<PAGE>
As Filed With the Securities and Exchange Commission on January 9, 1998
File No. 002-89729
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ___ [ ]
POST-EFFECTIVE AMENDMENT NO. ___ [ ]
MAS FUNDS
---------
(Exact Name of Registrant as Specified in Charter)
One Tower Bridge
West Conshohocken, PA 19428
---------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 354-8185
--------------
----------------
(Name and Address of Agent for Service)
Copies to:
John H. Grady, Esq.
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036
and
Richard J. Shoch, Esq.
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective on February 9, 1998,
pursuant to Rule 488.
No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
<PAGE>
MAS FUNDS
January 9, 1998
Cross Reference Sheet
ITEMS REQUIRED BY FORM N-14
<TABLE>
<CAPTION>
Part A Information Required in Prospectus Registration Statement Heading
- ------ ---------------------------------- ------------------------------
<S> <C> <C>
Item 1. Beginning of Registration Statement and Cover Page of Registration Statement
Outside Front Cover Page of Prospectus
Item 2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus
Item 3. Synopsis and Risk Factors Synopsis; Risks
Item 4. Information About the Transaction Synopsis; Reasons for the Reorganization;
Description of the Reorganization
Item 5. Information About the Registrant Prospectus Cover Page; Synopsis; Description
of the Reorganization; The Portfolios'
Investment Objectives and Policies; Shareholder
Rights; The MAS and MSIF Portfolios
Item 6. Information About the Company Being Prospectus Cover Page; Synopsis; Description
Acquired of the Reorganization; The Portfolios' Investment
Objectives and Policies; Shareholder Rights;
Information About the MAS and MSIF Portfolios
Item 7. Voting Information Prospectus Cover Page; Notice of Special
Meeting of Shareholders; Synopsis; Voting
Matters
Item 8. Interest of Certain Persons and Experts Voting Matters
Item 9. Additional Information Required for Inapplicable
Reoffering by Persons Deemed to be
Underwriters
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Information Required in a
Part B Statement of Additional Information
- ------ -----------------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. Additional Information About Incorporated by Reference to the Registrant's
the Registrant Prospectus and SAI attached as exhibits to this
filing
Item 13. Additional Information About Incorporated by Reference to the Company's
the Company Being Acquired Prospectus and SAI attached as exhibits to
this filing
Item 14. Financial Statements Financial Statements
Part C Other Information
- ------ -----------------
Item 15. Indemnification Indemnification
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
</TABLE>
<PAGE>
February __, 1998
Dear Shareholder:
A Special Meeting of Shareholders of the Balanced and Small Cap Value
Equity Portfolios of Morgan Stanley Institutional Fund, Inc. ("MSIF") has been
scheduled for March 11, 1998. If you were a Shareholder of record of either of
these Portfolios as of the close of business on February 5, 1998, you are
entitled to vote at the meeting and for any adjournment of the meeting.
The attached Proxy Statement/Prospectus is designed to give you information
relating to the proposal upon which you are being asked to vote. The Board of
Directors is recommending that you approve a reorganization under which your
Portfolio would transfer all of its assets and liabilities to a corresponding
portfolio of MAS Funds in return for shares of that MAS Funds Portfolio.
Assuming approval by Shareholders, you will receive an amount of Institutional
Class shares of the corresponding MAS Funds Portfolio equal in value to your
MSIF Portfolio shares. The MAS Funds family of funds is managed by Miller
Anderson & Sherrerd, LLP, an affiliate of Morgan Stanley Asset Management Inc.,
the adviser to MSIF. It is anticipated that the transaction will be tax free
for Shareholders, and the Board of Directors expects it to result in operational
efficiencies. We encourage you to follow the Directors' recommendation to
approve the proposal.
Your vote is important to us. Your immediate response will help prevent
the need for additional solicitations. Thank you for taking the time to
consider this important proposal and for your investment in the Portfolios.
PLEASE MARK, SIGN, AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
Sincerely,
Michael F. Klein
President
<PAGE>
INFORMATION ABOUT YOUR PROXY STATEMENT/PROSPECTUS
Q. WHY AM I RECEIVING THIS PROXY STATEMENT/PROSPECTUS?
A. MSIF is seeking your approval of a reorganization of the Balanced and Small
Cap Value Equity Portfolios whereby each Portfolio would transfer all of
its assets and liabilities to a similar, corresponding portfolio of MAS
Funds in return for Institutional Class shares of that MAS Funds Portfolio.
The MSIF Portfolios then would distribute those shares to their
shareholders in liquidation. The reorganizations are being proposed
principally to achieve greater efficiency in managing the Portfolios.
Please refer to the proxy statement/prospectus for a detailed explanation
of the proposed item and for a fuller description of MAS Funds.
Q. WHY DO I NEED TO VOTE?
A. Your vote is needed to ensure that the proposal can be acted upon. Your
immediate response on the enclosed proxy card will help save on the costs
of any further solicitations for a shareholder vote. We encourage all
shareholders to participate in the governance of their Fund.
Q. HOW DOES THE BOARD OF DIRECTORS SUGGEST THAT I VOTE?
A. After careful consideration, the Board of Directors unanimously recommends
that you vote "FOR" the item proposed on the enclosed proxy card.
Q. WHO IS PAYING FOR EXPENSES RELATED TO THE SHAREHOLDER MEETING?
A. Each Portfolio is paying for its portion of the expenses relating to the
meeting.
Q. WHERE DO I MAIL MY PROXY CARD?
A. You may use the enclosed postage-paid envelope or mail your proxy card to:
Proxy Tabulator
P.O. Box 9122
Hingham, MA 02043-9717
Q. WHO DO I CALL IF I HAVE QUESTIONS?
A. We will be happy to answer your questions about the proxy solicitation.
Please call us at 1-800-733-8481 ext. 442 between 9:00 a.m. and 11:00 p.m.
Eastern time, Monday through Friday.
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK, 10020
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 11, 1998
Notice is hereby given that a Special Meeting of Shareholders of certain
portfolios of the Morgan Stanley Institutional Fund, Inc. ("MSIF") will be held
at the offices of Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, NY, Conference Room 3, 22nd Floor on March 11, 1998 at 4:00
p.m. (Eastern Time) for the purposes of considering the proposals set forth
below.
Proposal 1: Approval of an Agreement and Plan of Reorganization and
Liquidation providing for (i) the transfer of all of the
assets and liabilities of the MSIF Small Cap Value Equity
Portfolio to the MAS Funds ("MAS") Mid Cap Value Portfolio
in exchange for shares of the MAS Mid Cap Value Portfolio;
(ii) the distribution of the MAS Mid Cap Value Portfolio
shares so received to shareholders of the MSIF Small Cap
Value Equity Portfolio; and (iii) the termination under
state law of the MSIF Small Cap Value Equity Portfolio;
Proposal 2: Approval of an Agreement and Plan of Reorganization and
Liquidation providing for (i) the transfer of all of the
assets and liabilities of the MSIF Balanced Portfolio to the
MAS Balanced Portfolio in exchange for shares of the MAS
Balanced Portfolio; (ii) the distribution of the MAS
Balanced Portfolio shares so received to shareholders of the
MSIF Balanced Portfolio; and (iii) the termination under
state law of the MSIF Balanced Portfolio;
Proposal 3: The transaction of such other business as may properly be
brought before the meeting.
Shareholders of record as of the close of business on February 5, 1998 are
entitled to notice of, and to vote at, this meeting or any adjournment thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY THE BOARD OF
DIRECTORS OF MSIF. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE MEETING.
PROXIES MAY BE REVOKED AT ANY TIME BEFORE
<PAGE>
THEY ARE EXERCISED BY SUBMITTING A WRITTEN NOTICE OF REVOCATION OR A
SUBSEQUENTLY EXECUTED PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
Valerie Y. Lewis
Secretary
February____, 1998
<PAGE>
PROXY STATEMENT/PROSPECTUS
DATED February ___, 1998
RELATING TO THE ACQUISITION OF THE ASSETS OF CERTAIN PORTFOLIOS OF
MORGAN STANLEY INSTITUTIONAL FUND, INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
1-800-548-7786
BY AND IN EXCHANGE FOR SHARES OF CERTAIN PORTFOLIOS OF
MAS FUNDS
ONE TOWER BRIDGE
WEST CONSHOHOCKEN, PENNSYLVANIA 19428
1-800-354-8185
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of the Morgan Stanley
Institutional Fund, Inc. ("MSIF") in connection with the Special Meeting of
Shareholders (the "Meeting") of the MSIF Small Cap Value Equity and Balanced
Portfolios (each an "MSIF Portfolio") to be held on March 11, 1998 at 4:00 p.m.
(Eastern Time) at the offices of Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas, New York, NY, Conference Room 3, 22nd Floor. At the
meeting, shareholders of each MSIF Portfolio will be asked to consider and
approve an Agreement and Plan of Reorganization and Liquidation (the
"Reorganization Agreement"), by and between MSIF and MAS Funds ("MAS") on
behalf of its Mid Cap Value and Balanced Portfolios thereof (each an "MAS
Portfolio"; the MSIF Portfolios and MAS Portfolios are referred to collectively
as "Portfolios") and the matters contemplated therein. A copy of the
Reorganization Agreement is attached as Exhibit A.
The Reorganization Agreement provides that each MSIF Portfolio will
transfer all of its known assets and known liabilities to a corresponding MAS
Portfolio identified below opposite each name:
MAS Acquiring Portfolios MSIF Acquired Portfolios
------------------------ --------------------------------
Mid Cap Value Portfolio Small Cap Value Equity Portfolio
Balanced Portfolio Balanced Portfolio
In exchange for the transfers of these assets and liabilities, MAS will
simultaneously issue shares in the two MAS Portfolios to the corresponding MSIF
Portfolios listed above in an amount equal in value to the net asset value of
the MSIF Portfolios' shares.
The MSIF Portfolios have two classes of shares (Class A and Class B), and
the MAS Portfolios have three classes of shares (Institutional, Investment and
Adviser). Holders of Class A
<PAGE>
and B shares of each MSIF Portfolio will receive an amount of Institutional
Class shares of the corresponding MAS Portfolio equal in value to their MSIF
Portfolio shares.
Immediately after the transfer of the MSIF Portfolios' assets and
liabilities, the MSIF Portfolios will make liquidating distributions of the MAS
Portfolios' shares received to shareholders of the MSIF Portfolios, so that a
holder of shares in a MSIF Portfolio at the Effective Time of the Reorganization
(as defined in the Reorganization Agreement) will receive Institutional Class
Shares of the corresponding MAS Portfolio with the same aggregate net asset
value as the shareholder had in the MSIF Portfolio immediately before the
Reorganization. Following the Reorganization, shareholders of the MSIF
Portfolios will be shareholders of the corresponding MAS Portfolios, and the
MSIF Portfolios will be terminated under state law.
MAS and MSIF are both open-end, management investment companies. Miller
Anderson & Sherrerd, LLP ("Miller Anderson") provides investment advisory
services to the MAS Portfolios. Morgan Stanley Asset Management Inc. ("MSAM")
serves as investment adviser for MSIF. Miller Anderson is wholly-owned,
indirectly, by MSAM and certain of its affiliates. Miller Anderson and MSAM are
wholly-owned, directly or indirectly, by Morgan Stanley, Dean Witter, Discover &
Co.
This Proxy Statement/Prospectus sets forth concisely the information
that a shareholder of each of the MSIF Portfolios should know before voting
on the Reorganization, and should be retained for future reference. Certain
additional relevant documents listed below, which have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated in whole or in
part by reference. A Statement of Additional Information dated February ___,
1998, relating to this Proxy Statement/Prospectus and the Reorganization and
including certain financial information about the MSIF Portfolios and the MAS
Portfolios, has been filed with the SEC and is incorporated in its entirety
into this Proxy Statement/Prospectus. A copy of such Statement of Additional
Information is available upon request and without charge by writing to MAS
Funds, One Tower Bridge, West Conshohocken, PA 19428 or by calling toll-free
1-800-354-8185.
For a more detailed discussion of the investment objectives, policies,
risks and restrictions of the MSIF Portfolios, see the prospectus for the MSIF
Portfolios, dated May 1, 1997, as supplemented through September 26, 1997, which
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this Proxy Statement/Prospectus insofar as it
relates to the MSIF Portfolios and not to any other portfolio of MSIF described
therein. It is available without charge by calling 1-800-548-7786. For a more
detailed discussion of the investment objectives, policies, risks and
restrictions of the MAS Portfolios, see the prospectus for MAS Funds relating to
the Institutional Class Shares of the MAS Portfolios, dated January 31, 1997, as
supplemented through June 5, 1997, which has been filed with the SEC and is
incorporated by reference into this Proxy Statement/Prospectus insofar as it
relates to the MAS Portfolios, and not to any other portfolio of MAS Funds
described therein. A copy of the prospectus for the MAS Portfolios accompanies
this Proxy Statement/Prospectus. A Statement of Additional Information for the
MAS Portfolios dated January 31, 1997, as supplemented through June 5, 1997,
has been filed
-2-
<PAGE>
with the SEC, and is incorporated by reference into this Proxy
Statement/Prospectus. A copy is available upon request and without charge by
calling 1-800-354-8185.
