<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 0.3%
Hong Kong 37.4%
Indonesia 1.7%
Korea 16.1%
Malaysia 3.7%
Pakistan 0.3%
Philippines 4.0%
Singapore 14.3%
Taiwan 16.9%
Thailand 3.6%
Other 1.7%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ---------------------------------------- ------------- ----------
<S> <C> <C>
Samsung Electronics Co. Korea 5.0 %
Sun Hung Kai Properties Ltd. Hong Kong 4.8 %
Hutchison Whampoa Ltd. Hong Kong 4.5 %
Hon Hai Precision Industry Taiwan 3.7 %
HSBC Holdings plc Hong Kong 3.5 %
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------ ----------
<S> <C> <C>
Finance $2,643 21.1 %
Technology 1,867 14.9 %
Capital Equipment 1,652 13.2 %
Services 1,342 10.7 %
Consumer Products 1,324 10.6 %
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI)
ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
<S> <C> <C>
AVERAGE ANNUAL
ONE SINCE
YEAR INCEPTION(3)
---------- ----------------
PORTFOLIO........... -6.45% -29.43%
INDEX............... -7.39% -31.71%
</TABLE>
1. The MSCI All-Country Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes dividends).
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 March 3, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI COMBINED FAR EAST
ASIAN EQUITY
PORTFOLIO FREE EX-JAPAN INDEX(1)
<S> <C> <C>
3/3/1997 $10,000 $10,000
12/31/1997 $5,648 $5,373
12/31/1998 $5,284 $4,976
*Commencement of operations
</TABLE>
In accordance with SEC regulations, Portfolio performance
shown assumes that all recurring fees (including management
fees) were deducted and all dividends and distributions were
reinvested.
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY
THE MSCI ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX AND 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 investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Asian
issuers (excluding Japan). The Portfolio intends to invest in equity securities
that are traded on recognized stock exchanges of countries in Asia and in equity
securities of companies organized under the laws of an Asian country whose
business is conducted principally in Asia.
For the year ended December 31, 1998, the Portfolio had a total return of -6.45%
compared to -7.39% for the Morgan Stanley Capital International (MSCI)
All-Country Far East Free ex-Japan Index (the "Index"). For the period from
inception on March 3, 1997 to December 31, 1998, the Portfolio had an average
annual total return of -29.43% compared to -31.71% for the Index.
The Portfolio underperformed the Index during the fourth quarter, with a total
return of 26.30% compared to 40.18% for the Index. Key contributors to the weak
relative performance during the fourth quarter were overweight positions in
Taiwan and utilities stocks and underweight positions in banking and property
stocks. This portfolio mix had contributed to relative out-performance in the
second and third quarters. A combination of domestic and global factors has
contributed to the
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
recovery in Asian stock markets including domestic monetary and fiscal policy
easing, improved domestic liquidity from current account surpluses, U.S. and
European interest rate cuts, corporate restructuring and currency strengthening
relative to the U.S. dollar.
The IMF crisis countries of South Korea, Thailand and Indonesia led the fourth
quarter rally just as they had led the downturn in late 1997. The much-maligned
IMF programs, based on tight monetary and fiscal policy, created significant
contractions in domestic consumption and investment. These contractions led to a
swing from current account deficits to current account surpluses, which
stabilized and then strengthened the currencies. Currency strength allowed the
governments to relax monetary and fiscal policy early in the third quarter with
IMF approval. By September, data began to emerge suggesting that industrial
production and some categories of consumption had bottomed in Korea and
Thailand. Interest rates have fallen dramatically, due to easier monetary policy
and falling inflationary expectations. For example, interest rates fell from
over 30% at the peak in Korea to 7% today; interest rate declines encouraged
domestic investors to return to the equity markets, pushing stocks up. In 1999,
easier monetary policy should stimulate some improvement in domestic consumption
as well.
Banking sector reform and recapitalization will be critical to the resumption of
strong growth across Asia because banks remain the key financial intermediaries
in most countries. Korea has taken the lead in addressing its banking problems.
