VCIT Vanguard Intermediate Term Corporate Bond

monthly bond purchases should economic conditions warrant. The European
Central Bank cut benchmark interest rates and pledged to maintain systemic
support after successfully containing a run on a Cyprus bank. Elsewhere in
developed markets, the Bank of Japan’s new governor set an explicit inflation
target and pledged to double bond purchases in what many believe was
unprecedented policy reform.

Several emerging market central banks were more aggressive, with Brazil’s
central bank hiking interest rates amid rising inflation and China’s central bank
(PBOC) taking measures to curb real estate and credit speculation. Chinese liq-
uidity tightening weighed on credit markets at period-end, and a jump in the
interbank lending rate underscored concerns about the country’s shadow bank-
ing system. India’s central bank, on the other hand, lowered benchmark interest
rates in an effort to boost economic growth. Volatility surfaced in the emerging
market region as political protests intensified, and asset prices fell as investors
responded to rising bond rates by unwinding highly leveraged emerging market
carry trades. ¹ Given the rise in rates near period-end, longer duration Treasury
and emerging market bond prices experienced meaningful price declines. In the
second quarter, gold, traditionally a safe haven, posted its worst quarterly per-
formance since 1974 as inflation expectations remained subdued and global
commodities stayed under pressure. Investor sentiment improved in the last
week of the period, and emerging market stock prices rebounded from period
lows after the PBOC intervened to calm China’s interbank market, positive
economic reports helped stabilize Japanese government bond yields, and several
Fed members reassured investors that the Fed’s accommodative monetary
policy would continue.

The foregoing information reflects our analysis and opinions as of June 30, 2013. The information is not a
complete analysis of every aspect of any market, country, industry or fund. Statements of fact are from
sources considered reliable.

1. In a carry trade, an investor seeks to profit from an interest rate differential by borrowing low-yielding currencies
and lending high-yielding currencies. The use of borrowed capital to facilitate the trade creates leverage for the
borrower.

2 | Semiannual Report

4 | Semiannual Report

In contrast, key detractors from the Fund’s absolute performance included Antofagasta, a Chilean copper mining group; AmBev (Companhia de Bebidas das Americas), one of the world’s largest beer and soft drink producers; and Souza Cruz, a major Brazilian cigarette company. Investor concerns about copper demand growth caused Antofagasta’s share price to decline, along with those of many copper mining companies, despite the company’s solid first-quarter earnings. Antofagasta’s announcement that it was resuming a copper mine construction project, seen by many investors as only marginally profitable, also contributed to the share price weakness.

Brazil’s currency depreciation, tax hikes, anti-government demonstrations in June, and concerns about slower global economic growth and the potential effects of the U.S. Federal Reserve Board’s tapering of its asset purchase program led many foreign investors to sell Brazilian stocks. This environment negatively affected AmBev’s and Souza Cruz’s share prices, which reached period lows before recovering near period-end. In our assessment, these companies’ strong operations, low debt levels, good dividend yields and popular brands make them attractive investments. In our view, AmBev and Souza Cruz could continue to increase their market share as Brazilian consumers may become wealthier and more discerning.

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 six months ended June 30, 2013, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.

In the past six months, our continued search for investments we considered to be attractively valued led us to increase the Fund’s holdings in Saudi Arabia and Singapore and to initiate positions in the Philippines and Taiwan. We also added to our investment in Switzerland and initiated positions in the U.K. as we identified companies listed in these developed countries that had significant emerging market operations and that we believed were well positioned, as a result, to benefit from stronger personal income and consumer demand growth in emerging market countries. We undertook some of our largest purchases in real estate; textiles, apparel and luxury goods; consumer products; wireless telecommunication services; and hotels, restaurants and

Semiannual Report | 5

leisure companies. Key purchases included new positions in Unilever, a U.K.-listed global consumer products company that derives more than 50% of its sales from emerging and frontier markets; Shin, a major telecommunications group in Thailand; and Melco Crown Entertainment, one of only six casino operators in Macau, the world’s largest gaming market.

Conversely, we closed the Fund’s position in Kazakhstan and reduced investments in Russia, Indonesia, India and China via China H and Red Chip shares as certain stocks reached their sale targets and to focus on stocks we considered to be more attractively valued within our investment universe. ³ We reduced the Fund’s holdings largely in commercial banks; metals and mining; automobiles; and oil, gas and consumable fuels companies. Key sales included elimination of the Fund’s position in Brazilian iron ore producer Vale and reduction of the Fund’s investments in Indonesian car and motorcycle manufacturer Astra International, and Chinese oil and gas company PetroChina.

Thank you for your continued participation in Emerging Markets Series.

