<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
%
Australia 1.1
Belgium 1.8
Canada 2.5
Finland 1.1
France 5.7
Germany 6.1
Hong Kong 0.5
Ireland 2.8
Italy 2.2
Japan 7.4
Netherlands 5.5
New Zealand 0.4
Portugal 0.6
Spain 1.0
Sweden 1.3
Switzerland 7.7
United Kingdom 12.0
United States 36.3
Other 4.0
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION(3)
---------- ---------- ------------------
<S> <C> <C> <C>
PORTFOLIO... 12.18% 17.20% 22.10%
INDEX...... 16.64% 17.03% 22.96%
</TABLE>
1. The MSCI World Index is an unmanaged index of an arithmetic market
value-weighted average of the performance of over 1,470 securities listed on
the stock exchanges of countries in Europe, Australasia, the Far East, Canada
and the United States.
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 January 2, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ ------------ -------------
<S> <C> <C>
Nestle Switzerland 2.7%
United
Philip Morris Cos., Inc. States 2.5%
Cie Financiere Richemont AG,
Class A (Units) Switzerland 2.2%
ING Groep N.V. Netherlands 2.1%
MBIA, Inc. United 2.1%
States
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------- --------- -------------
<S> <C> <C>
Consumer Products $ 7,714 25.2%
Finance 5,753 18.8%
Capital Equipment 5,119 16.7%
Services 5,090 16.7%
Materials 2,184 7.2%
</TABLE>
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
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 Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing primarily in equity securities of issuers
throughout the world, including U.S. issuers, using an approach that is oriented
to the selection of individual stocks that Morgan Stanley Asset Management
believes are undervalued.
For the six months ended June 30, 1998, the Portfolio had a total return of
12.18% compared to 16.64 % for the Morgan Stanley Capital International (MSCI)
World Index (the "Index"). For the one year period ended June 30, 1998, the
Portfolio had a total return of 17.20% compared to 17.03% for the Index. From
inception on January 2, 1997 to June 30, 1998, the Portfolio had an average
annual total return of 22.10% compared to 22.96% for the Index.
The approach in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of global databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Stocks selected
from this screening process are put through detailed fundamental analysis.
Important areas covered during this in-depth study include the companies'
balance sheet and cash flow, franchise, products, management and the strategic
value of the businesses assets.
The Portfolio's underperformance in 1998 was almost entirely due to weak
relative performance from U.S. stock selection, particularly in the second
quarter. It is also clearly reflective of the fact that the U.S. market is being
driven to record levels by macro-cap names such as General Electric and
Coca-Cola respectively trading at 35 times and 53 times trailing earnings. As
value investors, we are loath to pay such premiums in what seems to be a flight
to (apparent) quality.
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
Several of our U.S. stocks were hurt, however, by specific events that we
believe caused them to be oversold. Borg Warner (BWA), for example, the auto
components manufacturer, fell 24 percent during the second quarter because of
Asian fears (20 percent of sales) and production delays within Ford, which
produces 20 percent of BWA's sales. The oil stocks Noble Drilling and Ocean
Energy continue to be affected by weakness in the price of oil. Philip Morris,
one of our largest holdings, fell 4% amid continuing litigation worries. We
expect, however, some shareholder-friendly measures to be announced by the
company during the second half of the year. Stock selection in Italy was also a
negative contributor during the past six months, as Telecom Italia fell 20
percent in the second quarter. On a positive note, stock selection in
Switzerland, the Netherlands and Ireland was particularly strong and our
underweight positions in Japan and Southeast Asia continue to benefit the
Portfolio.
Given a remarkably strong first half of the year in Europe, robust returns in
the United States, and sustained weakness throughout Asia, it is somewhat
difficult to predict the second half of 1998. The U.S. market's current
fascination with Internet stocks seems unhealthily optimistic while,
importantly, earnings expectations for the balance of the year remain overly
optimistic. Continental Europe provides the only environment where both
corporate profits are accelerating and interest rates are likely to remain low.
