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Exhibit 17(a)
PROSPECTUS May 1, 2000
A Portfolio of
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
U.S. REAL ESTATE PORTFOLIO
Above average current income and long-term capital appreciation by investing
primarily in equity securities of companies in the U.S. real estate industry,
including real estate investment trusts ("REITs").
Investment Adviser
Morgan Stanley Asset Management
Distributor
Morgan Stanley & Co. Incorporated
The Universal Institutional Funds, Inc. (the "Fund") is a mutual fund that
provides investment vehicles for variable annuity contracts and variable life
insurance policies and for certain tax-qualified investors. The U.S. Real
Estate Portfolio (the "Portfolio") is one portfolio of the Fund managed by
Morgan Stanley Asset Management ("MSAM" or the "Adviser").
The Securities and Exchange Commission (the "Commission") has not approved or
disapproved these securities or passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
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INVESTMENT SUMMARY
U.S. Real Estate Portfolio 1
Additional Risk Factors and Information 2
INVESTMENT ADVISER 3
MANAGEMENT FEE 3
PORTFOLIO MANAGERS 4
SHAREHOLDER INFORMATION 5
FINANCIAL HIGHLIGHTS 6
</TABLE>
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INVESTMENT SUMMARY
U. S. REAL ESTATE PORTFOLIO
The Portfolio seeks above average current income and long-term capital
appreciation by investing primarily in equity securities of companies in the
U.S. real estate industry, including real estate investment trusts ("REITs").
Approach
The Adviser seeks a combination of current income and long-term gain by
constructing a portfolio of equity securities of companies that are in the U.S.
real estate business. The Portfolio focuses on REITs as well as real estate
operating companies and diversifies its investments as to issuers, property
types and region. The Adviser's approach emphasizes bottom-up stock selection
with a top-down asset allocation overlay.
Process
The Adviser actively manages the Portfolio using a combination of top-down and
bottom-up methodologies. The top-down asset allocation overlay is determined by
focusing on key regional criteria, which include demographic and macroeconomic
considerations (for example, population, employment, household formation and
income). The Adviser employs a value-driven approach to bottom-up security
selection which emphasizes underlying asset values, values per square foot and
property yields. In seeking an optimal matrix of regional and property market
exposure, the Adviser considers broad demographic and macroeconomic factors as
well as criteria, such as space demand, new construction and rental patterns.
Risk
Investing in the Portfolio may be appropriate for you if you are willing to
accept the risks and uncertainties of the U.S. real estate market in the hope
of earning current income and long-term gain. In general, prices of equity
securities are more volatile than those of fixed income securities. The prices
of equity securities will rise and fall in response to a number of different
factors. In particular, prices of equity securities will respond to events that
affect entire financial markets or industries (changes in inflation or consumer
demand, for example) and to events that affect particular issuers (news about
the success or failure of a new product, for example). As a result of price
volatility, there is a risk that you may lose money by investing in the
Portfolio. Investing in real estate companies entails the risks of the real
estate business generally, including sensitivity to economic and business
cycles, changing demographic patterns and government actions. In addition, at
times the Portfolio's market sector, U.S. real estate securities, may
underperform relative to other sectors.
Investing in REITs exposes investors to the risks of owning real estate
directly, as well as to risks that relate specifically to the way in which REITs
are organized and operated. REITs generally invest directly in real estate
(equity REITs), in mortgages (mortgage REITs) or in some combination of the two
(hybrid REITs). The Portfolio will invest primarily in equity REITs. Operating
REITs requires specialized management skills and the Portfolio indirectly bears
REIT management expenses along with the direct expenses of the Portfolio.
Individual REITs may own a limited number of properties and may concentrate in a
particular region or property type. REITs also must satisfy specific Internal
Revenue Code requirements in order to qualify for the tax-free pass through of
income. The risks of investing in the Portfolio may be intensified because the
Portfolio is non-diversified which means it may invest in securities of a
limited number of issuers. As a result, the performance of a particular
investment or a small group of investments may affect the Portfolio's
performance more than if the Portfolio were diversified.
[CHART]
PERFORMANCE
Commenced operations on March 3, 1997
1998 1999
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-10.86% -1.47%
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HIGH (QUARTER) LOW (QUARTER)
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4/99 - 6/99 7/98 - 9/98
13.09% -8.80%
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AVERAGE ANNUAL TOTAL RETURN for periods ended December 31, 1999.