We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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 his-
torical performance is no guarantee of future results, these insights may help you understand our investment
management philosophy.

3. “Red Chip” denotes shares of Hong Kong Stock Exchange-listed companies with significant exposure to China.

6 | Semiannual Report

Performance Summary as of 6/30/13

Emerging Markets Series

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 does 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.

Endnotes

All investments involve risks, including possible loss of principal. 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 is actively managed but there is no guarantee that the manager’s
investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

1. Fund investment results reflect past expense reductions, without which the results 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. Six-month return has not
been annualized.
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 current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund operat-
ing expenses to become higher than the figures shown.

Semiannual Report | 7

Your Fund’s Expenses

Emerging Markets Series

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases, if applicable; 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:

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 | Semiannual 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, 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.

Semiannual Report | 9

Investment Strategy

We employ a bottom-up, value-oriented, long-term investment strategy. 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. We also consider a company’s price/earnings ratio, profit margins and liquidation value.

affairs’ market influence may persist for some time as global markets are nurtured by policy support, we remained encouraged by falling correlations and their positive implications for the Fund’s company fundamentals-driven portfolio.

We were also encouraged to see certain higher-conviction Fund allocations deliver robust returns. A long-standing overweighting and stock selection in the health care sector helped the Fund’s positions outperform the benchmark’s sector allocation. ² We began building positions in many pharmaceutical companies in the late 2000s, when concerns about an impending patent cliff and high-profile research and development (R&D) disappointments resulted in low valuations. We did not expect some of the world’s most profitable and, in our view, innovative companies to allow revenues to evaporate. We focused on firms that seemed to us most proactively preparing for patent expirations by shifting product mixes to longer duration assets, improving R&D productivity and cutting costs. With the patent cliff now largely passed, these investments began to reward us, led by major pharmaceuticals developers Sanofi (France) and GlaxoSmithKline (U.K.), each among the Fund’s top five holdings. Also among the period’s top performers were specialty drugmakers Roche Holding (Switzerland), Elan (Ireland), Merck (Germany) and Bayer (Germany). Even following the sector’s recent gains, we believe health care still offered lower valuations and more secure dividend streams than other defensive sectors, and we remained favorable toward our reasonably valued pharmaceuticals and biotechnology holdings given our assessment of their long-term total return potential.

We believe strategically investing in undervalued stocks is not the only element critical to long-term investment success; knowing what overvalued stocks to avoid is also essential. For example, our discipline in what we viewed as the overvalued materials sector also benefited relative performance during the semi-annual review period. ³ Although we held overweighted allocations many years ago, when the market focused elsewhere, in recent years accelerated emerging market growth and surging commodity prices led to what we viewed as speculative excesses in the metals and mining industry; consequently, we found few bargain opportunities. Our analysis suggested managements displayed poor capital discipline, exacerbating industrial overcapacity and pressuring spot prices as it seemed to us nearly everyone invested simultaneously. The industry also grew overly reliant on China as the source of marginal commodity demand, which became a liability once China sought to transform its investment-based industrial economy into a consumer-based model capable of

2. The health care sector comprises biotechnology, health care equipment and supplies, and pharmaceuticals in the SOI.

3. The materials sector comprises chemicals, construction materials, containers and packaging, and metals and mining in the SOI.

12 | Semiannual Report

producing higher-value goods and services. Commodity prices declined during the review period as emerging market growth slowed, inflation remained subdued and the U.S. dollar strengthened. Thus, our materials sector underweighting was a large contributor to relative performance. In addition, the Fund’s contrarian allocations in depressed building aggregate companies —cement makers CRH (Ireland) and Heidelberg Cement (Germany) — also supported outperformance amid improvements in the outlook for housing and infrastructure projects in developed markets.

We found what we believed were better cyclical opportunities outside the materials sector. The Fund’s stock selection in the industrials and energy sectors helped relative performance during the period. ⁴ The industrials sector was supported by airline investments, with U.K.-based carrier International Consolidated Airlines Group’s stock rallying. Ongoing efforts by airlines to stay profitable and competitive also buoyed aircraft manufacturers such as Embraer (Brazil), which benefited from new orders as airlines upgraded fleets. Embraer’s stock posted a healthy gain during the period, in contrast to a notable loss for Brazil’s stock market. Energy holdings performed better than the MSCI ACWI ex USA Index despite oil prices’ lack of direction. Given the formidable challenges in forecasting oil prices with any degree of certainty, we focused on energy companies that did not appear to us overly dependent on an extended period of high oil prices. Many integrated oil firm stocks traded near record-low valuation levels, which we viewed as unwarranted given their balance sheet strength, dividend sustainability and asset value support. For oil services companies, earnings continued to recover from cyclical lows and demand for expensive and complex rig platforms remained robust, although many stocks still traded well below their long-term average valuation levels.