Korea's program includes forced mergers of troubled banks, the use of government
funds to recapitalize failed banks and purchasing non-performing assets from
failed banks and liquidating these assets. Korea has also benefited from the
presence of one of Asia's few domestic bond markets, which has helped to keep
financing available even while the heavy bank reform work was underway. Thailand
has also designed a good recapitalization program although there have been some
disappointments in its implementation. One of the key elements of the banking
package, enhanced foreclosure laws, was delayed until mid-1999. The Indonesian
program has been designed, but due to the greater scale of the banking problems
in Indonesia, will take longer to implement. Bank recapitalization will allow
the restructuring efforts to move onto the next phase, corporate level debt
restructuring. These initiatives will require some debt forgiveness and
insolvent banks were in no position to take the required write-downs.
Hong Kong performed well during the fourth quarter but lagged the overall Index.
Hong Kong's equity market is particularly sensitive to interest rate movements
due to its heavy weighting of property and financial stocks. Interest rate cuts
in the U.S. and Hong Kong during September and October were very supportive to
the market. In addition, the Hong Kong Monetary Authority purchased
approximately 25% of the free float of most major stocks during its August
market intervention. This technical condition probably exaggerated the market's
move upwards when interest rates began to fall. Due to Hong Kong's decision to
maintain its currency peg to the U.S. dollar even as its neighbors devalued,
companies in Hong Kong have been forced to cut costs to remain competitive. The
resulting deflationary conditions have prevented real interest rates from
falling very far in Hong Kong; cuts in nominal interest rates have been matched
by a fall into outright deflation. The territory has not experienced real
interest rates at these levels for an extended period of time over the last few
decades and this should delay economic recovery and limit stock market gains.
Although we expect further reductions in nominal and real rates in 1999, the
scope for significant declines are limited given the U.S. dollar peg and
deflation. Revenue growth will be hard to come by in 1999 and much of the
earnings growth will be generated from comparisons with 1998 earnings which
include heavy non-recurring provisions. In addition, the HKMA must design a
program for the disposition of its extensive stock holdings. For these reasons,
we entered 1999 underweight Hong Kong equities.
China was the worst performing East Asian market in 1998. This underperformance
reflects the weakness of most of the listed Chinese companies as well as the
challenging economic conditions within China. The Chinese economy is currently
experiencing persistent deflation, oversupply of most manufactured goods,
slowing exports, high real interest rates and bank asset quality problems. The
Chinese government has attempted to deal with these issues through a massive
government-funded infrastructure program. This program helped gross domestic
product growth approach the government's target for 1998 but did not flow
through into corporate earnings and equity performance. The Chinese have begun
to grapple with external debt problems recently, as well. We expect the Chinese
government will shift from infrastructure spending to real reform as 1999
progresses. Some interesting values are starting to emerge among the Chinese
companies but earnings visibility remains poor and the flow of news will likely
be negative in the first half of the year.
We have maintained an overweight position in the technology sector in 1998.
These positions primarily consist of electronics companies in Taiwan, Korea and
Singapore. These stocks were more influenced by their local markets during the
fourth quarter than by individual company fundamentals. The Korean companies
outperformed the regional index during the quarter while the Taiwanese
underperformed along with Taiwan. Overall, the group underperformed during the
quarter but outperformed for the
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
year. These positions are the result of bottom-up work at the individual company
level. Given the quality of management, market positions, financial condition
and growth prospects of the portfolio of electronics stocks we hold, we believe
they could outperform again in 1999.
Malaysia's decision to implement capital controls in early September led to its
removal from the MSCI free indexes in late November. Shifting securities
regulations have severely limited the ability of most foreign investors to trade
over the past few months. We have a portfolio of sound, primarily
consumer-oriented stocks in Malaysia. The Malaysian government has signaled that
it is studying various proposals to lift the capital controls. We expect some
movement on this during the first half of 1999. We will reexamine our weighting
in Malaysia when the Malaysian authorities introduce their new rules.
Several themes we expect to drive equity performance in 1999 include modest
improvements in domestic consumption in most economies, disinflation in some
countries and deflation in others and the ability of companies to enhance their
own performance through corporate restructuring. Restructurings broadly include
debt restructuring, divestitures, sales of strategic stakes to multinationals,
business unit shutdowns, mergers or staff downsizing. We have seen all of the
above announced in various forms in 1998. The markets have clearly rewarded
companies that adopt Western style restructuring with a focus on enhancing
shareholder value. During 1999, we will be monitoring the progress of the
restructurings announced in 1998 and searching for management teams with the
vision and ability to improve returns to shareholders going forward.