While Asia's travails are slowing the pace of recovery we do not expect even the
capital goods dependent economy of Germany to stagnate. Stock markets have not,
however, been slow to discount this environment and multiples are high, although
European markets generally remain more attractive than the United States on
price-to-book value and price-to-cash flow multiples. The extent of earnings
disappointment from Asia will be the key driver of the second half, although
companies in both Europe and the United States typically generate less than 10
percent of their sales there. Money flows, merger and acquisition activity, and
interest rates should remain supportive in the near term.
We decreased our U.S. weighting during the period as some of our U.S. stocks
have reached their fair-value targets and we strive to add more defensive names.
We would expect to continue our underweighting in the United States, with
selected overweights in Europe. Despite regular visits from our analysts--and
absent fundamental reform--we struggle to find catalysts that will unlock what
increasingly appears to be relative value in Japan, and the risk in Southeast
Asia continues to outweigh the potential return.
Additions to the Portfolio in the past six months included:
AMERICAN STORES operates the second largest food-store chain and one of the
largest drugstore chains in the U.S.. The company is currently tackling its
enormous transition from a decentralized holding company into an integrated
operating company. Over time, the benefits of this re-engineering program will
outweigh the implementation costs and the company should also benefit from a
stabilization of their Capital Expediture which has grown over the last few
years.
CHASE MANHATTAN provides domestic and international financial services, and has
virtually completed nationalizing two of the largest mergers in U.S. banking
history. It is the leading player in the corporate loan syndication business and
has weakened recently due to concerns over its emerging markets exposure. Chase
should be able to grow earnings at a double-digit rate, and use excess cash to
buy back 3 to 4 percent of the stock.
TUPPERWARE CORP manufactures and markets a broad line of consumer and personal
care products, with its core product line being food storage containers. The
company also has a line of children's educational toys, serving products and
gifts, and its products are sold in more than 100 countries as well as U.S. The
stock is cheap on a cash-flow basis for a high return on capital business.
UNICOM (Commonwealth Edison) (USA) supplies electricity to 70% of northern
Illinois. Its assets are split 70% generation and 30% T&D (transmission and
distribution). The company is the largest nuclear operator in the United States
and provides energy marketing and district cooling services in twelve states.
The strengths of the company include: a new regulatory environment (Dec. 1997)
that protects it from competition until 2006 at the earliest; highly regarded
new management; and improving nuclear operating rates. The stock is cheap
relative to book value and earnings.
AEGIS (U.K.) is the holding company for Carat, the largest independent media
planning and buying agency in Europe, with a roster of multinational clients
including Volkswagen, Philips, American Express, Walt Disney, and Coca-Cola. As
media audiences fragment and new media proliferate, Carat is expanding the range
of services it offers to help clients target and reach consumers efficiently.
The company is also expanding from a small base in the U.S. and Asia to serve
the multinational clients whose loyalty it enjoys in Europe. Even while growing,
Aegis is able to convert 100% or more of its operating profit into operating
cash flow by virtue of the float provided by customers, who pay their bills
before the company pays the media.
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
BTR (U.K.) is a diversified engineering group currently restructuring to
concentrate on core businesses of automotive components, power drives, control
systems and specialist engineering. These remaining businesses are more cash
generative, and have higher growth and higher returns on investment than the
businesses scheduled for disposal. Principal threats to the investment thesis
are likely disposal proceeds, an operating environment which has already
generated multiple profit warnings, market concerns on management credibility
and the threat of margin erosion. These concerns are valid, but look well
discounted in the current share price. A satisfactory resolution of these issues
and prudent use of disposal proceeds should lead to a re-rating of the stock.
WOLSELEY (U.K.) is one of the world's largest distributors of building products,
with principal operations in the USA, U.K. and Continental Europe. Principal
businesses are the distribution of plumbing prerequisites and heating-related
supplies through Ferguson Enterprises in the U.S. and the Plumb Centre in the
U.K.. The market appears to have over-reacted to a profits warning from
Wolseley's U.S. operations, where increased Information Technology spending has
raised fears of past under-investment. Allayment of these concerns combined with
good growth potential around the world should lead to a re-rating of the stock.
