<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 0.7%
Belgium 1.7%
Bermuda 0.3%
Canada 2.4%
Denmark 0.1%
Finland 1.2%
France 7.4%
Germany 5.0%
Ireland 2.2%
Italy 3.0%
Japan 7.5%
Netherlands 3.8%
New Zealand 0.6%
Portugal 0.8%
Spain 2.9%
Sweden 1.0%
Switzerland 8.7%
United Kingdom 9.5%
United States 33.3%
Other 7.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT
OF
NET
SECURITY COUNTRY ASSETS
- ---------------------------------------- --------------- ---------
<S> <C> <C>
Philip Morris Cos., Inc. United States 3.3%
American Stores Co. United States 3.1%
Nestle (Registered) Switzerland 3.0%
Cie Financiere Richemont AG,
Class A Switzerland 2.8%
Houghton Mifflin Co. United States 2.1%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------- ------------ ------------
<S> <C> <C>
Consumer Products $ 11,772 27.0%
Finance 7,272 16.7%
Capital Equipment 6,897 15.8%
Services 6,525 15.0%
Materials 3,345 7.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1)
- ------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------
AVERAGE
ANNUAL
SINCE
ONE YEAR INCEPTION(3)
---------- -------------
<S> <C> <C>
PORTFOLIO............................... 13.47% 16.76%
INDEX................................... 24.34% 20.50%
</TABLE>
1. The MSCI World Index is an unmanaged index of the 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.
COMPARISON OF THE CHANGE IN VALUE OF A
$10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GLOBAL EQUITY MSCI WORLD
<S> <C> <C>
Portfolio Index(1)
1/2/97* $10,000 $10,000
12/31/97 $12,004 $11,666
12/31/98 $13,621 $14,506
*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 PERFORMANCE RESULTS PROVIDED 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 the Portfolio's Adviser believes are
undervalued.
For the year ended December 31, 1998, the Portfolio had a total return of 13.47%
compared to 24.34% for the Morgan Stanley Capital International (MSCI) World
Index (the "Index"). For the period since inception on January 2, 1997 through
December 31, 1998, the Portfolio had an average annual total return of 16.76%
compared to 20.50% for the Index.
During the second half of 1998, stock selection in Europe was the largest
contributor to the Portfolio's underperformance, as the Portfolio's European
holdings returned -4.6% compared to the Index's 1.6% gain. One of the
Portfolio's largest holdings, Swiss food producer Nestle, rose just 2%, due to
concerns over the weakening U.S. dollar affecting revenues and profits (50% of
Nestle revenues are derived in dollars or dollar-related currencies). Rallying
European currencies also
1
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
weighed heavily on export oriented companies such as Bayer (-19%), as well as
BASF (-20%) which suffered further on the announcement of proposed changes in
the structure of German corporate tax. These losses were mitigated by strong
performance in the telecommunications sector, where increased penetration of
mobile phones in Southern Europe sparked a rally in Telecom Italia (+32%).
The Portfolio's U.S. portion also underperformed the Index, rising 5.2% against
the Index's 10.5% return. World oil prices, despite a brief spike during the
U.S. air-raids on Iraq, continued to fall sharply, leading to a collapse in the
share prices of Ocean Energy (-67%) and contract driller Noble Drilling (-46%).
These losses were mitigated by sharp increases in the prices of stocks like
Houghton Mifflin (+49%), which benefited from increased sales of school
textbooks, and COMSAT (+27%), which announced it was being taken over by
Lockheed. Philip Morris (+36%) also gained as the tide of tobacco liability
lawsuits appeared to have peaked.
In Asia, the Portfolio outperformed the Index, notably in Japan where the
Portfolio returned 21.0% against a 7.9% Index return. Strong U.S. sales allowed
consumer products maker Kao Corp to rise 47%, while higher than expected profits
also prompted gains in Fujisawa Pharmaceutical (+52%). Both companies also
benefited as investors sought shares of companies that were insulated from the
domestic economy.