NATIONAL ASSOCIATION OF
REAL ESTATE INVESTMENT
U.S. REAL ESTATE TRUSTS (NAREIT) EQUITY
PORTFOLIO INDEX*
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Past One Year -1.47% -4.62%
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Since Inception 1.27% -2.25%
The bar chart and table above show the
performance of the Portfolio year-by-
year and as an average over different
periods of time. This performance in-
formation does not include the impact
of any charges deducted by your insur-
ance company. If it did, returns would
be lower. The bar chart and table dem-
onstrate the variability of perfor-
mance over time and provide an indica-
tion of the risks of investing in the
Portfolio. How the Portfolio has per-
formed in the past does not necessar-
ily indicate how the Portfolio will
perform in the future.
* The NAREIT Equity Index is an
unmanaged market weighted index of
tax-qualified REITs listed on the
New York and American Stock
Exchanges and the NASDAQ National
Market System. An index is a
hypothetical measure of performance
based on the ups and downs of
securities that make up a particular
market. An index does not show
actual investment returns or reflect
payment of management or brokerage
fees, which would lower the index's
performance.
1
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INVESTMENT SUMMARY
ADDITIONAL RISK FACTORS AND INFORMATION
This section discusses additional risk factors and information relating to the
Portfolio. The Portfolio's investment practices and limitations are described
in more detail in the Statement of Additional Information ("SAI") which is
legally part of this Prospectus. For details on how to obtain a copy of the
SAI and other reports and information, see the back cover of this Prospectus.
Price volatility
The value of your investment in the Portfolio is based on the market prices of
the securities the Portfolio holds. These prices change daily due to economic
and other events that affect markets generally, as well as those that affect
particular regions or companies. These price movements, sometimes called
volatility, may be greater or lesser depending on the types of securities the
Portfolio owns and the markets in which the securities trade. Over time,
equity securities have generally shown gains superior to fixed income
securities, although they have tended to be more volatile in the short term.
Fixed income securities, regardless of credit quality, experience price
volatility, especially in response to interest rate changes.
Real estate investing
The Portfolio invests in companies that are mainly in the real estate business
(that is, they either (i) derive at least 50% of their revenues or profits
from the ownership, construction, management, financing or sale of
residential, commercial or industrial real estate, or (ii) have at least 50%
of the fair market value of their assets invested in residential, commercial
or industrial real estate). As a result, these companies (and, therefore, the
Portfolio) will experience the risks of investing in real estate directly.
Real estate is a cyclical business, highly sensitive to general and local
economic developments and characterized by intense competition and periodic
overbuilding. Real estate income and values may also be greatly affected by
demographic trends, such as population shifts or changing tastes on values.
Government actions, such as tax increases, zoning law changes or environmental
regulations, may also have a major impact on real estate. Changing interest
rates and credit quality requirements will also affect the cash flow of real
estate companies and their ability to meet capital needs.
Investment discretion
In pursuing the Portfolio's investment objective, the Adviser has considerable
leeway in deciding which investments it buys, holds or sells on a day-to-day
basis, and which trading strategies it uses. For example, the Adviser may
determine to use some permitted trading strategies while not using others. The
success or failure of such decisions will affect the Portfolio's performance.
Temporary defensive investments
When the Adviser believes that changes in economic, financial or political
conditions warrant, the Portfolio may invest without limit in certain short-
and medium-term fixed income securities for temporary defensive purposes. If
the Adviser incorrectly predicts the effects of these changes, such defensive
investments may adversely affect the Portfolio's performance and the Portfolio
may not achieve its investment objective.
Portfolio turnover
Consistent with its investment policies, the Portfolio will purchase and sell
securities without regard to the effect on portfolio turnover. Higher
portfolio turnover will cause the Portfolio to incur additional transaction
costs.
2
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INVESTMENT ADVISER
MSAM, with principal offices at 1221 Avenue of the Americas, New York, New
York 10020, the Adviser to the Portfolio, conducts a worldwide portfolio
management business, and provides a broad range of portfolio management
services to customers in the United States and abroad. Morgan Stanley Dean
Witter & Co. ("MSDW") is the direct parent of the Adviser and Morgan Stanley &
Co. Incorporated ("Morgan Stanley"), the Fund's distributor. MSDW is a
preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses -- securities, asset
management and credit services. As of December 31, 1999, the Adviser and its
institutional investment advisory affiliates had approximately $184.4 billion
in assets under management or fiduciary advice. On December 1, 1998, Morgan
Stanley Asset Management Inc. changed its name to Morgan Stanley Dean Witter
Investment Management Inc. but continues to do business in certain instances
using the name Morgan Stanley Asset Management.