GROUPE DANONE is France's largest brewer of beer as well as the world number two
in mineral water and number one in European dairy products. Though the company
has problems in their biscuits and pasta businesses, management is committed to
turning these around. Danone has a low level of maintenance capital expenditure
and generates strong free cash flow.
VALMET (Finland) is the world's leading paper machine manufacturer with a strong
global position. In recent years it has expanded from its strong European base
and is now well established in both North America and the fast growing markets
in Asia. In recent years the group has reduced its cyclicality by increasing the
use of subcontractors and expanding the service and maintenance business. Valmet
has a strong financial position and is cheap on earnings and cashflow.
Stock sales during the first half of the year included:
COLES MYER (Australia) reached fair value.
IRISH LIFE (Ireland) reached target price.
SULZER (Switzerland) reached fair value.
BASS (U.K.) reached target price.
JOHN MOWLEM (U.K.) reached target price.
RACAL ELECTRONICS (U.K.) sold on strength.
TATE AND LYLE (U.K.) better value elsewhere.
UNILEVER (U.K.) reached target price.
ASCENT ENTERTAINMENT (USA) spin off from Comsat.
AT&T (USA) reached fair value.
BROWNING-FERRIS (USA) low conviction on investment thesis going forward.
LUKENS STEEL (USA) takeover.
PENNZOIL (USA) sold in wake of management actions following failed takeover
attempt.
July 1998
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
COMMON STOCKS (93.4%)
AUSTRALIA (1.1%)
94,300 CSR Ltd..................................................... $ 272
18,700 Telstra Corp., Ltd. (Installment
Receipts-Final Installment of AUD 1.35/Share due
11/17/98)................................................. 48
-------
320
-------
BELGIUM (1.8%)
2,920 Delhaize-Le Lion............................................ 204
6,000 G.I.B. Group................................................ 339
-------
543
-------
CANADA (2.5%)
4,750 Potash Corp. of Saskatchewan, Inc........................... 357
16,000 TELUS Corp.................................................. 414
-------
771
-------
FINLAND (1.1%)
4,800 Pohjola Insurance Group, Class B............................ 239
6,100 Valmet Oyj.................................................. 105
-------
344
-------
FRANCE (5.7%)
610 Bongrain.................................................... 306
2,200 Elf Aquitaine............................................... 309
3,300 France Telecom.............................................. 228
2,200 Groupe Danone............................................... 606
(a)1,670 SGS-Thomson Microelectronics N.V............................ 118
2,500 Scor........................................................ 159
-------
1,726
-------
GERMANY (6.1%)
13,200 BASF AG..................................................... 626
4,900 Bayer AG.................................................... 253
100 Karstadt AG................................................. 48
8,770 VEBA AG..................................................... 598
158 Viag AG..................................................... 107
242 Volkswagen AG............................................... 233
-------
1,865
-------
HONG KONG (0.5%)
37,000 Hysan Development Co., Ltd.................................. 31
71,000 Jardine Strategic Holdings, Inc............................. 135
-------
166
-------
IRELAND (2.4%)
14,958 Bank of Ireland............................................. 306
60,901 Green Property plc.......................................... 425
-------
731
-------
ITALY (2.2%)
36,300 Mediaset S.p.A.............................................. 232
90,200 Telecom Italia S.p.A. Di Risp (NCS)......................... 437
-------
669
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
JAPAN (7.4%)
9,000 Fuji Photo Film Ltd......................................... $ 314
16,000 Fujisawa Pharmaceutical Co., Ltd............................ 150
10,000 Hitachi Ltd................................................. 65
12 Japan Tobacco, Inc.......................................... 81
32,000 Kao Corp.................................................... 494
10,000 Matsushita Electric Industrial Co., Ltd..................... 161
27 Nippon Telegraph & Telephone Corp........................... 224
33,000 Shionogi & Co., Ltd......................................... 190
1,800 Sony Corp................................................... 155
12,000 Sumitomo Marine & Fire Insurance Co......................... 67
3,000 TDK Corp.................................................... 222
