<PAGE>
SUPPLEMENT DATED DECEMBER 16, 1997
TO THE PROSPECTUS DATED MAY 1, 1997 AS SUPPLEMENTED SEPTEMBER 19, 1997
MONEY MARKET PORTFOLIO
FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
CORE EQUITY PORTFOLIO
EQUITY GROWTH PORTFOLIO
VALUE PORTFOLIO
MID CAP GROWTH PORTFOLIO
MID CAP VALUE PORTFOLIO
U.S. REAL ESTATE PORTFOLIO
INTERNATIONAL FIXED INCOME PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL MAGNUM PORTFOLIO
EMERGING MARKETS EQUITY PORTFOLIO
ASIAN EQUITY PORTFOLIO
BALANCED PORTFOLIO
MULTI-ASSET-CLASS PORTFOLIO
PORTFOLIOS OF
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS
02208-2798
--------------
The Prospectus is hereby supplemented as follows: The following paragraph and
table are added under the heading "Financial Highlights" on page 3 of the
Prospectus:
The following table provides unaudited financial highlights for the Emerging
Markets Debt Portfolio for the period June 16, 1997 to October 31, 1997. These
unaudited financial highlights are part of the Fund's unaudited financial
statements which are included in the Fund's current Statement of Additional
Information.
<TABLE>
<CAPTION>
EMERGING MARKETS
DEBT PORTFOLIO
--------------------------
PERIOD FROM JUNE 16, 1997*
TO OCTOBER 31, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
- ---------------------------------- --------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.24
Net Realized and Unrealized Loss................. (0.90)
--------
Total From Investment Operations................. (0.66)
--------
NET ASSET VALUE, END OF PERIOD..................... $ 9.34
========
TOTAL RETURN....................................... (6.60)%
========
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's).................. 15,632
Ratio of Expenses to Average Net Assets............ 1.30%**
Ratio of Net Investment Income to Average Net
Assets............................................ 7.84%**
Portfolio Turnover Rate............................ 229%
- ------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income....... $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets................... 1.81%**
Net Investment Income to Average Net Assets...... 7.33%**
- ------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
SUPPLEMENT DATED DECEMBER 16, 1997
TO THE PROSPECTUS DATED JULY 1, 1997 AS SUPPLEMENTED SEPTEMBER 19, 1997
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIO OF
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS
02208-2798
--------------
The Prospectus is hereby supplemented as follows: The following paragraph and
table are added after the first paragraph under the heading "Financial
Highlights" on page 3 of the Prospectus:
The following table provides unaudited financial highlights for the Emerging
Markets Debt Portfolio for the period June 16, 1997 to October 31, 1997. These
unaudited financial highlights are part of the Fund's unaudited financial
statements which are included in the Fund's current Statement of Additional
Information.
<TABLE>
<CAPTION>
EMERGING MARKETS
DEBT PORTFOLIO
--------------------------
PERIOD FROM JUNE 16, 1997*
TO OCTOBER 31, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
- ---------------------------------- --------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.24
Net Realized and Unrealized Loss................. (0.90)
-------
Total From Investment Operations................. (0.66)
-------
NET ASSET VALUE, END OF PERIOD..................... $ 9.34
=======
TOTAL RETURN....................................... (6.60)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's).................. $15,632
Ratio of Expenses to Average Net Assets............ 1.30%**
Ratio of Net Investment Income to Average Net
Assets............................................ 7.84%**
Portfolio Turnover Rate............................ 229%
- ------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income....... $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets................... 1.81%**
Net Investment Income to Average Net Assets...... 7.33%**
- ------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
SUPPLEMENT DATED DECEMBER 16, 1997 TO THE PROSPECTUS DATED JULY 15, 1997
AS SUPPLEMENTED SEPTEMBER 19, 1997
EMERGING MARKETS DEBT PORTFOLIO
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL MAGNUM PORTFOLIO
EMERGING MARKETS EQUITY PORTFOLIO
PORTFOLIOS OF
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS
02208-2798
--------------
The Prospectus is hereby supplemented as follows: The following paragraph and
table are added under the heading "Financial Highlights" on page 3 of the
Prospectus:
The following table provides unaudited financial highlights for the Emerging
Markets Debt Portfolio for the period June 16, 1997 to October 31, 1997. These
unaudited financial highlights are part of the Fund's unaudited financial
statements which are included in the Fund's current Statement of Additional
Information.