Conversely, isolated weakness among the Fund’s information technology holdings weighed on relative performance. ⁵ South Korean consumer electronics giant Samsung Electronics’ share price declined as concerns arose about the sustainability of margins in the firm’s handset business and the negative impact of a weaker Japanese yen on South Korean exporters. However, our analysis indicated the loss of competitiveness by Japanese consumer electronics manufacturers could limit any long-term impact from currency fluctuations, and Samsung’s share price did not reflect the firm’s ample cash position, managerial track record and leadership in notably profitable business lines. We viewed recent share price weakness as a temporary setback; even after this period’s sell-off, Samsung has delivered a total return of more than 600% since the

4. The industrials sector comprises air freight and logistics, airlines, industrial conglomerates, professional services,
and trading companies and distributors in the SOI. The energy sector comprises energy equipment and services; and oil,
gas and consumable fuels in the SOI.
5. The information technology sector comprises communications equipment, semiconductors and semiconductor
equipment, and software in the SOI.

Semiannual Report | 13

Fund established a position in 2001. The Fund’s underweighting and selection in consumer discretionary stocks also hurt relative performance. ⁶ We viewed modest declines among auto parts manufacturers as long-term buying opportunities rather than reasons for concern.

The Fund’s underweighted allocation to the consumer staples sector also detracted from relative performance as cautious, income-oriented equity investors bid up valuations in the defensive sector. ⁷ We continued to find few bargain opportunities, in our view, amid the sector’s popularity and believed many stocks remained vulnerable to increasing competitive forces and margin pressures. We found what we considered to be more attractive defensive opportunities in the telecommunication services sector, which offered one of the highest dividend yields among global market sectors and solid exposure to fast-growing mobile markets in developing countries. ⁸ However, a slowdown in emerging market growth and continued competitive pressures and regulatory uncertainty negatively affected our overweighted allocation during the period, resulting in relative underperformance. Among the Fund’s biggest sector laggards was China Telecom, China’s third-largest mobile operator. The firm’s share price retreated because of concerns about the company’s subsidization of Apple’s iPhone, which has helped grow market share among high-value customers at the expense of near-term profitability. We believe China Telecom is pursuing a sensible growth strategy, and near-term pressures obscured considerable long-term value.

From a regional standpoint, stock selection in and an overweighted allocation to Europe buoyed relative returns, and we continued to find opportunities we considered attractive. Following hard-won fiscal progress, painful austerity measures began to ease. Germany, and the committee led by the European Commission, the European Central Bank and the International Monetary Fund (“Troika”) that organized loans to the Greek, Irish, Portuguese and Cyprus governments, have become increasingly flexible dealing with the peripheral countries. The Troika has acknowledged progress by extending debt repayment deadlines and shifting the focus from emergency austerity measures to structural growth reforms intended to propel sustainable economic recovery. From our perspective, such encouraging progress was not reflected in valuations or corporate profit margins during the period. European stocks remained at the widest discount on record to the U.S. market based on the cyclically adjusted price-to-earnings ratio, and profits (outside of Germany) remained near 2009 lows.

6. The consumer discretionary sector comprises auto components, automobiles, household durables, leisure equipment
and products, multiline retail and speciality retail in the SOI.
7. The consumer staples sector comprises food and staples retailing, and food products in the SOI.
8. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunica-
tion services in the SOI.

14 | Semiannual Report

Stock selection in Asia weighed on relative performance. We identified fewer opportunities in Asia, although conditions became more interesting to us across much of the region. Following a sustained emerging market stock sell-off punctuated by the biggest weekly outflows on record at period-end, emerging markets stocks traded at the cheapest level relative to developed market stocks on a price-to-book basis since 2006. Japan, another Fund underweighting, also looked cheap to us on a price-to-book basis, although this modest valuation seemed to reflect an average return on equity roughly 50% lower than that of global markets. The region looked significantly less cheap based on price-to-earnings multiples; at 25 times 2012 earnings, Japan was among the highest valued developed markets. Although we continued to find some opportunities, significant risks remained that the Bank of Japan’s radical policy reforms may not accomplish the structural changes needed for Japanese companies to gain competitiveness and improve profitability.

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 six months ended June 30, 2013, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.

Overall, equity valuations remained selectively attractive to us during the period, and managements impressively restored corporate profitability and balance sheet strength in a challenging environment. Policymakers also deserved credit for stabilizing key regions, and many economies were experiencing modest recoveries after the worst global recession in recent history. However, we believe growth still needs to be self-sustained in a more normal yield environment for investors to maintain confidence in equity earnings and valuations. If capital misallocation, moral hazard and sovereign fiscal impairment arise, that could lead to volatility and realized losses in some asset classes. In this environment, we believe diversified equity stakes in productive businesses are among the best propositions for long-term investors, and we remain confident in the capital preservation and appreciation prospects of the Fund’s value-oriented portfolio.