OUTLOOK
Overall the Portfolio is defensively positioned for a continuation of volatile
financial market conditions in 1999. The three largest surprises for investors
in 1998 were slower than expected global growth (1.8% versus consensus of 3.5%),
lower than expected global inflation (1.3% versus consensus of 2.3%), and
finally, as a result of the former, weaker than expected earnings. The slowdown
in global growth occurring outside the U.S., in particular in Japan, but
increasingly in Europe, suggests caution is warranted. Indeed despite aggressive
global easing in monetary policy, led by the Federal Reserve, it seems a near
certainty that earnings expectations for 1999 are far too optimistic.
Consistent with our cautionary view on global growth, the Portfolio remains
overweight in the consumer products sector (27%). Utilities, telecoms and food
retailing are also overweighted. Telecom Italia is our largest telecommunication
holding. The Portfolio is underweight in those banks with a strong emphasis on
regional bank franchises like Bank of Ireland, and Nordbanken. In contrast, the
Portfolio has overweighted re-insurance and financial guaranty companies, such
as MBIA, Scor, and Enhance Financial due to compelling valuation levels.
The Portfolio remains underweight in the U.S. and Japan. Many of our U.S.
holdings reached fair value in the last 12 months and have been sold. Our
holdings are concentrated in the mid cap segment of the U.S. market where value
is most attractive following an unprecedented narrowing in U.S. market
leadership in 1998. We have found selective value in Japanese pharmaceuticals
like Fujisawa which is cheap relative to its global peer group. Kao, with its
core household products business, and Nippon Telegraph & Telephone lend
defensiveness. The challenge in Japan remains finding management who have
embraced concepts such as return on capital and maximizing shareholder value.
Finding cheap companies is not the problem, rather it is finding high quality
cheap companies that is more difficult. Portfolio weightings in Europe have
risen gradually through 1998, funded by reductions in the U.S. In particular,
Switzerland, UK, Ireland and Germany are overweighted as a result of our stock
selection.
1998 has been a difficult year for value managers. This is starkly illustrated
by the performance gulf between the MSCI World Growth index for the year (+25%)
and the MSCI Value index (+14%) for the year (with the World Index rising 24%).
While we know that a value strategy outperforms both Growth and the Index over
long periods of time, Value can and has underperformed Growth during times of
economic uncertainty as investors pay more for the perception of stable
earnings. Similarly, the narrowing leadership associated with manias or stock
bubbles can also disadvantage a value style like during the nifty fifty of the
early 70's or the internet/technology bubble which drove S & P 500 index
performance in 1998. Of note, the S & P 500's performance was narrower than in
all
2
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
but one of the past 10 years. While the S & P 500 returned 28.5% for the year,
the median return of all stocks in the Index was just 6.6%. 10 growth stocks
accounted for 41% of the S & P 500's 1998 performance. Microsoft, GE, Wal Mart,
Lucent, Cisco, and Intel top the list of growth stocks dominating performance.
Our disciplined value process ensures that we do not get swept up into such
manias, highlighted by the fantastic valuations currently ascribed to internet
shares.
The flight to growth and liquidity in 1998 has also meant that the large
cap/midcap valuation premium has reached historic proportions. We expect that
patient exploitation of this valuation anomaly will be rewarded over time. The
Portfolio is a value portfolio and reflects our bottom-up value discipline. The
price to cash flow ratio of the Portfolio is less than 9 times versus 14.2 times
for the MSCI World Index. This provides some comfort in what seems, after the
fourth quarter rally, once again an expensive equity world.
Recent additions to the Portfolio include:
LION NATHAN (New Zealand) enjoys a dominant position, along with Fosters, in the
Australasian brewing market. The stock generates substantial free cash flow with
capital spending below depreciation and is currently undervalued due to concern
over recent market share losses in Australia, and management turnover. The stock
is underpinned by its valuation and an attractive dividend yield.