11,000 Toyo Seikan Kaisha Ltd...................................... 135
-------
2,258
-------
NETHERLANDS (5.5%)
12,000 ABN Amro Holding N.V........................................ 281
500 Akzo Nobel N.V.............................................. 111
(a)6,800 Benckiser N.V., Class B..................................... 418
10,012 ING Groep N.V............................................... 656
2,600 Philips Electronics N.V..................................... 219
-------
1,685
-------
NEW ZEALAND (0.4%)
54,900 Lion Nathan Ltd............................................. 122
-------
PORTUGAL (0.6%)
5,000 Cimpor-Cementos de Portugal................................. 176
-------
SOUTH AFRICA (0.0%)
2,000 Sasol Ltd................................................... 12
-------
SPAIN (1.0%)
19,400 Iberdrola................................................... 315
-------
SWEDEN (1.3%)
54,300 Nordbanken Holding AB....................................... 398
-------
SWITZERLAND (5.5%)
50 ABB AG (Bearer)............................................. 74
65 Ascom Holdings AG (Bearer).................................. 120
420 Forbo Holding AG (Registered)............................... 214
348 Holderbank Financiere Glarus AG, Class B (Bearer)........... 443
390 Nestle (Registered)......................................... 835
-------
1,686
-------
UNITED KINGDOM (12.0%)
95,500 Aegis Group plc............................................. 155
9,155 Aggreko plc................................................. 30
6,069 B.A.T. Industries plc....................................... 61
(a)105,269 BTR plc..................................................... 299
8,700 Bank of Ireland............................................. 178
10,803 Bass plc.................................................... 203
10,950 Burmah Castrol plc.......................................... 196
9,155 Christian Salvesen plc...................................... 18
8,600 Danka Business Systems plc ADR.............................. 102
35,200 English China Clays plc..................................... 121
50,100 Imperial Tobacco Group plc.................................. 370
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
60,000 Matthews (Bernard) plc...................................... $ 117
20,171 Peninsular & Oriental Steam Navigation Co................... 291
19,400 Premier Farnell plc......................................... 98
18,500 Reckitt & Colman plc........................................ 353
6,330 Rolls-Royce plc............................................. 26
36,933 Royal & Sun Alliance Insurance Group plc.................... 382
64,576 WPP Group plc............................................... 423
41,200 Wolseley plc................................................ 242
-------
3,665
-------
UNITED STATES (36.3%)
4,450 Albertson's, Inc............................................ 231
5,005 Aluminum Company of America................................. 330
25,350 American Stores Co.......................................... 613
6,865 B. F. Goodrich Co........................................... 341
(a)3,800 BJ's Wholesale Club, Inc.................................... 154
3,200 BankBoston Corp............................................. 178
8,900 Boise Cascade Corp.......................................... 291
10,200 Borg-Warner Automotive, Inc................................. 490
(a)24,000 Cadiz Land Co., Inc......................................... 278
8,590 Chase Manhattan Corp........................................ 648
10,150 COMSAT Corp................................................. 287
(a)33,150 Data General Corp........................................... 495
(a)14,200 Egghead, Inc................................................ 120
9,000 Enhance Financial Services Group, Inc....................... 304
5,250 Finova Group, Inc........................................... 297
(a)14,000 GenRad, Inc................................................. 277
7,000 General Signal Corp......................................... 252
3,100 Georgia Pacific Corp........................................ 183
1,550 Georgia Pacific Corp. (Timber Group)........................ 36
(a)3,800 Homebase, Inc............................................... 30
13,100 Houghton Mifflin Co......................................... 416
3,430 IBP, Inc.................................................... 62
(a)14,600 InteliData Technologies Corp................................ 14
8,700 MBIA, Inc................................................... 651
