<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
INVESTMENT OVERVIEW
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
<S> <C> <C>
PERCENT OF
COUNTRY NET ASSETS
--------- -------------
Morgan Stanley India Investment
Fund, Inc. India 4.5%
Telebras Brazil 4.2%
Eletrobras Brazil 3.5%
Indian Petrochemicals Corp. Ltd. India 2.5%
Samsung Electronics Korea 2.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE COUNTRIES
<S> <C> <C>
VALUE PERCENT OF
COUNTRY (000) NET ASSETS
- ------------------------------------ --------- -------------
Brazil $ 1,499 12.7%
India 1,184 10.0%
Hong Kong 1,075 9.1%
Mexico 1,073 9.1%
Russia 832 7.1%
</TABLE>
PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
YTD
---------------
<S> <C>
Portfolio(3)........................... -2.03%
Index.................................. -1.70
</TABLE>
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (assumes dividends are reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. Commenced operations on October 1, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The Emerging Markets Equity Portfolio seeks long-term capital appreciation by
investing primarily in common and preferred stocks, convertible securities,
rights and warrants to purchase common stocks, sponsored or unsponsored ADRs and
other equity securities of emerging market country issuers. The Portfolio
commenced operations on October 1, 1996.
For the period from October 1, 1996 (commencement of operations) through
December 31, 1996, the Portfolio had a total return of -2.03% as compared to
- -1.70% for the IFC Global Total Return Composite Index (the "Index").
The Portfolio's underperformance was most prominent during the month of October,
when the Portfolio fell 4.0% versus the Index return of -2.7%. The Portfolio
slightly underperformed in November, returning 1.3% compared with 1.6% for the
Index. The December pick-up in emerging markets translated into a gain of 1.1%
for the Portfolio versus 0.3% for the Index.
The Portfolio's underperformance in October and November was largely
attributable to an overweight position in India, which fell 10.9% in the two
months ending November. Our underweight position in Malaysia, which returned
2.0% in October and 4.1% in November, was also a negative factor. The largest
contributors to the Portfolio's outperformance in December, relative to the
Index, came from India, Russia and Latin America, specifically Brazil and Mexico
- -- all overweight positions.
Following two weak years, hopes ran high in early 1996 that the emerging markets
would recover. After a relatively strong first half, however, the emerging
markets lost ground in the second half of the year. The first six months of 1996
was dominated by politics as several of the larger emerging markets, notably
Russia, South Korea, India and Taiwan, held successful elections. Fears of
contagion from a decline in the lofty U.S. equity market and concerns of a rise
in U.S. interest rates sapped support from emerging market equities and led to a
weak second half. As always in the emerging market universe, there were major
disparities in performance among the markets (as shown in the chart on the
following page).
By region, Latin America out-performed Europe/Middle East and Asia (see the
table on the following page). Three emerging markets achieved results in excess
of 100% for the year -- Russia, Venezuela and Hungary posted returns of 151.1%,
127.9% and 104.2%, respectively. The emerging Asian markets offered some of the
best and worst to investors. Taiwan ended the year up 38.9%, and Hong Kong
finished the year up 28.9%. Thailand and Korea, beset with export and liquidity
problems, were the worst performing emerging markets of 1996, down 38.0% and
38.4%, respectively. India had a very strong first quarter, rallying 11.5%, but
lost virtually all the gain to end the year down 3.8%.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
There are several reasons to be optimistic about the outlook for the emerging
markets in 1997. First, as a group, the emerging economies are in much better
financial shape than three years ago when the Federal Reserve began to raise
interest rates. Major inroads have been made on inflation, leaving scope for
interest rates to continue to decline in the majority of emerging markets,
despite the path of U.S. rates. Inflation in the OECD economies is expected to
increase during 1997, but in Latin America and emerging Europe it is forecasted
to steadily decline. Only in Asia is there expected to be an increase in
inflation, but even here it is from a very low base. One clear signal of
successful economic strengthening has been the performance of emerging markets
debt. Reacting to the numerous credit upgrades and improved economic management,
emerging market debt was the best performing asset class during 1996. Emerging
market stocks, on the other hand, have lagged both developed markets and debt,
and emerging market equity performance has yet to reflect the fundamental
improvements.
