PROSPECTUS TEMPLETON INSTITUTIONAL FUNDS May 1, 2018 Advisor Class Primary Shares Service Shares Foreign Smaller Companies Series TFSCX Global Equity Series TGESX International Equity Series TFEQX TFESX The U.S. Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. ZTIF P 05/18
Contents Fund Summaries Information about the Fund you should know before investing Foreign Smaller Companies Series... 2 Global Equity Series... 9 International Equity Series... 16 Fund Details More information on investment policies, practices and risks/financial highlights Foreign Smaller Companies Series... 23 Global Equity Series... 33 International Equity Series... 43 Distributions and Taxes... 53 Your Account Information about qualified investors, account transactions and services Qualified Investors... 57 Buying Shares... 59 Investor Services... 62 Selling Shares... 64 Exchanging Shares... 66 Account Policies... 70 Questions... 77 For More Information Where to learn more about the Fund Back Cover
FOREIGN SMALLER COMPANIES SERIES FOREIGN SMALLER COMPANIES SERIES Foreign Smaller Companies Series Effective at the close of market on December 10, 2013, the Fund was closed to new investors. Existing investors who had an open and funded account on December 10, 2013 can continue to invest through exchanges and additional purchases. The following limited exceptions apply: (1) clients of discretionary investment allocation programs where such programs had investments in the Fund prior to the close of business on December 10, 2013, (2) employer sponsored retirement plans or benefit plans and their participants where the Fund was available to participants prior to the close of business on December 10, 2013, (3) employer sponsored retirement plans or benefit plans that approved the Fund as an investment option as of December 10, 2013, but have not opened an account as of that date, may open accounts and make purchases of Fund shares, provided that the initial account is opened with the Fund on or prior to February 10, 2014, (4) other Franklin Templeton Funds, (5) trustees and officers of the Trust, (6) members of the Fund s portfolio management team, and (7) certain assets which were previously committed by new investors for investment in the near future which the Board has specifically approved. The Fund may restrict, reject or cancel any purchase order, including an exchange request, and reserves the right to modify this policy at any time. Investment Goal Long-term capital growth. Fees and Expenses of the Fund These tables describe the fees and expenses that you may pay if you buy and hold shares of the Fund. Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases None Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment) Management fees 0.95% Other expenses 0.04% Acquired fund fees and expenses 1 0.01% Total annual Fund operating expenses 1.00% Fee waiver and/or expense reimbursement 2-0.01% Total annual Fund operating expenses after fee waiver and/or expense reimbursement 1,2 0.99% 1. Total annual Fund operating expenses differ from the ratio of expenses to average net assets shown in the Financial Highlights, which reflect the operating expenses of the Fund and do not include acquired fund fees and expenses. 2. The investment manager has contractually agreed in advance to reduce its fee as a result of the Fund s investment in a Franklin Templeton money fund (acquired fund) for the next 12-month period. Contractual fee waiver and/or expense reimbursement agreements may not be changed or terminated during the time period set forth above. Example This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of the period. The Example also assumes that your investment has a 5% return each year and that the Fund s operating expenses remain the same. The Example reflects adjustments made to the Fund s operating expenses due to the fee waivers and/or expense reimbursements by management for the 1 Year numbers only. Although your actual costs may be higher or lower, based on these assumptions your costs would be: Portfolio Turnover 1 Year 3 Years 5 Years 10 Years $101 $317 $552 $1,224 The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the Example, affect the Fund s performance. During the most recent fiscal year, the Fund s portfolio turnover rate was 25.97% of the average value of its portfolio. 2 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 3
FOREIGN SMALLER COMPANIES SERIES FOREIGN SMALLER COMPANIES SERIES Principal Investment Strategies 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. For purposes of this 80% policy, smaller companies are defined as those with market capitalizations that do not exceed $4 billion. However, under normal conditions, when making an initial purchase of securities of a company, the investment manager will only invest in securities of companies with a market capitalization of not more than $2 billion. Once a security qualifies for initial purchase, it continues to qualify for additional purchases as long as it is held by the Fund, provided that the issuer s market capitalization does not exceed $4 billion. In addition, the Fund may continue to hold securities that have grown to have a market capitalization in excess of $4 billion. The result may be that the Fund could hold a significant percentage of its net assets in securities of companies that have market capitalizations in excess of $2 billion. The Fund predominantly invests in equity securities, primarily common stock. The Fund may invest more than 25% of its assets in the securities of issuers located in any one country. When choosing equity investments for the Fund, the investment manager applies a bottom-up, value-oriented, long-term approach, focusing on the market price of a company s securities relative to the investment manager s evaluation of the company s long-term earnings, asset value and cash flow potential. The investment manager also considers a company s price/earnings ratio, profit margins and liquidation value. The investment manager may consider selling an equity security when it believes the security has become overvalued due to either its price appreciation or changes in the company s fundamentals, when the investment manager believes that the market capitalization of a security has become too large, or when the investment manager believes another security is a more attractive investment opportunity. Principal Risks You could lose money by investing in the Fund. Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Market The market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly or unpredictably. The market value of a security or other investment may be reduced by market activity or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more buyers than sellers, prices tend to rise. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund. Smaller Companies Securities issued by smaller companies may be more volatile in price than those of larger companies, involve substantial risks and should be considered speculative. Such risks may include greater sensitivity to economic conditions, less certain growth prospects, lack of depth of management and funds for growth and development and limited or less developed product lines and markets. In addition, smaller companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans. Foreign Securities (non-u.s.) Investing in foreign securities typically involves more risks than investing in U.S. securities, and includes risks associated with: (i) internal and external political and economic developments e.g., the political, economic and social policies and structures of some foreign countries may be less stable and more volatile than those in the U.S. or some foreign countries may be subject to trading restrictions or economic sanctions; (ii) trading practices e.g., government supervision and regulation of foreign securities and currency markets, trading systems and brokers may be less than in the U.S.; (iii) availability of information e.g., foreign issuers may not be subject to the same disclosure, accounting and financial reporting standards and practices as U.S. issuers; (iv) limited markets e.g., the securities of certain foreign issuers may be less liquid (harder to sell) and more volatile; and (v) currency exchange rate fluctuations and policies. The risks of foreign investments may be greater in developing or emerging market countries. Value Style Investing A value stock may not increase in price as anticipated by the investment manager if other investors fail to recognize the company s value and bid up the price, the markets favor faster-growing companies, or the factors that the investment manager believes will increase the price of the security do not occur or do not have the anticipated effect. Liquidity From time to time, the trading market for a particular security or type of security or other investments in which the Fund invests may become less liquid or even illiquid. Reduced liquidity will have an adverse impact on the Fund s ability to sell such securities or other investments when necessary to meet the Fund s liquidity needs, which may arise or increase in response to a specific economic event or because the investment manager wishes to purchase particular 4 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 5
FOREIGN SMALLER COMPANIES SERIES FOREIGN SMALLER COMPANIES SERIES investments or believes that a higher level of liquidity would be advantageous. Reduced liquidity will also generally lower the value of such securities or other investments. Market prices for such securities or other investments may be volatile. Regional Focus Because the Fund may invest at least a significant portion of its assets in companies in a specific region, including Europe, the Fund is subject to greater risks of adverse developments in that region and/or the surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, even in countries in which the Fund is not invested, may adversely affect the value of investments held by the Fund. Current political uncertainty surrounding the European Union (EU) and its membership, including the 2016 referendum in which the United Kingdom voted to exit the EU, may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of such instability impacting other more stable countries may increase the economic risk of investing in companies in Europe. Focus To the extent that the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, the Fund may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Management The Fund is subject to management risk because it is an actively managed investment portfolio. The Fund s investment manager applies investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. Performance The following bar chart and table provide some indication of the risks of investing in the Fund. The bar chart shows changes in the Fund s performance from year to year. The table shows how the Fund s average annual returns for 1 year, 5 years, 10 years or since inception, as applicable, compared with those of a broad measure of market performance. The Fund s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. You can obtain updated performance information at ftinstitutional.com or by calling (800) 321 8563. Annual Total Returns -47.28% 2008 68.04% 2009 21.37% 2010-11.30% 2011 21.56% 22.24% 2012 2013 Year -3.32% 2014 1.88% 2015-0.85% 2016 34.18% Best Quarter: Q2 09 36.82% Worst Quarter: Q4 08-27.19% As of March 31, 2018, the Fund s year-to-date return was 1.48%. Average Annual Total Returns For the periods ended December 31, 2017 1 Year 5 Years 10 Years Foreign Smaller Companies Series Return Before Taxes 34.18% 9.88% 6.39% Return After Taxes on Distributions 31.97% 9.13% 5.71% Return After Taxes on Distributions and Sale of Fund Shares 20.72% 7.79% 5.08% MSCI All Country World ex-us Small Cap Index (index reflects no deduction for fees, expenses or taxes) 32.12% 10.42% 5.06% The after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. 2017 6 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 7