Several risk factors we will be monitoring in 1999 include the performance of
the Japanese economy, the large supply of new offerings and capital raisings we
expect to see in Asia and growth in the developed economies that are the primary
markets for Asian exports. Upside surprises could include successful bank
recapitalization and economic recovery in Japan and stronger than expected
import demand from the U.S. and Europe.
During 1998, we constructed a fairly defensive portfolio emphasizing consumer
and technology companies and utilities while limiting our exposure to banks and
properties. During the fourth quarter, we increased our exposure to banks and
properties but, as performance reflects, we remained underweight these sectors.
In 1999, we are focusing more of our research time and company visits on
companies that have the ability to implement sound restructuring programs or are
sensitive to recoveries in domestic consumption. We do not believe that all of
Asia's economic problems have been solved but the trends have certainly
improved.
January 1999
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (98.1%)
CHINA (0.3%)
(a)92,000 Hengan International Group Co., Ltd.............. $ 33
-------
HONG KONG (37.4%)
39,000 Cheung Kong Holdings Ltd......................... 281
114,000 China Telecom (Hong Kong)........................ 197
77,000 CLP Holdings Ltd................................. 384
158,000 Dairy Farm International Holdings Ltd............ 182
200,120 Hong Kong & China Gas Co., Ltd................... 254
84,500 Hong Kong Electric Holdings Ltd.................. 256
164,400 Hong Kong Telecommunications Ltd................. 288
17,600 HSBC Holdings plc................................ 439
80,400 Hutchison Whampoa Ltd............................ 568
102,000 Li & Fung Ltd.................................... 211
77,000 New World Development Co., Ltd................... 194
59,000 SmarTone Telecommunications Holdings Ltd......... 164
82,000 Sun Hung Kai Properties Ltd...................... 598
74,000 Swire Pacific Ltd., Class A...................... 331
95,000 Television Broadcasts Ltd........................ 245
19,000 VTech Holdings Ltd............................... 83
-------
4,675
-------
INDONESIA (1.7%)
40,000 Gudang Garam..................................... 58
(a)8,500 PT Bat Indonesia................................. 15
15,500 PT Semen Gresik.................................. 16
34,500 Unilever Indonesia............................... 129
-------
218
-------
KOREA (15.9%)
1,720 Hankuk Glass Industry Co., Ltd................... 36
11,190 Korea Electric Power Corp........................ 277
3,710 Nong Shim Co., Ltd............................... 213
(d)3,240 Pohang Iron & Steel Co., Ltd..................... 205
5,100 Pohang Iron & Steel Co., Ltd. ADR................ 86
931 S1 Corp.......................................... 174
3,900 Samsung Electro-Mechanics Co..................... 84
9,323 Samsung Electronics Co........................... 625
(a,e)78 Samsung Electronics Co. GDR...................... 3
520 Samsung Fire & Marine Insurance.................. 195
(d)120 SK Telecom Co., Ltd.............................. 91
-------
1,989
-------
MALAYSIA (3.7%)
(d)7,000 Amway (Malaysia) Holdings Bhd.................... 10
(d)46,000 Carlsberg Brewery Malaysia Bhd................... 92
(d)79,000 Guiness Anchor Bhd............................... 56
(d)53,000 Hap Seng Consolidated Bhd........................ 24
(d)17,000 Nestle (Malaysia) Bhd............................ 48
(d)76,000 R.J. Reynolds Bhd................................ 60
(d)19,000 Rothmans of Pall Mall (Malaysia) Bhd............. 78
(d)51,000 Telekom Malaysia Bhd............................. 94
-------
462
-------
PAKISTAN (0.3%)
(d)167 Lever Brothers Pakistan Ltd...................... 2
(d)11,700 Shell Pakistan Ltd............................... 34
-------
36
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
PHILIPPINES (4.0%)
26,300 Bank of the Phillipine Islands................... $ 56
(a)137,450 La Tondena Distillers, Inc....................... 109
3,790 Manila Electric Co., Class B..................... 12
(a)446,700 Music Corp....................................... 37
75,550 San Miguel Corp., Class B........................ 146
722,960 SM Prime Holdings, Inc........................... 137
-------
497
-------
SINGAPORE (14.3%)
53,000 City Development Ltd............................. 230
88,000 Natsteel Electronics Ltd......................... 224