This Proxy Statement/Prospectus constitutes the proxy statement of MSIF for
the Meeting and is expected to be sent to shareholders on or about
February ___, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-3-
<PAGE>
TABLE OF CONTENTS
Page
Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
The Reorganization. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
The Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Reasons for the Reorganization . . . . . . . . . . . . . . . . . . . . . . . 14
Information Relating to the Reorganization . . . . . . . . . . . . . . . . . 17
The Portfolios' Investment Objectives and Policies . . . . . . . . . . . . . 19
The Portfolios' Purchase, Exchange and Redemption Procedures . . . . . . . . 20
Shareholder Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Information About the MAS and MSIF Portfolios. . . . . . . . . . . . . . . . 25
Voting Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Shareholder Inquiries. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Exhibit A - Form of Agreement and Plan of Reorganization and Liquidation . .A-1
-4-
<PAGE>
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and is qualified by reference to the more
complete information contained herein and in the attached Exhibit A.
Shareholders should read this entire Proxy Statement/Prospectus carefully.
THE REORGANIZATION
BACKGROUND. The Board of Directors of MSIF, including the Directors who are
not "interested persons" of MSIF within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940 ("1940 Act"), has unanimously approved, subject
to shareholder approval, entry into an Agreement and Plan of Reorganization
between MSIF and MAS. A copy of the form of Agreement and Plan of
Reorganization and Liquidation (the "Reorganization Agreement") is attached
hereto as Exhibit A. The Reorganization Agreement provides that each MSIF
Portfolio will transfer all of its assets and stated liabilities to the
corresponding MAS Portfolio in exchange solely for Institutional Class Shares of
that MAS Portfolio. Each MSIF Portfolio will distribute the MAS Portfolio
shares that it receives to its shareholders in liquidation. Each MSIF Portfolio
will then be terminated under state law. No sales charge will be imposed in
connection with these transactions.
The Board of Directors of MSIF has concluded that the Reorganization would
be in the best interests of the MSIF Portfolios and their shareholders and that
the interests of existing shareholders in the MSIF Portfolios would not be
diluted as a result of the transactions contemplated by the Reorganization. The
Board of Directors of MSIF recommends that you vote for approval of the
Reorganization Agreement.
TAX CONSEQUENCES. The consummation of the Reorganization is subject to the
receipt of an opinion of counsel to MSIF to the effect that the Reorganization
will qualify as a tax-free reorganization for federal income tax purposes.
SPECIAL CONSIDERATIONS AND RISK FACTORS. Although the investment
objectives and policies of the MAS Portfolios and the MSIF Portfolios are, in
many respects, similar, management of MSIF believes that an investment in the
corresponding MAS Portfolios involves investment characteristics, including
risks, that are, in some respects, different from those of the MSIF
Portfolios. Because of these different risks and other differences in the
investment objectives and policies of the MAS Portfolios, shareholders should
consider whether the corresponding MAS Portfolio conforms to their investment
objectives.
-5-
<PAGE>
THE FUNDS
BUSINESS OF THE FUNDS. MSIF is a no-load, open-end management investment
company, which offers redeemable shares in a series of diversified and
non-diversified investment portfolios. It was organized as a Maryland
corporation on June 16, 1988. MSIF offers two classes of shares, Class A shares
and Class B shares. Class A shares differ from Class B shares with respect to
distribution costs, as set forth in the prospectus.
MAS is a no-load, open-end, management investment company, which offers
redeemable shares in a series of diversified and non-diversified investment
portfolios. It was organized as a Pennsylvania business trust on September 15,
1984. MAS offers three classes of shares, Institutional, Investment and
Adviser, which differ with respect to distribution and shareholder servicing
costs, as set forth in the prospectus.
INVESTMENT OBJECTIVES AND POLICIES. The investment objective of the MAS
Mid Cap Value Portfolio is to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk. It invests in
undervalued common stocks with equity capitalization in the range of the
companies represented in the S&P MidCap 400 Index (currently ranging from $500
million to $6 billion).
The investment objective of the MSIF Small Cap Value Equity Portfolio is to
provide high long-term total return. It invests in undervalued equity
securities of small to medium sized corporations with market capitalizations in
the range of companies represented in the Russell 2500 Small Companies Index
(currently $70 million to $1.3 billion).
The investment objective of the MAS Balanced Portfolio is to achieve above
average total return over a market cycle of three to five years, consistent with
reasonable risk. It invests in a diversified portfolio of common stocks and
fixed-income securities.
The investment objective of the MSIF Balanced Portfolio is to achieve high
total return while preserving capital by investing in a combination of
undervalued equity securities and fixed-income securities.
DIVIDEND POLICIES. Dividends from the net investment income of the MSIF
and MAS Portfolios, except the MAS Mid Cap Value Portfolio, are declared and
paid to shareholders on a quarterly basis. The MAS Mid Cap Value Portfolio
declares and pays dividends from its net investment income annually. For all
Portfolios, capital gains, if any, are distributed annually.
INVESTMENT ADVISERS AND ADVISORY FEES. Miller Anderson & Sherrerd, LLP
("Miller Anderson") is a registered investment adviser and serves as investment
adviser to the MAS Portfolios and the other investment portfolios of MAS.
Miller Anderson supervises and manages all of the investment operations of MAS.
Miller Anderson is wholly owned, indirectly, by MSAM and certain of its
affiliates, all of which are direct or indirect subsidiaries of Morgan Stanley,
Dean Witter,
-6-
<PAGE>
Discover & Co. Miller Anderson also serves as investment adviser to employee
benefit plans, endowment funds, foundations and other institutional investors,
and as investment adviser or sub-adviser to several other investment companies.
Miller Anderson had approximately $55.7 billion of assets under management as of
September 30, 1997 and is located at One Tower Bridge, West Conshohocken,
Pennsylvania 19428.
Under an agreement with MAS Funds, Miller Anderson is entitled to receive a
fee from each MAS Portfolio, calculated quarterly, at the following annual
percentage rates of each Portfolio's net assets:
MAS Portfolio Percentage Rate
------------- ---------------
Mid Cap Value Portfolio . . . . . . . . 0.750%
Balanced Portfolio. . . . . . . . . . . 0.450%
For the fiscal year ending September 30, 1997, Miller Anderson received the
following as compensation for its services:
MAS Portfolio Fees (as a percentage of net assets)
------------- ------------------------------------
Mid Cap Value Portfolio . . . . . . . . 0.730%*
Balanced Portfolio. . . . . . . . . . . 0.450%
*Miller Anderson voluntarily agreed to waive a portion of its fee so that total
operating expenses for the Institutional Class Shares of the Mid Cap Value
Portfolio did not exceed 0.88%.
The Portfolio Managers of the MAS Portfolios share primary responsibility
for managing the Portfolio's assets. The Portfolio Managers of the MAS
Portfolios are as follows:
Mid Cap Value Portfolio: Gary G. Schlarbaum, Bradley S. Daniels and
William B. Gerlach
Balanced Portfolio: Thomas L. Bennett, Gary G. Schlarbaum,
Horacio A. Valeiras, and Richard B. Worley
Morgan Stanley Asset Management Inc. ("MSAM"), an indirect, wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co., serves as the
investment adviser for MSIF. MSAM supervises and manages all of the investment
operations of MSIF. As of October 31, 1997, MSAM, together with its affiliated
institutional asset management companies (excluding Miller Anderson), had
approximately $81.8 billion in assets under management as an investment manager
or as a named fiduciary or fiduciary adviser. MSAM is located at 1221 Avenue of
the Americas, New York, NY 10020.
-7-
<PAGE>
Under an agreement with MSIF, MSAM is entitled to receive a fee from each
MSIF Portfolio, payable quarterly, at the following annual percentage rates:
MSIF Portfolio Percentage Rate
-------------- ---------------
Small Cap Value Equity Portfolio. . . .0.85%
Balanced Portfolio. . . . . . . . . . .0.50%
For the year ending December 31, 1996, MSAM received the following as
compensation for its services:
MSIF Portfolio Fees (as a percentage of net assets)
-------------- ------------------------------------
Small Cap Value Equity Portfolio. . . .0.53%*
Balanced Portfolio. . . . . . . . . . .0.00%*
* MSAM voluntarily agreed to waive a portion of its fee so that the total
operating expenses of the Small Cap Value Equity and Balanced Portfolios
did not exceed 1.00% and 0.70%, respectively, for Class A Shares and 1.25%
and 0.95%, respectively, for Class B Shares.
Pursuant to an arrangement between Miller Anderson and MSAM, two of the
individuals responsible for managing the investments of the MAS Mid Cap Value
Portfolio, Gary G. Schlarbaum and William B. Gerlach, are also responsible for
managing the investments of the MSIF Small Cap Value Equity Portfolio. Stephen
C. Sexauer and Alford E. Zick, Jr. manage the investments of the MSIF Balanced
Portfolio.
The following comparative fee tables show the current fees for the
corresponding MAS and MSIF Portfolios.
SHAREHOLDER TRANSACTION EXPENSES. Neither MAS nor MSIF impose fees on
shareholder transactions.
-8-
<PAGE>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) -
NET OF FEE WAIVERS AND/OR REIMBURSEMENTS
<TABLE>
<CAPTION>
Management Fees
(net of fee waivers Total Operating Expenses
and expense 12b-1 Other (net of fee waivers and
Portfolio reimbursements) Fees Expenses expense reimbursements)(1)
- --------- ------------------- ----- -------- ---------------------------
<S> <C> <C> <C> <C>
MAS Mid Cap Value 0.73% None 0.17% 0.90%
Institutional Class
MSIF Small Cap Value 0.53% None 0.47% 1.00%
Equity-Class A
MSIF Small Cap Value 0.53% 0.25% 0.47% 1.25%
Equity-Class B
- -------------------------------------------------------------------------------------------
MAS Balanced 0.45% None 0.13% 0.58%
Institutional Class
MSIF Balanced-
Class A 0.00% None 0.70% 0.70%
MSIF Balanced-
Class B 0.00% 0.25% 0.70% 0.95%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) The Total Operating Expenses of the MAS Portfolios exclude the effect of
expense offsets. If expense offsets were included, the Total Operating Expenses
would be 0.88% and 0.56% of the average daily net assets of the MAS Mid Cap
Value Portfolio and MAS Balanced Portfolio, respectively. Miller Anderson has
voluntarily agreed to waive its advisory fees and/or reimburse certain expenses
to the extent necessary to keep Total Operating Expenses for the Institutional
Class Shares of the MAS Mid Cap Value Portfolio from exceeding 0.88% of the
Portfolio's average daily net assets. Absent such waivers and reimbursements,
management fees would be 0.75% and total operating expenses would be 0.92% of
the Portfolio's average daily net assets attributable to the Institutional
Class Shares.
MSAM has voluntarily agreed to waive a portion of its fee so that the total
operating expenses of the Small Cap Value Equity and Balanced Portfolios do not
exceed 1.00% and 0.70%, respectively, for Class A Shares and 1.25% and 0.95%,
respectively, for Class B Shares. Absent such waivers and reimbursements,
management fees would be 0.85% and 0.50% of the Small Cap Value Equity and
Balanced Portfolios' average daily net assets, respectively. Absent waivers or
reimbursements, the Total Operating Expenses, as a percentage of the average
daily net assets of each class, of the MSIF Small Cap Value Equity Portfolio
would be 1.32% for Class A and 1.57% for Class B, and of the MSIF Balanced
Portfolio would be 1.32% for Class A and 1.57% for Class B.
EXAMPLE
The purpose of this table is to assist investors in understanding the
various expenses that a shareholder in a Portfolio will bear directly or
indirectly. The following illustrates the expenses on a $1,000 investment under
the existing and proposed fees and the expenses stated above, assuming (1) a 5%
annual return and (2) redemption at the end of each time period:
-9-
<PAGE>
Portfolio 1 year 3 years 5 years 10 years
--------- ------ ------- ------- --------
MAS Mid Cap Value $9 $29 $50 $111
MSIF Small Cap Value-Class A $10 $32 $55 $122
MSIF Small Cap Value-Class B $13 $40 $69 $151
- --------------------------------------------------------------------------------
MAS Balanced $6 $19 $32 $73
MSIF Balanced-Class A $7 $22 $39 $87
MSIF Balanced-Class B $10 $30 $53 $117
- --------------------------------------------------------------------------------
The Example above should not be considered a representation of future expenses
of the Portfolios. Actual expenses may be greater or less than those shown.
The MAS Portfolios offer other classes of shares which vary with respect to
distribution and shareholder service costs.
OTHER SIGNIFICANT FEES. In addition to serving as adviser, MSAM provides
shareholder services and other administrative services to the MSIF Portfolios
under an administration agreement. The administration agreement also provides
that MSAM, through its agents, will provide MSIF with dividend disbursing and
transfer agent services. For its services under this agreement, MSAM is
entitled to receive a monthly fee which, on an annual basis, equals 0.15% of the
average daily net assets of each Portfolio.