FOREIGN SMALLER COMPANIES SERIES GLOBAL EQUITY SERIES Investment Manager Templeton Investment Counsel, LLC (Investment Counsel) Portfolio Managers Harlan B. Hodes Executive Vice President/Portfolio Manager-Research Analyst of Investment Counsel and portfolio manager of the Fund since 2007. Purchase and Sale of Fund Shares You may purchase shares of the Fund on any business day by mail (Franklin Templeton Institutional Services, P.O. Box 33030, St. Petersburg, FL 33733-8030). You may redeem shares of the Fund on any business day by mail at the address listed above, or by telephone at (800) 321 8563. The minimum initial purchase varies depending on the type of investor and could be up to $1,000,000. More information about eligibility to invest in the Fund and the applicable minimum requirements is under Your Account in the detail section of the Fund s prospectus. There is no minimum investment for subsequent purchases. Taxes The Fund s distributions are generally taxable to you as ordinary income, capital gains, or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account, in which case your distributions would generally be taxed when withdrawn from the taxdeferred account. Payments to Broker-Dealers and Other Financial Intermediaries If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your financial advisor or visit your financial intermediary s website for more information. Global Equity Series Investment Goal Long-term capital growth. Fees and Expenses of the Fund These tables describe the fees and expenses that you may pay if you buy and hold shares of the Fund. Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment) Management fees 0.78% Other expenses 0.04% Total annual Fund operating expenses 0.82% Example This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of the period. The Example also assumes that your investment has a 5% return each year and that the Fund s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: Portfolio Turnover None 1 Year 3 Years 5 Years 10 Years $84 $262 $455 $1,014 The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual Fund operating 8 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 9
GLOBAL EQUITY SERIES GLOBAL EQUITY SERIES expenses or in the Example, affect the Fund s performance. During the most recent fiscal year, the Fund s portfolio turnover rate was 25.27% of the average value of its portfolio. Principal Investment Strategies The Fund invests in the equity securities of companies located anywhere in the world, including developing markets. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities. The equity securities in which the Fund primarily invests are common stock. Under normal market conditions, the Fund will invest at least 40% of its net assets in foreign securities. The Fund may invest in equity securities of any size company, across the entire market capitalization spectrum. The Fund may invest a substantial portion of its assets in smaller and midsize companies. From time to time, based on economic conditions, the Fund may have significant investments in one or more countries or in particular sectors such as financial institutions or industrial companies. When choosing equity investments for the Fund, the investment manager applies a bottom-up, value-oriented, long-term approach, focusing on the market price of a company s securities relative to the investment manager s evaluation of the company s long-term earnings, asset value and cash flow potential. The investment manager also considers a company s price/earnings ratio, profit margins and liquidation value. In selecting securities for the Fund, the investment manager attempts to identify those companies that offer above-average opportunities for capital appreciation in various countries and industries where economic and political factors, including currency movements, are favorable to capital growth. The investment manager may consider selling an equity security when it believes the security has become overvalued due to either its price appreciation or changes in the company s fundamentals, or when the investment manager believes another security is a more attractive investment opportunity. Principal Risks You could lose money by investing in the Fund. Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Market The market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly or unpredictably. The market value of a security or other investment may be reduced by market activity or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more buyers than sellers, prices tend to rise. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund. Foreign Securities (non-u.s.) Investing in foreign securities typically involves more risks than investing in U.S. securities, and includes risks associated with: (i) internal and external political and economic developments e.g., the political, economic and social policies and structures of some foreign countries may be less stable and more volatile than those in the U.S. or some foreign countries may be subject to trading restrictions or economic sanctions; (ii) trading practices e.g., government supervision and regulation of foreign securities and currency markets, trading systems and brokers may be less than in the U.S.; (iii) availability of information e.g., foreign issuers may not be subject to the same disclosure, accounting and financial reporting standards and practices as U.S. issuers; (iv) limited markets e.g., the securities of certain foreign issuers may be less liquid (harder to sell) and more volatile; and (v) currency exchange rate fluctuations and policies. The risks of foreign investments