1,100 Mellon Bank Corp............................................ 77
(a)5,750 NCR Corp.................................................... 187
(a)12,170 Noble Drilling Corp......................................... 293
(a)17,595 Ocean Energy, Inc........................................... 344
11,800 Penncorp Financial Group, Inc............................... 242
14,100 Pharmacia & Upjohn, Inc..................................... 650
19,300 Philip Morris Cos., Inc..................................... 760
2,740 Tecumseh Products Co., Class A.............................. 145
9,250 Tenneco, Inc................................................ 352
2,450 Terra Nova (Bermuda) Holdings Ltd., Class A................. 77
(a)950 Toys "R" Us, Inc............................................ 22
18,400 Tupperware Corp............................................. 518
5,900 UST Corp.................................................... 156
4,300 Unicom Corp................................................. 151
4,600 United Dominion Industries Ltd.............................. 154
-------
11,106
-------
TOTAL COMMON STOCKS (COST $26,025)............................................ 28,558
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
UNITS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
UNITS (2.6%)
IRELAND (0.4%)
13,500 Clondalkin Group plc........................................ $ 113
-------
SWITZERLAND (2.2%)
510 Cie Financiere Richemont AG, Class A........................ 668
-------
TOTAL UNITS (COST $774)....................................................... 781
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
HONG KONG (0.0%)
(a)3,700 Hysan Development Co., Ltd. (COST $0)....................... --
-------
TOTAL FOREIGN & U.S. SECURITIES (96.0%) (COST $26,799)........................ 29,339
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENT (3.0%)
REPURCHASE AGREEMENT (3.0%)
$931 Chase Securities, Inc. 5.40%, dated 6/30/98, due 7/1/98, to
be repurchased at $931, collateralized by U.S. Treasury
Bonds, 8.875%, due 2/15/19, valued at $959 (COST $931).... 931
-------
FOREIGN CURRENCY (0.4%)
BEF 143 Belgian Franc............................................... 4
GBP 52 British Pound............................................... 86
FIM 12 Finnish Markka.............................................. 2
DEM 5 German Mark................................................. 3
HKD 20 Hong Kong Dollar............................................ 2
ITL 13,647 Italian Lira................................................ 8
JPY 784 Japanese Yen................................................ 6
NZD 4 New Zealand Dollar.......................................... 2
ESP 13 Spanish Peseta.............................................. --
-------
TOTAL FOREIGN CURRENCY (COST $113)............................................ 113
-------
TOTAL INVESTMENTS (99.4%) (COST $27,843)...................................... 30,383
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Cash...................................................................... $ 1
Receivable for Investments Sold........................................... 292
Dividends Receivable...................................................... 77
Foreign Withholding Tax Reclaim Receivable................................ 10
-------
380
LIABILITIES (-0.6%)
Payable for Investments Purchased......................................... (96)
Investment Advisory Fees Payable.......................................... (28)
Professional Fees Payable................................................. (25)
Custodian Fees Payable.................................................... (13)
Net Unrealized Loss on Foreign Currency Exchange Contracts................ (9)
Administrative Fees Payable............................................... (8)
Other Liabilities......................................................... (8) (187)
------- --------
NET ASSETS (100%).................................................................... $30,576
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,321,094 outstanding $0.001 par value shares (authorized 500,000,000
shares)............................................................................ $ 13.17
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital...................................................................... $27,443
Undistributed Net Investment Income.................................................. 216
Accumulated Net Realized Gain........................................................ 386
Unrealized Appreciation on Investments and Foreign Currency Translations.............
