. (c) Rounds to less than 0.1% of net assets. (d) Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. This security has been deemed liquid under guidelines approved by the Fund's Board of Trustees. At December 31, 2008, the value of this security was $2,980,570, representing 0.06% of net assets. (e) The security is traded on a discount basis with no stated coupon rate. (f) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Annual Report | 17 Templeton Institutional Funds FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2008
FOREIGN EQUITY SERIES --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ...................................... $ 4,659,482,732 Cost - Sweep Money Fund (Note 7) ................................. 221,909,924 --------------- Total cost of investments ........................................ $ 4,881,392,656 =============== Value - Unaffiliated issuers ..................................... $ 4,581,413,549 Value - Sweep Money Fund (Note 7) ................................ 221,909,924 --------------- Total value of investments ....................................... 4,803,323,473 Foreign currency, at value (cost $262) .............................. 264 Receivables: Investment securities sold ....................................... 1,382,999 Capital shares sold .............................................. 6,605,023 Dividends and interest ........................................... 12,263,277 --------------- Total assets .................................................. 4,823,575,036 --------------- Liabilities: Payables: Capital shares redeemed .......................................... 101,857,406 Affiliates ....................................................... 2,925,033 Accrued expenses and other liabilities .............................. 696,745 --------------- Total liabilities ............................................. 105,479,184 --------------- Net assets, at value ....................................... $ 4,718,095,852 =============== Net assets consist of: Paid-in capital ..................................................... $ 5,097,165,290 Distribution in excess of net investment income ..................... (80,322,173) Net unrealized appreciation (depreciation) .......................... (78,453,744) Accumulated net realized gain (loss) ................................ (220,293,521) --------------- Net assets, at value ....................................... $ 4,718,095,852 =============== PRIMARY SHARES: Net assets, at value ................................................ $ 4,687,747,300 =============== Shares outstanding .................................................. 316,283,737 =============== Net asset value per share(a) ........................................ $ 14.82 =============== SERVICE SHARES: Net assets, at value ................................................ $ 30,348,552 =============== Shares outstanding .................................................. 2,048,587 =============== Net asset value and maximum offering price per share(a) ............. $ 14.81 ===============
(a) Redemption price is equal to net asset value less redemption fees retained by the Fund. The accompanying notes are an integral part of these financial statements. 18 | Annual Report Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2008
FOREIGN EQUITY SERIES --------------- Investment income: Dividends: (net of foreign taxes of $27,458,378) Unaffiliated issuers ............................................. $ 252,893,868 Sweep Money Fund (Note 7) ........................................ 2,770,618 Interest ............................................................ 4,577,109 --------------- Total investment income ....................................... 260,241,595 --------------- Expenses: Management fees (Note 3a) ........................................... 47,452,545 Administrative fees (Note 3b) ....................................... 5,685,679 Transfer agent fees (Note 3c) ....................................... 106,283 Sub-transfer agent fees - Service Shares (Note 3c) ............... 89,736 Custodian fees (Note 4) ............................................. 2,166,867 Reports to shareholders ............................................. 118,254 Registration and filing fees ........................................ 226,008 Professional fees ................................................... 115,973 Trustees' fees and expenses ......................................... 150,885 Other ............................................................... 233,707 --------------- Total expenses ................................................... 56,345,937 Expense reductions (Note 4) ...................................... (53,409) --------------- Net expenses .................................................. 56,292,528 --------------- Net investment income ...................................... 203,949,067 --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments (includes gains of $11,436,968 from a redemption in-kind - Note 9) ............................................. 48,070,550 Foreign currency transactions .................................... (5,185,677) --------------- Net realized gain (loss) ...................................... 42,884,873 --------------- Net change in unrealized appreciation (depreciation) on: Investments ...................................................... (3,937,200,090) Translation of other assets and liabilities denominated in foreign currencies ............................................ 216,208 Change in deferred taxes on unrealized appreciation (depreciation) .. 2,104,690 --------------- Net change in unrealized appreciation (depreciation) .......... (3,934,879,192) --------------- Net realized and unrealized gain (loss) ................................ (3,891,994,319) --------------- Net increase (decrease) in net assets resulting from operations ........ $(3,688,045,252) ===============