Second, foreign direct investment (FDI) in the emerging markets is running in
excess of $100 billion per annum underpinning future growth prospects for these
economies. Foreign reserves of the emerging economies -- currently around $700
billion -- have doubled since 1993 and are now almost equal to the aggregate
reserves of the industrialized countries. In addition, portfolio flows which, by
nature, have shorter time horizons than FDI have also picked up from the hiatus
following the Mexican peso crisis suggesting confidence is returning. We expect
portfolio flows to total approximately $30 billion in 1997. At their peak in
1993, almost $1 billion per week was being invested in the emerging markets.
Third, on a valuation basis, the emerging markets (see table) sell at 16.2 times
trailing price to earnings ratio, which is lower than 1991 levels of valuation
and compare very favorably with the U.S. and international EAFE markets. During
the last two years, global financial markets have focused on the bull market in
the U.S., but the emerging markets have made tremendous fundamental progress and
are laggards in performance terms.
While the economic picture for the emerging markets overall continues to
improve, there are still hurdles to be overcome in individual countries. Some of
the emerging markets have to make progress on reducing their government deficits
(India, Pakistan, Brazil, and Russia) and their current account deficits
(Thailand and Turkey). In aggregate, however, the outlook is for continued
progress to be made by all these countries on their deficits. We anticipate that
the emerging markets will do well, relative to other asset classes in 1997,
based on their good value, continued premium earnings growth prospects and their
persistence in improving their economic standing in the world.
Madhav Dhar
PORTFOLIO MANAGER
Marianne L. Hay
PORTFOLIO MANAGER
January 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
MSCI Emerging Markets Indices
Performance ($US)
12 Months to December 31, 1996
Venezuela 127.90%
Poland 57.20%
Taiwan 38.90%
Brazil 38.00%
Portugal 32.30%
Turkey 31.90%
Hong Kong 28.90%
Indonesia 25.40%
Malaysia 24.50%
Argentina 16.80%
Mexico 16.10%
Philippines 15.10%
Colombia 6.60%
Greece 1.40%
Peru -2.80%
India -3.80%
Israel -3.90%
Jordan -11.40%
Sri Lanka -16.30%
Chile -16.40%
Pakistan -19.40%
South Africa -20.10%
Thailand -38.00%
Korea -38.40%
% change
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE
1996
---------------
<S> <C> <C>
MSCI US............................................................................................... 21.4%
MSCI EAFE............................................................................................. 4.4
MSCI EMF.............................................................................................. 3.9
EMF Asia.............................................................................................. 1.6
EM Europe/Middle East................................................................................. 11.3
EMF Latin America..................................................................................... 18.9
<CAPTION>
SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL
<CAPTION>
VALUATION
12 MONTH TRAILING
PRICE/EARNINGS
-------------------
<S> <C>
MSCI US............................................................................................... 19.3x
MSCI EAFE............................................................................................. 25.8x
MSCI EMF.............................................................................................. 16.2x
EMF Asia.............................................................................................. 19.1x
EM Europe/Middle East................................................................................. 13.0x
EMF Latin America..................................................................................... 14.1x
SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL
</TABLE>
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (82.0%)
ARGENTINA (2.0%)
1,700 Telecom Argentina ADR....................................... $ 69
4,100 Telefonica de Argentina ADR................................. 106
2,360 YPF ADR..................................................... 60
-------
235
-------
BRAZIL (6.6%)
180 Cia Energetica de Minas Gerais ADR.......................... 6
666,000 Eletrobras.................................................. 238
2,190 Eletrobras ADR.............................................. 39
32,000 Light....................................................... 11
1,410 Multicanal Participaccoes ADR............................... 18
2,478,000 Telebras.................................................... 178
3,445 Telebras ADR................................................ 264
(a)120,000 Telecom de Sao Paulo........................................ 26
-------
780
-------
CHILE (0.4%)
1,080 Cia Cervecerias Unidas ADR.................................. 17
1,150 Santa Isabel ADR............................................ 26
-------
43
-------
CHINA (0.9%)
(a)130,000 Guangshen Railway Co. Ltd., Class H......................... 56
96,000 Yizheng Chemical Fibre Co. Ltd., Class H.................... 23