Morgan Stanley & Co., Incorporated ("Morgan Stanley"), an affiliate of
MSAM, serves as the exclusive distributor of Class A and Class B shares of
MSIF. MSIF has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act, under which
Morgan Stanley is entitled to receive a distribution fee from each Portfolio,
which is accrued daily and paid quarterly, of 0.25% of the average daily net
assets of the Class B shares of each Portfolio on an annualized basis. Each Plan
is designed to compensate Morgan Stanley for its services, not to reimburse
Morgan Stanley for its expenses, and Morgan Stanley may retain any portion of
the fee that it does not expend in fulfillment of its obligation to MSIF.
Morgan Stanley may, in its discretion, voluntarily waive from time to time all
or any portion of its distribution fee and each of Morgan Stanley and MSAM is
free to make additional payments out of its own assets to promote the sale of
Portfolio shares, including payments that compensate financial institutions for
distribution services or shareholder services.
Miller Anderson provides administrative services to MAS pursuant to an
administration agreement. Under this agreement, Miller Anderson receives an
annual fee, accrued daily and payable monthly of 0.08% of MAS' average daily net
assets. MAS Fund Distribution, Inc. ("MASDI"), a wholly-owned subsidiary of
Miller Anderson, serves as the exclusive distributor of the shares of MAS.
MASDI receives no compensation for its services with respect to Institutional
Class Shares.
Chase Global Funds Services Company ("CGFSC"), a subsidiary of The Chase
Manhattan Bank ("Chase"), provides sub-administration, fund accounting and other
services to MSIF and MAS pursuant to sub-administration agreements with MSAM and
Miller Anderson, respectively. CGFSC
-10-
<PAGE>
also serves as transfer and dividend disbursing agent for both MSIF and MAS.
CGFSC is located at 73 Tremont Street, Boston, Massachusetts 02108.
Chase and Morgan Stanley Trust Company serve as custodians for the MSIF
Portfolios and Chase serves as custodian for the MAS Portfolios.
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES. The terms of applicable
purchase, exchange and redemption procedures for MAS and MSIF shares are
substantially the same.
RISKS
MAS MID CAP VALUE AND MSIF SMALL CAP VALUE EQUITY PORTFOLIO. The MAS Mid
Cap Value Portfolio and the MSIF Small Cap Value Equity Portfolio each invests
principally in equity securities of domestic companies that are deemed by their
respective investment advisers to be undervalued, although they also may invest
in other securities, including securities of foreign issuers. Each Portfolio
invests principally in companies whose market capitalizations are in the range
represented by companies included in certain market indices (discussed in more
detail below). Because the market capitalizations of these indices overlap, the
Portfolios often may, and in fact currently do, invest in many of the same
companies. In addition, the persons principally responsible for managing the
assets of the MAS Mid Cap Value Portfolio also manage the assets of the MSIF
Small Cap Value Equity Portfolio. Accordingly, as of September 30, 1997, the
Portfolios had a substantial portion of their assets invested in the same
companies (see the pro forma financial information included in the Statement of
Additional Information that relates to this Proxy Statement/Prospectus for more
details on the Portfolios' holdings). Since the Portfolios generally may invest
in the same or similar securities, they are subject to substantially the same
investment risks. However, there are some differences between the Portfolios,
which are described below.
MARKET CAPITALIZATION. The MAS and MSIF Portfolios differ with respect to
the market capitalizations of the companies in which they may invest. The MAS
Mid Cap Value Portfolio invests principally in equity securities of companies
with capitalizations generally ranging from $500 million to $6 billion. The
MSIF Small Cap Value Equity Portfolio invests principally in equity securities
of smaller companies with capitalizations generally ranging from $70 million to
$1.3 billion. Thus, each Portfolio may invest in some of the same securities as
the other, depending on its adviser's judgment regarding market conditions and
the relative attractiveness of securities of larger or smaller companies. To
the extent that the MSIF Portfolio invests in companies that are smaller than
those in which the MAS Portfolio invests, such investments may present a higher
degree of risk and price volatility because such companies may have fewer
products or lines of business and may not possess management personnel equipped
to guide the firms beyond the initial entrepreneurial or start-up phases.
DERIVATIVES. The MAS and MSIF Portfolios may invest in certain derivative
instruments, including caps, floors and collars, futures and options on futures,
options, structured notes, and
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<PAGE>
swaps. These instruments are described more fully in the prospectuses of the
respective Portfolios and involve certain risks described therein. Certain of
these instruments also require the Portfolios to segregate some or all of their
liquid assets to cover their obligations thereunder. The MSIF Portfolio limits
its use of derivative instruments generally to 33 1/3% of its total assets, as
measured by the aggregate notional amount of outstanding derivative instruments,
except that derivatives used for hedging purposes are not subject to this limit.
The MAS Portfolio may enter into futures contracts and write put or call options
subject to the limit that the Portfolio may not enter into a futures contract to
the extent that its outstanding obligations to purchase securities, combined
with its outstanding obligations relating to options transactions, would exceed
50% of its total assets. The MAS Portfolio is not subject to any percentage
limit on its ability to invest in other types of derivative instruments, such as
swaps, except that the requirement that it set aside liquid assets to cover its
obligations under certain instruments imposes practical limits on its ability to
so invest.
The primary risks associated with the use of futures and options are (i)
imperfect correlation between the value of the securities held by a Portfolio
and the value of the particular futures or option instrument, and (ii) the risk
that a Portfolio could not close out a futures or options position when it would
be most advantageous to do so. In addition, the need to segregate assets to
cover its obligations could, at higher levels of segregation, result in a
Portfolio having less flexibility to manage its investments properly, meet
shareholder redemption requests, or meet other obligations and forcing the
Portfolio to sell other securities that it wanted to retain or to realize
unintended gains or losses. Other derivative instruments are subject to risks,
including the risk of default by the other party to a transaction, the risk of
loss due to changes in market values, interest rates or currency exchange rates,
and the risk that an instrument may become illiquid.
ILLIQUID SECURITIES. Neither the MAS Portfolio nor the MSIF Portfolio may
invest more than an aggregate of 15% of its net assets in illiquid securities.
In addition, the MSIF Portfolio may not invest more than 10% of its total assets
in securities that are restricted from sale to the public without registration
under the 1933 Act, except for securities that can be sold to qualified
institutional investors in accordance with Rule 144A under the 1933 Act. The
MAS Portfolio has no similar limit.
PLEDGING ASSETS. The MAS Portfolio may pledge, mortgage or hypothecate
assets in an amount up to 50% of its total assets, provided that it may
segregate assets without limit in order to comply with the requirements of
Section 18(f) of the 1940 Act and applicable rules, regulations or
interpretations of the SEC and its staff. The MSIF Portfolio may not pledge,
mortgage, or hypothecate any of its assets to an extent greater than 10% of its
total assets at fair market value.
SELLING SHORT. The MAS Portfolio may engage in short selling, provided (i)
the Portfolio by virtue of its ownership of other securities, has the right to
obtain securities equivalent in kind and amount to the securities sold short
and, if the right is conditional, the sale is made upon the same conditions, or
(ii) the Portfolio maintains liquid assets in a segregated account in an amount
that, when combined with the amount of collateral deposited with the broker,
equals the current market value of the security sold short. The MSIF Portfolio
may not sell securities short.
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<PAGE>
TEMPORARY DEFENSIVE INVESTING. The MAS and MSIF Portfolios each may, for
temporary defensive purposes, invest up to 100% of its assets in money market
instruments or certain types of fixed income securities, or may hold cash. The
fixed income securities the MSIF Portfolio may invest in are high quality short
and medium term fixed income securities. The MAS Portfolio may, for these
purposes, invest in any fixed income instrument that the Portfolio is permitted
to purchase.
MAS AND MSIF BALANCED PORTFOLIOS. The Portfolios generally may invest in
the same or similar securities and, thus, are subject to substantially the same
investment risks. However, there are some differences between the Portfolios,
which are described below.
DERIVATIVES. The MAS Balanced Portfolio and the MSIF Balanced Portfolio
may invest in certain derivative instruments, including caps, floors and
collars, futures and options on futures, options, structured notes, and swaps.
These instruments are described more fully in the prospectuses of the respective
Portfolios and involve certain risks described therein. Certain of these
instruments also require the Portfolios to segregate some or all of their liquid
assets to cover their obligations thereunder. The MSIF Portfolio limits its use
of derivative instruments generally to 33 1/3% of its total assets, as measured
by the aggregate notional amount of outstanding derivative instruments, except
that derivatives used for hedging purposes are not subject to this limit. The
MAS Portfolio may enter into futures contracts and write put or call options
subject to the limit that the Portfolio may not enter into a futures contract to
the extent that its outstanding obligations to purchase securities, combined
with its outstanding obligations relating to options transactions, would exceed
50% of its total assets. The MAS Portfolio is not subject to any percentage
limit on its ability to invest in other types of derivative instruments, such as
swaps, except that the requirement that it set aside liquid assets to cover its
obligations under certain instruments imposes practical limits on its ability to
so invest.
The primary risks associated with the use of futures and options are (i)
imperfect correlation between the value of the securities held by a Portfolio
and the value of the particular futures or option instrument, and (ii) the risk
that a Portfolio could not close out a futures or options position when it would
be most advantageous to do so. In addition, the need to segregate assets to
cover its obligations could, at higher levels of segregation, result in a
Portfolio having less flexibility to manage its investments properly, meet
shareholder redemption requests, or meet other obligations and forcing the
Portfolio to sell other securities that it wanted to retain or to realize
unintended gains or losses. Other derivative instruments are subject to risks,
including the risk of default by the other party to a transaction, the risk of
loss due to changes in market values, interest rates or currency exchange rates,
and the risk that an instrument may become illiquid.
FOREIGN INVESTMENT. The MAS and MSIF Portfolios may each invest up to 25%
of its assets in equity or fixed income securities of foreign issuers. The
Portfolios differ as to the types of foreign fixed income securities they may
purchase. The MSIF Portfolio may invest in foreign mortgage-backed securities,
corporate bonds, bank obligations and short-term money market instruments. It
may not invest in foreign government securities. The MAS Portfolio may invest
in a broader range of foreign fixed income securities, including foreign
government securities. In addition, the MAS
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<PAGE>
Portfolio may invest up to 10% of its assets, subject to its overall 25% limit
on foreign securities, in Brady Bonds, which are foreign fixed income securities
created in connection with debt restructurings. Because of the unique risks
associated with investments in Brady Bonds and the history of defaults by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds generally are viewed as more speculative. The MSIF Portfolio generally
may not invest in Brady Bonds.
ILLIQUID SECURITIES. Neither the MAS Portfolio nor the MSIF Portfolio may
invest more than an aggregate of 15% of its net assets in illiquid securities.
In addition, the MSIF Portfolio may not invest more than 10% of its total assets
in securities that are restricted from sale to the public without registration
under the 1933 Act, except for securities that can be sold to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act. The MAS
Portfolio has no similar limit.
PLEDGING ASSETS. The MAS Portfolio may pledge, mortgage or hypothecate
assets in an amount up to 50% of its total assets, provided that it may
segregate assets without limit in order to comply with the requirements of
Section 18(f) of the 1940 Act and applicable rules, regulations or
interpretations of the SEC and its staff. The MSIF Portfolio may not pledge,
mortgage, or hypothecate any of its assets to an extent greater than 10% of its
total assets at fair market value.
SELLING SHORT. The MAS Portfolio may engage in short selling, provided (i)
the Portfolio has the right to obtain securities equivalent in kind and amount
to the securities sold short and, if the right is conditional, the sale is made
upon the same conditions, or (ii) the Portfolio maintains liquid assets in a
segregated account in an amount that, when combined with the amount of
collateral deposited with the broker, equals the current market value of the
security sold short. The MSIF Portfolio may not sell securities short.
TEMPORARY DEFENSIVE INVESTING. The MAS and MSIF Portfolios each may, for
temporary defensive purposes, invest up to 100% of its assets in money market
instruments or certain types of fixed income securities or may hold cash. The
MSIF Balanced Portfolio may, for temporary, defensive purposes invest in high
quality short and medium term fixed income securities. The MAS Balanced
Portfolio may, for these purposes, invest in any fixed income instrument that
the Portfolio is permitted to purchase.
REASONS FOR THE REORGANIZATION
In electing to approve the Reorganization Agreement and recommend it to
shareholders of MSIF, the Directors acted upon information provided to them
indicating that the proposed transaction would operate in the best interests of
MSIF shareholders. The Directors considered the terms and conditions of the
Reorganization Agreement, the affiliation between MSAM and Miller Anderson and
their cooperation in providing investment management and shareholder services,
the size and history of asset growth of the MSIF and MAS Portfolios, the fees
and expenses of the Portfolios, the Portfolios' investment performance, the
compatibility of the Portfolios' investment objectives, significant investment
policies and limitations, the anticipated tax treatment of the
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<PAGE>
Reorganization, and any costs to be incurred by the Portfolios in connection
with the Reorganization. In particular, the Directors determined that the
proposed transaction offered the following benefits:
- - INVESTMENT IN FUNDS OFFERING GREATER EFFICIENCIES: The Directors
considered the relatively small size of the MSIF Portfolios and that the
proposed transaction would, if effected, result in the MSIF Portfolios'
shareholders being invested in significantly larger MAS Portfolios, which
may be better able to achieve cost efficiencies because of their larger
size. The Directors noted that the total operating expenses of the MAS
Portfolios were generally lower than those of the MSIF Portfolios.