Semiannual Report | 15

Thank you for your continued participation in Foreign Equity Series. We look forward to serving your future investment needs.

CFA ^® is a trademark owned by CFA Institute.

The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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.

16 | Semiannual Report

Performance Summary as of 6/30/13

Foreign Equity Series

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 does 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.

Endnotes

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations,
economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the
extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it 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 invest-
ments. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability
of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries, may increase
the economic risk of investing in companies in Europe. The Fund is actively managed but there is no guarantee that the manager’s investment deci-
sions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

1. Cumulative total return represents the change in value of an investment over the periods indicated.
2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not
been annualized.
3. These figures represent the value of a hypothetical $1,000,000 investment in the Fund over the periods indicated.
4. Figures are as stated in the current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund operat-
ing expenses to become higher than the figures shown.

Semiannual Report | 17

Your Fund’s Expenses

Foreign Equity Series

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases, if applicable; 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) for each share class listed in 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:

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

18 | Semiannual Report

Semiannual Report | 19

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 long-term (typically five years) earnings, asset value and cash flow potential. We also consider a company’s price/earnings ratio, profit margins, liquidation value and other factors.

our assessment the trend for mining production volumes, which drives the utilization level of Emeco’s fleet, looks positive, and the company’s conservative balance sheet positions it well for solid long-term growth.

Headquartered in London, African Minerals is a minerals exploration and development firm. The company has a strong Sierra Leone-based iron ore production growth profile that could, in our view, help offset any potential further weakness in the underlying commodity price. Although the share price was weak during the period owing to global macroeconomic issues, we believe the company could benefit over the longer term from potentially strong revenue and earnings growth as a new project accelerates, tripling iron ore production, and from low-cost growth options that could increase production significantly over the next five years.

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 six months ended June 30, 2013, the U.S. dollar increased in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.

22 | Semiannual Report

Thank you for your continued participation in Foreign Smaller Companies Series. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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.

Semiannual Report | 23

Performance Summary as of 6/30/13

Foreign Smaller Companies Series

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 does 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.

Endnotes

All investments involve risks, including possible loss of principal. 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 is actively managed but there is no
guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the
main investment risks.

1. Fund investment results reflect past expense reductions, without which the results 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. Six-month return has not
been annualized.
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 current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund operat-
ing expenses to become higher than the figures shown.

24 | Semiannual Report

Your Fund’s Expenses

Foreign Smaller Companies Series

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases, if applicable; 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:

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.

Semiannual Report | 25

26 | Semiannual Report

offered lower valuations and more secure dividend streams than other defensive sectors, and we remained favorable toward our reasonably valued pharmaceuticals and biotechnology holdings given our assessment of their long-term total return potential.

An even-weighted Fund allocation in the materials sector also outperformed, aided by stock selection in the metals and mining industry. ⁴ Our analysis suggested managements displayed poor capital discipline, exacerbating industrial overcapacity and pressuring spot prices as it seemed to us nearly everyone invested simultaneously. The industry also grew overly reliant on China as the source of marginal commodity demand, which became a liability once China sought to transform its investment-based industrial economy into a consumer-based model capable of producing higher value goods and services. We remained underweighted in the metals and mining industry, although recent stock declines created opportunities that appeared interesting to us. One opportunity led us to invest in Australian steel manufacturer Bluescope Steel, a top contributor during this period. ³ Following share price weakness related to a rights issue and headwinds in the domestic construction market for Bluescope, we initiated a position in the stock at a valuation we viewed as low. Shares rallied after Bluescope brought its full Australian steel capacity back on-line and entered a joint venture with Japan’s Nippon Steel that could alleviate balance sheet concerns and improve exposure to high-growth international markets. Elsewhere in the sector, the Fund benefited from holdings in out-of-favor cyclical chemicals companies, including U.S.-based LyondellBasell Industries and building materials firms CRH (Ireland) and HeidelbergCement (Germany).

Among other cyclical sectors, we found stock values in information technology (IT), industrials and especially financials, each of which represented higher Fund allocations than materials, and each outperformed the benchmark during the period. ⁵ The Fund’s financials holdings, at slightly below the benchmark’s weighting, offered differentiated value prospects enhanced by our concentration in deep-value European banks and insurers and financial services firms in higher growth regions. Leading sector returns was Voya Financial, a top provider of employee-sponsored U.S. pension plans. ⁶ Voya was spun off from Dutch financial services firm ING Groep late in the period.