MANAGEMENT FEE
The Adviser is entitled to receive a management fee at an annual percentage of
the Portfolio's average daily net assets as follows:
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<CAPTION>
ASSETS FEE
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First $500 million 0.80%
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From $500 million to $1 billion 0.75%
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More than $1 billion 0.70%
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However, the Adviser has voluntarily agreed to reduce its management fee
and/or reimburse the Portfolio so that total annual operating expenses of the
Portfolio will not exceed 1.10% of its average daily assets. For purposes of
determining the amount of the voluntary management fee waiver and/or
reimbursement, if any, the annual operating expenses of the Portfolio exclude
certain investment related expenses such as foreign country tax expense and
interest expense on amounts borrowed. As a result, the expense ratio,
including these expenses, after fee waivers and/or reimbursements may be
higher than 1.10%. Fee waivers and/or expense reimbursements are voluntary and
the Adviser reserves the right to terminate any waiver and/or reimbursement at
any time without notice.
For the fiscal year ended December 31, 1999, the Adviser received no fee from
the Portfolio for management services due to fee waivers. In addition, for the
same period the Adviser reimbursed expenses of approximately $121,000.
3
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PORTFOLIO MANAGERS
The following individuals have primary day-to-day portfolio management
responsibility for the Portfolio:
Theodore R. Bigman and Douglas A. Funke
Theodore R. Bigman is a Managing Director of MSAM and Morgan Stanley and has
primary responsibility for managing MSAM's global real estate securities
business. Prior to joining MSAM in 1995, he was a Director at CS First Boston,
where he worked for eight years in the Real Estate Group. While at CS First
Boston, Mr. Bigman established and managed that firm's REIT effort, which
included primary responsibility for $2.5 billion of initial public offerings
by REITs. Mr. Bigman graduated from Brandeis University in 1983 with a B.A. in
Economics and received his M.B.A. from Harvard University in 1987. Douglas A.
Funke, a Vice President of MSAM and Morgan Stanley, joined Morgan Stanley in
1993 as a Financial Analyst. Currently, he is responsible for providing
research and analytical support for the group's real estate securities
investment business. Prior to joining MSAM in 1995, he was a member of Morgan
Stanley's Interest Rate and Foreign Exchange Risk Management Group, where he
assisted in the execution of more than $3 billion of structured financings and
firm-related risk management projects. Mr. Funke graduated from the University
of Chicago in 1993 with a B.A. in Economics and Political Science. He is a
member of the National Association of Real Estate Investment Trusts and the
New York Society of Security Analysts. Mr. Bigman has shared primary
responsibility for managing the Portfolio's assets since its inception. Mr.
Funke has shared primary responsibility for managing the Portfolio's assets
since January 1999.
4
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SHAREHOLDER INFORMATION
Purchasing and selling Fund shares
Shares are offered on each day that the New York Stock Exchange (the "NYSE")
is open for business.
The Portfolio offers its shares only to insurance companies for separate
accounts they establish to fund variable life insurance and variable annuity
contracts, and by other entities under qualified pension and retirement plans.
An insurance company purchases or redeems shares of the Portfolio based on,
among other things, the amount of net contract premiums or purchase payments
allocated to a separate account investment division, transfers to or from a
separate account investment division, contract loans and repayments, contract
withdrawals and surrenders, and benefit payments. The contract prospectus
describes how contract owners may allocate, transfer and withdraw amounts to,
and from, separate accounts.
Pricing of Portfolio shares
The price per share will be the net asset value (NAV) per share next
determined after the Fund or its designee receives your purchase or redemption
order. The NAV for one share is the value of that share's portion of all of
the assets in the Portfolio. The Fund determines the NAV for the Portfolio as
of the close of the NYSE (normally 4:00 p.m. Eastern Time) on each day that
the NYSE is open for business.
About net asset value
The NAV per share of the Portfolio is determined by dividing the total market
value of the Portfolio's investments and other assets, less any liabilities,
by the total number of outstanding shares of the Portfolio. In making this
calculation, the Portfolio generally values securities at market price. If
market prices are unavailable or may be unreliable because of events occurring
after the close of trading, fair value prices may be determined in good faith
using methods approved by the Board of Directors. The Portfolio may hold
portfolio securities that are listed on foreign exchanges. These securities
may trade on weekends or other days when the Portfolio does not calculate its
NAV. As a result, the value of these investments may change on days when you
cannot purchase or sell shares.