- - ACCESS TO A BROADER ARRAY OF INVESTMENT OPTIONS: The Directors noted that,
at the time they approved the Reorganization, MAS consisted of 26
portfolios and total anticipated assets in excess of $13 billion. Since
then, MAS has grown to 28 portfolios with over $16 billion in assets.
Shareholders of the MSIF Portfolios, by becoming part of the MAS complex,
would be able to exchange their shares for Institutional Class Shares of
other MAS portfolios. MSIF shareholders also would be able to exchange
their shares for Class A Shares of other MSIF portfolios that are not part
of the proposed transfer. Shareholders should note that the MAS Funds
Small Cap Value Portfolio is currently closed to new investors.
- - CONTINUITY OF MANAGEMENT: MSAM and Miller Anderson are closely affiliated
and work together in managing the assets of numerous MSIF and MAS
Portfolios and in providing services to shareholders. In addition, the
individuals responsible for managing the MSIF Small Cap Value Equity
Portfolio are also responsible, with one additional person, for managing
the MAS Mid Cap Value Portfolio.
- - SIMILARITIES OF THE PORTFOLIOS: The Directors considered the fact that the
Portfolios proposed to be combined have similar investment objectives,
policies and strategies. In particular, the Directors noted that there is
considerable overlap in the companies represented in the market
capitalization ranges of the companies tracked by the Russell 2500 Small
Company Index and the S&P Mid Cap 400 Index, within which ranges the MSIF
Small Cap Value Equity Portfolio and the MAS Mid Cap Value Portfolio,
respectively, principally invest. The Directors further noted that the
MSIF Balanced and MAS Balanced Portfolios invest in similar-sized
companies.
- - TAX-FREE NATURE OF TRANSACTION; LACK OF DILUTION: The Directors were
informed that the Reorganization would be accomplished without the
imposition of federal income taxes on the MSIF Portfolios, the MAS
Portfolios, or their shareholders and that outside counsel to MSIF would
issue an opinion to this effect. The interests of MSIF shareholders will
not be materially diluted as a result of the proposed transaction.
Shareholders of the MSIF Portfolios will receive shares of the MAS
Portfolios equal in value to the value of the MSIF Portfolio shares they
own.
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<PAGE>
- - PERFORMANCE OF MAS: The Board considered information relating to the
historical performance of the MAS Portfolios. The Directors were given
details on the performance record for each MAS Portfolio, both on an
absolute basis and in comparison to the MSIF Portfolios and relevant
benchmarks and industry averages. The table below compares the performance
of the MAS and MSIF Portfolios.
Average Annual Total Return for Periods Ended September 30, 1997
Portfolio 1 Year 3 Years 5 Years Since Inception*
--------- ------ ------- ------- ----------------
MSIF Balanced
Class A 21.09% 15.61% 11.76% 11.31%
MAS Balanced
Institutional Class 27.44% 20.62% n.a. 14.53%
- --------------------------------------------------------------------------------
MSIF Small Cap
Value Equity
Class A 56.16% 27.52% n.a. 20.11%
MAS Mid Cap
Value Institutional
Class 61.40% n.a. n.a. 42.61%
- --------------------------------------------------------------------------------
Average Annual Total Return for Periods Ended December 31, 1996
Portfolio 1 Year 3 Years 5 Years Since Inception*
--------- ------ ------- ------- ----------------
MSIF Balanced
Class A 10.93% 10.23% 10.15% 10.39%
MAS Balanced
Institutional Class 15.37% 12.94% n.a. 12.30%
- --------------------------------------------------------------------------------
MSIF Small Cap
Value Equity
Class A 22.99% 15.01% n.a. 14.32%
MAS Mid Cap
Value Institutional
Class 40.77% n.a. n.a. 36.62%
- --------------------------------------------------------------------------------
* Inception dates for the Portfolios are as follows: MSIF Balanced Portfolio
commenced operations 2/20/90; MAS Balanced Portfolio commenced operations
12/31/92; MSIF Small Cap Value Equity Portfolio commenced operations 12/17/92;
MAS Mid Cap Value Portfolio commenced operations 12/30/94.
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<PAGE>
INFORMATION RELATING TO THE REORGANIZATION
DESCRIPTION OF THE REORGANIZATION. The following summary is qualified in
its entirety by reference to the Reorganization Agreement found in Exhibit A.
The Reorganization Agreement provides that substantially all of the assets
and liabilities of each MSIF Portfolio will be transferred to the corresponding
MAS Portfolio at the Effective Time of the Reorganization. In exchange for the
transfer of these assets, MAS will simultaneously issue at the Effective Time of
the Reorganization a number of full and fractional Institutional Class shares of
each MAS Portfolio to the corresponding MSIF Portfolio equal in value to the
respective net asset values of each MSIF Portfolio immediately prior to the
Effective Time of the Reorganization.
Following the transfer of assets and liabilities in exchange for MAS
Portfolio shares, each MSIF Portfolio will distribute pro rata the shares of the
corresponding MAS Portfolios so received to its shareholders in liquidation.
Each shareholder of the MSIF Portfolios owning shares at the Effective Time of
the Reorganization will receive Institutional Class shares of equal value. Such
liquidation and distribution will be accomplished by the establishment of
accounts in the names of the shareholders of the MSIF Portfolios' shareholders
on the share records of MAS' transfer agent. Each account will represent the
respective pro rata number of full and fractional Institutional Class Shares of
the MAS Portfolios due to the shareholders of the corresponding MSIF Portfolios.
The MAS Portfolios do not issue share certificates to shareholders. Shares of
the MAS Portfolios to be issued will have no preemptive or conversion rights.
No sales charge will be imposed in connection with the receipt of such
Institutional Class shares by the MSIF Portfolios' shareholders. The MSIF
Portfolios then will be terminated under state law.
As provided in the Reorganization Agreement, each Portfolio will bear its
own expenses resulting from the Reorganization. The Reorganization is subject
to a number of conditions, including approval of the Reorganization Agreement by
shareholders of the MSIF Portfolios; the receipt of certain legal opinions
described in Section 6, 7 and 8 of the Reorganization Agreement (including an
opinion of counsel that the MAS Portfolios' shares issued in accordance with the
terms of the Reorganization Agreement are validly issued, fully paid and
non-assessable); the receipt of certain certificates from the parties concerning
aggregate asset values; and the parties' performance in all material respects of
the agreements and undertakings in the Reorganization Agreement.
The Reorganization Agreement and the Reorganization may be abandoned with
respect to one or both of the MSIF Portfolios or MAS Portfolios without penalty
at any time prior to the Effective Time of the Reorganization by resolution of
the Board of Directors of MSIF or the Board of Trustees of MAS or at the
discretion of any duly authorized officer of MAS or MSIF, if circumstances
should develop that, in the opinion of such Board or officer, make proceeding
with the Reorganization inadvisable.
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<PAGE>
FEDERAL INCOME TAXES. The Reorganization is intended to qualify for
federal income tax purposes as a tax-free reorganization under Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended. If so qualified,
shareholders of the MSIF Portfolios will not recognize gain or loss in the
transaction; the tax basis of the MAS shares received will be the same as the
basis of the MSIF shares surrendered; and the holding period of the MAS shares
received will include the holding period of the MSIF shares surrendered,
provided that the shares surrendered were capital assets in the hands of the
MSIF shareholders at the time of the transaction. As a condition to the closing
of the Reorganization, MSIF and MAS will receive an opinion from counsel to that
effect. MSIF, on behalf of the MSIF Portfolios, has not sought a tax ruling
from the Internal Revenue Service. The opinion of counsel is not binding on the
Internal Revenue Service and does not preclude the Internal Revenue Service from
adopting a contrary position. Shareholders should consult their own tax
advisers concerning the potential tax consequences of the Reorganization to
them, including state and local tax consequences.
CAPITALIZATION. The following table sets forth as of September 30, 1997
(i) the capitalization of each of the MAS Portfolios; (ii) the capitalization of
each of the MSIF Portfolios; and (iii) the pro forma combined capitalization of
the Portfolios assuming the Reorganization has been approved.
<TABLE>
<CAPTION>
Portfolio Net Assets Net Asset Value Per Share Shares Outstanding
- --------- ---------- ------------------------- ------------------
<S> <C> <C> <C>
MAS Mid Cap Value $220,259,681 $21.80 10,103,104
Institutional Class $1,238,516 $21.75 56,951
Investment Class ------------ ----------
Total $221,498,197 10,160,055
MSIF Small Cap Value Equity $34,648,575 $14.65 2,364,674
Class A $8,043,615 $14.63 549,793
Class B ------------ ----------
Total $42,692,190 2,914,467
Combined Portfolios $262,951,871 $21.80 12,062,013
Institutional Class $1,238,516 $21.75 56,951
Investment Class ------------ ----------
Total $264,190,387 12,118,964
- ---------------------------------------------------------------------------------------------------
MAS Balanced $343,283,828 $15.30 22,437,992
Institutional Class $3,943,685 $15.30 257,760
Investment Class $27,366,384 $15.30 1,789,135
Adviser Class ------------ ----------
Total $374,593,897 24,484,887
MSIF Balanced $4,351,469 $8.85 491,933
Class A $707,025 $8.82 80,180
Class B ------------ ----------
Total $5,058,494 572,113
Combined Portfolios $348,342,322 $15.30 22,766,688
Institutional Class $3,943,685 $15.30 257,760
Investment Class $27,366,384 $15.30 1,789,135
Adviser Class ------------ ----------
Total $379,652,391 24,813,583
- ---------------------------------------------------------------------------------------------------
</TABLE>
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THE PORTFOLIOS' INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the MAS Portfolios are, in many
respects, similar to those of the corresponding MSIF Portfolios. There are,
however, differences of which shareholders should be aware. These differences
are outlined below.
MAS MID CAP VALUE PORTFOLIO AND MSIF SMALL CAP VALUE EQUITY PORTFOLIO
The investment objective of the MAS Mid Cap Value Portfolio is to achieve
above-average total return over a market cycle of three to five years,
consistent with reasonable risk. The Portfolio seeks to achieve this objective
by investing in common stocks with equity capitalizations in the range of the
companies represented in the S&P Mid Cap 400 Index which Miller Anderson
believes to be relatively undervalued at the time of purchase, based on certain
proprietary measures of value. The Portfolio may invest up to 5% of its total
assets in foreign equity securities (not including American Depository Receipts)
and may use derivatives such as futures, options, and swaps to pursue portfolio
strategy.
The investment objective of the MSIF Small Cap Value Equity Portfolio is to
provide high long-term total return. The Portfolio seeks to achieve its
objective by investing in equity securities of small- to medium-sized companies
that MSAM believes to be undervalued relative to the stock market in general at
the time of purchase. The Portfolio invests primarily in companies domiciled in
the United States with equity capitalizations in the range of the companies
represented in the Russell 2500 Small Company Index. The Portfolio may, from
time to time, invest in securities of similar sized foreign issuers.
As noted above, because the market capitalizations of companies tracked by
the S&P Mid Cap 400 Index and the Russell 2500 Small Company Index overlap, the
Portfolios often may be invested in the same companies. As of September 30,
1997, the Portfolios had a substantial portion of their assets invested in the
same companies (see the Statement of Additional Information relating to this
Proxy Statement/Prospectus). To the extent that the Portfolios continue to hold
securities of companies whose market capitalizations are within the ranges
tracked by both indices, it will reduce the need to dispose of securities that
do not meet the MAS Portfolio's investment criteria.
MAS AND MSIF BALANCED PORTFOLIOS
The investment objective of the MAS Balanced Portfolio is to achieve above
average total return over a market cycle of three to five years, consistent with
reasonable risk. The Portfolio invests in a diversified portfolio of common
stocks and fixed income securities. Under normal conditions, the Portfolio will
be invested 60% in common stocks and 40% in fixed income securities and at least
25% will be invested in senior fixed income securities. The asset mix may be
changed with common stocks ordinarily representing between 45% and 75% of the
total investment. Up to 25% of the Portfolio's total assets may be invested in
foreign equity or fixed income securities, and up to 10% may be invested in
Brady Bonds. Derivatives may be used to pursue portfolio strategy.
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<PAGE>
The average weighted maturity of the Portfolio's fixed income securities will
ordinarily be greater than five years.
The investment objective of the MSIF Balanced Portfolio is to achieve high
total return while preserving capital. The Portfolio seeks to achieve its
objective by investing in a combination of undervalued equity securities and
fixed income securities. It primarily invests in large capitalization equity
securities, intermediate-maturity bonds and cash equivalents. The Portfolio
typically maintains between 35% and 65% of its total assets invested in equity
securities of large capitalization companies, principally companies domiciled in
the U.S. The Portfolio's fixed income investments will primarily consist of
short- and intermediate-term government, corporate and mortgage-related fixed
income instruments. Under normal circumstances, the average maturity of the
fixed income securities will be approximately five years. Up to 25% of the
Portfolio's total assets may be invested in the securities of foreign issuers.