21,000 Oversea-Chinese Banking Corp. (Foreign).......... 142
8,000 Rothmans Industries Ltd.......................... 48
30,000 Singapore Airlines Ltd. (Foreign)................ 220
(a)13,900 Singapore Press Holdings Ltd..................... 151
174,000 Singapore Technologies Engineering Ltd........... 162
44,000 United Overseas Bank Ltd. (Foreign).............. 283
83,000 Venture Manufacturing (Singapore) Ltd............ 317
14,000 Want Want Holdings Ltd........................... 17
-------
1,794
-------
TAIWAN (16.9%)
(a)12,816 Asustek Computer, Inc............................ 120
(a)9,026 Asustek Computer, Inc. GDR....................... 79
37,000 Cathay Life Insurance Co., Ltd................... 119
(a)33,050 China Development Corp........................... 61
(a)76,561 Compal Electronics, Inc.......................... 250
(a)29,340 Compeq Manufacturing Co., Ltd.................... 192
309,842 Far Eastern Textile Ltd.......................... 253
(a)82,800 Hon Hai Precision Industry....................... 458
(a,d)31,500 Kuoyang Construction............................. 7
41,000 President Chain Store Corp....................... 129
(a)102,552 Siliconware Precision Industries Co.............. 181
(a)117,200 Taiwan Semiconductor Manufacturing Co............ 258
-------
2,107
-------
THAILAND (3.6%)
6,200 Advanced Info Service PCL (Foreign).............. 37
(d)40,900 BEC World PCL (Foreign).......................... 225
9,900 Delta Electronics (Thailand) PCL (Foreign)....... 52
(a)4,000 PTT Exploration & Production PCL (Foreign)....... 28
(a)61,700 Thai Farmers Bank PCL (Foreign).................. 109
-------
451
-------
TOTAL COMMON STOCKS (COST $11,336)............................ 12,262
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.2%)
KOREA (0.2%)
(a,d)158 Samsung Fire & Marine Insurance Co............... 30
-------
TAIWAN (0.0%)
(a,d)93,561 Compal Electronics, Inc.......................... --
-------
TOTAL RIGHTS (COST $0)........................................ 30
-------
TOTAL FOREIGN SECURITIES (98.3%) (COST $11,336)............... 12,292
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT AMOUNT
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
FOREIGN CURRENCY (1.6%)
HKD 73 Hong Kong Dollar................................. $ 9
IDR 20,038 Indonesian Rupiah................................ 3
MYR (d)570 Malaysian Ringgit................................ 105
PKR (d)240 Pakistani Rupee.................................. 4
PHP 1 Phillipines Peso................................. --
SGD 40 Singapore Dollar................................. 25
TWD 1,770 Taiwan Dollar.................................... 55
KRW 79 South Korean Won................................. --
-------
TOTAL FOREIGN CURRENCY (COST $201)............................ 201
-------
TOTAL INVESTMENTS (99.9%) (COST $11,537)...................... 12,493
-------
OTHER ASSETS (1.8%)
Cash........................................... $ 122
Receivable for Investments Sold................ 41
Receivable for Portfolio Shares Sold........... 21
Due from Adviser............................... 24
Dividends Receivable........................... 6
Foreign Withholding Tax Reclaim Receivable..... 1
Other Assets................................... 9 224
------
LIABILITIES (-1.7%)
Payable for Portfolio Shares Redeemed.......... (140)
Professional Fees Payable...................... (27)
Custodian Fees Payable......................... (19)
Payable for Investments Purchased.............. (15)
Administrative Fees Payable.................... (3)
Payable for Foreign Taxes...................... (3)
Other Liabilities.............................. (6) (213)
------ --------
NET ASSETS (100%)........................................ $12,504
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,390,941 outstanding $0.001 par value
shares (authorized 500,000,000 shares)................. $ 5.23
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital.......................................... $18,612
Undistributed Net Investment Income...................... 1
Accumulated Net Realized Loss............................ (7,062)
Unrealized Appreciation on Investments and Foreign
Currency Translations (Net of foreign taxes of $3)..... 953
--------
NET ASSETS............................................... $12,504
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing security
(d) -- Securities (totaling $1,165 or 9.3% of net assets at December 31,
1998) were valued at fair value--See Note A-1 to financial statements.