The accompanying notes are an integral part of these financial statements. Annual Report | 19 Templeton Institutional Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FOREIGN EQUITY SERIES YEAR ENDED DECEMBER 31, -------------------------------- 2008 2007 --------------- -------------- Increase (decrease) in net assets: Operations: Net investment income .............................................. $ 203,949,067 $ 206,626,441 Net realized gain (loss) from investments and foreign currency transactions .................................................... 42,884,873 752,853,744 Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes ........................... (3,934,879,192) 447,476,103 --------------- -------------- Net increase (decrease) in net assets resulting from operations ................................................ (3,688,045,252) 1,406,956,288 --------------- -------------- Distributions to shareholders from: Net investment income: Primary Shares ..................................................... (116,638,592) (337,298,627) Service Shares ..................................................... (595,462) (6,047,617) Net realized gains: Primary Shares ..................................................... (461,846,071) (495,682,366) Service Shares ..................................................... (1,944,902) (8,697,904) Tax return of capital: Primary Shares ..................................................... (6,041,906) -- Service Shares ..................................................... (38,216) -- --------------- -------------- Total distributions to shareholders ...................................... (587,105,149) (847,726,514) --------------- -------------- Capital share transactions: (Note 2) Primary Shares ..................................................... (132,971,686) 1,208,441,383 Service Shares ..................................................... (128,567,654) 175,811,194 --------------- -------------- Total capital share transactions ......................................... (261,539,340) 1,384,252,577 --------------- -------------- Redemption fees .......................................................... 27,932 28,313 --------------- -------------- Net increase (decrease) in net assets ........................... (4,536,661,809) 1,943,510,664 Net assets: Beginning of year ..................................................... 9,254,757,661 7,311,246,997 --------------- -------------- End of year ........................................................... $ 4,718,095,852 $9,254,757,661 =============== ============== Distributions in excess of net investment income included in net assets: End of year ........................................................... $ (80,322,173) $ (158,223,078) =============== ==============
The accompanying notes are an integral part of these financial statements. 20 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Institutional Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of four separate funds. The Foreign Equity Series (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers two classes of shares: Primary Shares and Service Shares. Each class of shares differs by its transfer agency fees and voting rights on matters affecting a single class. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. At December 31, 2008, a portion of the securities held by the Fund were fair valued. All security valuation procedures are approved by the Trust's Board of Trustees. Annual Report | 21 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. D. INCOME AND DEFERRED TAXES No provision has been made for U.S. income taxes because it is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. 22 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. INCOME AND DEFERRED TAXES (CONTINUED) The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of December 31, 2008, and has determined that no provision for income tax is required in the Fund's financial statements. Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Annual Report | 23 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any Fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Fund and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. H. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At December 31, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Fund's shares were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2008 2007 ----------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ----------- --------------- ----------- --------------- PRIMARY SHARES: Shares sold .................... 47,189,948 $ 1,048,350,855 62,169,907 $ 1,790,944,002 Shares issued in reinvestment of distributions ............ 30,987,557 530,703,931 26,528,242 733,703,547 Shares redeemed in-kind (Note 9) .................... (2,162,529) (50,278,808) -- -- Shares redeemed ................ (77,270,787) (1,661,747,664) (45,282,230) (1,316,206,166) ----------- --------------- ----------- --------------- Net increase (decrease) ........ (1,255,811) $ (132,971,686) 43,415,919 $ 1,208,441,383 =========== =============== =========== ===============
24 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2008 2007 -------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT ---------- ------------- --------- ------------ SERVICE SHARES: Shares sold .................... 2,291,131 $ 41,458,231 5,842,118 $170,491,561 Shares issued in reinvestment of distributions ............ 163,000 2,540,363 531,207 14,745,444 Shares redeemed ................ (6,466,648) (172,566,248) (312,618) (9,425,811) ---------- ------------- --------- ------------ Net increase (decrease) ........ (4,012,517) $(128,567,654) 6,060,707 $175,811,194 ========== ============= ========= ============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------- ---------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ------------------------------------------------- 0.700% Up to and including $1 billion 0.680% Over $1 billion, up to and including $5 billion 0.660% Over $5 billion, up to and including $10 billion 0.640% Over $10 billion, up to and including $15 billion 0.620% Over $15 billion, up to and including $20 billion 0.600% In excess of $20 billion