THE PORTFOLIOS' PURCHASE, EXCHANGE AND REDEMPTION
PROCEDURES
The purchase, exchange and redemption procedures governing the Shares of
the Funds are substantially the same.
PURCHASE PROCEDURES.
MAS PORTFOLIOS. Shares of the MAS Portfolios may be purchased directly
from MASDI. Institutional Class Shares are available to clients of Miller
Anderson with combined investments of $5 million and shareholder organizations
who have a contractual arrangement with MAS Funds or MASDI, including
institutions such as trusts, foundations or broker/dealers purchasing for the
accounts of others. Institutional Class Shares are offered directly to
investors without a sales commission at the net asset value of the Portfolio
next determined after receipt of the purchase order. Purchase orders may be
transmitted by mail or by wire.
Additional investments of Institutional Class Shares at net asset value may
be made at any time (minimum investment is $1,000). Additional investment
orders may be transmitted by mail or by wire.
The net asset value of the MAS Mid Cap Value Portfolio's Institutional
Class shares is determined as of the close of the New York Stock Exchange
("NYSE"), ordinarily 4:00 p.m. (Eastern time), on each day MAS is open for
business. The net asset value of the MAS Balanced Portfolio's Institutional
Class shares is determined as of the later of close of the NYSE (ordinarily 4:00
p.m. Eastern time) or one hour after the close of the bond markets (ordinarily
4:00 Eastern Time), on each day MAS is open for business. The net asset value
per share is calculated by dividing the total market value of each Portfolio's
investments and other assets, less any liabilities, by the total outstanding
shares of that Portfolio.
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<PAGE>
MAS reserves the right, in its sole discretion, to suspend the offering of
Institutional Class shares of any of its Portfolios or to reject any purchase
orders when, in the judgment of management, such suspension or rejection is in
the best interest of MAS. MAS also reserves the right, in its sole discretion,
to waive the minimum initial and subsequent investment amounts.
MSIF PORTFOLIOS. Shares of the MSIF Portfolios may be purchased directly
from MSIF or through its distributor. The minimum initial investment and
minimum account size are $500,000 for Class A shares and $100,000 for Class B
shares. Class A shares are offered directly to investors at net asset value
with no sales commission or 12b-1 fee. Class B shares are offered at net asset
value with no sales commission, but with a 12b-1 fee, which is accrued daily and
paid quarterly, equal to 0.25% of the Class B shares' average daily net assets
on an annualized basis. Additional investments may be made at any time (minimum
investment $1,000). Purchase orders may be transmitted by mail or by wire.
The purchase price of the Class A and Class B shares of each MSIF Portfolio
is the net asset value next determined after the order is received. An order
received prior to the close of the NYSE (ordinarily 4:00 p.m. Eastern time) will
be executed at the price computed on the date of receipt. Orders received after
the close of the NYSE will be executed at the price computed on the next day the
NYSE is open as long as the transfer agent received payment by check or by
Federal Funds wire prior to the regular close of the NYSE on such day.
The net asset value per share of a class of shares of each of the MSIF
Portfolios is determined by dividing the total market value of the Portfolio's
investments and other assets attributable to such class, less any liabilities
attributable to such class, by the total number of outstanding shares of such
class of the Portfolio. Net asset value is calculated separately for each class
of the Portfolio. Net asset value per share is determined as of the regular
close of the NYSE on each day that the NYSE is open for business.
EXCHANGE PRIVILEGES.
MAS PORTFOLIOS. Each MAS Portfolio's Institutional Class Shares may be
exchanged for shares of MAS' other portfolios offering Institutional Class
Shares based on the respective net asset values of the shares involved. There
are no exchange fees. The officers of MAS reserve the right not to accept any
request for an exchange when, in their opinion, the exchange privilege is being
used as a tool for market timing. In addition, MSIF Portfolio shareholders who
become shareholders of an MAS Portfolio as a result of the Reorganization will
be permitted to exchange Institutional Class Shares of the MAS Portfolios for
Class A Shares of MSIF's other portfolios.
MSIF PORTFOLIOS. Shares of each MSIF Portfolio may be exchanged for shares
of any other available portfolio of MSIF. In exchange for shares of a portfolio
with more than one class, the class of shares received in the exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
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<PAGE>
same minimum initial investment and account size for determining the class of
shares received in the exchange will apply.
The exchange privileges of MAS and MSIF may be modified or terminated at
any time upon 60-days' notice to shareholders. Investors should obtain and read
the applicable prospectus prior to tendering shares for exchange.
REDEMPTION PROCEDURES.
Shares of the MAS and MSIF Portfolios may be redeemed without charge by
mail or by telephone. The shares will be redeemed at the next determined net
asset value of shares to their applicable class. Any redemption proceeds may be
more or less than the purchase price of the shares, depending on, among other
things, the market value of the investment securities held by the Portfolio.
If the Board of Directors of MSIF or the Board of Trustees of MAS determine
that it would be detrimental to the best interest of the remaining shareholders
to make payment wholly or partly in cash, redemption proceeds may be paid in
whole or in part by a distribution in-kind of readily marketable securities held
by a portfolio in lieu of cash in conformity with applicable rules of the SEC.
Investors may incur brokerage charges on the sale of portfolio securities
received in such payments of redemptions.
PORTFOLIO TRANSACTIONS
The Portfolios' policies regarding portfolio transactions are substantially
the same. Please refer to the Portfolios' respective Prospectuses for more
information.
SHAREHOLDER RIGHTS
MAS
GENERAL. MAS Funds was established as a business trust under Pennsylvania
law by a Declaration of Trust dated February 15, 1984, as amended and restated
as of November 11, 1993. MAS is also governed by its Bylaws and by applicable
Pennsylvania law.
SHARES. MAS is authorized to issue an unlimited number of shares of
beneficial interest, without par value, from an unlimited number of series
(portfolios) of shares. Currently, MAS consists of twenty-eight portfolios and
three classes of shares, the Institutional Class, the Adviser Class and the
Investment Class shares. The three classes differ with respect to
administrative and distribution costs, as set forth in the MAS prospectus. As a
result of the Reorganization, shareholders of MSIF shares will receive
Institutional Class Shares of the MAS Portfolios. The shares of each MAS
Portfolio have no preference as to conversion, exchange, dividends, retirement
or other features, and have no preemptive rights.
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<PAGE>
VOTING REQUIREMENTS. Shareholders of MAS Funds shares are entitled to one
vote for each full share held and fractional votes for fractional shares. The
shares of MAS have non-cumulative voting rights, which means that the holder of
more than 50% of the shares voting for the election of Trustees can elect 100%
of the Trustees if they choose to do so. At shareholder meetings, the holders
of 40% of a portfolio's shares entitled to vote at the meeting constitute a
quorum. Shareholders of a class have exclusive voting rights regarding any
matter submitted to shareholders that relates solely to that class of shares,
and separate voting rights on any other matter submitted to shareholders in
which the interests of the shareholders of that class differ from the interests
of holders of any other class.
SHAREHOLDER MEETINGS. Annual meetings of shareholders will not be held,
but special meetings of shareholders may be held under certain circumstances. A
meeting will be held to vote on the removal of a Trustee(s) of MAS if requested
in writing by the holders of not less than 10% of the outstanding shares of MAS.
MAS will assist in shareholder communications in such matters to the extent
required by law.
ELECTION AND TERM OF TRUSTEES. MAS' affairs are supervised by the Trustees
under the laws governing business trusts in the Commonwealth of Pennsylvania.
Trustees of MAS are elected by a majority vote of a quorum cast by written
ballot at the regular meeting of shareholders, if any, or at a special meeting
held for that purpose. Trustees hold office until their successors are duly
elected and qualified or until their death, removal or resignation.
Shareholders may remove a Trustee by vote of a majority of the votes entitled to
be cast for the election of directors and may elect a successor to fill a
resulting vacancy. A Trustee elected thereby serves for the balance of the term
of the removed Trustee.
SHAREHOLDER LIABILITY. The shareholders of MAS Funds generally are not
personally liable for the acts, omissions or obligations of the Trustees or MAS.
LIABILITY OF TRUSTEES. The Trustees shall not be personally liable for any
obligation of MAS. MAS will indemnify its Trustees and officers against all
liabilities and expenses except for liabilities arising from such person's
self-dealing, willful misconduct or recklessness.
MSIF
GENERAL. MSIF was organized as a Maryland corporation on June 16, 1988.
MSIF is governed by its Articles of Incorporation, as amended and restated,
dated September 27, 1988, its By-Laws, and applicable Maryland law.
SHARES. MSIF is authorized to issue up to 34 billion shares of common
stock, with a $.001 par value per share, including up to one billion shares of
common stock of each of the MSIF Portfolios. The Board of Directors may
increase the number of shares MSIF is authorized to issue without the approval
of the shareholders of MSIF. The shares of common stock of each MSIF Portfolio
are currently classified into two classes, the Class A shares and the Class B
shares. Class A shares differ from Class B shares with respect to minimum
investment requirements and fund
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<PAGE>
expenses. The shares have no preference as to conversion, exchange, dividends,
retirement or other features and have no preemptive rights.
VOTING REQUIREMENTS. Shareholders of MSIF are entitled to one vote for
each full share held and fractional votes for fractional shares. The shares of
MSIF have non-cumulative voting rights, which means that the holder of more than
50% of the shares voting for the election of Trustees can elect 100% of the
Trustees if they choose to do so. At shareholder meetings, the holders of
one-third of a Portfolio's shares outstanding and entitled to vote at the
meeting, present in person or by proxy, constitute a quorum. Shareholders of a
class have exclusive voting rights regarding any matter submitted to
shareholders that relates solely to that class of shares, and separate voting
rights on any other matter submitted to shareholders in which the interests of
the shareholders of that class differ from the interests of holders of any other
class.
SHAREHOLDER MEETINGS. Annual meetings of shareholders will not be held,
but special meetings of shareholders may be held under certain circumstances. A
meeting will be held to vote on the removal of a Director(s) of MSIF if
requested in writing by the holders of not less than 10% of the outstanding
shares of MSIF. MSIF will assist in shareholder communications in such matters
to the extent required by law.
ELECTION AND TERM OF DIRECTORS. Pursuant to MSIF's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of MSIF's adviser, administrator and distributor. The
officers of MSIF conduct and supervise its daily business operations. Directors
of MSIF are elected by a majority vote of the shares present in person or by
proxy at the regular meeting of shareholders, if any, or at a special meeting
held for that purpose. Directors hold office until their successors are duly
elected and qualified or until their death, removal or resignation.
Shareholders may remove a Director by vote of a majority of the votes entitled
to be cast for the election of directors and may elect a successor to fill a
resulting vacancy.
SHAREHOLDER LIABILITY. The shareholders of MSIF have no personal liability
for acts or obligations of MSIF.
LIABILITY OF DIRECTORS. The Articles of Incorporation provide that, to the
fullest extent permitted by Maryland law, no director or officer of MSIF shall
be liable to MSIF or to its shareholders for damages. The Articles of
Incorporation provide that MSIF will indemnify their directors and officers to
the fullest extent permitted under Maryland law and the 1940 Act.
LIQUIDATION OR DISSOLUTION. In the event of a liquidation or dissolution
of MSIF, shareholders of each class of common stock shall be entitled to
receive, as a class, out of the assets of MSIF available for distribution to
shareholders, but other than general assets not belonging to any particular
class of stock, the assets belonging to such class; such assets shall be
distributed among such shareholders in proportion to the number of shares of
such class held by them. In the event that there are any general assets not
belonging to any particular class of stock and available for distribution,
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<PAGE>
such distribution shall be made to the holders of stock of all classes of common
stock in proportion to the asset value of the respective classes of common
stock.
The foregoing is only a summary of certain rights of shareholders of MAS
and MSIF under their governing charter documents and By-Laws, state law and the
1940 Act and is not a complete description of provisions contained in those
sources. Shareholders should refer to the provisions of state law, the 1940 Act
and rules thereunder directly for a more thorough description.
INFORMATION ABOUT THE MAS AND MSIF PORTFOLIOS
Information concerning the operation and management of the MAS Portfolios
is incorporated herein by reference to the current prospectus relating to the
Institutional Class Shares of those Portfolios dated January 31, 1997, as
supplemented through June 5, 1997, a copy of which accompanies this Proxy
Statement/Prospectus. Additional information about the MAS Portfolios is
included in the Statement of Additional Information dated January 31, 1997,
which is available upon request and without charge by calling 1-800-354-8185.
Information about the MSIF Portfolios is included in the current prospectus
relating to those Portfolios dated May 1, 1997, as supplemented through
September 26, 1997, which is incorporated by reference herein solely with
respect to those Portfolios. Additional information is included in the
Statement of Additional Information of MSIF dated May 1, 1997 and supplemented
through September 26, 1997, which is available upon request and without charge
by calling 1-800-548-7786. Each Statement of Additional Information has been
filed with the SEC. The MAS Portfolios and MSIF Portfolios are each subject to
the informational requirements of the Securities Exchange Act of 1934 and the
1940 Act, and in accordance therewith file reports and other information,
including proxy material and charter documents, with the SEC. These items may
be inspected and copied at the Public Reference Facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison St., Chicago, IL
60661-2511 and Seven World Trade Center, Suite 1300, New York, NY 10048.