<TABLE>
<CAPTION>
EMERGING MARKETS
DEBT PORTFOLIO
--------------------------
PERIOD FROM JUNE 16, 1997*
TO OCTOBER 31, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
- ---------------------------------- --------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.24
Net Realized and Unrealized Loss................. (0.90)
-------
Total From Investment Operations................. (0.66)
-------
NET ASSET VALUE, END OF PERIOD..................... $ 9.34
=======
TOTAL RETURN....................................... (6.60)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's).................. $15,632
Ratio of Expenses to Average Net Assets............ 1.30%**
Ratio of Net Investment Income to Average Net
Assets............................................ 7.84%**
Portfolio Turnover Rate............................ 229%
- ------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income....... $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets................... 1.81%**
Net Investment Income to Average Net Assets...... 7.33%**
- ------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
SUPPLEMENT DATED DECEMBER 16, 1997
TO THE PROSPECTUS DATED OCTOBER 1, 1997
HIGH YIELD PORTFOLIO
U.S. REAL ESTATE PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
ASIAN EQUITY PORTFOLIO
PORTFOLIOS OF
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS
02208-2798
--------------
The Prospectus is hereby supplemented as follows: The following paragraph and
table are added after the first paragraph under the heading "Financial
Highlights" on page 3 of the Prospectus:
The following table provides unaudited financial highlights for the Emerging
Markets Debt Portfolio for the period June 16, 1997 to October 31, 1997. These
unaudited financial highlights are part of the Fund's unaudited financial
statements which are included in the Fund's current Statement of Additional
Information.
<TABLE>
<CAPTION>
EMERGING MARKETS
DEBT PORTFOLIO
--------------------------
PERIOD FROM JUNE 16, 1997*
TO OCTOBER 31, 1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
- ---------------------------------- --------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............................ 0.24
Net Realized and Unrealized Loss................. (0.90)
-------
Total From Investment Operations................. (0.66)
-------
NET ASSET VALUE, END OF PERIOD..................... $ 9.34
=======
TOTAL RETURN....................................... (6.60)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's).................. 15,632
Ratio of Expenses to Average Net Assets............ 1.30%**
Ratio of Net Investment Income to Average Net
Assets............................................ 7.84%**
Portfolio Turnover Rate............................ 229%
- ------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income....... $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets................... 1.81%**
Net Investment Income to Average Net Assets...... 7.33%**
- ------------------------------------------------------------------------------
</TABLE>
*Commencement of operations
**Annualized
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
SUPPLEMENT DATED DECEMBER 16, 1997 TO STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 1, 1997 PREVIOUSLY SUPPLEMENTED ON JULY 1, 1997, JULY 15, 1997,SEPTEMBER
19, 1997, OCTOBER 1, 1997, OCTOBER 15, 1997 AND JANUARY 1, 1998
PORTFOLIOS OF
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS 02208-2798
--------------
The Fund's Statement of Additional Information is hereby amended and
supplemented by the following financial statements for the Emerging Markets
Debt Portfolio for the period June 16, 1997 to October 31, 1997.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO
STATEMENT OF NET ASSETS