64,000 Zhenhai Refining & Chemical Co. Ltd., Class H............... 24
-------
103
-------
COLOMBIA (0.3%)
86,000 Banco de Colombia........................................... 35
-------
EGYPT (0.9%)
175 Commercial International Bank............................... 26
1,200 Eastern Tobacco............................................. 18
1,000 Helwan Portland Cement...................................... 18
650 North Cairo Mills Co. ...................................... 26
1,000 Torah Portland Cement....................................... 20
-------
108
-------
HONG KONG (9.1%)
(a)7,000 Asia Satellite Telecommunications Holdings Ltd. ............ 16
12,000 Cheung Kong Holdings Ltd. .................................. 107
(a)15,000 Cheung Kong Infrastructure Holdings......................... 40
(a)43,000 China Resources Beijing Land................................ 27
62,000 China Resources Enterprise Ltd. ............................ 139
21,000 Citic Pacific Ltd. ......................................... 122
30,000 Cosco Pacific Ltd. ......................................... 35
1,000 Hang Seng Bank Ltd. ........................................ 12
6,000 Henderson Land Development Co. Ltd. ........................ 60
14,000 Hong Kong Ferry Holdings.................................... 27
15,600 Hong Kong Telecommunications Ltd. .......................... 25
17,000 Hutchison Whampoa Ltd. ..................................... 134
18,000 New World Development Co. Ltd. ............................. 122
(a)9,000 Shanghai Industrial Holdings Ltd. .......................... 33
7,000 Sun Hung Kai Properties Ltd. ............................... 86
6,000 Swire Pacific Ltd., Class A................................. 57
(a)118,000 Tingyi (Cayman Islands) Holdings Co. ....................... 31
-------
1,073
-------
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
HUNGARY (0.5%)
400 Graboplast Rt............................................... $ 13
950 MOL Magyar Olaj-es Gazipari Rt GDR.......................... 12
450 Pannonplast Rt.............................................. 17
(a)1,200 Tisza Vegyi Kombinat Rt GDR................................. 14
-------
56
-------
INDIA (10.0%)
2,500 Century Textiles and Industries Ltd. GDR.................... 127
(a)60,000 Crompton Greaves Ltd. GDR................................... 239
25,000 Indian Petrochemicals Corp. Ltd. GDR........................ 291
(a,g)55,500 Morgan Stanley India Investment Fund, Inc. ................. 527
-------
1,184
-------
INDONESIA (6.3%)
37,000 Astra International (Foreign)............................... 102
(d)48,000 Bank International Indonesia (Foreign)...................... 47
(d)37,000 Bimantara Citra (Foreign)................................... 49
(a,d)75,000 Daya Guna Samudera (Foreign)................................ 87
(d)18,000 Gudang Garam (Foreign)...................................... 78
(d)21,000 Hanjaya Mandala Sampoerna (Foreign)......................... 112
(d)64,000 Indah Kiat Pulp & Paper Corp. (Foreign)..................... 47
(d)129,000 Telekomunikasi Indonesia (Foreign).......................... 223
-------
745
-------
ISRAEL (3.6%)
5,150 Blue Square-Israel Ltd. ADR................................. 73
1,940 Elbit Ltd. ................................................. 14
6,466 Elbit Medical Imaging Ltd. ................................. 27
6,466 Elbit Systems Ltd. ......................................... 50
800 First International Bank of Israel Ltd., Class 5............ 92
940 Koor Industries Ltd. ....................................... 82
3,750 Supersol Ltd. .............................................. 92
-------
430
-------
KOREA (4.3%)
(a)2,800 Cho Hung Bank Co. Ltd. GDR.................................. 21
(a)2,600 Kookmin Bank GDR............................................ 47
2,600 Korea Electric Power Corp. ADR.............................. 54
8,333 Korea Mobile Telecommunications ADR......................... 107
1,570 Pohang Iron & Steel Co. Ltd. ADR............................ 32
(a,e)5,800 Samsung Electronics GDR..................................... 240
-------
501
-------
MEXICO (9.1%)
4,800 Apasco...................................................... 33
(a)50,920 Banacci, Class B............................................ 107
44,030 Cemex CPO................................................... 157
1,300 Cemex, Class B.............................................. 5
(a)30,400 Cifra, Class B.............................................. 37
(a)1,740 Desc ADR.................................................... 38
(a)945 Empresas ICA Sociedad Controladora ADR...................... 14
61,350 FEMSA, Class B.............................................. 210
(a)4,260 Gruma, Class B.............................................. 26
(a)810 Gruma GDR................................................... 20
(e)200 Grupo Carso ADR............................................. 2
13,560 Grupo Carso, Class A1....................................... 71
(a)308,555 Grupo Financiero Bancomer, Class B.......................... 123
14,000 Grupo Industrial Maseca, Class B............................ 18
(a)7,255 Grupo Televisa GDR.......................................... 186
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
MEXICO (CONT.)