FINANCIAL STATEMENTS. The financial statements of the MAS Portfolios
contained in the MAS Funds annual report to shareholders for the fiscal year
ended September 30, 1997 have been audited by Price Waterhouse LLP, its
independent accountants. The financial statements of the MSIF Portfolios
contained in MSIF's annual report to shareholders for the fiscal year ended
December 31, 1996 have been audited by Price Waterhouse LLP, its independent
accountants. These financial statements, as well as interim financial statements
for the MSIF Portfolios dated as of June 30, 1997 and pro forma financial
statements reflecting the MAS Mid Cap Value Portfolio after the Reorganization,
are incorporated by reference into this Proxy Statement/Prospectus insofar as
such financial statements relate to the Portfolios, and not to any other
portfolios that are part of the MSIF or MAS Funds families and described
therein. A copy of MAS Funds' and MSIF's Annual Reports, which include
discussions of the performance of the MAS Portfolios and the MSIF Portfolios,
respectively, accompanies this Proxy Statement/Prospectus. MAS Funds and MSIF
each will furnish, without charge, a copy of its most recent Semi-Annual Report
succeeding such Annual Report, if any, on request. Requests should be directed
to MAS at One Tower Bridge, West Conshohocken,
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<PAGE>
Pennsylvania 19428 or by calling 1-800-354-8185 and to MSIF at P.O. Box 2798,
Boston, Massachusetts 02208 or by calling 1-800-548-7786.
LEGAL MATTERS. Morgan, Lewis & Bockius LLP, 1800 M Street, N.W.,
Washington, D.C. 20036, serves as counsel both to MAS and MSIF. Morgan, Lewis
& Bockius LLP will render opinions concerning the issuance of MAS Institutional
Class Shares, the validity of actions taken by MSIF with respect to the
Reorganization and the outstanding Class A and Class B shares of the MSIF
Portfolios and certain federal tax matters described above. Neither MSIF nor MAS
is involved in any litigation.
THE BOARDS OF DIRECTORS OF THE MSIF PORTFOLIOS RECOMMEND THAT YOU VOTE FOR
APPROVAL OF THE REORGANIZATION AGREEMENT.
VOTING MATTERS
GENERAL INFORMATION. This Proxy Statement/Prospectus is being furnished in
connection with the solicitation of proxies by the Boards of Directors of the
MSIF Portfolios in connection with the Meeting. It is expected that the
solicitation of proxies will be primarily by mail. Officers and service
contractors of the MAS and MSIF Portfolios may also solicit proxies by
telephone, telegraph or in person. The cost of solicitation will be borne,
directly or indirectly, by each of MAS and MSIF.
VOTING RIGHTS AND REQUIRED VOTE. Each share of the MSIF Portfolios is
entitled to one vote. Approval of the Reorganization Agreement with respect to
each MSIF Portfolio requires the affirmative vote of a majority of the
outstanding voting securities of that Portfolio present at the meeting in person
or by proxy. The vote of a "majority of the outstanding securities" means the
vote of 67% or more of the voting securities present, if the holders of more
than 50% of the outstanding voting securities are present in person or by proxy
or the vote of more than 50% of the outstanding voting securities, whichever is
less. Any shareholder giving a proxy may revoke it at any time before it is
exercised by submitting to MSIF a written notice of revocation or a subsequently
executed proxy or by attending the Meeting and voting in person. The proposed
Reorganization of each MSIF Portfolio will be voted upon separately by the
shareholders of the respective Portfolios. The consummation of each Portfolio's
Reorganization is not conditioned on the approval of the other.
Shares represented by a properly executed proxy will be voted in accordance
with the instructions thereon, or if no specification is made, the shares will
be voted "FOR" the approval of the Reorganization Agreement. It is not
anticipated that any matters other than the adoption of the Reorganization
Agreement will be brought before the Meeting. Should other business properly be
brought before the Meeting, it is intended that the accompanying proxies will be
voted in accordance with the judgment of the persons named as such proxies. For
the purposes of determining the presence of a quorum for transacting business at
the Meeting, abstentions and broker "non-votes" (that is, proxies from brokers
or nominees indicating that such persons have not received instructions from the
beneficial owners or other persons entitled to vote shares on a particular
matter with respect
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<PAGE>
to which the brokers or nominees do not have discretionary power) will be
treated as shares that are present but which have not been voted. For this
reason, abstentions and broker non-votes will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the Reorganization Agreement.
If sufficient votes in favor of the proposals set forth in the Notice of
the Special Meeting are not received by the time scheduled for the meeting, the
persons named as proxies may propose one or more adjournments of the Meeting for
a reasonable period of time to permit further solicitation of proxies with
respect to the proposals. Any such adjournment will require the affirmative
vote of a majority of the votes cast on the question in person or by proxy at
the session of the Meeting to be adjourned. The persons named as proxies will
vote in favor of such adjournment those proxies which they are entitled to vote
in favor of the proposals. They will vote against any such adjournment those
proxies required to be voted against the proposals. The costs of any additional
solicitation and of any adjourned session will be borne by MSIF and MAS.
RECORD DATE AND OUTSTANDING SHARES. Only shareholders of record of the
MSIF Portfolios at the close of business on February 5, 1998 (the "Record Date")
are entitled to notice of and to vote at the Meeting and any postponement or
adjournment thereof. At the close of business on the Record Date there were
outstanding and entitled to vote:
_______shares of common stock of MSIF Small Cap Value Equity Portfolio;
_______shares of common stock of MSIF Balanced Portfolio.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
MSIF. As of November 28, 1997, to MSIF's knowledge, no person owned of
record or beneficially 5% or more of the MSIF Small Cap Value Equity Portfolio's
Class A shares. The following persons owned of record or beneficially 5% or
more of each other class of the MSIF Portfolios' outstanding shares as of
November 28, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
MSIF SMALL CAP VALUE EQUITY PORTFOLIO:
CLASS B
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PERCENTAGE OF
PERCENTAGE OF CLASS INSTITUTIONAL CLASS
B SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- ------------------------------------------------------------------------------------------------------------
John A. Mansour * 5.77% +
111 Congress Avenue
Suite 3000
Austin, TX 78701-4043
- ------------------------------------------------------------------------------------------------------------
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<PAGE>
- ------------------------------------------------------------------------------------------------------------
MSIF BALANCED PORTFOLIO:
CLASS A
- ------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
PERCENTAGE OF CLASS INSTITUTIONAL CLASS
B SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- ------------------------------------------------------------------------------------------------------------
First Bank NA, Trustee 23.16% +
Kinney Pringing Co. Profit Sharing Trust *
P.O. Box 64010
St. Paul, MN 55154-0010
- ------------------------------------------------------------------------------------------------------------
H. Conrad Meyer & Sarah Meyer * 17.05% +
One Woodland Avenue
Bronxville, NY 10708-3208
- ------------------------------------------------------------------------------------------------------------
Guarantee & Trust Co. Trustee FBO * 10.3% +
H. Conrad Meyer III
One Woodland Avenue
Bronxville, NY 10708-3208
- ------------------------------------------------------------------------------------------------------------
Jeffrey R. Holzschuh * 6.78% +
21 Kenilworth Terrace
Greenwich, CT 06830
- ------------------------------------------------------------------------------------------------------------
MSIF BALANCED PORTFOLIO:
CLASS B
- ------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
PERCENTAGE OF CLASS INSTITUTIONAL CLASS
B SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- ------------------------------------------------------------------------------------------------------------
William Guthrie * 64% +
435 Sheridan Road
Winnetka, IL 60093-2626
- ------------------------------------------------------------------------------------------------------------
Ramakrishna Kothalanka MD PA Profit Sharing Plan * 36% +
126 Bentley Avenue
Jersey City, NJ 07304-1702
- ------------------------------------------------------------------------------------------------------------
* Record and Beneficial Ownership.
+ Less than 1%.
As of November 28, 1997, the Directors and officers of MSIF as a group
owned less than 1% of the total outstanding Class A and Class B shares of either
MSIF Portfolio.
MAS. As of November 28, 1997, to MAS's knowledge, the following persons
owned of record or beneficially 5% or more of each class' outstanding shares:
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-------------------------------------------------------------------------------------------------------------
MAS FUNDS MID CAP VALUE PORTFOLIO:
INSTITUTIONAL CLASS
- -------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
INSTITUTIONAL CLASS INSTITUTIONAL CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- -------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. ** 12.08% 10.15%
Special Custody Account for the
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
- -------------------------------------------------------------------------------------------------------------
Georgetown Memorial Hospital * 10.63% 8.92%
P.O. Drawer 171B
Georgetown, SC 29442
- -------------------------------------------------------------------------------------------------------------
The Hearst Foundation * 9.21% 7.73%
State Street Bank & Trust*
P.O. Box 1992
Boston, MA 02105
- -------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank * 9.21% 7.73%
Hearst Corporation *
3 Chase Metro Tech Center
6th Floor
New York, NY 11245
- -------------------------------------------------------------------------------------------------------------
Berklee College of Music * 8.27% 6.94%
1140 Boylston Street, Box 67
Boston, MA 02215-3693
- -------------------------------------------------------------------------------------------------------------
Morgan Stanley Plan 8504 * 6.01% 5.05%
P.O. Box 92956
Chicago, IL 60675
- -------------------------------------------------------------------------------------------------------------
MAS FUNDS MID CAP VALUE PORTFOLIO:
INVESTMENT CLASS
- -------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
INVESTMENT CLASS INVESTMENT CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- -------------------------------------------------------------------------------------------------------------
Northern Trust Trustee 69.92% 69.92%
FBO UA Local 467 *
P.O. Box 92956
Chicago, IL 60675
- -------------------------------------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------------------------------------
Don S. McGuire & Clay Felchlin McGuire* 13.04% 13.04%
P.O. Box 1358
Pebble Beach, CA 93953
- -------------------------------------------------------------------------------------------------------------
Lion Insurance Co. * 9.32% 9.32%
P.O. Box 39
Westerville, OH 43086-0039
- -------------------------------------------------------------------------------------------------------------
MAS FUNDS BALANCED PORTFOLIO:
INSTITUTIONAL CLASS
- -------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
INSTITUTIONAL CLASS INSTITUTIONAL CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- -------------------------------------------------------------------------------------------------------------
The Bank of New York * 61.63% 60.72%
P.O. Box 1066
Wall Street Station
New York, NY 10286-0001
ALL SHARES OWNED BY THE BANK OF NEW YORK ARE ALSO OWNED BY OTHER ACCOUNTS,
WHICH ARE LOCATED AT THE SAME ADDRESS. THESE ACCOUNTS ARE LISTED BELOW,
TOGETHER WITH THE PERCENTAGE OF THE TOTAL OUTSTANDING INSTITUTIONAL CLASS
SHARES OWNED BY EACH ACCOUNT.
Wendel & Co. A/C #617026 * 31.48% 31.02%
Wendel & Co. #507415 * 9.19% 9.06%
Trustee for A&P Savings Plan
Wendel & Co. A/C #018768 * 7.68% 7.56%
Wendel & Co. A/C #017735 * 7.01% 6.90%
Wendel & Co. A/C #507709 6.27% 6.18%
FAO Aramark Corporation *
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<PAGE>
MAS FUNDS BALANCED PORTFOLIO:
INVESTMENT CLASS
- -------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
INVESTMENT CLASS INVESTMENT CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- -------------------------------------------------------------------------------------------------------------
Nabank & Co./DRK ** 92.78% 92.78%
P.O. Box 2180
Tulsa, OK 74101-2180
EACH OF THE FOLLOWING PERSONS IS DEEMED TO BENEFICIALLY OWN ALL OF THESE
SHARES AND ARE LOCATED AT THE SAME ADDRESS:
Bank of Oklahoma +
Willbrose Profit Sharing Plan +
- -------------------------------------------------------------------------------------------------------------
Roderick Dean Marcoux * 6.28% 6.28%
P.O. Box 3898
Incline Village, NV 89450
- -------------------------------------------------------------------------------------------------------------
MAS FUNDS BALANCED PORTFOLIO:
ADVISER CLASS
- -------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
ADVISER CLASS ADVISER CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- -------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional Operations CD (FIIDC) ** 81.57% 81.57%
As Agent For Certain EE Benefit Plans
100 Magellan Way KWIC
Covington, KY 41015
- -------------------------------------------------------------------------------------------------------------
Stanley R. Navas * 17.59% 17.59%
109 Kennondale Lane
Richmond, VA 23226
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Record and Beneficial Ownership.
** Record Ownership Only.
+ Beneficial Owner Only.
As of November 28, 1997, the Trustees and officers of MAS as a group owned
less than 1% of the total outstanding Institutional, Investment, or Adviser
Class Shares of either MAS Portfolio.