MICHELIN (France) is currently one of the top 3 global tire producers. While the
company has been all about margins in the past, the management are now saying
that a 15% return on equity is the target, with the margin becoming a means to
this end, rather than an end in itself. Management seem to be fairly advanced in
their thinking in terms of return on capital employed, and this is very
important as Michelin has never in the past been run on asset efficiency. From
an external perspective, the three majors do seem to be playing a more profit
oriented game now that they have a clear lead over the second tier in terms of
market share. Consolidation has come in the OEM which should no longer need to
be subsidised by the AM, a fact that has helped the smaller players in the past.
POTASH CORP. OF SASKATCHEWAN (Canada) is the world's lowest cost and highest
reserved producer of potash and one of the world's most efficient producers of
phosphate and nitrogen, the other key fertilizer applications. The company is
renowned for its supply management and is generating substantial free cash flow.
SWISSCOM (Switzerland) is the previously state owned Telecom PTT, which was
recently floated in an initial public offering of the shares on October 5, 1998.
The company is active in the operation and maintenance of the major voice,
mobile and data networks in Switzerland. Swisscom benefits from high market
shares and high margins in its mobile business.
January 1999
3
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (91.7%)
AUSTRALIA (0.7%)
117,900 CSR Ltd.......................................... $ 288
-------
BELGIUM (1.7%)
2,920 Delhaize-Le Lion................................. 258
8,890 G.I.B. Group..................................... 466
-------
724
-------
BERMUDA (0.3%)
6,150 Terra Nova (Bermuda) Holdings Ltd., Class A...... 155
-------
CANADA (2.4%)
7,550 Potash Corp. of Saskatchewan, Inc................ 484
27,270 TELUS Corp....................................... 576
-------
1,060
-------
DENMARK (0.1%)
1,010 Danisco A.S...................................... 55
-------
FINLAND (1.2%)
8,950 Pohjola Insurance Group, Class B................. 491
3,500 Valmet Oyj....................................... 47
-------
538
-------
FRANCE (7.4%)
875 Bongrain......................................... 392
5,070 Elf Aquitaine.................................... 586
3,300 France Telecom................................... 262
2,910 Groupe Danone.................................... 833
2,840 Michelin (C.G.D.E.), Class B..................... 114
3,180 Pernod Ricard.................................... 207
5,000 Rhone-Poulence, Class A.......................... 257
8,500 Scor............................................. 562
-------
3,213
-------
GERMANY (4.8%)
17,300 BASF AG.......................................... 660
6,780 Bayer AG......................................... 285
100 Karstadt AG...................................... 52
11,370 VEBA AG.......................................... 674
158 Viag AG.......................................... 93
(a)4,140 Volkswagen AG.................................... 335
-------
2,099
-------
IRELAND (2.0%)
23,839 Bank of Ireland.................................. 531
60,901 Green Property plc............................... 345
-------
876
-------
ITALY (3.0%)
52,900 Mediaset S.p.A................................... 430
137,700 Telecom Italia S.p.A. Di Risp (NCS).............. 868
-------
1,298
-------
JAPAN (7.5%)
14,000 Fuji Photo Film Ltd.............................. 521
16,000 Fujisawa Pharmaceutical Co., Ltd................. 227
36,000 Hitachi Ltd...................................... 223
48 Japan Tobacco, Inc............................... 481
32,000 Kao Corp......................................... 723
10,000 Matsushita Electric Industrial Co., Ltd.......... 177
54 Nippon Telegraph & Telephone Corp................ 417
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