4. The materials sector comprises chemicals, construction materials, containers and packaging, and metals and min-
ing in the SOI.
5. The IT sector comprises semiconductors and semiconductor equipment, and software in the SOI. The industrials
sector comprises air freight and logistics, airlines and industrial conglomerates in the SOI. The financials sector com-
prises capital markets, commercial banks, diversified financial services, insurance, and thrifts and mortgage finance
in the SOI.
6. Listed as ING U.S. in the SOI.

Semiannual Report | 29

Our conservative analysis valued the firm’s closed variable annuity book at zero and even assigned a discount to the 401(k) unit. The share price climbed following the company’s May initial public offering as investors took note of this value proposition. While many of our financials holdings performed well recently, in our view the stocks shifted from profoundly undervalued to very cheap. Many of our holdings aggressively restructured to restore profitability and meet stricter capital requirements, and we saw additional performance potential as profits and book values continued to normalize. Stock selection also supported relative performance in IT and industrials. A diverse group of semiconductors and hardware manufacturers led the IT sector, and industrials benefited from strong gains for U.K.-based air carrier International Consolidated Airlines Group. ³

Underperforming Fund sectors included energy, telecommunication services and consumer staples. ⁷ Stock selection in the Fund’s underweighted allocation to energy was a notable detractor, hampered by China-based holdings China Coal Energy and China Shenhua Energy, the country’s two largest coal miners. Slowing economic growth and the increasing use of hydropower generation hurt demand for the companies during a time when supply expanded. However, our analysis indicated supply was likely to reach normalized levels, with significant production cuts among larger and smaller miners beginning during the past year. Coal still accounted for 80% of Chinese power generation, and the depressed valuations for the two companies left considerable potential for performance if demand recovers and supply rebalances. Elsewhere in the energy sector, we found certain opportunities among integrated oil companies and oilfield services firms trading at valuations we considered modest and offering strong balance sheets, sustainable dividends and considerable asset value support.

Telecommunication services holdings also detracted from relative performance, pressured by China Telecom, China’s third-largest mobile operator. The firm’s share price retreated because of concerns about the company’s subsidization of Apple’s iPhone, which has helped grow market share among high-value customers at the expense of near-term profitability. We continued to uncover selective values in global telecommunications. A slowdown in emerging market growth and continued competitive pressures and regulatory uncertainty kept valuations low, creating opportunities in a sector offering what we viewed as excellent long-term global growth prospects and the market’s highest dividend yield. Among defensive market segments, we were less

7. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI. The
telecommunication services sector comprises diversified telecommunication services and wireless telecommunication
services in the SOI. The consumer staples sector comprises beverages, food and staples retailing and food products in
the SOI.

30 | Semiannual Report

favorable toward consumer staples, which became popular and to us, expensive in recent years as skeptical investors sought conservative means of stock market exposure. We continued to find few bargain opportunities amid the sector’s popularity and believed many stocks remained vulnerable to increasing competitive forces and margin pressures.

From a regional standpoint, stock selection helped offset unfavorable allocations, notably for the Fund’s European holdings, which outperformed the benchmark’s return during the period. Stock selection in the U.S. also contributed to performance, as the Fund’s U.S. holdings outperformed the benchmark’s U.S. stocks and overcame a detractive underweighting in the country. Asian stocks were the Fund’s sole regional detractors, hampered mainly by an overweighting and stock selection in China. As we continued searching globally for bargains, we maintained a significant overweighting in Europe as valuations remained reasonable to us and fundamentals attractive. Hard-won fiscal progress was realized and policymakers began to shift the focus from crisis-driven austerity measures to structural growth reforms intended to promote sustainable economic recovery. In our view, such progress was still not reflected in valuations or corporate profit margins during the period. European stocks remained at the widest discount on record to the U.S. market based on the cyclically adjusted price-to-earnings ratio, and profits (outside of Germany) remained near 2009 lows.

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 six months ended June 30, 2013, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment substantially in securities with non-U.S. currency exposure.

Overall, equity valuations remained selectively attractive to us during the period, and managements impressively restored corporate profitability and balance sheet strength in a challenging environment. Policymakers also deserved credit for stabilizing key regions, and many economies were experiencing modest recoveries after the worst global recession in recent history. However, in our view, growth still needs to be self-sustained in a more normal yield environment for investors to maintain confidence in equity earnings and valuations. If capital misallocation, moral hazard and sovereign fiscal impairment arise, that could lead to volatility and realized losses in some asset

Semiannual Report | 31

classes. In this environment, we believe diversified equity stakes in productive businesses are among the best propositions for long-term investors, and we remain confident in the capital preservation and appreciation prospects of the Fund’s value-oriented portfolio.