460 Panamerican Beverages, Inc., Class A........................ $ 22
-------
1,069
-------
PAKISTAN (2.5%)
84,000 Fauji Fertilizer Co. Ltd. .................................. 141
(a)246,700 Pakistan Telecommunications................................. 155
-------
296
-------
PERU (0.3%)
1,645 Telefonica del Peru ADR..................................... 31
-------
PHILIPPINES (1.8%)
25,000 Ayala Land, Inc., Class B................................... 29
(a)42,000 DMCI Holdings, Inc. ........................................ 27
185,200 JG Summit Holdings, Inc., Class B........................... 52
7,000 Manila Electric Co., Class B................................ 57
960 Philippine Long Distance Telephone Co. ..................... 53
-------
218
-------
POLAND (1.5%)
1,000 Bank Rozwoju Eksportu S.A. ................................. 30
300 Bank Slaski S.A. ........................................... 31
(a)1,000 Debica S.A. ................................................ 22
4,200 Elektrim S.A. .............................................. 38
(a)2,100 Exbud S.A. ................................................. 20
3,000 Wielkopolski Bank Kredytowy S.A. ........................... 20
350 Zywiec...................................................... 16
-------
177
-------
RUSSIA (7.1%)
(a)9,000 Gazprom ADR................................................. 155
4,500 LUKoil Holding ADR.......................................... 206
6,500 Mosenergo ADR............................................... 198
(a)45,000 Rostelecom.................................................. 109
(a)3,500 Tatneft ADR................................................. 164
-------
832
-------
SOUTH AFRICA (3.4%)
27,500 Gencor Ltd. ................................................ 100
56,500 Polfin Ltd. ................................................ 94
17,100 Sasol Ltd. ................................................. 203
-------
397
-------
TAIWAN (2.7%)
16,000 Cathay Life Insurance Co. Ltd. ............................. 102
54,000 China Steel Corp. .......................................... 51
13,000 Formosa Plastics Corp. ..................................... 32
(a)30,000 Pacific Construction........................................ 26
(a)25,000 Siliconware Precision Industries Co. ....................... 53
41,000 Yang Ming Marine Transport.................................. 54
-------
318
-------
THAILAND (4.4%)
(d)9,800 Advanced Info Service PCL (Foreign)......................... 92
11,800 Bangkok Bank PCL (Foreign).................................. 114
17,300 Finance One PCL (Foreign)................................... 35
(d)9,600 Shinawatra Computer Co. plc (Foreign)....................... 116
13,600 Siam Commercial Bank PCL (Foreign).......................... 99
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
11,100 Thai Farmers Bank PCL (Foreign)............................. $ 69
-------
525
-------
TURKEY (3.6%)
892,000 Bossa....................................................... 75
1,160,000 Eregli Demir Celik.......................................... 139
2,562,000 Turkiye Garanti Bankasi A.S. ............................... 116
3,785,000 Yapi ve Kredi Bankasi A.S. ................................. 94
-------
424
-------
VENEZUELA (0.2%)
910 Cia Anonima Nacional Telefonos de Venezuela ADR............. 26
-------
ZIMBABWE (0.5%)
8,300 Delta Corp. ................................................ 29
18,900 Meikles Africa Ltd. ........................................ 28
-------
57
-------
TOTAL COMMON STOCKS (COST $9,792)........................................ 9,663
-------
PREFERRED STOCKS (6.0%)
BRAZIL (NON-VOTING STOCKS) (6.0%)
15,780,000 Banco Bradesco.............................................. 114
180,000 Banco Itau.................................................. 78
276,000 Brahma...................................................... 151
1,194,000 Cia Energetica de Minas Gerais.............................. 41
60,000 Coteminas................................................... 19
900 Eletrobras ADR.............................................. 17
319,000 Eletrobras, Class B......................................... 118
(e)1,500 Pao de Acucar ADR........................................... 26
589,000 Petrobras................................................... 94
624,000 Telebras.................................................... 48
-------