33,000 Sumitomo Marine & Fire Insurance Co.............. $ 209
3,000 TDK Corp......................................... 275
-------
3,253
-------
NETHERLANDS (3.8%)
12,000 ABN Amro Holding N.V............................. 252
7,595 Benckiser N.V., Class B.......................... 497
10,012 ING Groep N.V.................................... 611
4,450 Philips Electronics N.V.......................... 299
-------
1,659
-------
NEW ZEALAND (0.6%)
111,900 Lion Nathan Ltd.................................. 285
-------
PORTUGAL (0.8%)
10,270 Cimpor-Cementos de Portugal...................... 328
-------
SPAIN (2.9%)
36,800 Iberdrola........................................ 689
13,450 Telefonica de Espana............................. 599
-------
1,288
-------
SWEDEN (1.0%)
66,400 Nordbanken Holding AB............................ 426
-------
SWITZERLAND (8.7%)
50 ABB AG (Bearer).................................. 59
65 Ascom Holdings AG (Bearer)....................... 102
853 Cie Financiere Richemont AG, Class A............. 1,208
420 Forbo Holding AG (Registered).................... 184
390 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 462
593 Nestle (Registered).............................. 1,293
(a)1,160 Swisscom AG (Registered)......................... 486
-------
3,794
-------
UNITED KINGDOM (9.5%)
6,400 Allied Domecq plc................................ 59
34,600 Blue Circle Industries plc....................... 179
139,169 BTR plc.......................................... 287
5,900 Bank of Ireland.................................. 129
28,350 Burmah Castrol plc............................... 406
8,955 Christian Salvesen plc........................... 14
28,750 English China Clays plc.......................... 78
49,600 Imperial Tobacco Group plc....................... 531
60,000 Matthews (Bernard) plc........................... 116
19,400 Premier Farnell plc.............................. 52
58,100 Reckitt & Colman plc............................. 769
55,390 Royal & Sun Alliance Insurance Group plc......... 452
103,076 WPP Group plc.................................... 627
66,100 Wolseley plc..................................... 418
-------
4,117
-------
UNITED STATES (33.3%)
545 Albertson's, Inc................................. 35
5,525 Aluminum Company of America...................... 412
35,970 American Stores Co............................... 1,329
10,365 B. F. Goodrich Co................................ 372
(a)13,150 BJ's Wholesale Club, Inc......................... 609
3,200 BankBoston Corp.................................. 125
17,100 Boise Cascade Corp............................... 530
10,950 Borg-Warner Automotive, Inc...................... 611
(a)24,000 Cadiz Inc........................................ 183
24,300 COMSAT Corp...................................... 875
9,500 Chase Manhattan Corp............................. 647
(a)33,150 Data General Corp................................ 545
</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.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
UNITED STATES (CONT.)
9,000 Enhance Financial Services Group, Inc............ $ 270
11,650 Finova Group, Inc................................ 628
(a)22,750 GenRad, Inc...................................... 358
5,400 Georgia Pacific Corp............................. 316
(a)3,700 Homebase, Inc.................................... 23
19,300 Houghton Mifflin Co.............................. 912
8,530 IBP, Inc......................................... 248
(a)14,600 InteliData Technologies Corp..................... 19
12,860 MBIA, Inc........................................ 843
6,450 Mellon Bank Corp................................. 443
(a)7,250 NCR Corp......................................... 303
(a)15,470 Noble Drilling Corp.............................. 200
(a)26,595 Ocean Energy, Inc................................ 168