2,531
--------
NET ASSETS........................................................................... $30,576
--------
--------
</TABLE>
- ---------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ---------- ----- ----------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
U.S.$ 10 $ 10 7/01/98 ZAR 60 $ 10 $ --
GBP 406 671 12/16/98 U.S.$ 662 662 (9)
----- ----- ---
$ 681 $ 672 $ (9)
----- ----- ---
----- ----- ---
</TABLE>
- ---------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
AUD -- Australian Dollar
NCS -- Non Convertible Shares
ZAR -- South African Rand
- ----------------------------------------------------------------
At June 30, 1998, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of the Portfolio were:
<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 27,730 $ 3,723 $ (1,183) $ 2,540
</TABLE>
For the six months June 30, 1998, purchases and sales of investment securities
for the Portfolio, other than long-term U.S. Government securities and
short-term investments, were approximately $15,161,000 and $1,090,000,
respectively. There were no purchases and sales of long-term U.S. Government
securities during the six months ended June 30, 1998.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- ------- ---------
<S> <C> <C>
Capital Equipment....................... $ 5,119 16.7%
Consumer Products....................... 7,714 25.2
Energy.................................. 1,103 3.6
Finance................................. 5,753 18.8
Mining.................................. 540 1.8
Materials............................... 2,184 7.2
Multi-Industry.......................... 1,244 4.1
Technology.............................. 592 1.9
Services................................ 5,090 16.7
------- ---------
Total Foreign & U.S. Securities......... $29,339 96.0%
------- ---------
------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
(UNAUDITED)
(000)
<S> <C>
- -----------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 297
Interest 84
Less: Foreign Taxes Withheld (27)
------
Total Income 354
------
EXPENSES:
Investment Advisory Fees 94
Less: Fees Waived (45)
------
Net Investment Advisory Fees 49
Administrative Fees 33
Professional Fees 21
Shareholder Reports 16
Custodian Fees 14
Directors' Fees and Expenses 1
Other 2
------
Net Expenses 136
------
Net Investment Income 218
------
NET REALIZED GAIN (LOSS) ON:
Investments Sold 264
Foreign Currency Transactions (7)
------
Net Realized Gain 257
------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments 1,719
Foreign Currency Translations (22)
------
Change in Unrealized Appreciation/Depreciation 1,697
------
Net Realized Gain and Change in Unrealized
Appreciation/Depreciation 1,954
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,172
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD FROM JANUARY 2,
JUNE 30, 1998 1997*
(UNAUDITED) TO DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 218 $ 96
Net Realized Gain 257 332
Change in Unrealized
Appreciation/Depreciation 1,697 834
------- -------
Net Increase in Net Assets
Resulting from Operations 2,172 1,262
------- -------
DISTRIBUTIONS:
Net Investment Income -- (96)
Net Realized Gain -- (205)
------- -------
Total Distributions -- (301)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 25,048 14,602
Distributions Reinvested -- 172
Redeemed (11,351) (1,028)
------- -------
Net Increase in Net Assets Resulting
from Capital Share Transactions 13,697 13,746
------- -------
Total Increase in Net Assets 15,869 14,707
NET ASSETS:
Beginning of Period 14,707 --
------- -------
End of Period (Including
undistributed (overdistributed)
net investment income $216 and
$(2), respectively) $30,576 $14,707
------- -------
------- -------
- ---------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,925 1,324
Shares Issued on Distributions
Reinvested -- 15
Shares Redeemed (856) (87)
------- -------
Net Increase in Capital Shares
Outstanding 1,069 1,252
------- -------
------- -------
- ---------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JANUARY 2, 1997*
JUNE 30, 1998 TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.74 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.09 0.08
Net Realized and Unrealized Gain 1.34 1.92
------- -------
Total From Investment Operations 1.43 2.00
------- -------
DISTRIBUTIONS
Net Investment Income -- (0.08)
Net Realized Gain -- (0.18)
------- -------
Total Distributions -- (0.26)
------- -------
NET ASSET VALUE, END OF PERIOD $ 13.17 $ 11.74
------- -------
------- -------
TOTAL RETURN 12.18% 20.04%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $30,576 $14,707
Ratio of Expenses to Average Net
Assets 1.15%** 1.15%**
Ratio of Net Investment Income to
Average Net Assets 1.85%** 1.24%**
Portfolio Turnover Rate 5% 20%
- -----------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.02 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.54%** 2.43%**
Net Investment Income (Loss) to
Average Net Assets 1.47%** (0.04)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
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 June 30, 1998, the Fund was comprised of eleven separate active
portfolios (individually referred to as a "Portfolio", collectively as the
"Portfolios").
The accompanying financial statements cover only the Global Equity Portfolio.