TOTAL PREFERRED STOCKS (COST $711)....................................... 706
-------
TOTAL FOREIGN SECURITIES (88.0%) (COST $10,503).......................... 10,369
-------
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (10.0%)
REPURCHASE AGREEMENT (10.0%)
$1,183 Chase Securities, Inc. 5.95%, dated 12/31/96, due 1/2/97, to
be repurchased at $1,183, collateralized by U.S. Treasury
Bonds, 7.25%, due 5/15/16, valued at $1,200
(COST $1,183)............................................. 1,183
-------
FOREIGN CURRENCY (2.2%)
BRL 14 Brazilian Real.............................................. 13
EGP 380 Egyptian Pound.............................................. 112
HKD 10 Hong Kong Dollar............................................ 2
MXP 33 Mexican Peso................................................ 4
PKR 4,293 Pakistani Rupee............................................. 107
PHP 1 Philippines Peso............................................ --
TWD 580 Taiwan Dollar............................................... 21
-------
TOTAL FOREIGN CURRENCY (COST $258)....................................... 259
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
<CAPTION>
<C> <S> <C>
TOTAL INVESTMENTS (100.2%) (COST $11,944*)............................... $11,811
-------
OTHER ASSETS (4.0%)
Cash...................................................... $ 1
Deferred Organization Costs............................... 342
Due from Adviser.......................................... 82
Receivable for Portfolio Shares Sold...................... 32
Dividends Receivable...................................... 8
Receivable for Investments Sold........................... 3 468
-----
LIABILITIES (-4.2%)
Payable for Investments Purchased......................... (275)
Organization Costs Payable................................ (105)
Custodian Fees Payable.................................... (39)
Professional Fees Payable................................. (39)
Sub-Administrative Fees Payable........................... (10)
Administrative Fees Payable............................... (9)
Deferred Foreign Taxes Payable............................ (2)
Other Liabilities......................................... (11) (490 )
----- --------
NET ASSETS (100%)........................................... $11,789
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,205,732 outstanding $0.001 par value shares,
unlimited number authorized............................... $ 9.78
-------
-------
<CAPTION>
(000)
-------
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................. $11,978
Undistributed Net Investment Income......................... 3
Accumulated Net Realized Loss............................... (57 )
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of foreign taxes of $2)................. (135 )
-------
NET ASSETS.................................................. $11,789
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- ----- ---------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
$2 $ 2 1/02/97 BRL 2 $ 2 $ --
----- ----- ---
----- ----- ---
</TABLE>
- ---------------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security.
(d) -- Security valued at fair value -- See note A-1 to
financial statements. Fair valued securities
totaled $851,000 or 7.2% of net assets at December
31, 1996.
(e) -- 144A Security -- Certain conditions for public
sale may exist.
(g) -- The fund is advised by Morgan Stanley Asset
Management Inc. The Portfolio earned no income
from this security for the period ended December
31, 1996.
ADR -- American Depositary Receipt
CPO -- Ordinary Participating Certificate (no voting
rights)
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
</TABLE>
- ---------------
* At December 31, 1996, cost, unrealized appreciation, unrealized depreciation
and net unrealized depreciation, for U.S. Federal income tax purposes, of the
investments of the Portfolio were:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED NET UNREALIZED
COST APPRECIATION DEPRECIATION DEPRECIATION
(000) (000) (000) (000)
- --------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 11,688 $ 627 $ (763) $ (136)
</TABLE>
- --------------------------------------------------------------------------------
For the period ended December 31, 1996, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $11,337,000 and $777,000,
respectively. There were no long-term purchases and sales of U.S. Government
securities during the period.