may be greater in developing or emerging market countries. Regional Focus Because the Fund may invest at least a significant portion of its assets in companies in a specific region, including Europe, the Fund is subject to greater risks of adverse developments in that region and/or the surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, even in countries in which the Fund is not invested, may adversely affect the value of investments held by the Fund. Current political uncertainty surrounding the European Union (EU) and its membership, including the 2016 referendum in which the United Kingdom voted to exit the EU, may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of such instability impacting other more stable countries may increase the economic risk of investing in companies in Europe. Developing Market Countries The Fund s investments in securities of issuers in developing market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets, including: delays in settling portfolio securities transactions; currency and capital controls; greater sensitivity to interest rate changes; pervasiveness of corruption and crime; currency exchange rate volatility; and inflation, deflation or currency devaluation. 10 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 11
GLOBAL EQUITY SERIES GLOBAL EQUITY SERIES Value Style Investing A value stock may not increase in price as anticipated by the investment manager if other investors fail to recognize the company s value and bid up the price, the markets favor faster-growing companies, or the factors that the investment manager believes will increase the price of the security do not occur or do not have the anticipated effect. Smaller and Midsize Companies Securities issued by smaller and midsize companies may be more volatile in price than those of larger companies, involve substantial risks and should be considered speculative. Such risks may include greater sensitivity to economic conditions, less certain growth prospects, lack of depth of management and funds for growth and development, and limited or less developed product lines and markets. In addition, smaller and midsize companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans. Annual Total Returns 23.85% 7.32% 0.00% -6.10% 24.63% 30.43% -2.01% -3.43% 4.67% 20.88% Focus To the extent that the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, the Fund may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Management The Fund is subject to management risk because it is an actively managed investment portfolio. The Fund s investment manager applies investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. Performance The following bar chart and table provide some indication of the risks of investing in the Fund. The bar chart shows changes in the Fund s performance from year to year. The table shows how the Fund s average annual returns for 1 year, 5 years, 10 years or since inception, as applicable, compared with those of a broad measure of market performance. The Fund s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. You can obtain updated performance information at ftinstitutional.com or by calling (800) 321 8563. 2008 2009 2010 2011 2012 2013 Year Best Quarter: Q2 09 19.52% Worst Quarter: Q3 11-17.07% As of March 31, 2018, the Fund s year-to-date return was -2.27%. Average Annual Total Returns For the periods ended December 31, 2017 1 Year 5 Years Since Inception 3/31/2008 Global Equity Series Return Before Taxes 20.88% 9.32% 5.32% Return After Taxes on Distributions 20.42% 7.47% 4.35% Return After Taxes on Distributions and Sale of Fund Shares 12.47% 7.16% 4.20% MSCI All Country World Index (index reflects no deduction for fees, expenses or taxes) 24.62% 11.40% 6.40% The after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. 2014 2015 2016 2017 12 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 13
GLOBAL EQUITY SERIES GLOBAL EQUITY SERIES Investment Manager Templeton Investment Counsel, LLC (Investment Counsel) Portfolio Managers Peter A. Nori, CFA Executive Vice President/Portfolio Manager - Research Analyst of Investment Counsel and portfolio manager of the Fund since inception (2008). create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your financial advisor or visit your financial intermediary s website for more information. Antonio T. Docal, CFA Executive Vice President/Portfolio Manager - Research Analyst of Investment Counsel and portfolio manager of the Fund since inception (2008). Matthew R. Nagle, CFA Portfolio Manager of Investment Counsel and portfolio manager of the Fund since January 2018. Purchase and Sale of Fund Shares You may purchase shares of the Fund on any business day by mail (Franklin Templeton Institutional Services, P.O. Box 33030, St. Petersburg, FL 33733-8030). You may redeem shares of the Fund on any business day by mail at the address listed above, or by telephone at (800) 321 8563. The minimum initial purchase varies depending on the type of investor and could be up to $1,000,000. More information about eligibility to invest in the Fund and the applicable minimum requirements is under Your Account in the detail section of the Fund s prospectus. There is no minimum investment for subsequent purchases. Taxes The Fund s distributions are generally taxable to you as ordinary income, capital gains, or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account, in which case your distributions would generally be taxed when withdrawn from the taxdeferred account. Payments to Broker-Dealers and Other Financial Intermediaries If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may 14 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 15