Thank you for your continued participation in Global Equity Series. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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.

32 | Semiannual Report

Performance Summary as of 6/30/13

Global Equity Series

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 does 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.

Endnotes

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations,
economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the
extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it 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 invest-
ments. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability
of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries, may increase
the economic risk of investing in companies in Europe. The Fund is actively managed but there is no guarantee that the manager’s investment deci-
sions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

1. Fund investment results reflect past expense reductions, without which the results 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. Six-month return has not
been annualized.
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 current prospectus. In periods of market volatility, assets may decline significantly, causing total annual Fund operat-
ing expenses to become higher than the figures shown.

Semiannual Report | 33

Your Fund’s Expenses

Global Equity Series

As a Fund shareholder, you can incur two types of costs:

• Transaction costs, including sales charges (loads) on Fund purchases, if applicable; 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:

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.

34 | Semiannual 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, 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.

Semiannual Report | 35

^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 Total return is not annualized for periods less than one year.
^f Ratios are annualized for periods less than one year.
^g Benefit of expense reduction rounds to less than 0.01%.

36 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

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See Abbreviations on page 78.

^a Non-income producing.
^b Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or
in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30,
2013, the aggregate value of these securities was $5,737,974, representing 3.22% of net assets.
^c At June 30, 2013, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or
extended period of time due to ownership limits and/or potential possession of material non-public information.
^d See Note 1(d) regarding Participatory Notes.
^e See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.

40 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

^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 Total return is not annualized for periods less than one year.
^f Ratios are annualized for periods less than one year.
^g Benefit of expense reduction rounds to less than 0.01%.
^h Excludes the value of portfolio securities delivered as a result of a redemption in-kind.

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 41

^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 Total return is not annualized for periods less than one year.
^f Ratios are annualized for periods less than one year.
^g Benefit of expense reduction rounds to less than 0.01%.
^h Excludes the value of portfolio securities delivered as a result of a redemption in-kind.

42 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

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46 | Semiannual Report

See Abbreviations on page 78.

^a Non-income producing.
^b Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or
in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2013,
the aggregate value of this security was $50,398,831 representing 0.87% of net assets.
^c Security purchased on a delayed delivery basis. See Note 1(c).
^d Security has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2013, the value of this security was $313,614, representing less than
0.01% of net assets.
^e See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 47

^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 Total return is not annualized for periods less than one year.
^f Ratios are annualized for periods less than one year.
^g Benefit of expense reduction rounds to less than 0.01%.

48 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Semiannual Report | 49

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52 | Semiannual Report

See Abbreviations on page 78.

^a Non-income producing.
^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.
^c Security has been deemed illiquid because it may not be able to be sold within seven days.
^d A portion or all of the security is on loan at June 30, 2013. See Note 1(e).
^e See Note 1(e) regarding securities on loan.
^f The rate shown is the annualized seven-day yield at period end.

Semiannual Report | The accompanying notes are an integral part of these financial statements. | 53

^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%.

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64 | The accompanying notes are an integral part of these financial statements. | Semiannual Report

Templeton Institutional Funds

Templeton Institutional Funds

Notes to Financial Statements (unaudited) (continued)

The Funds have procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the fund. As a result, differences may arise between the value of the Funds’ portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC 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 Depositary 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 that may call into question the reliability of the values of the foreign securities held by the Funds. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Funds’ portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes. The Emerging Markets Series’ financial statements have been adjusted to reflect investment values as of June 30, 2013.

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. The Funds may enter into foreign currency exchange contracts to facilitate

66 | Semiannual Report

Templeton Institutional Funds

Notes to Financial Statements (unaudited) (continued)

transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Board.

The Funds do 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 Statements 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

Certain funds 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 Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.

d. Participatory Notes

Certain funds invest in Participatory Notes (P-Notes). P-notes are promissory notes that are designed to offer a return linked to the performance of a particular underlying equity security or market. P-Notes are issued by banks or broker-dealers and allow the fund to gain exposure to common stocks in markets where direct investment is not allowed. Income received from P-Notes is recorded as dividend income in the Statement of Operations. P-Notes may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract. These securities may be more volatile and less liquid than other investments held by the Fund.

Semiannual Report | 67

Templeton Institutional Funds

Notes to Financial Statements (unaudited) (continued)

Certain funds participate in an agency based securities lending program. The fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in a non-registered money fund as indicated on the Statements of Investments. The fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the fund. The securities lending agent has agreed to indemnify the fund in the event of default by a third party borrower.

f. Income and Deferred Taxes

It is each fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. Each fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is determined to apply the Funds record an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

Each fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, each fund has determined that no liability for unrecognized tax benefits is required in each fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

68 | Semiannual Report

Templeton Institutional Funds

Notes to Financial Statements (unaudited) (continued)

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. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are 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.