- --------------------------------------------------------------------------------
At December 31, 1996, the Emerging Markets Equity Portfolio had available
capital loss carryforwards to offset future net capital gains, to the extent
provided by regulations, through December 31, 2004 of approximately $9,000. To
the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.
- --------------------------------------------------------------------------------
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1996 to December 31, 1996,
the Emerging Markets Equity Portfolio incurred and elected to defer until
January 1, 1997, for U.S. Federal income tax purposes, net capital losses of
approximately $45,000.
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION
(Unaudited)
<TABLE>
<CAPTION>
MARKET % OF NET
SECTOR DIVERSIFICATION VALUE ASSETS
- --------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Capital Equipment................................................................ $ 1,081 9.2%
Consumer Goods................................................................... 1,588 13.5
Energy........................................................................... 1,091 9.3
Finance.......................................................................... 1,984 16.8
Foreign Currency................................................................. 259 2.2
Materials........................................................................ 1,355 11.5
Multi-Industry................................................................... 989 8.4
Repurchase Agreement............................................................. 1,183 10.0
Services......................................................................... 2,281 19.3
--------- -----
Total Investments................................................................ $ 11,811 100.2%
Other Assets and Liabilities (Net)............................................... (22) (0.2)
--------- -----
Net Assets....................................................................... $ 11,789 100.0%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996*
TO
DECEMBER 31, 1996
(000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends $ 19
Interest 36
-----
Total Income 55
-----
EXPENSES:
Investment Advisory Fees 32
Less: Fees Waived (32)
-----
Net Investment Advisory Fees --
Custodian Fees 39
Professional Fees 38
Amortization of Organizational Costs 18
Shareholder Reports 11
Sub-Administrative Fees 10
Administrative Fees 9
Other 4
Expenses Reimbursed by Adviser (82)
-----
Net Expenses 47
-----
Net Investment Income 8
-----
NET REALIZED LOSS ON:
Investments Sold (57)
Foreign Currency Transactions (3)
-----
Net Realized Loss (60)
-----
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments and Foreign Currency Translations** (135)
-----
Change in Unrealized Appreciation/Depreciation (135)
-----
Net Realized Loss and Change in Unrealized
Appreciation/Depreciation (195)
-----
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (187)
-----
-----
</TABLE>
- ------------
* Commencement of operations
** Net of foreign taxes of $2 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996*
TO
DECEMBER 31, 1996
(000)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8
Net Realized Loss (60)
Change in Unrealized Appreciation/Depreciation (135)
-------
Net Decrease in Net Assets Resulting from Operations (187)
-------
DISTRIBUTIONS:
Net Investment Income (20)
-------
Total Distributions (20)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 11,993
Distributions Reinvested 3
-------
Net Increase in Net Assets Resulting from Capital Share
Transactions 11,996
-------
Total Increase in Net Assets 11,789
NET ASSETS:
Beginning of Period --
-------
End of Period $ 11,789
-------
-------
Undistributed net investment income included in end of
period net assets $ 3
-------
-------
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,205
Shares Issued for Distributions Reinvested 1
-------
Net Increase in Capital Shares Outstanding 1,206
-------
-------
- --------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
- -------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996*
TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS 1996
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Investment Income 0.01
Net Realized and Unrealized Loss (0.21)
-------
Total From Investment Operations (0.20)
-------
DISTRIBUTIONS
Net Investment Income (0.02)
-------
Total Distributions (0.02)
-------
NET ASSET VALUE, END OF PERIOD $ 9.78
-------
-------
TOTAL RETURN (2.03)%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 11,789
Ratio of Expenses to Average Net Assets 1.75%**
Ratio of Net Investment Income to Average Net Assets 0.32%**
Portfolio Turnover Rate 9%
Average Commission Rate# $ 0.0013
- --------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income (Loss) $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 6.17%**
Net Investment Income (Loss) to Average Net Assets (4.06)%**
- --------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Morgan Stanley Universal Funds, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of December 31, 1996, the Fund was comprised of one active,
non-diversified portfolio, the Emerging Markets Equity Portfolio (referred to as
the "Portfolio"). The Portfolio commenced operations on October 1, 1996.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies ("Participating Insurance Companies").