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
-------- -------
<C> <S> <C>
DEBT INSTRUMENTS (89.8%)
ARGENTINA (15.3%)
BONDS (15.3%)
U.S.$250 Acindar Industrial Argentina SA, Series 2, "Euro",
(Floating Rate), 11.75%, 11/12/98......................... $ 251
ARP770 CIA International Telecommunications, 10.375%, 8/01/04..... 616
170 Republic of Argentina, 11.75%, 2/12/07..................... 141
U.S.$550 Republic of Argentina Global Bond, 9.75%, 9/19/27.......... 450
1,104 Republic of Argentina, Series L, "Euro", (Floating Rate),
6.688%, 3/31/05........................................... 938
-------
2,396
-------
BRAZIL (14.1%)
BONDS (14.1%)
1,859 Federative Republic of Brazil, Series C, (Floating Rate),
PIK, 8.00%, 4/15/14....................................... 1,455
200 Federative Republic of Brazil Front Loaded Interest
Reduction Bond, Series L, (Step Bond), 4.50%, 4/15/09..... 137
510 Federative Republic of Brazil Global Bond, 10.125%,
5/15/27................................................... 398
300 Federative Republic of Brazil, Series L, (Floating Rate),
6.75%, 4/15/09............................................ 215
-------
2,205
-------
BULGARIA (4.1%)
BONDS (4.1%)
825 Republic of Bulgaria Front Loaded Interest Reduction Bond,
Series A, (Step Bond), 2.50%, 7/28/12..................... 449
25 Republic of Bulgaria Interest Arrears Bond, Series PDI,
(Floating Rate), 6.688%, 7/28/11.......................... 16
250 Republic of Bulgaria, Series A, (Floating Rate), 6.688%,
7/28/24................................................... 173
-------
638
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<C> <S> <C>
CAYMAN ISLANDS (3.2%)
BOND (3.2%)
550 Pera Financial Services, 9.375%, 10/15/02................... $ 501
-------
ECUADOR (0.3%)
BOND (0.3%)
87 Republic of Ecuador Global Bond, (Floating Rate), 6.688%,
2/27/15.................................................... 51
-------
IVORY COAST (2.2%)
BOND (2.2%)
1,100 Republic of Ivory Coast Front Loaded Interest Reduction
Bond, Zero Coupon, 12/29/49................................ 349
-------
JAMAICA (1.2%)
BOND (1.2%)
200 Government of Jamaica, 9.625%, 7/02/02 190
-------
MAURITIUS (0.9%)
BOND (0.9%)
150 Pindo Deli Finance Mauritius Ltd., 10.75%, 10/01/07......... 138
-------
MEXICO (13.4%)
BONDS (13.4%)
120 Banco National Global Bond, 7.25%, 2/02/04.................. 109
150 Petroleos Mexicanos, 9.50%, 9/15/27......................... 134
700 United Mexican States Discount Bond, Series A, (Floating
Rate), 6.693%, 12/31/19 (Value Recovery Rights Attached)... 626
300 United Mexican States Global Bond, "Euro', 11.375%,
9/15/16.................................................... 313
750 United Mexican States Global Bond, 11.50%,
5/15/26.................................................... 630
350 United Mexican States Par Bond, Series W-A, 6.25%, 12/31/19
(Value Recovery Rights Attached)........................... 274
-------
2,086
-------
MOROCCO (2.3%)
LOAN AGREEMENT (2.3%)
450 Kingdom of Morocco, Restructuring & Consolidation Agreement,
Tranche A, (Floating Rate), 6.813%,
1/01/09 (Participation: J.P. Morgan and Salomon Brothers).. 363
-------
PANAMA (1.1%)
BOND (1.1%)
200 Republic of Panama Global Bond, 8.875%,
9/30/27.................................................... 171
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<C> <S> <C>
PERU (2.7%)
BOND (2.7%)
850 Republic of Peru Front
Loaded Interest
Reduction Bond, (Step
Bond), 3.25%, 3/07/17.. 425
-------
RUSSIA (16.7%)
LOAN AGREEMENTS (1.9%)
300 International Bank for
Economic Cooperation
12/31/00
(Participation: Salomon
Brothers).............. 192
150 Russia II A, 12/31/99
(Participation: Salomon
Brothers).............. 101
-------
293
-------
NOTES (14.8%)
1,075 Russia Interest Arrears
Note 12/31/99.......... 712