Dividends and distributions
The Portfolio distributes its investment income annually as dividends and
makes distributions of capital gains, if any, at least annually.
Taxes
The Portfolio expects that it will not have to pay federal income taxes if it
distributes annually all of its net investment income and net capital gains.
The Portfolio will not be subject to federal excise taxes with respect to
undistributed income.
Special tax rules apply to life insurance companies, variable annuity
contracts and variable life insurance contracts. Net income and realized
capital gains that the Portfolio distributes are not currently taxable when
left to accumulate within a variable annuity or variable life insurance
contract or under a qualified pension or retirement plan. For information on
federal income taxation of a life insurance company with respect to its
receipt of distributions from the Portfolio and federal income taxation of
owners of variable annuity or variable life insurance contracts, refer to the
contract prospectus.
Because each investor's tax circumstances are unique and the tax laws may
change, you should consult your tax advisor about the federal, state and local
tax consequences applicable to your investment.
5
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FINANCIAL HIGHLIGHTS
U.S. REAL ESTATE PORTFOLIO
The financial highlights table is intended to help you understand the
Portfolio's financial performance since its inception. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate that an investor would have earned (or lost) on
an investment in the Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose unqualified report appears in the Portfolio's Annual Report to
Shareholders and is incorporated by reference in the SAI. The Annual Report
and the Fund's financial statements, as well as the SAI, are available at no
cost from the Fund at the toll free number noted on the back cover to this
Prospectus or from your insurance company.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED MARCH 3, 1997* TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C> <C>
SELECTED PER SHARE DATA
AND RATIOS
Net Asset Value,
Beginning of Period $ 9.80 $ 11.41 $ 10.00
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Income From Investment
Operations
Net Investment Income 0.43 0.40 0.17
Net Realized and
Unrealized Gain (Loss) (0.59) (1.63) 1.61
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Total From Investment
Operations (0.16) (1.23) 1.78
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Distributions
Net Investment Income (0.53) (0.29) (0.17)
Net Realized Gain -- (0.09) (0.20)
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Total Distributions (0.53) (0.38) (0.37)
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Net Asset Value, End of
Period $ 9.11 $ 9.80 $ 11.41
======= ======= =======
Total Return (1.47)% (10.86)% 17.99%
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Ratios and Supplemental
Data:
Net Assets, End of
Period (000's) $15,966 $15,134 $13,055
Ratio of Expenses to
Average Net Assets 1.10% 1.10% 1.10%**
Ratio of Net Investment
Income to Average Net
Assets 5.03% 4.14% 3.14%**
Portfolio Turnover Rate 40% 100% 114%
Effect of Voluntary
Expense Limitation
During the Period:
Per Share Benefit to
Net Investment Income $ 0.07 $ 0.06 $ 0.07
Ratios Before Expense
Limitation:
Expenses to Average Net
Assets 1.90% 1.73% 2.32%**
Net Investment Income
to Average Net Assets 4.23% 3.51% 1.92%**
</TABLE>
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* Commencement of operations
** Annualized
6
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WHERE TO FIND ADDITIONAL INFORMATION
Statement of Additional Information
In addition to this Prospectus, the Fund has an SAI, dated May 1, 2000, which
contains additional, more detailed information about the Fund and the
Portfolio. The SAI is incorporated by reference into this Prospectus and,
therefore, legally forms a part of this Prospectus.
Shareholder Reports
The Fund publishes annual and semi-annual reports containing financial
statements. These reports contain additional information about the Portfolio's
investments. In the Fund's shareholder reports, you will find a discussion of
the market conditions and the investment strategies that significantly
affected the Portfolio's performance during that period.
For additional Fund information, including information regarding the
investments comprising the Portfolio, please call 1-800-281-2715 or contact
your insurance company.
You may obtain the SAI and shareholder reports without charge by contacting
the Fund at the toll-free number above or your insurance company.
Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Commission in any of the following ways: (1)
In person: you may review and copy documents in the Commission's Public
Reference Room in Washington, D.C. (for information on the operation of the
Public Reference Room, call 1-202-942-8090); (2) On-line: you may retrieve
information from the EDGAR Database on the Commission's web site at
"http://www.sec.gov"; or (3) By mail; you may request documents, upon payment
of a duplicating fee, by writing to Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549-0102. You may also obtain this
information, upon payment of a duplicating fee, by e-mailing the Commission at
the following address: [email protected]. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-
7607.
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. LOGO APPEARS HERE]
P.O. Box 2798
Boston, Massachusetts 02208-2798
For information call 1-800-281-2715