(e) -- 144A Security-certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
- ---------------
At December 31, 1998, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments (excluding foreign currency) of
the Portfolio were:
<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
(000) (000) (000) (000)
- --------- ------------- --------------- -----------------
<S> <C> <C> <C>
$ 11,560 $ 1,858 $ (1,126) $ 732
</TABLE>
- ---------------
For the year ended December 31, 1998, purchases and sales of investment
securities for the Portfolio, other than long-term U.S. Government securities
and short-term investments, were approximately $14,404,543 and $12,921,517
respectively. There were no purchases and sales of U.S. Government securities
for the year ended December 31, 1998.
- ---------------
At December 31, 1998, the Portfolio had available capital loss carryforwards to
offset future net capital gains, to the extent provided by regulations, through
December 31, 2006 of approximately $6,486,000. To the extent that capital loss
carryforwards are used to offset any future net capital gains realized during
the carryforward period as provided by U.S. tax regulations, no capital gains
tax liability will be incurred by the Portfolio for gains realized and not
distributed. To the extent that capital gains are so offset, such gains will not
be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1998 to December 31, 1998,
the Portfolio incurred and elected to defer until January 1, 1999, for U.S.
Federal income tax purposes, net capital losses of approximately $353,000.
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
VALUE NET
SECTOR DIVERSIFICATION (000) ASSETS
- ---------------------------------------- ------- ---------
<S> <C> <C>
Capital Equipment....................... $ 1,652 13.2%
Capital Goods........................... 871 7.0
Consumer Products....................... 1,324 10.6
Consumer Staples........................ 488 3.9
Multi-Industry.......................... 900 7.2
Energy.................................. 862 6.9
Finance................................. 2,643 21.1
Materials............................... 343 2.8
Technology.............................. 1,867 14.9
Services................................ 1,342 10.7
------- ---
Total Foreign Securities................ $12,292 98.3%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
(000)
<S> <C>
- --------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 242
Interest 48
Less: Foreign Taxes Withheld (18)
-------
Total Income 272
-------
EXPENSES:
Investment Advisory Fees 93
Less: Fees Waived (93)
-------
Net Investment Advisory Fees --
Custodian Fees 114
Administrative Fees 38
Shareholder Reports 37
Professional Fees 34
Directors' Fees and Expenses 1
Other 7
Expenses Reimbursed by Adviser (91)
-------
Net Expenses 140
-------
Net Investment Income 132
-------
NET REALIZED LOSS ON:
Investments Sold (4,610)
Foreign Currency Transactions (99)
-------
Net Realized Loss (4,709)
-------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (Net of foreign taxes of $3 on unrealized appreciation) 3,796
Foreign Currency Translations (7)
-------
Change in Unrealized Appreciation/Depreciation 3,789
-------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation (920)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (788)
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 3, 1997* TO
DECEMBER 31, 1998 DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 132 $ 27
Net Realized Loss (4,709) (2,392)
Change in Unrealized Appreciation/Depreciation 3,789 (2,836)
-------- -------
Net Decrease in Net Assets Resulting from
Operations (788) (5,201)
-------- -------
DISTRIBUTIONS:
Net Investment Income (103) (16)
-------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 13,610 18,447
Distributions Reinvested 62 9
Redeemed (12,848) (668)
-------- -------
Net Increase in Net Assets Resulting from Capital
Share Transactions 824 17,788
-------- -------
Total Increase (Decrease) in Net Assets (67) 12,571
NET ASSETS:
Beginning of Period 12,571 --
-------- -------
End of Period (Including undistributed net
investment income of $1 and $73, respectively) $ 12,504 $ 12,571
-------- -------
-------- -------
- ----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,849 2,333
Shares Issued on Distributions Reinvested 13 2
Shares Redeemed (2,701) (105)
-------- -------
Net Increase in Capital Shares Outstanding 161 2,230
-------- -------
-------- -------
- ----------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 3, 1997*
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1998 TO DECEMBER 31, 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.64 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.01
Net Realized and Unrealized Loss (0.42) (4.36)
------- -------
Total From Investment Operations (0.37) (4.35)
------- -------
DISTRIBUTIONS
Net Investment Income (0.04) (0.01)
------- -------
NET ASSET VALUE, END OF PERIOD $ 5.23 $ 5.64
------- -------
------- -------
TOTAL RETURN (6.45)% (43.52)%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $12,504 $12,571
Ratio of Expenses to Average Net Assets 1.21% 1.35%**
Ratio of Expenses to Average Net Assets Excluding
Interest Expense and Foreign Tax Expense 1.20% 1.20%**
Ratio of Net Investment Income to Average Net
Assets 1.14% 0.32%**
Portfolio Turnover Rate 121% 130%
- ---------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period:
Per Share Benefit to Net Investment Income $ 0.07 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.80% 3.10%**
Net Investment Loss to Average Net Assets (0.45)% (1.43)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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. Effective January 6, 1999, the Fund's name changed to the Morgan
Stanley Dean Witter Universal Funds, Inc. As of December 31, 1998, the Fund was
comprised of eleven separate active portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). An additional Portfolio, the
Money Market Portfolio, commenced operations on January 5, 1999.