11,800 Penncorp Financial Group, Inc.................... 12
10,600 Pharmacia & Upjohn, Inc.......................... 600
26,500 Philip Morris Cos., Inc.......................... 1,418
6,690 Tecumseh Products Co., Class A................... 312
11,350 Tenneco, Inc..................................... 387
5,900 UST Corp......................................... 139
16,000 Unicom Corp...................................... 617
-------
14,489
-------
TOTAL COMMON STOCKS (COST $36,811)............................ 39,945
-------
PREFERRED STOCKS (0.2%)
GERMANY (0.2%)
(a)1,930 Volkswagen AG (COST $97)......................... 96
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
UNITS (000)
<C> <S> <C>
- -----------------------------------------------------------------------
UNITS (0.2%)
IRELAND (0.2%)
13,500 Clondalkin Group plc (COST $112)................. 97
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
SPAIN (0.0%)
(a)13,450 Telefonica S.A., expiring 1/30/99 (COST $0)...... 12
-------
TOTAL FOREIGN & U.S. SECURITIES (92.1%) (COST $37,020)........ 40,150
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (7.8%)
REPURCHASE AGREEMENT (7.8%)
$3,378 Chase Securities, Inc., 4.45%, dated 12/31/98,
due 1/4/99, to be repurchased at $3,380,
collateralized by U.S. Treasury Bonds, 10.375%,
due 11/15/12, valued at $3,413 (COST $3,378)... 3,378
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -----------------------------------------------------------------------
FOREIGN CURRENCY (0.1%)
FRF 25 French Franc..................................... $ 5
ESP 4,284 Spanish Peseta................................... 30
-------
TOTAL FOREIGN CURRENCY (COST $35)............................. 35
-------
TOTAL INVESTMENTS (100%) (COST $40,433)....................... 43,563
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -----------------------------------------------------
OTHER ASSETS (0.6%)
Cash............................... $ 1
Receivable for Investments Sold.... 125
Dividends Receivable............... 61
Receivable for Portfolio Shares
Sold.............................. 54
Foreign Withholding Tax Reclaim
Receivable........................ 10
Other.............................. 1 252
-----
LIABILITIES (-0.6%)
Payable for Foreign Currency
Exchange Contracts................ (125)
Investment Advisory Fees Payable... (45)
Payable for Investments
Purchased......................... (35)
Professional Fees Payable.......... (30)
Administrative Fees Payable........ (9)
Custodian Fees Payable............. (8)
Payable for Portfolio Shares
Redeemed.......................... (3)
Other Liabilities.................. (7) (262)
----- -------
NET ASSETS (100%)........................... $43,553
-------
-------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 3,314,064 outstanding $0.001
par value shares (authorized 9,000,000,000
shares)................................... $ 13.14
-------
-------
NET ASSETS CONSIST OF:
Paid in Capital............................. $40,246
Overdistributed Net Investment Income....... (13)
Accumulated Net Realized Gain............... 190
Unrealized Appreciation on Investments and
Foreign Currency Translations............. 3,130
-------
NET ASSETS.................................. $43,553
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing security
NCS -- Non Convertible Shares
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.)
DECEMBER 31, 1998
- ----------------------------------------------------------------
At December 31,1998, 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>
$ 40,398 $ 5,422 $ (2,292) $ 3,130
</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 $30,113,000 and $5,868,000,
respectively. There were no purchases and sales of long-term U.S. Government
securities during the year ended December 31, 1998.
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 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 currency losses of approximately $26,000.