EXPENSES. In order to obtain the necessary quorum at the Meeting,
additional solicitation may be made by mail, telephone, telegraph, facsimile or
personal interview by representatives of MSIF, MSAM or by Shareholder Services
Corporation, a solicitation firm located in New York, NY
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<PAGE>
that has been engaged to assist in proxy solicitation at an estimated cost of
approximately $3,500. All costs of solicitation (including the printing and
mailing of this proxy statement, meeting notice and form of proxy, as well as
any necessary supplementary solicitations) will be paid by MSIF. Persons
holding shares as nominees will, upon request, be reimbursed for their
reasonable expenses in sending soliciting material to their principals.
OTHER BUSINESS
The Board of Directors of MSIF knows of no other business to be brought
before the Meeting. However, if any other matters come before the Meeting, it
is the intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
MSIF. Shareholder inquiries may be addressed to MSIF in writing at the
address on the cover page of this Proxy Statement/Prospectus or by telephoning
1-800-548-7786.
MAS. Shareholder inquiries may be addressed to MAS in writing at One Tower
Bridge, West Conshohocken, Pennsylvania 19428 or by calling 1-800-354-8185.
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED
TO DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
By the Order of the Board of Directors,
Valerie Y. Lewis
Secretary
Morgan Stanley Institutional Fund, Inc.
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<PAGE>
AGREEMENT AND PLAN
OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
January 9, 1998 (the "Agreement"), by and between Morgan Stanley
Institutional Fund, Inc. ("MSIF"), a Maryland corporation, on behalf of the
Small Cap Value Equity and Balanced Portfolios (each an "Acquired Fund," and
collectively, the "Acquired Funds"), and MAS Funds, a Pennsylvania business
trust, on behalf of the Mid Cap Value and Balanced Portfolios (each an
"Acquiring Fund," and collectively, the "Acquiring Funds").
WHEREAS, MSIF was organized under Maryland law as a corporation under
Articles of Incorporation dated September 27, 1988, as amended and restated;
MSIF is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); MSIF has authorized
capital consisting of 38,000,000,000 shares of common stock, par value $.001 per
share, including 1,000,000,000 shares of the Small Cap Value Equity Portfolio,
and 1,000,000,000 shares of the Balanced Portfolio; the Acquired Funds are duly
organized and validly existing series of MSIF; and
WHEREAS, MAS Funds was organized under Pennsylvania law as a business trust
under a Declaration of Trust dated February 15, 1984, as amended and restated;
MAS Funds is an open-end management investment company registered under the 1940
Act; and the Acquiring Funds are duly organized and validly existing series of
MAS Funds;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree to effect (i) the transfer of all of the assets of the
MSIF Small Cap Value Equity Portfolio solely in exchange for (a) the assumption
by the MAS Mid Cap Value Portfolio of all or substantially all of the
liabilities of the MSIF Small Cap Value Equity Portfolio and (b) beneficial
shares of the MAS Mid Cap Value Portfolio, followed by the distribution, at the
Effective Time (as defined in Section 9 of this Agreement), of such beneficial
shares of the MAS Mid Cap Value Portfolio to the holders of shares of common
stock of the MSIF Small Cap Value Equity Portfolio on the terms and conditions
hereinafter set forth in liquidation of the MSIF Small Cap Value Equity
Portfolio; and (ii) the transfer of all of the assets of the MSIF Balanced
Portfolio solely in exchange for (a) the assumption by the MAS Balanced
Portfolio of all or substantially all of the liabilities of the MSIF Balanced
Portfolio and (b) beneficial shares of the MAS Balanced Portfolio, followed by
the distribution, at the Effective Time (as defined in Section 9 of this
Agreement), of such beneficial shares of the MAS Balanced Portfolio to the
holders of shares of common stock of the MSIF Balanced Portfolio on the terms
and conditions hereinafter set forth in liquidation of the MSIF Balanced
Portfolio. For convenience: (x) the MSIF Small Cap Value Equity Portfolio and
the MAS Mid Cap Value Portfolio are referred to generically hereinafter as
"corresponding" Acquired and Acquiring Funds, as are the MSIF Balanced Portfolio
and the MAS Balanced Portfolio; (y) the beneficial shares of the MAS Mid Cap
Value and Balanced
A - 1
<PAGE>
Portfolios that are given in exchange for the assets of the corresponding
Acquired Funds are referred to hereinafter as the "Acquiring Funds Shares"; and
(z) the shares of common stock of the MSIF Small Cap Value Equity and Balanced
Portfolios that are held by the holders of such shares at the Effective Time are
referred to hereinafter as the "Acquired Funds Shares." The parties hereto
covenant and agree as follows:
1. PLAN OF REORGANIZATION. At the Effective Time, each Acquired Fund will
assign, deliver and otherwise transfer all of its assets and good and marketable
title thereto, free and clear of all liens, encumbrances and adverse claims
except as provided in this Agreement, and assign all or substantially all of its
liabilities as are set forth in a statement of assets and liabilities, to be
prepared as of the Effective Time (the "Statement of Assets and Liabilities") to
the corresponding Acquiring Fund and each Acquiring Fund shall acquire all such
assets, and shall assume all such liabilities of the corresponding Acquired
Fund, in exchange for delivery to the corresponding Acquired Fund by such
Acquiring Fund of a number of its Acquiring Funds Shares (both full and
fractional) equivalent in value to the Acquired Funds Shares of the
corresponding Acquired Fund outstanding immediately prior to the Effective Time.
The assets and stated liabilities of each Acquired Fund, as set forth in the
Statement of Assets and Liabilities attached hereto as Exhibit A, shall be
exclusively assigned to and assumed by the corresponding Acquiring Fund. All
debts, liabilities, obligations and duties of each Acquired Fund, to the extent
that they exist at or after the Effective Time and are stated in the Statement
of Assets and Liabilities, shall after the Effective Time attach to the
corresponding Acquiring Fund and may be enforced against the corresponding
Acquiring Fund to the same extent as if the same had been incurred by the
corresponding Acquiring Fund.
2. TRANSFER OF ASSETS. The assets of each Acquired Fund to be acquired by the
corresponding Acquiring Fund shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable) as set forth in the Statement of Assets and Liabilities, as well as
any claims or rights of action or rights to register shares under applicable
securities laws, any books or records of such Acquired Fund and other property
owned by such Acquired Fund at the Effective Time.
3. LIQUIDATION AND DISSOLUTION OF THE ACQUIRED FUNDS. At the Effective Time,
the Acquired Funds will liquidate and the Acquiring Funds Shares (both full and
fractional) received by the Acquired Funds will be distributed to the
shareholders of record of the Acquired Funds as of the Effective Time in
exchange for their respective Acquired Funds Shares and in complete liquidation
of the Acquired Funds. Each shareholder of the Acquired Funds will receive a
number of Acquiring Funds Shares equal in value to the Acquired Funds Shares
held by that shareholder. Such liquidation and distribution will be accompanied
by the establishment of an open account on the share records of the Acquiring
Funds in the name of each shareholder of record of the Acquired Funds and
representing the respective number of Acquiring Funds Shares due such
shareholder. As soon as practicable after the Effective
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<PAGE>
Time, but not later than April __, 1998, MSIF shall take all steps as shall
be necessary and proper to effect a complete termination of the Acquired Funds.
4. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUNDS. The Acquiring Funds
represent and warrant to the Acquired Funds as follows:
(a) ORGANIZATION, EXISTENCE, ETC. MAS Funds is a business trust duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has the power to carry on its business as
it is now being conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. MAS Funds is registered under the
1940 Act as an open-end management investment company; such registration
has not been revoked or rescinded and is in full force and effect.
(c) FINANCIAL STATEMENTS. The audited financial statements, if any, of
MAS Funds relating to the Acquiring Funds dated as of September 30, 1997
(the "Acquiring Funds Financial Statements"), which will, if available, be
delivered to the Acquired Funds as of the Effective Time, will fairly
present the financial position of the Acquiring Funds as of the date
thereof.
(d) SHARES TO BE ISSUED UPON REORGANIZATION. The Acquiring Funds Shares
to be issued in connection with the Reorganization have been duly
authorized and upon consummation of the Reorganization will be validly
issued, fully paid and nonassessable.
(e) AUTHORITY RELATIVE TO THIS AGREEMENT. MAS Funds, on behalf of the
Acquiring Funds, has the power to enter into this Agreement and to carry
out its obligations hereunder. The execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated
hereby, have been duly authorized by the MAS Funds Board of Trustees, and
no other proceedings by the Acquiring Funds are necessary to authorize its
officers to effectuate this Agreement and the transactions contemplated
hereby. Each of the Acquiring Funds is not a party to or obligated under
any charter, by-law, indenture or contract provision or any other
commitment or obligation, or subject to any order or decree, which would be
violated by its executing and carrying out this Agreement.
(f) LIABILITIES. There are no liabilities of the Acquiring Funds, whether
or not determined or determinable, other than liabilities disclosed or
provided for in the Acquiring Funds Financial Statements, if any, and
liabilities incurred in the ordinary course of business prior to the
Effective Time or otherwise previously disclosed to the Acquired Funds,
none of which has been materially adverse to the business, assets or
results of operations of the Acquiring Funds. MAS Funds' Registration
Statement does not contain any untrue statement of a material fact required
to be stated therein or make the statements therein not misleading.
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<PAGE>
(g) LITIGATION. Except as previously disclosed to the Acquired Funds,
there are no claims, actions, suits or proceedings pending or, to the
actual knowledge of the Acquiring Funds, threatened which would materially
adversely affect any of the Acquiring Funds or its assets or business or
which would prevent or hinder in any material respect consummation of the
transactions contemplated hereby.
(h) CONTRACTS. Except for contracts and agreements disclosed to the
Acquired Funds, under which no default exists, each of the Acquiring Funds
is not a party to or subject to any material contract, debt instrument,
plan, lease, franchise, license or permit of any kind or nature whatsoever
with respect to the Acquiring Funds.
(i) TAXES. As of the Effective Time, all Federal and other tax returns
and reports of the Acquiring Funds required by law to have been filed shall
have been filed, and all other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of
the Acquiring Funds' knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any of such returns.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRED FUNDS. The Acquired Funds
represent and warrant to the Acquiring Funds as follows:
(a) ORGANIZATION, EXISTENCE, ETC. MSIF is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Maryland and has the power to carry on its business as it is now being
conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. MSIF is registered under the 1940
Act as an open-end management investment company; and such registration has
not been revoked or rescinded and is in full force and effect.
(c) FINANCIAL STATEMENTS. The audited financial statements of MSIF
relating to the Acquired Funds as of December 31, 1996 and the unaudited
financial statements relating to the Acquired Funds as of June 30, 1997
(the "Acquired Funds Financial Statements"), as delivered to the Acquiring
Funds, fairly represent the financial position of the Acquired Funds as of
the respective dates thereof, and the results of their operations and
changes in their net assets for the periods indicated.
(d) MARKETABLE TITLE TO ASSETS. Each of the Acquired Funds will have, at
the Effective Time, good and marketable title to, and full right, power and
authority to sell, assign, transfer and deliver, the assets to be
transferred to the Acquiring Funds. Upon delivery and payment for such
assets, each of the Acquiring Funds will have good and marketable title to
such assets without restriction on the transfer thereof free and clear of
all liens, encumbrances and adverse claims.
(e) AUTHORITY RELATIVE TO THIS AGREEMENT. MSIF, on behalf of the Acquired
Funds, has the power to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this
Agreement, and the consummation
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<PAGE>
of the transactions contemplated hereby, have been duly authorized by
MSIF's Board of Directors, and no other proceedings by the Acquired Funds
are necessary to authorize its officers to effectuate this Agreement and
the transactions contemplated hereby. Each of the Acquired Funds is not a
party to or obligated under any charter, by-law, indenture or contract
provision or any other commitment or obligation, or subject to any order or
decree, which would be violated by its executing and carrying out this
Agreement.
(f) LIABILITIES. There are no liabilities of the Acquired Funds, whether
or not determined or determinable, other than liabilities disclosed or
provided for in the Acquired Funds Financial Statements and liabilities
incurred in the ordinary course of business prior to the Effective Time or
otherwise previously disclosed to the Acquiring Funds, none of which has
been materially adverse to the business, assets or results of operations of
the Acquired Funds. MSIF's Registration Statement, which is on file with
the Securities and Exchange Commission, does not contain any untrue
statement of a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(g) LITIGATION. Except as previously disclosed to the Acquiring Funds,
there are no claims, actions, suits or proceedings pending or, to the
knowledge of the Acquired Funds, threatened which would materially
adversely affect the Acquired Funds or its assets or business or which
would prevent or hinder in any material respect consummation of the
transactions contemplated hereby.
(h) CONTRACTS. Except for contracts and agreements disclosed to the
Acquiring Funds, under which no default exists, each of the Acquired Funds,
at the Effective Time, is not a party to or subject to any material
contract, debt instrument, plan, lease, franchise, license or permit of any
kind or nature whatsoever.