INTERNATIONAL EQUITY SERIES INTERNATIONAL EQUITY SERIES International Equity Series Investment Goal Long-term capital growth. Fees and Expenses of the Fund These tables describe the fees and expenses that you may pay if you buy and hold shares of the Fund. Shareholder Fees (fees paid directly from your investment) Primary Shares Service Shares Maximum Sales Charge (Load) Imposed on Purchases None None Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment) Primary Shares Service Shares Management fees 0.76% 0.76% Other expenses 0.02% 0.17% Acquired fund fees and expenses 1 0.01% 0.01% Total annual Fund operating expenses 1 0.79% 0.94% 1. Total annual Fund operating expenses differ from the ratio of expenses to average net assets shown in the Financial Highlights, which reflect the operating expenses of the Fund and do not include acquired fund fees and expenses. Example This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of the period. The Example also assumes that your investment has a 5% return each year and that the Fund s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years Primary Shares $81 $252 $439 $978 Service Shares $96 $300 $520 $1,155 Portfolio Turnover The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the Example, affect the Fund s performance. During the most recent fiscal year, the Fund s portfolio turnover rate was 16.39% of the average value of its portfolio. Principal Investment Strategies Under normal market conditions, the Fund invests at least 80% of its net assets in foreign (non-u.s.) equity securities. The Fund predominantly invests in companies located outside the U.S. including companies located in developing market countries. The Fund may invest in equity securities of any size company, across the entire market capitalization spectrum, including smaller and midsize companies. The equity securities in which the Fund primarily invests are common stock. From time to time, based on economic conditions, the Fund may have significant investments in one or more countries or in particular sectors. When choosing equity investments for the Fund, the investment manager applies a bottom-up, value-oriented, long-term approach, focusing on the market price of a company s securities relative to the investment manager s evaluation of the company s long-term earnings, asset value and cash flow potential. The investment manager also considers a company s price/earnings ratio, profit margins and liquidation value. In selecting securities for the Fund, the investment manager attempts to identify those companies that offer above-average opportunities for capital appreciation in various countries and industries where economic and political factors, including currency movements, are favorable to capital growth. The investment manager may consider selling an equity security when it believes the security has become overvalued due to either its price appreciation or changes in the company s fundamentals, or when the investment manager believes another security is a more attractive investment opportunity. 16 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 17
INTERNATIONAL EQUITY SERIES INTERNATIONAL EQUITY SERIES Principal Risks You could lose money by investing in the Fund. Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Market The market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly or unpredictably. The market value of a security or other investment may be reduced by market activity or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more buyers than sellers, prices tend to rise. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund. Foreign Securities (non-u.s.) Investing in foreign securities typically involves more risks than investing in U.S. securities, and includes risks associated with: (i) internal and external political and economic developments e.g., the political, economic and social policies and structures of some foreign countries may be less stable and more volatile than those in the U.S. or some foreign countries may be subject to trading restrictions or economic sanctions; (ii) trading practices e.g., government supervision and regulation of foreign securities and currency markets, trading systems and brokers may be less than in the U.S.; (iii) availability of information e.g., foreign issuers may not be subject to the same disclosure, accounting and financial reporting standards and practices as U.S. issuers; (iv) limited markets e.g., the securities of certain foreign issuers may be less liquid (harder to sell) and more volatile; and (v) currency exchange rate fluctuations and policies. The risks of foreign investments may be greater in developing or emerging market countries. Regional Focus Because the Fund may invest at least a significant portion of its assets in companies in a specific region, including Europe, the Fund is subject to greater risks of adverse developments in that region and/or the surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, even in countries in which the Fund is not invested, may adversely affect the value of investments held by the Fund. Current political uncertainty surrounding the European Union (EU) and its membership, including the 2016 referendum in which the United Kingdom voted to exit the EU, may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of such instability impacting other more stable countries may increase the economic risk of investing in companies in Europe. Developing Market Countries The Fund s investments in securities of issuers in developing market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets, including: delays in settling portfolio securities transactions; currency and capital controls; greater sensitivity to interest rate changes; pervasiveness of corruption and crime; currency exchange rate volatility; and inflation, deflation or currency devaluation. Value Style Investing A value stock may not increase in price as anticipated by the investment manager if other investors fail to recognize the company s value and bid up the price, the markets favor faster-growing