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.

h. 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.

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, on behalf of the Funds, 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.

Semiannual Report | 69

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Templeton Institutional Funds

Notes to Financial Statements (unaudited) (continued)

3. T RANSACTIONS WITH A FFILIATES (continued) c. Transfer Agent Fees

Each class of shares pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholding servicing fees paid to third parties. These fees are allocated daily to such classes based upon the relative proportion of net assets of each class.

For the period ended June 30, 2013, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:

d. Waiver and Expense Reimbursements

TIC and FT Services had contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the Foreign Smaller Companies Series and the Global Equity Series so that the common expenses (i.e. a combination of management fees, administrative fees, and other expenses) did not exceed 0.95% and 0.81%, respectively (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2013. Effective May 1, 2013, the contractual fee waiver was eliminated.

TAML and FT Services had contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the Emerging Markets Series so that the common expenses did not exceed 1.24% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2013. Effective May 1, 2013, the contractual fee waiver was eliminated.

4. E XPENSE O FFSET A RRANGEMENT

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 period ended June 30, 2013, the custodian fees were reduced as noted in the Statements of Operations.

74 | Semiannual Report

Templeton Institutional Funds

Notes to Financial Statements (unaudited) (continued)

9. C ONCENTRATION OF R ISK

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.

10. C REDIT F ACILITY

The Funds, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matures on January 17, 2014. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.

Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay their share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon their relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statements of Operations. During the period ended June 30, 2013, the Funds did not use the Global Credit Facility.

11. F AIR V ALUE M EASUREMENTS

The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds’ own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds’ financial instruments and are summarized in the following fair value hierarchy:

• Level 1 – quoted prices in active markets for identical financial instruments
• Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
• Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of financial instruments)

The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.

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Templeton Institutional Funds

Shareholder Information

Board Review of Investment Management Agreement

At a meeting held February 26, 2013, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreements for each of the separate series comprising Templeton Institutional Funds (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, along with periodic reports on expenses, shareholder services, legal and compliance matters, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates, as well as a third-party survey of transfer agent fees charged Funds within the Franklin Templeton Investments complex in comparison with those charged other fund complexes deemed comparable. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis prepared by management. The Lipper reports compared each Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Additional material accompanying such profitability analysis included information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates to U.S. mutual funds and other accounts, including management’s explanation of differences where relevant. Such material also included a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and an analysis concerning transfer agent fees charged by an affiliate of the Manager.

In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s decision.

NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board’s opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund

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complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management’s continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned well during the Florida hurricanes and blackouts experienced in previous years, and that those operations in the New York/New Jersey area ran smoothly during the more recent Hurricane Sandy. Among other factors taken into account by the Board were the Manager’s best execution trading policies, including a favorable report by an independent portfolio trading analytical firm, which also covered FOREX transactions. Consideration was also given to the experience of each Fund’s portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management’s determination of a portfolio manager’s bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person’s fund management area so as to be aligned with the interests of shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager and the continuous enhancements to the Franklin Templeton website. Particular attention was given to management’s conservative approach and diligent risk management procedures, including continuous monitoring of counterparty credit risk and attention given to derivatives and other complex instruments including expanded collateralization requirements. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager’s parent company and its commitment to the mutual fund business as evidenced by its subsidization of money market funds.

INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed its investment performance in comparison with its Lipper selected performance universe during 2012, and for the previous 10 years ended December 31, 2012, for those Funds that had been in existence for such length of time and for lesser periods for other Funds depending on when their operations commenced. The following summarizes the performance results for each Fund.

Emerging Markets Series – The Lipper performance universe for this Fund consisted of all retail and institutional emerging markets funds as designated by Lipper. The Lipper report showed the

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Fund’s 2012 total return to be in the second-lowest performing quintile of the Lipper performance universe, and its total return on an annualized basis to be in the second-highest performing quintile of such universe for each of the previous three- and five-year periods, and to be in the middle quintile of such universe for the previous 10-year period. The Board found the Fund’s overall comparative performance as set forth in the Lipper report to be acceptable, noting that its 2012 total return as set forth in such report exceeded 15.5%.

Foreign Equity Series – The Lipper performance universe for this Fund consisted of all retail and institutional international large-value funds as designated by Lipper. The Lipper report showed the Fund’s total return for 2012 to be in the second-highest performing quintile of such performance universe and its total return on an annualized basis to be in the highest or best performing quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund’s overall comparative performance as set forth in the Lipper report.