2,700 Russian Principal Notes
12/31/99............... 1,593
-------
2,305
-------
2,598
-------
VENEZUELA (12.3%)
BONDS (12.3%)
1,000 Republic of Venezuela
Debt Conversion Bonds,
Series DL, (Floating
Rate), 6.75%, 12/18/07 872
1,287 Venezuela Global Bond,
9.25%, 9/15/27 1,049
-------
1,921
-------
TOTAL DEBT INSTRUMENTS
(COST $16,131)................ 14,032
-------
STRUCTURED INVESTMENTS (1.2%)
UNITED KINGDOM (1.2%)
200 Ing Bank N.V. LIBOR or
T-Bill Linked Note,
8/14/98 (Cost $200).... $ 194
-------
<CAPTION>
NO. OF
RIGHTS
------
<C> <S> <C>
RIGHTS (0.0%)
MEXICO (0.0%)
1,447 United Mexican States,
expiring 6/30/03 (Cost
$0).................... --
-------
SHORT-TERM INVESTMENT (28.0%)
UNITED STATES (28.0%)
REPURCHASE AGREEMENT (28.0%)
4,377 Chase Securities, Inc.
5.48%, dated 10/31/97,
due 11/03/97 to be
repurchased at $4,378,
collateralized by U.S.
Treasury Notes, 6.375%
due 4/30/99, valued at
$4,472 (Cost $4,377)... 4,377
-------
TOTAL INVESTMENTS (119.0%)
(COST $20,708*)............... 18,603
-------
</TABLE>
<TABLE>
<S> <C>
OTHER ASSETS (42.4%)
Cash...................................................... $ 778
Receivable for Investments Sold........................... 5,640
Interest Receivable....................................... 204
Other..................................................... 6
------
6,628
------
LIABILITIES (-61.4%)
Payable for Investments Purchased......................... (9,544)
Investment Advisory Fees Payable.......................... (16)
Professional Fees......................................... (21)
Net Unrealized Loss on Forward Foreign Currency Exchange
Contracts................................................ (6)
Custodian Fees Payable.................................... (5)
Administrative Fees Payable............................... (1)
Other Liabilities......................................... (6)
------
(9,599)
------
NET ASSETS (100%)................................................ $15,632
=======
<CAPTION>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,673,993 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $ 9.34
=======
AMOUNT
NET ASSETS CONSIST OF: (000)
-------
Paid in Capital.................................................. $17,126
Undistributed Net Investment Income.............................. 406
Accumulated Net Realized Gain.................................... 211
Unrealized Depreciation on Investments and Foreign Currency
Translations.................................................... (2,111)
-------
NET ASSETS....................................................... $15,632
=======
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACTS INFORMATION:
Under the terms of foreign currency exchange contracts open at October 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY UNREALIZED
TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- -------- ----- ---------- ----------- ----- ----------
<S> <C> <C> <C> <C> <C>
DEM 361 $210 12/02/97 U.S.$201 $201 $(9)
U.S.$154 154 12/02/97 DEM 269 156 2
U.S.$ 52 52 12/02/97 DEM 92 53 1
---- ---- ----
$416 $410 $(6)
==== ==== ====
</TABLE>
ARP-Argentine Peso
PIK-Payment-In-Kind. Income may be paid in additional securities or cash atthe
discretion of the issuer.
PDI-Past Due Interest
The accompanying notes are an integral part of the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
* At October 31,1997, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Emerging Markets Debt
Portfolio were:
<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
(000) (000) (000) (000)
- ------- ------------ -------------- --------------
<S> <C> <C> <C>
$20,708 $ 1 $(2,106) $(2,105)
</TABLE>
For the period ended October 31, 1997, purchases and sales of investment
securities for the Emerging Markets Debt Portfolio, other than long-term U.S.