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 average of 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. The prices provided by a pricing service are
determined without regard to bid or last sale prices, but take into account
institutional size trading in similar groups of securities and any developments
related to the specific 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 each 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.
Certain Portfolios may be subject to taxes imposed by countries in which they
invest. 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 these amounts are earned.
Taxes may also be based on the movement of foreign currency and are accrued
based on the value of investments denominated in such currency.
3. REPURCHASE AGREEMENTS: The Portfolios of the Fund 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.
9
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
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.
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. In the absence of
trading of the foreign shares in such markets, the Fund values the foreign
shares at the closing exchange price of the local shares. Such securities are
identified as fair valued in the Statement of Net Assets.
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates and, in certain situations, to gain exposure to foreign
currencies. 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 Portfolios as unrealized gain or loss. The Portfolios record
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. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The
Portfolios may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, the Portfolio may purchase securities
on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
either a segregated account in which it maintains liquid assets in an amount at
least equal in value to the Portfolio's commitments to purchase such securities
or designates such assets as segregated on the custodian's records for the
Portfolio's regular custody account. Purchasing securities on a forward
commitment or when-issued or delayed-delivery basis may involve a risk that the
market price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of delivery.
7. LOAN AGREEMENTS: Certain Portfolios 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 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 typically 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.
8. 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 commencement of operations. Morgan Stanley Asset Management Inc. has
10
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
agreed that in the event any of its initial shares which comprised the Fund at
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.
9. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolio sells securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities at the
market price at the time of replacement. The Portfolio may have to pay a premium
to borrow the securities as well as pay any dividends or interest payable on the
securities until they are replaced. The Portfolio's obligation to replace the
securities borrowed in connection with a short sale will generally be secured by
collateral deposited with the broker that consists of cash, U.S. government
securities or other liquid, high grade debt obligations. In addition, the
Portfolio will either designate on the custodian records in its regular custody
account or place in a segregated account with its Custodian an amount of cash,
U.S. government securities or other liquid high grade debt obligations equal to
the difference, if any, between (1) the market value of the securities sold and
(2) any cash, U.S. government securities or other liquid high grade debt
obligations deposited as collateral with the broker in connection with the short
sale. Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases cannot exceed the total amount
invested.
10. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, index, instrument or basket of
instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based upon
their quoted daily settlement prices; changes in initial settlement value
(represented by cash paid to or received from brokers as "variation margin") are
accounted for as unrealized appreciation (depreciation). When futures contracts
are closed, the difference between the opening value at the date of purchase and
the value at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to manage exposure to the
stock and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs. Futures
contracts involve market risk in excess of the amounts recognized in the
Statement of Net Assets. Risks arise from the possible movements in security
values underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which may
not correlate with the change in value of the hedged investments. In addition,
there is the risk that the Portfolios may not be able to enter into a closing
transaction because of an illiquid secondary market.
11. SWAP AGREEMENTS: The Portfolios may enter into swap agreements to exchange
one return or cash flow for another return or cash flow in order to hedge
against unfavorable changes in the value of securities or to remain fully
invested and to reduce transaction costs. The following summarizes swaps which
may be entered into by the Portfolios.
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security, instrument or basket of instruments underlying
the transaction exceeds or falls short of the offsetting interest obligation,
the Portfolio will receive a payment from or make a payment to the counterparty,
respectively. Total return swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as unrealized
gains or losses in the Statement of Operations. Periodic payments received or
made at the end of each measurement period, but prior to termination, are
recorded as realized gains or losses in the Statement of Operations. Realized
gains or losses on maturity or termination of interest rate and total return
swaps are presented in the Statement of Operations.
Because there is no organized market for these swap agreements, the value of
open swaps reported in the Statement of Net Assets may differ from that which
would be realized in the event the Portfolio terminated its position in the
agreement. Risks may arise upon entering into these agreements from the
potential inability of the counterparties to meet the terms of the agreements
and are generally limited to the amount of net interest payments to be received
and/or favorable movements in the value of the underlying security, instrument
or basket of instruments, if any, at the date of default.
12. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on portfolio securities and other financial instruments. Premiums
are received and are recorded as liabilities. The liabilities are subsequently
adjusted to reflect the current value of the options written. Premiums received
from writing options which expire are treated as realized gains. Premiums
received from writing options which
11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
are exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the net realized gain or loss. By
writing a covered call option, a Portfolio, in exchange for the premium,
foregoes the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase. By writing a
covered put option, a Portfolio, in exchange for the premium, accepts the risk
of a decline in the market value of the underlying security below the exercise
price.
Certain Portfolios may purchase call and put options on portfolio securities or
other financial instruments. The Portfolio may purchase call options to protect
against an increase in the price of the security or financial instrument it
anticipates purchasing. Each Portfolio may purchase put options on securities
which it holds or other financial instruments to protect against a decline in
the value of the security or financial instrument or to close out covered
written put positions. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Portfolio and the prices of
options relating to the securities purchased or sold by the Portfolio and from
the possible lack of a liquid secondary market for an option. The maximum
exposure to loss for any purchased option is limited to the premium initially
paid for the option.
13. 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. 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.
The amount and character of income and capital gain distributions to be paid by
Portfolios of 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 the
character and timing of the recognition of gains or losses on securities and
foreign currency exchange contracts, the timing of the deductibility of certain
foreign taxes and dividends received from real estate investment trusts.
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.
Settlement and registration of foreign securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible that a Portfolio holding these
securities could lose its share registration through fraud, negligence or even
mere oversight. In addition, shares being delivered for sales and cash being
paid for purchases may be delivered before the exchange is complete. This may
subject a Portfolio to further risk of loss in the event of a failure to
complete the transaction by the counterparty.
B. ADVISER: Morgan Stanley Asset Management Inc. ("MSAM"), a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., provides the Global Equity
Portfolio with investment advisory services for a fee, paid quarterly, at the
annual rate based on average daily net assets as follows:
<TABLE>
<CAPTION>
FROM MORE
FIRST $500 MILLION TO THAN
PORTFOLIO $500 MILLION $1 BILLION $1 BILLION
- --------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
Global Equity.............. 0.80% 0.75% 0.70%
</TABLE>
MSAM has agreed to reduce fees payable to it and to reimburse the Portfolio, if
necessary, to the extent that the annual operating expenses, as defined,
expressed as a percentage of average daily net assets, exceed the maximum ratio
of 1.15%.
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
corporate affiliate 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 in
certain emerging market countries.
D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Dean Witter &
12
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Co., 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 six months ended June 30, 1998, the Portfolio
incurred custody fees with MSTC of approximately $12,000 and had amounts payable
to MSTC at June 30, 1998 of approximately $9,000.
In addition, for the six months ended June 30, 1998, the Portfolio incurred
interest expense on balances with MSTC of approximately $1,000.
E. OTHER: During the six months ended June 30, 1998, the Portfolio paid
brokerage commissions to Morgan Stanley & Co., Incorporated, an affiliated
broker/dealer, of approximately $9,000.
At June 30, 1998, the net assets of certain Portfolios 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, a Portfolio may have shareholders that hold a significant
portion of the Portfolio's outstanding shares. Investment activities of these
shareholders could have a material impact on those Portfolios.
13
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley Asset Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director,
Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and CEO,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer,
LumeLite Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin & Boehm, P.C.
OFFICERS
Stefanie V. Chang
VICE PRESIDENT
James A. Gallo
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Lorraine Truten
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Rene J. Feuerman
ASSISTANT TREASURER
Karl O. Hartmann
ASSISTANT SECRETARY
INVESTMENT ADVISERS AND ADMINISTRATORS
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, NY 10020
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
THE PROSPECTUS OF THE MORGAN STANLEY UNIVERSAL FUNDS, INC. WHICH DESCRIBES IN
DETAIL EACH INVESTMENT PORTFOLIO'S INVESTMENT POLICIES, FEES AND EXPENSES.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
14