B. ADMINISTRATIVE FEES The Fund pays its allocated share of an administrative fee to FT Services based on the aggregate average daily net assets of certain funds within the Trust as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- --------------------------------------------------- 0.150% Up to and including $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion
Annual Report | 25 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. TRANSFER AGENT FEES For the year ended December 31, 2008, the Fund paid transfer agent fees of $196,019, of which $92,543 was retained by Investor Services. Service Shares may pay up to 0.15% of average daily net assets for sub-transfer agency fees. For the period ended December 31, 2008, the Fund paid $89,736 for sub-transfer agency fees. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended December 31, 2008, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, realized capital losses, realized currency losses and ordinary income losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses, realized currency losses and ordinary income losses of $218,432,510, $1,565,387 and $14,732,156 respectively. The tax character of distributions paid during the years ended December 31, 2008 and 2007, was as follows:
2008 2007 ------------ ------------ Distributions paid from: Ordinary income .......... $132,532,407 $362,163,529 Long term capital gain ... 448,492,620 485,562,985 Return of capital ........ 6,080,122 -- ------------ ------------ $587,105,149 $847,726,514 ============ ============
26 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 5. INCOME TAXES (CONTINUED) At December 31, 2008, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments ......................................... $ 4,947,276,753 =============== Unrealized appreciation ..................................... $ 863,466,236 Unrealized depreciation ..................................... (1,007,419,516) --------------- Net unrealized appreciation (depreciation) .................. $ (143,953,280) ===============
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions and gains and losses realized on in-kind shareholder redemptions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2008, aggregated $458,471,435 and $863,199,622, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Pursuant to a SEC exemptive order specific to the Funds' investment in the Sweep Money Fund, asset allocation fees are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CONCENTRATION OF RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. Annual Report | 27 Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 9. REDEMPTIONS IN-KIND During the year ended December 31, 2008, the Fund realized $11,436,968 of net gains resulting from a redemption in-kind in which a shareholder redeemed Fund shares for securities held by the Fund rather than for cash. Because such gains are not taxable to the Fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized gains to paid-in capital. 10. FAIR VALUE MEASUREMENTS The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund has determined that the implementation of SFAS 157 did not have a material impact on the Fund's financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy: - - Level 1 - quoted prices in active markets for identical securities - - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of December 31, 2008, in valuing the Fund's assets and liabilities carried at fair value.
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------- ------------ ------- -------------- ASSETS: Investments in Securities ...... $4,443,998,327 $359,325,146 $-- $4,803,323,473
28 | Annual Report Templeton Institutional Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOREIGN EQUITY SERIES 11. NEW ACCOUNTING PRONOUNCEMENT In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Fund is currently evaluating the impact, if any, of applying the various provisions of SFAS 161. 12. SUBSEQUENT EVENT On January 23, 2009, the Fund entered into, along with certain other funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), a $725 million senior unsecured syndicated global line of credit (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes and to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, each Borrower has agreed to pay its proportionate share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility. ABBREVIATIONS SELECTED PORTFOLIO ADR - American Depository Receipt FDR - Foreign Depository Receipt FHLB - Federal Home Loan Bank FHLMC - Federal Home Loan Mortgage Corp. GDR - Global Depository Receipt Annual Report | 29 Templeton Institutional Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON INSTITUTIONAL FUNDS - FOREIGN EQUITY SERIES In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Equity Series (one of the funds constituting Templeton Institutional Funds, hereafter referred to as the "Fund") at December 31, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2008 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California February 20, 2009 30 | Annual Report Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) FOREIGN EQUITY SERIES Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund designates the maximum amount allowable but no less than $453,901,413 as a long term capital gain dividend for the fiscal year ended December 31, 2008. Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount allowable but no less than $5,515,535 as a short term capital gain dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. Under Section 854(b)(2) of the Code, the Fund designates the maximum amount allowable but no less than $246,223,866 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2008. Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount allowable but no less than $5,372,128 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended December 31, 2008. At December 31, 2008, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on December 16, 2008, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following tables provide a detailed analysis of foreign tax paid, foreign source income, and foreign qualified dividends as designated by the Fund, to Primary Shares, and Service Shares shareholders of record. Record Date: 12/16/2008