Government securities and short-term investments, were $37,817,000 and
$21,031,000, respectively. There were no purchases or sales of U.S. Government
securities for the Emerging Markets Debt Portfolio during the period ending
October 31, 1997.
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 16,
1997* TO
OCTOBER 31,
1997
(000)
-----------
<S> <C>
INVESTMENT INCOME:
Dividend......................................................... $ 1
Interest......................................................... 476
-------
477
-------
EXPENSES:
Investment Advisory Fees......................................... 42
Less: Fees Waived............................................... (24)
-------
Net Investment Advisory Fees..................................... 18
Professional Fees................................................ 22
Administrative Fees.............................................. 13
Custodian Fees................................................... 8
Shareholder Reports.............................................. 6
Other Expenses................................................... 4
-------
Net Expenses.................................................... 71
-------
Net Investment Income............................................. 406
-------
NET REALIZED GAINS ON:
Investments Sold................................................. 232
Currency......................................................... (21)
-------
211
-------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments...................................................... (2,105)
Foreign Currency Translations.................................... (6)
-------
Change in Unrealized Appreciation/Depreciation.................. (2,111)
-------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation........................................ (1,900)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $(1,494)
=======
</TABLE>
- -------
* Commencement of operations
- --------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 16, 1997* TO
OCTOBER 31, 1997
(000)
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS OPERATIONS:
Net Investment Income......................................... $ 406
Net Realized Gain............................................. 211
Change in Unrealized Appreciation/Depreciation................ (2,111)
-------
Net Decrease in Net Assets Resulting from Operations.......... (1,494)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed.................................................... 23,115
Redeemed...................................................... (5,989)
-------
Net Increase in Net Assets Resulting from Capital Share
Transactions................................................. 17,126
-------
Total Increase in Net Assets.................................. 15,632
-------
NET ASSETS:
Beginning of Period........................................... --
-------
End of Period (Including undistributed net investment income
of $406)........................................................ $15,632
=======
(1) Capital Share Transactions:
Shares Subscribed............................................. 2,251
Shares Redeemed............................................... (577)
-------
Net Increase in Capital Shares Outstanding.................... 1,674
=======
</TABLE>
- -------
*Commencement of operations
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS DEBT PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 16, 1997*
TO OCTOBER 31,
1997
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)
- ---------------------------------- --------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................. $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................................... 0.24
Net Realized and Unrealized Loss................................ (0.90)
-------
Total From Investment Operations................................ (0.66)
-------
NET ASSET VALUE, END OF PERIOD................................... $ 9.34
=======
TOTAL RETURN..................................................... (6.60)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's)................................ $15,632
Ratio of Expenses to Average Net Assets.......................... 1.30%**
Ratio of Net Investment Income to Average Net Assets............. 7.84%**
Portfolio Turnover Rate.......................................... 229%
- --------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period:
Per Share Benefit to Net Investment Income...................... $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets................................... 1.81%**
Net Investment Income to Average Net Assets.................... 7.33%**
</TABLE>
- -------------------------------------------------------------------------------
**Annualized
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 1997
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 October 31, 1997, the Fund was comprised of eleven
separate active, diversified and non-diversified portfolios (individually
referred to as a "Portfolio", collectively as the "Portfolios"). The Emerging
Markets Debt Portfolio commenced operations on June 16, 1997. The financial
statements presented here are for the Emerging Markets Debt Portfolio only.
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.