The accompanying financial statements relate to the Asian Equity Portfolio.
Please refer to the Investment Overview for the Portfolio's investment
objectives.
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. 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.
A 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 these amounts are earned.
Taxes may also be based on transactions in 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
8
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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.
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.
The investment techniques of the Fund described in the following notes (5-11)
are applicable to certain, but not all, of the Portfolios of the Fund.
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 Portfolio as unrealized gain or loss. The Portfolio records
realized gains or losses when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
is generally limited to the amount of the unrealized gain on the contracts, if
any, at the date of default. Risks may also arise from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Certain
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 up to 120 days after the date of the
transaction. Additionally, a 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 a 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. A 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. A
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. A 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. A 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 a 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.
9
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
8. 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 purchased securities cannot exceed the total
amount invested.
9. 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 its 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 a Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market.
10. SWAP AGREEMENTS: Certain 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 Portfolio:
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 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.
11. 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 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
10
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 their portfolio
securities or other financial instruments. A 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.
12. 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 that
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 the Portfolio to further risk of loss in the event of a failure to
complete the transaction by the counterparty.
B. ADVISER: Morgan Stanley Dean Witter Investment Management Inc. ("MSDW
Investment Management"), a wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co., provides the 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 THAN
$500 MILLION TO $1 BILLION $1 BILLION
- --------------- --------------- -------------
<S> <C> <C>
0.80% 0.75% 0.70%
</TABLE>
MSDW Investment Management 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 1.20%.
C. ADMINISTRATOR: MSDW Investment Management (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. CUSTODIAN: The Chase Manhattan Bank and its affiliates serve as custodian for
the Fund. The Fund's assets held outside the United States have been held by
Morgan Stanley Trust Company ("MSTC"), which was an affiliate of the Adviser
prior to October 1, 1998. On October 1, 1998, MSTC was acquired by the Chase
Manhattan Bank. Custody fees are payable monthly based on assets held in
custody, investment purchase and sales activity, and account maintenance fee,
plus reimbursement for certain out-of-pocket expenses. Through September 30,
1998, the Fund
11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
paid MSTC fees of approximately $74,000. Through September 30, 1998, the
Portfolio incurred custody fees with MSTC of approximately $1,000.
E. OTHER: During the year ended December 31, 1998, the Portfolio paid brokerage
commissions to Morgan Stanley & Co., an affiliated broker/dealer, of
approximately $3,000.
At December 31, 1998, the net assets of certain Portfolios were substantially
comprised of foreign denominated securities and currency. Changes in foreign
currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
From time to time, a Portfolio has shareholders that hold a significant portion
of the Portfolio's outstanding shares. Investment activities of these
shareholders could have a material impact on those Portfolios.
12
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Morgan Stanley Dean Witter Universal Funds, Inc.
(formerly Morgan Stanley Universal Funds, Inc.)--
Asian Equity Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Morgan Stanley Dean Witter Universal Funds, Inc.--Asian Equity Portfolio
(hereafter referred to as the "Fund") at December 31, 1998, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and for the period March 3, 1997
(commencement of operations) through December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
13
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Dean Witter
Investment Management Inc. and Morgan Stanley
Dean Witter Investment Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Dean Witter Investment
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.
INVESTMENT ADVISERS AND ADMINISTRATORS
Morgan Stanley Dean Witter Investment 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
CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245
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
Belinda A. Brady
ASSISTANT TREASURER
Karl O. Hartmann
ASSISTANT SECRETARY
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
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