companies, or the factors that the investment manager believes will increase the price of the security do not occur or do not have the anticipated effect. Smaller and Midsize Companies Securities issued by smaller and midsize companies may be more volatile in price than those of larger companies, involve substantial risks and should be considered speculative. Such risks may include greater sensitivity to economic conditions, less certain growth prospects, lack of depth of management and funds for growth and development, and limited or less developed product lines and markets. In addition, smaller and midsize companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans. Focus To the extent that the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, the Fund may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Management The Fund is subject to management risk because it is an actively managed investment portfolio. The Fund s investment manager applies investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. Performance The following bar chart and table provide some indication of the risks of investing in the Fund. The bar chart shows changes in the Fund s performance from year to year for Primary Shares. The table shows how the Fund s average annual returns 18 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 19
INTERNATIONAL EQUITY SERIES INTERNATIONAL EQUITY SERIES for 1 year, 5 years, 10 years or since inception, as applicable, compared with those of a broad measure of market performance. The Fund s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. You can obtain updated performance information at ftinstitutional.com or by calling (800) 321 8563. The additional index in the table below shows how the Fund s performance compares to an additional leading developed markets index. PRIMARY SHARES ANNUAL TOTAL RETURNS -42.15% 2008 33.63% 2009 6.70% 2010-10.89% 2011 18.55% 19.51% 2012 2013 Year -6.78% 2014-2.67% 2015 1.30% 2016 22.92% Best Quarter: Q2 09 25.68% Worst Quarter: Q3 11-20.93% As of March 31, 2018, the Fund s year-to-date return was -1.91%. 2017 Average Annual Total Returns For the periods ended December 31, 2017 1 Year 5 Years 10 Years International Equity Series - Primary Shares Return Before Taxes 22.92% 6.19% 1.64% Return After Taxes on Distributions 21.93% 5.40% 1.03% Return After Taxes on Distributions and Sale of Fund Shares 14.14% 4.88% 1.43% International Equity Series - Service Shares 22.73% 6.02% 1.46% MSCI All Country World ex-us Index (index reflects no deduction for fees, expenses or taxes) 27.77% 7.29% 2.31% MSCI EAFE Index (index reflects no deduction for fees, expenses or taxes) 25.62% 8.39% 2.42% The after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown only for Primary Shares and aftertax returns for other classes will vary. Investment Manager Templeton Investment Counsel, LLC (Investment Counsel) Portfolio Managers Antonio T. Docal, CFA Executive Vice President/Portfolio Manager - Research Analyst of Investment Counsel and portfolio manager of the Fund since 2003. Peter A. Nori, CFA Executive Vice President/Portfolio Manager - Research Analyst of Investment Counsel and portfolio manager of the Fund since 1999. Matthew R. Nagle, CFA Portfolio Manager of Investment Counsel and portfolio manager of the Fund since January 2018. 20 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 21
INTERNATIONAL EQUITY SERIES FOREIGN SMALLER COMPANIES SERIES Purchase and Sale of Fund Shares You may purchase shares of the Fund on any business day by mail (Franklin Templeton Institutional Services, P.O. Box 33030, St. Petersburg, FL 33733-8030). You may redeem shares of the Fund on any business day by mail at the address listed above, or by telephone at (800) 321 8563. The minimum initial purchase varies depending on the type of investor and could be up to $1,000,000. More information about eligibility to invest in the Fund and the applicable minimum requirements is under Your Account in the detail section of the Fund s prospectus. There is no minimum investment for subsequent purchases. Taxes The Fund s distributions are generally taxable to you as ordinary income, capital gains, or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account, in which case your distributions would generally be taxed when withdrawn from the taxdeferred account. Payments to Broker-Dealers and Other Financial Intermediaries If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your financial advisor or visit your financial intermediary s website for more information. Foreign Smaller Companies Series Effective at the close of market on December 10, 2013, the Fund was closed to new investors. Existing investors who had an open and funded account on December 10, 2013 can continue to invest through exchanges and additional purchases. The following limited exceptions apply: (1) clients of discretionary investment allocation programs where such programs had investments in the Fund prior to the close of business on December 10, 2013, (2) employer sponsored retirement plans or benefit plans and their participants where the Fund was available to participants prior to the close of business on December 10, 2013, (3) employer sponsored retirement plans or benefit plans that approved the Fund as an investment option as of December 10, 2013, but have not opened an account as of that date, may open accounts and make purchases of Fund shares, provided that the initial account is opened with the Fund on or prior to February 10, 2014, (4) other Franklin Templeton Funds, (5) trustees and officers of the Trust, (6) members of the Fund s portfolio management team, and (7) certain assets which were previously committed by new investors for investment in the near future which the Board has specifically approved. The Fund may restrict, reject or cancel any purchase order, including an exchange request, and reserves the right to modify this policy at any time. Investment Goal The Fund s investment goal is long-term capital growth. Principal Investment Policies and Practices 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. Shareholders will be given 60 days advance notice of any change to this 80% policy. The Fund predominantly invests in equity securities, primarily common stock. An equity security represents a proportionate share of the ownership of a company; its value is based on the success of the company s business and the value of its assets, as well as general market conditions. Common stocks, preferred stocks, convertible securities and related depositary receipts are examples of equity securities. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. The Fund may invest in convertible securities without regard to the ratings assigned by ratings services. Depositary receipts are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. 22 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 23
FOREIGN SMALLER COMPANIES SERIES FOREIGN SMALLER COMPANIES SERIES The Fund may invest more than 25% of its assets in the securities of issuers located in any one country. Smaller Companies For purposes of monitoring the Fund s compliance with the requirement that it invest at least 80% of net assets in the equity securities of smaller companies, smaller companies are defined as those with market capitalizations that do not exceed $4 billion. Under normal market conditions, when making an initial purchase of securities of a company, the investment manager will only invest in securities of companies with a market capitalization of not more than $2 billion. Once a security qualifies for initial purchase, it continues to qualify for additional purchases as long as it is held by the Fund, provided that the issuer s market capitalization does not exceed $4 billion. In addition, the Fund may continue to hold securities that originally qualified for initial purchase as smaller companies (with a market capitalization of less than $2 billion) that have grown to have a market capitalization in excess of $4 billion. The result may be that the Fund could hold a significant percentage of its net assets in securities of companies that have market capitalizations in excess of $2 billion. In some emerging markets, the Fund may invest in companies that qualify as small cap but still are among the largest in that market. When choosing equity investments for this Fund, the investment manager applies a bottom-up, value-oriented, long-term approach, focusing on the market price of a company s securities relative to the investment manager s evaluation of the company s long-term earnings, asset value and cash flow potential. This includes an assessment by the investment manager of the potential impacts of material environmental, social and governance factors on the long-term risk and return profile of a company. The investment manager also considers a company s price/ earnings ratio, profit margins and liquidation value. The investment manager may consider selling an equity security when it believes the security has become overvalued due to either its price appreciation or changes in the company s fundamentals, when the investment manager believes that the market capitalization of a security has become too large, or when the investment manager believes another security is a more attractive investment opportunity. Temporary Investments When the investment manager believes market or economic conditions are unfavorable for investors, the investment manager may invest up to 100% of the Fund s assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include U.S. dollar and non-dollar securities such as government securities, bank obligations, high quality commercial paper and repurchase agreements. The investment manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. Under unusual circumstances and on a temporary basis, including times during which the Fund may experience large cash inflows, the Fund may invest in securities of issuers that would not be considered smaller companies. Principal Risks Market The market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly or unpredictably. Securities or other investments may decline in value due to factors affecting individual issuers, markets generally or sectors within the markets. The value of a security or other investment may go up or down due to general market conditions which are not specifically related to a particular issuer, such as real or perceived adverse economic conditions, changes in interest rates or exchange rates, or adverse investor sentiment generally. The value may also go up or down due to factors that affect an individual issuer or a particular sector. During a general downturn in the securities markets, multiple asset classes may decline in value. When markets perform well, there can be no assurance that securities or other investments held by the Fund will participate in or otherwise benefit from the advance. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund. Smaller Companies While investments in smaller companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, securities issued by smaller companies have been more volatile in price than larger company securities, especially over the short term. Among the reasons for the greater price volatility are the less certain growth prospects of smaller companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller companies to changing economic conditions. In addition, smaller companies may lack depth of management, be unable to generate funds necessary for growth or development, have limited product lines or be developing or marketing new products or services for which markets are not yet established and may never become established. Smaller companies may be 24 Prospectus ftinstitutional.com ftinstitutional.com Prospectus 25