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 accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
OCTOBER 31, 1997
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: The Portfolio may enter into repurchase agreements
under which the Portfolio lends excess cash and takes possession of securities
with an agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian for
the Fund takes possession of the underlying securities which are held as
collateral, 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 last 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 foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized between
the trade and settlement dates on securities transactions, and the difference
between the amount of 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.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Portfolio may enter into foreign
currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A 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 and the change in market value is recorded
by the Portfolio as unrealized gain or loss. The Portfolio record realized
gains or losses when the contract is closed equal to the difference between the
value of the contract at the time is 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. LOAN AGREEMENTS: The Portfolio may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of sovereign
debt obligations and one or more financial institutions ("Lenders") deemed to
be creditworthy by the investment adviser. The Portfolio's investments in Loans
may be in the form of participations in Loans ("Participations") or assignments
of all or a portion of Loans ("Assignments") from third parties. The
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. The Portfolio has the right to receive
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
OCTOBER 31, 1997
payments of principal, interest and any fees to which it is entitled only upon
receipt by the Lender of the payments from the borrower. The Portfolio
generally has no right to enforce compliance by the borrower with the terms of
the loan agreement. As a result, the Portfolio may be subject to the credit
risk of both the borrower and the Lender that is selling the Participation.
When the Portfolio purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolio as the
purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Lender.
7. STRUCTURED SECURITIES: The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with or purchase by an entity of specified instruments and
the issuance by that entity of one or more classes of securities ("Structured
Securities") backed by, or representing interests in, the underlying
instruments. Structured securities generally will expose the Portfolio to
credit risks of the underlying instruments as well as of the issuer of the
structured security. Structured securities are typically sold in private
placement transactions with no active trading market. Investments in structured
securities may be more volatile than their underlying instruments, however, any
loss is limited to the amount of the original investment.
8. 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 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. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are apportioned among the Portfolios based upon relative net assets.
Distributions from the Portfolios are recorded on the ex-distribution date.
B. ADVISERS: Morgan Stanley Asset Management Inc. ("MSAM"), a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., provides the
Emerging Markets Debt Portfolio with investment advisory services for a fee,
paid quarterly, at the annual rate based on average daily net assets as
follows:
<TABLE>
<CAPTION>
ASSETS
--------------------------
FROM MORE
FIRST $500 THAN
$500 MILLION TO $1
PORTFOLIO MILLION $1 BILLION BILLION
- --------- ------- ---------- -------
<S> <C> <C> <C>
Emerging Markets Debt................................ 0.80 0.75 0.70
</TABLE>
MSAM has agreed to reduce fees payable to itself and to reimburse the
Portfolio, if necessary, if the annual operating expenses, as defined,
expressed as a percentage of average daily net assets, exceed the maximum ratio
indicated as follows:
<TABLE>
<CAPTION>
MAXIMUM EXPENSE
PORTFOLIO RATIO
- --------- ---------------
<S> <C>
Emerging Markets Debt........................................... 1.30
</TABLE>
C. ADMINISTRATOR: MSAM (the "Administrator") 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 the Administrator and Chase Global Funds Services Company ("CGFSC"), a
subsidiary of The Chase Manhattan Bank ("Chase"), CGFSC provides certain
administrative services to the Fund. For such services, the Administrator pays
CGFSC a portion of the fee the Administrator receives from the Fund. Certain
employees of CGFSC are officers of the Fund. In addition, the Fund incurs local
administration fees in connection with doing business with 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 domestic 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 October 31, 1997, the following Portfolios incurred custody fees
and had amounts payable to MSTC at October 31, 1997:
<TABLE>
<CAPTION>
CUSTODY
MSTC FEES PAYABLE
CUSTODY FEES TO
INCURRED MSTC
PORTFOLIO (000) (000)
- --------- ------------ ------------
<S> <C> <C>
Emerging Markets Debt................................. $ 8 $ 5
</TABLE>
In addition, for the period ended October 31, 1997, the following Portfolios
have earned interest income and incurred interest expense on balances with MSTC
as follows:
<TABLE>
<CAPTION>
INTEREST INTEREST
INCOME EXPENSE
PORTFOLIO (000) (000)
- --------- -------- --------
<S> <C> <C>
Emerging Markets Debt......................................... $ -- $ 2
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
OCTOBER 31, 1997
At October 31, 1997, the net assets of the Portfolio was 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, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