Foreign Smaller Companies Series – The Lipper performance universe for this Fund consisted of all retail and institutional international small/mid-cap growth funds as designated by Lipper. The Lipper report showed the Fund’s total return for 2012 to be in the middle performing quintile of its performance universe, and its total return on an annualized basis to also be in the middle performing quintile of such universe during the previous three-year period, but to be in the highest performing quintile and second-highest performing quintile, respectively during the previous five-and 10-year periods. The Board found the Fund’s overall comparative performance as shown in the Lipper report to be satisfactory.

Global Equity Series – The Lipper performance universe for this Fund consisted of all retail and institutional global large-cap value funds. The Fund has been in operation for only four years and the Lipper report showed the Fund’s total return in 2012 to be in the highest or best performing quintile of such universe and its total return on an annualized basis to be in the second-highest performing quintile of such universe for its four-year period of operation. The Board was satisfied with the Fund’s comparative performance as shown in the Lipper report.

COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratio of each Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from each fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund’s contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The

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Lipper contractual investment management fee analysis includes administrative fees as being part of a management fee. The Lipper report for Emerging Markets Series showed the Fund’s contractual investment management fee rate to be 11 basis points above the median for its Lipper expense group, but its actual total expense ratio to be below the median for such expense group. The Lipper report for Global Equity Series showed the Fund’s contractual investment management fee rate to be within six basis points of the median of its Lipper expense group and its actual total expense ratio to be below the median of such expense group. The Lipper report for Foreign Smaller Companies Series showed both its contractual investment management fee rate and actual total expense ratio to be below the median of its Lipper expense group. The Board was satisfied with the comparative expenses of these Funds as shown in the Lipper report, noting in each case that expenses had been subsidized by management fee waivers. The Lipper report for Foreign Equity Series showed its contractual investment management fee rate to be within one basis point of the median of its Lipper expense group and its actual total expense ratio to be below the median of its expense group. The Board was satisfied with the comparative expenses of this Fund as shown in the Lipper report.

MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton’s U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2012, being the most recent fiscal year-end for Franklin Resources, Inc., the Manager’s parent. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager’s own cost accounting, the cost allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds’ independent registered public accounting firm had been engaged by the Manager to periodically review the reasonableness of the allocation methodologies solely for use by the Funds’ Board in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management’s expenditures in improving shareholder services provided the Funds, as well as the need to implement systems and meet additional regulatory and compliance requirements resulting from statutes such as the Sarbanes-Oxley and Dodd-Frank Acts and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager’s parent on an overall basis to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses,

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as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including revenues generated from transfer agent services and potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided.

ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with a fund and its shareholders through management fee breakpoints so that as a fund grows in size, its effective management fee rate declines. The schedule of management fees for each of the Funds provides breakpoints that go beyond their existing asset sizes, and the Board believes such schedules provide a sharing of benefits to each Fund and its shareholders to the extent economies of scale may be realized by the Manager and its affiliates. At December 31, 2012, the assets of Global Equity Series, Emerging Markets Series, and Foreign Smaller Companies Series were each less than $495 million and the Board questioned, however, whether economies of scale existed at such levels, noting also that their expenses had been subsidized by management fee waivers.

In addition to the investment advisory services furnished under investment management agreements, administrative services are provided to Foreign Smaller Companies Series and Global Equity Series under separate agreements at a fixed charge of 20 basis points. At the February 26, 2013, Board meeting, the Board eliminated the separate agreements and approved a new form of investment management agreement for these Funds combining such services. In approving the new form of investment management agreements, the Board took into account the fact that the types of services and aggregate fee, including breakpoints, would be the same as provided under the previous separate agreements and that combining such services was consistent with Lipper’s methodology of considering contractual investment management fees to include any separately charged administrative fee.

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Proxy Voting Policies and Procedures

The Funds’ investment managers have established Proxy Voting Policies and Procedures (Policies) that the Funds use to determine how to vote proxies relating to portfolio securities. Shareholders may view the Funds’ 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, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Funds’ 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 Funds file 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.

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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 and he is
"independent" as defined under the relevant Securities and Exchange
Commission Rules and Releases.

Item 4. Principal Accountant Fees and Services. N/A

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 Trustees 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 changes in the
Registrant’s internal controls or in other factors that could
materially affect the internal controls over financial reporting
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 Laura F. Fergerson, Chief Executive Officer - Finance and
Administration, and Mark H. Otani, Chief Financial Officer and Chief
Accounting Officer

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 of Laura F. Fergerson, Chief Executive Officer - Finance and
Administration, and Mark H. Otani, Chief Financial Officer and Chief
Accounting Officer