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date, for which market quotations are readily available, are valued at
the mean between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which are based primarily on institutional size trading in similar
groups of securities. Debt securities purchased with remaining maturities of 60
days or less are valued at amortized cost, if it approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.
2. INCOME TAXES: It is the Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
The Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as income and/or capital gains
are earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/ or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars as quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities are treated as ordinary income
for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
trade and settlement dates on securities transactions, and the difference
between the amount of accrued investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Net Assets. The change in net unrealized currency gains (losses)
for the period is reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Portfolio may enter into
forward foreign currency exchange contracts to attempt to protect securities and
related receivables and payables against changes in future foreign currency
exchange rates. A forward foreign currency exchange contract is an agreement
between two parties to buy or sell currency at a set price on a future date. The
market value of the contract will fluctuate with changes in currency exchange
rates. The contract is marked-to-market daily using the forward rate and the
change in market value is recorded by the Portfolio as unrealized gain or loss.
The Portfolio records realized gains or losses when the contract is closed equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and is generally limited to the amount of the unrealized gain on
the contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
6. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Portfolio's commencement of operations. Morgan Stanley Asset Management Inc.
has agreed that in the event any of it's initial shares in the Portfolio which
comprised the Fund at it's inception are redeemed, the proceeds on redemption
will be reduced by the pro-rata portion of any unamortized organizational costs
in the same proportion as the number of shares redeemed bears to the initial
shares held at time of redemption.
7. OTHER: Security transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Fund is informed of such dividends) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased (other
than mortgage-backed securities) are amortized according to the effective yield
method over their respective lives. Distributions from the Portfolio are
recorded on the ex-date.
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions and for organizational expenses.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.
Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated net
investment loss for the purpose of calculating net investment income (loss) per
share in the Financial Highlights.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., provides the Portfolio
with investment advisory services for a fee, paid quarterly, at the annual rate
of 1.25% of the first $500 million of average daily net assets, 1.20% of the
next $500 million of average daily net assets and 1.15% of average daily net
assets exceeding $1 billion. The Adviser has agreed to reduce fees payable to it
and to reimburse the Portfolio, if necessary, if the annual operating expenses,
expressed as a percentage of average daily net assets, exceed the maximum ratio
of 1.75%.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
C. ADMINISTRATOR: MSAM also provides the Portfolio with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of the Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and
Chase Global Funds Services Company ("CGFSC"), a subsidiary of The Chase
Manhattan Bank ("Chase"), CGFSC provides certain administrative services to the
Portfolio. CGFSC is compensated for such services by MSAM from the fee it
receives from the Portfolio. Certain employees of CGFSC are officers of the
Fund. In addition, the Portfolio incurs local administration fees in doing
business in certain emerging market countries.
D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Group, Inc., acts as custodian for the Fund's assets held
outside the United States in accordance with a custodian agreement. Chase serves
as custodian for the Fund's U.S. assets in accordance with a separate custodian
agreement. Custodian fees are computed and payable monthly based on assets held,
investment purchases and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses. For the period ended December
31, 1996, the Portfolio incurred custody fees with MSTC totaling approximately
$38,000 which were payable to MSTC at December 31, 1996.
In addition, for the period ended December 31, 1996, the Portfolio earned
interest income of approximately $400 and incurred interest expense of
approximately $1,000 on balances maintained with MSTC.
E. OTHER: At December 31, 1996, the net assets of the Portfolio were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
From time to time, the Portfolio has shareholders that hold a significant
portion of the Portfolio's outstanding shares. Investment activities of these
shareholders could have a material impact on the Portfolio. At December 31,
1996, a significant number of the shares outstanding were owned by MSAM and its
affiliates.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Universal Funds, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Emerging Markets Equity Portfolio (constituting Morgan Stanley Universal Funds,
Inc., hereafter referred to as the "Fund") at December 31, 1996, and the results
of its operations, the changes in its net assets and the financial highlights
for the period October 1, 1996 (commencement of operations) through December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 1996 by correspondence with the custodians and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 28, 1997