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED PAID INCOME DIVIDENDS CLASS PER SHARE PER SHARE PER SHARE - ----- ----------- -------------- ----------------- Primary Shares ... $0.0908 $0.7478 $0.6565 Service Shares ... $0.0908 $0.7478 $0.6565
Annual Report | 31 Templeton Institutional Funds TAX DESIGNATION (UNAUDITED) (CONTINUED) FOREIGN EQUITY SERIES Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate), or, as a tax deduction. Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends that have not been adjusted for the rate differential applicable to such dividend income.(1) Foreign Qualified Dividends Per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund.(1) In January 2009, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2008. The Foreign Source Income reported on Form 1099-DIV has not been adjusted for the rate differential on foreign source qualified dividend income. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2008 individual income tax returns. (1) Qualified dividends are taxed at a maximum rate of 15% (5% for those in the 10% and 15% income tax bracket). In determining the amount of foreign tax credit that may be applied against the U.S. tax liability of individuals receiving foreign source qualified dividends, adjustments may be required to the foreign tax credit limitation calculation to reflect the rate differential applicable to such dividend income. The rules however permit certain individuals to elect not to apply the rate differential adjustments for capital gains and/or dividends for any taxable year. Please consult your tax advisor and the instructions to Form 1116 for more information. 32 | Annual Report Templeton Institutional Funds BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- --------------- ------------------------ ------------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1992 138 Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ANN TORRE BATES (1958) Trustee Since 2008 30 SLM Corporation (Sallie Mae) and 500 East Broward Blvd. Allied Capital Corporation (financial Suite 2100 services). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995). FRANK J. CROTHERS (1944) Trustee Since 1990 23 Fortis, Inc. (utility holding 500 East Broward Blvd. company), Victory Nickel Inc. Suite 2100 (mineral exploration) and ABACO Fort Lauderdale, FL 33394-3091 Markets Limited (retail distributors). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director and Vice Chairman, Caribbean Utilities Company, Ltd. and director of various other private business and nonprofit organizations. EDITH E. HOLIDAY (1952) Lead Trustee since 138 Hess Corporation (exploration and 500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J. Heinz Suite 2100 Trustee Independent Company (processed foods and allied Fort Lauderdale, FL 33394-3091 Trustee since products), RTI International Metals, 2007 Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 33
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- --------------- ----------------------- ------------------------------------- DAVID W. NIEMIEC (1949) Trustee Since 2005 23 Emeritus Corporation (assisted l 500 East Broward Blvd. iving) and OSI Pharmaceuticals, Inc. Suite 2100 (pharmaceutical products). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Advisor, Saratoga Partners (private equity fund); and FORMERLY, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997). FRANK A. OLSON (1932) Trustee Since 2003 138 Hess Corporation (exploration and 500 East Broward Blvd. refining of oil and gas) and Sentient Suite 2100 Jet (private jet service). Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2005 145 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). CONSTANTINE D. TSERETOPOULOS Trustee Since 1990 23 None (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). ROBERT E. WADE (1946) Trustee Since 2007 37 El Oro and Exploration Co., p.l.c. 500 East Broward Blvd. (investments). Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired, former practicing attorney.
34 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- --------------- ----------------------- ------------------------------------- **CHARLES B. JOHNSON (1933) Trustee, Trustee and 138 None One Franklin Parkway Chairman of Vice President San Mateo, CA 94403-1906 the Board and since 1993 and Vice President Chairman of the Board since 1995 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. **GREGORY E. JOHNSON (1961) Trustee Since 2007 92 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments. JENNIFER J. BOLT (1964) Chief Since Not Applicable Not Applicable One Franklin Parkway Executive December 2008 San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President - Operations and Technology, Franklin Resources, Inc.; Director, Templeton Global Advisors Limited; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable One Franklin Parkway Compliance Compliance San Mateo, CA 94403-1906 Officer and Officer since Vice President 2004 and Vice - AML President - AML Compliance Compliance since 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Financial Since Not Applicable Not Applicable One Franklin Parkway Officer and February 2008 San Mateo, CA 94403-1906 Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
Annual Report | 35
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- --------------- ----------------------- ------------------------------------- JIMMY D. GAMBILL (1947) Vice President Since Not Applicable Not Applicable 500 East Broward Blvd. February 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. MARK MOBIUS (1936) Vice President Since 1993 Not Applicable Not Applicable 17th Floor, The Chater House 8 Connaught Road Central, Hong Kong PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Executive Chairman, Templeton Asset Management Ltd.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). GARY P. MOTYL (1952) President and Since 2005 Not Applicable Not Applicable 500 East Broward Blvd. Chief Executive Suite 2100 Officer - Fort Lauderdale, FL 33394-3091 Investment Management PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Templeton Investment Counsel, LLC; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments.