- ----------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
MARKET NET
SECTOR DIVERSIFICATION VALUE ASSETS
- ---------------------------------------- ------- ---------
<S> <C> <C>
Capital Equipment....................... $ 6,897 15.8%
Consumer Products....................... 11,772 27.0
Energy.................................. 1,674 3.8
Finance................................. 7,272 16.7
Gold Mines.............................. 983 2.2
Materials............................... 3,345 7.7
Multi-Industry.......................... 814 1.9
Services................................ 6,525 15.0
Technology.............................. 868 2.0
------- ---------
Total Foreign and U.S. Securities....... $40,150 92.1%
------- ---------
------- ---------
</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>
YEAR ENDED
DECEMBER 31, 1998
(000)
<S> <C>
- --------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 519
Interest 168
Less: Foreign Taxes Withheld (39)
------
Total Income 648
------
EXPENSES:
Investment Advisory Fees 236
Less: Fees Waived (141)
------
Net Investment Advisory Fees 95
Administrative Fees 84
Professional Fees 57
Shareholder Reports 65
Custodian Fees 34
Directors' Fees and Expenses 2
Other 5
------
Net Expenses 342
------
Net Investment Income 306
------
NET REALIZED GAIN (LOSS) ON:
Investments Sold 311
Foreign Currency Transactions (42)
------
Net Realized Gain 269
------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 2,310
Foreign Currency Translations (14)
------
Change in Unrealized
Appreciation/Depreciation 2,296
------
Net Realized Gain and Change in
Unrealized
Appreciation/Depreciation 2,565
------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,871
------
------
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 2, 1997* TO
DECEMBER 31, 1998 DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 306 $ 96
Net Realized Gain 269 332
Change in Unrealized
Appreciation/Depreciation 2,296 834
-------- -------
Net Increase in Net Assets
Resulting from Operations 2,871 1,262
-------- -------
DISTRIBUTIONS:
Net Investment Income (282) (96)
Net Realized Gain (243) (205)
-------- -------
Total Distributions (525) (301)
-------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 42,627 14,602
Distributions Reinvested 525 172
Redeemed (16,652) (1,028)
-------- -------
Net Increase in Net Assets Resulting
from Capital Share Transactions 26,500 13,746
-------- -------
Total Increase in Net Assets 28,846 14,707
NET ASSETS:
Beginning of Period 14,707 --
-------- -------
End of Period (Including
overdistributed net investment
income of $(13) and $(2),
respectively) $ 43,553 $ 14,707
-------- -------
-------- -------
- -----------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,307 1,324
Shares Issued on Distributions
Reinvested 41 15
Shares Redeemed (1,286) (87)
-------- -------
Net Increase in Capital Shares
Outstanding 2,062 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
YEAR ENDED JANUARY 2, 1997* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.74 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10 0.08
Net Realized and Unrealized Gain 1.48 1.92
------- -------
Total From Investment Operations 1.58 2.00
------- -------
DISTRIBUTIONS
Net Investment Income (0.09) (0.08)
Net Realized Gain (0.09) (0.18)
------- -------
Total Distributions (0.18) (0.26)
------- -------
NET ASSET VALUE, END OF PERIOD $ 13.14 $ 11.74
------- -------
------- -------
TOTAL RETURN 13.47% 20.04%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 43,553 $ 14,707
Ratio of Expenses to Average Net
Assets 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets 1.03% 1.24%**
Portfolio Turnover Rate 22% 20%
- ------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.63% 2.43%**
Net Investment Income/Loss to
Average Net Assets 0.56% (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
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. As of 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 Porftolio, commenced operations on January 5, 1999.
The accompanying financial statements relate to the Global Equity Portfolio.
Please refer to the Portfolio's 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 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 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
9
<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 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.
10
<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 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: 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 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 expire are treated as realized gains. Premiums
received from writing options which expire one treated as realized gains.
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
11
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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. 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 instrument 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
the 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 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 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 TO THAN
$500 MILLION $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 1.15%.
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 shares 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,
12
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
investment purchase and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses. Through September 30, 1998,
the Fund paid MSTC fees of approximately $17,000.
In addition, through September 30, 1998, the Portfolio incurred interest expense
on balances with MSTC of approximately $1,000.
E. OTHER: During the year ended December 31, 1998, the Portfolio paid brokerage
commissions to Morgan Stanley & Co., Incorporated, an affiliated broker/dealer,
of approximately $12,000.
At December 31, 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 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.
13
<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.) -
Global 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.- Global 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 January 2, 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
14
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, the percentage of distributions taxable as
ordinary income for the Portfolio, as reported on Form 1099-DIV, that qualify
for the dividends received deduction for corporations is 50.0%.
For the year ended December 31, 1998, the Portfolio has designated a 20%
long-term capital gain of approximately $113,000.
For the year ended December 31, 1998, the Portfolio intends to pass through to
shareholders foreign tax credits of approximately $39,000 and has derived gross
income from sources within foreign countries in the amount of approximately
$325,000.
15
<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.
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
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
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.
16