36 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------- --------------- --------------- ----------------------- ------------------------------------- ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments. GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000). CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Resources. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Gregory E. Johnson and Jennifer J. Bolt. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF ANN TORRE BATES AND DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MS. BATES HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE JANUARY 2008. SHE CURRENTLY SERVES AS A DIRECTOR OF SLM CORPORATION AND ALLIED CAPITAL CORPORATION AND WAS FORMERLY THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF NHP INCORPORATED AND VICE PRESIDENT AND TREASURER OF US AIRWAYS, INC. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MS. BATES AND MR. NIEMIEC HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. BATES AND MR. NIEMIEC ARE INDEPENDENT BOARD MEMBERS AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) 321-8563 TO REQUEST THE SAI. Annual Report | 37 Templeton Institutional Funds SHAREHOLDER INFORMATION FOREIGN EQUITY SERIES PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 38 | Annual Report This page intentionally left blank. This page intentionally left blank. (FRANKLIN TEMPLETON INSTITUTIONAL(R) LOGO) 600 Fifth Avenue New York, NY 10020 ANNUAL REPORT TEMPLETON INSTITUTIONAL FUNDS Foreign Equity Series INVESTMENT MANAGER Templeton Investment Counsel, LLC DISTRIBUTOR Franklin Templeton Distributors, Inc. One Franklin Parkway San Mateo, CA 94403-1906 FRANKLIN TEMPLETON INSTITUTIONAL SERVICES (800) 321-8563 ftinstitutional.com Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the investment manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. ZT454 A2008 02/09 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is David W. Niemiec he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $243,851 for the fiscal year ended December 31, 2008 and $215,491 for the fiscal year ended December 31, 2007. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning were $1,290 for the fiscal year ended December 31, 2008 and $0 for the fiscal year ended December 31, 2007. The services for which these fees were paid included tax compliance and advice. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $4,000 for the fiscal year ended December 31, 2008 and $46,000 for the fiscal year ended December 31, 2007. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $8,739 for the fiscal year ended December 31, 2008 and $0 for the fiscal year ended December 31, 2007. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $275,338 for the fiscal year ended December 31, 2008 and $0 for the fiscal year ended December 31, 2007. The services for which these fees were paid included review of materials provided to the fund Board in connect with the investment management contract renewal process. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $289,367 for the fiscal year ended December 31, 2008 and $46,000 for the fiscal year ended December 31, 2007. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON INSTITUTIONAL FUNDS By /s/JENNIFER J. BOLT --------------------------------- Jennifer J. Bolt Chief Executive Officer - Finance and Administration Date February 25, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JENNIFER J. BOLT --------------------------------- Jennifer J. Bolt Chief Executive Officer - Finance and Administration Date February 25, 2009 By /s/LAURA F. FERGERSON ---------------------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date February 25, 2009 EX-99.CODE ETH 2 ncsr_code308.txt CODE OF ETHICS Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised March 06, 2008 - ------------------------------------------------------------------------------- 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 March 2008 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 Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS 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 Galen G. Vetter Senior Vice President and Chief Executive Officer - Finance and Administration Jimmy D. Gambill Vice President Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER 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_1208.txt 302 CERTS Exhibit 12(a)(2) I, Jennifer J. Bolt, certify that: 1. I have reviewed this report on Form N-CSR of TEMPLETON INSTITUTIONAL FUNDS; 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. 2/25/2009 S\JENNIFER J. BOLT Jennifer J. Bolt Chief Executive Officer - Finance and Administration I, Laura F. Fergerson, certify that: 1. I have reviewed this report on Form N-CSR of TEMPLETON INSTITUTIONAL FUNDS; 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. 2/25/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 tifi906_1208.txt 906 CERTS 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, Jennifer J. Bolt, Chief Executive Officer of the TEMPLETON INSTITUTIONAL FUNDS (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 12/31/2008 (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: 2/25/2009 S\JENNIFER J. BOLT Jennifer J. Bolt Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Laura F. Fergerson, Chief Financial Officer of the TEMPLETON INSTITUTIONAL FUNDS (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 12/31/2008 (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: 2/25/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----