(i) TAXES. As of the Effective Time, all Federal and other tax returns
and reports of the Acquired Funds required by law to have been filed shall
have been filed, and all other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of
the Acquired Funds' knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any of such returns.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUNDS.
(a) All representations and warranties of the Acquired Funds contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Effective Time, with the same
force and effect as if made on and as of the Effective Time.
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<PAGE>
(b) The Acquiring Funds shall have received an opinion of counsel for the
Acquired Funds, dated as of the Effective Time, addressed to and in form
and substance satisfactory to counsel for the Acquiring Funds, to the
effect that (i) the Acquired Funds are duly organized and validly existing
series of MSIF under the laws of the State of Maryland; (ii) MSIF is an
open-end management investment company registered under the 1940 Act; (iii)
this Agreement and the Reorganization provided for herein and the execution
of this Agreement have been duly authorized and approved by all requisite
action of each of the Acquired Funds and this Agreement has been duly
executed and delivered by MSIF on behalf of the Acquired Funds and is a
valid and binding obligation of the Acquired Funds, subject to applicable
bankruptcy, insolvency, fraudulent conveyance and similar laws or court
decisions regarding enforcement of creditors' rights generally; (iv) to the
best of counsel's knowledge after reasonable inquiry, no consent, approval,
order or other authorization of any Federal or state court or
administrative or regulatory agency is required for each of the Acquired
Funds to enter into this Agreement or carry out its terms that has not been
obtained other than where the failure to obtain any such consent, approval,
order or authorization would not have a material adverse effect on the
operations of the Acquired Funds; and (v) upon consummation of this
Agreement, the Acquiring Funds shall have acquired all of the Acquired
Funds' assets listed in the Statement of Assets and Liabilities, free and
clear of all liens, encumbrances or adverse claims.
(c) The Acquired Funds shall have delivered to the Acquiring Funds at the
Effective Time the Acquired Funds' Statement of Assets and Liabilities,
prepared in accordance with generally accepted accounting principles
consistently applied, together with a certificate of the Treasurer or
Assistant Treasurer of the Acquired Funds as to the aggregate asset value
of the Acquired Funds' portfolio securities.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUNDS.
(a) All representations and warranties of the Acquiring Funds contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Effective Time, with the same
force and effect as if made on and as of the Effective Time.
(b) The Acquired Funds shall have received an opinion of counsel for the
Acquiring Funds, dated as of the Effective Time, addressed to and in form
and substance satisfactory to counsel for the Acquired Funds, to the effect
that:(i) the Acquiring Funds are duly organized and validly existing series
of MAS Funds under the laws of the Commonwealth of Pennsylvania; (ii) MAS
Funds is an open-end management investment company registered under the
1940 Act; (iii) this Agreement and the Reorganization provided for herein
and the execution of this Agreement have been duly authorized and approved
by all requisite action of each of the Acquiring Funds and this Agreement
has been duly executed and delivered by the Acquiring Funds and is a valid
and binding obligation of the Acquiring Funds, subject to
A - 6
<PAGE>
applicable bankruptcy, insolvency, fraudulent conveyance and similar laws
or court decisions regarding enforcement of creditors' rights generally;
(iv) to the best of counsel's knowledge, no consent, approval, order or
other authorization of any Federal or state court or administrative or
regulatory agency is required for each of the Acquiring Funds to enter into
this Agreement or carry out its terms that has not already been obtained,
other than where the failure to obtain any such consent, approval, order or
authorization would not have a material adverse effect on the operations of
the Acquiring Funds; and (v) the Acquiring Funds Shares to be issued in the
Reorganization have been duly authorized and upon issuance thereof in
accordance with this Agreement will be validly issued, fully paid and
nonassessable.
(c) The Acquiring Funds shall have delivered to the Acquired Funds at the
Effective Time, a certificate of the Treasurer or Assistant Treasurer of
the Acquiring Funds as to the aggregate asset value of the Acquiring Funds'
portfolio securities.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUNDS AND THE
ACQUIRING FUNDS. The obligations of the Acquired Funds and the Acquiring
Funds to effectuate this Agreement shall be subject to the satisfaction of
each of the following conditions:
(a) Such authority from the Securities and Exchange Commission (the "SEC")
as may be necessary to permit the parties to carry out the transactions
contemplated by this Agreement shall have been received.
(b) The Registration Statement on Form N-1A of the Acquiring Funds shall
be effective under the Securities Act of 1933, as amended (the "1933 Act"),
and, to the best knowledge of the Acquiring Funds, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
(c) The Acquiring Funds have filed all documents and paid all fees
required to permit their shares to be offered to the public in all states
of the United States, the Commonwealth of Puerto Rico and the District of
Columbia (except where such qualifications are not required) so as to
permit the transfer contemplated by this Agreement to be consummated.
(d) The Acquired Funds and the Acquiring Funds shall have received on or
before the Effective Time an opinion of counsel satisfactory to the
Acquired Funds and the Acquiring Funds substantially to the effect that for
Federal income tax purposes:
(1) No gain or loss will be recognized to the Acquired Funds
upon the transfer of its assets in exchange solely for the
Acquiring Funds Shares and the assumption by the Acquiring Funds
of the corresponding Acquired Fund's stated liabilities;
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<PAGE>
(2) No gain or loss will be recognized to the Acquiring Funds on
their receipt of the Acquired Funds' assets in exchange for the
Acquiring Funds Shares and the assumption by the Acquiring Funds
of the corresponding Acquired Fund's liabilities;
(3) The basis of an Acquired Fund's assets in the corresponding
Acquiring Fund's hands will be the same as the basis of those
assets in the Acquired Fund's hands immediately before the
conversion;
(4) The Acquiring Funds' holding period for the assets
transferred to the Acquiring Funds by the Acquired Funds will
include the holding period of those assets in the corresponding
Acquired Fund's hands immediately before the conversion;
(5) No gain or loss will be recognized to the Acquired Funds on
the distribution of the Acquiring Funds Shares to the Acquired
Funds' shareholders in exchange for their Acquired Funds Shares;
(6) No gain or loss will be recognized to the Acquired Funds'
shareholders as a result of the Acquired Funds' distribution of
Acquiring Funds Shares to the Acquired Funds' shareholders in
exchange for the Acquired Funds' shareholders' Acquired Funds
Shares;
(7) The basis of the Acquiring Funds Shares received by the
Acquired Funds' shareholders will be the same as the adjusted
basis of that Acquired Funds' shareholders' Acquired Funds Shares
surrendered in exchange therefor; and
(8) The holding period of the Acquiring Funds Shares received by
the Acquired Funds' shareholders will include the Acquired Funds'
shareholders' holding period for the Acquired Funds'
shareholders' Acquired Funds Shares surrendered in exchange
therefor, provided that said Acquired Funds Shares were held as
capital assets on the date of the conversion.
(e) A vote approving this Agreement and the Reorganization contemplated
hereby shall have been adopted by at least a majority of the outstanding
shares of each of the Acquired Funds entitled to vote at an annual or
special meeting; provided that, if a majority of the shares of only one
Acquired Fund approve the Agreement and the Reorganization, the parties may
execute the Agreement and effect the Reorganization solely with respect to
such Acquired Fund.
(f) The Board of Trustees of MAS Funds, at a meeting duly called for such
purpose, shall have authorized the issuance by each of the Acquiring Funds
of Acquiring Funds
A - 8
<PAGE>
Shares at the Effective Time in exchange for the assets of the Acquired
Funds pursuant to the terms and provisions of this Agreement.
9. EFFECTIVE TIME OF THE REORGANIZATION. The exchange of the Acquired Funds'
assets for Acquiring Funds Shares shall be effective as of close of
business on April __, 1998, or at such other time and date as fixed
by the mutual consent of the parties (the "Effective Time").
10. TERMINATION. This Agreement and the transactions contemplated hereby may
be terminated and abandoned with respect to one or more of the Acquiring
Funds and/or the Acquired Funds without penalty by resolution of the Board
of Directors of MSIF or the Board of Trustees of MAS Funds or at the
discretion of any duly authorized officer of MAS Funds or MSIF, at any time
prior to the Effective Time, if circumstances should develop that, in the
opinion of such Board or officer, make proceeding with the Agreement
inadvisable.
11. AMENDMENT AND WAIVER. This Agreement may be amended, modified or
supplemented in such manner as may be mutually agreed upon in writing by
the parties; PROVIDED, that no such amendment may have the effect of
changing the provisions for determining the number or value of Acquiring
Funds Shares to be paid to the Acquired Funds' shareholders under this
Agreement to the detriment of the Acquired Funds' shareholders without
their further approval. Furthermore, either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations (such waiver to be in writing and authorized by the President
or any Vice President of the waiving party with or without the approval of
such party's shareholders).
12. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland.
13. NOTICES. Any notice, report, statement or demand required or permitted by
any provision of this Agreement shall be in writing and shall be given by
prepaid telegraph, telecopy, certified mail, internet or overnight express
courier addressed as follows:
if to the Acquiring Funds:
Ms. Lorraine Truten
MAS Funds
One Tower Bridge
West Conshohocken, PA 19428
with a copy to:
John H. Grady, Esq.
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
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<PAGE>
Washington, D.C. 20036
if to the Acquired Funds:
Mr. Harold J. Schaff, Jr.
Morgan Stanley Institutional Fund, Inc.
1221 Avenue of the Americas
New York, NY 10020
with a copy to:
John H. Grady, Jr.
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036
14. FEES AND EXPENSES.
(a) Each of the Acquiring Funds and the Acquired Funds represents and
warrants to the other that there are no brokers or finders entitled to
receive any payments in connection with the transactions provided for
herein.
(b) Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by each Portfolio will
be borne by such Portfolio. Such expenses include, without limitation, (i)
expenses incurred in connection with the entering into and the carrying out
of the provisions of this Agreement; (ii) expenses associated with the
preparation and filing of the Proxy Statement under the Securities Exchange
Act of 1934, as amended; (iii) registration or qualification fees and
expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Funds Shares to
be issued in connection herewith in each state in which the Acquired Funds'
shareholders are resident as of the date of the mailing of the Proxy
Statement to such shareholders; (iv) postage; (v) printing; (vi) accounting
fees; (vii) legal fees; and (viii) solicitation costs of the transaction.
Each of the Acquiring Funds shall pay its own Federal and state
registration fees.
15. HEADINGS, COUNTERPARTS, ASSIGNMENT.
(a) The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not effect in any way the meaning or
interpretation of this Agreement.
(b) This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
(c) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but no
assignment or transfer hereof
A - 10
<PAGE>
or of any rights or obligations hereunder shall be made by any party
without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any
person, firm or corporation other than the parties hereto and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.
16. ENTIRE AGREEMENT. Each of the Acquiring Funds and the Acquired Funds agree
that neither party has made any representation, warranty or covenant not
set forth herein and that this Agreement constitutes the entire agreement
between the parties. The representations, warranties and covenants
contained herein or in any document delivered pursuant hereto or in
connection herewith shall survive the consummation of the transactions
contemplated hereunder.
17. FURTHER ASSURANCES. Each of the Acquiring Funds and the Acquired Funds
shall take such further action as may be necessary or desirable and proper
to consummate the transactions contemplated hereby.
18. BINDING NATURE OF AGREEMENT. As provided in each of (1) MSIF's Articles of
Incorporation, as amended and supplemented to date, on file with the State
Department of Assessments and Taxation of the State of Maryland; and (2)
MAS Funds Declaration of Trust, as amended and supplemented to date, on
file with the Pennsylvania Corporation Bureau of the Department of State,
this Agreement was executed by the undersigned officers of MAS Funds and
MSIF, on behalf of each of the Acquiring Funds and the Acquired Funds,
respectively, as officers and not individually, and the obligations of this
Agreement are not binding upon the undersigned officers individually, but
are binding only upon the assets and property of the corporation or trust.
Moreover, no series of a corporation or trust shall be liable for the
obligations of any other series of that corporation or trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Morgan Stanley Institutional Fund, Inc., on behalf of its series, Small Cap
Value Equity Portfolio and Balanced Portfolio
By
---------------------------
Name:
Title:
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<PAGE>
MAS Funds, on behalf of its series, Mid Cap Value Portfolio and Balanced
Portfolio
By
---------------------------
Name:
Title:
A - 12
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY PORTFOLIO
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS, MARCH 11, 1998
The undersigned Shareholder(s) of the Small Cap Value Equity Portfolio
("Portfolio") of Morgan Stanley Institutional Fund, Inc. ("MSIF"), revoking
previous proxies, hereby appoint(s) Michael F. Klein, Harold J. Schaaff, Jr.,
and Valerie Y. Lewis, and each of them (each with full power of substitution),
as the proxy or proxies of the undersigned to attend the Special Meeting of
Shareholders of the Portfolio to be held on March 11, 1998, and any adjournment
thereof (the "Meeting"), and to vote all of the shares of the Portfolio that the
signer would be entitled to vote if personally present at the Meeting on the
proposal set forth below respecting the approval of the Agreement and Plan of
Reorganization and Liquidation and, in accordance with their own discretion, on
any other matters properly brought before the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE FUND WHICH
RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL:
1. To approve an Agreement and Plan of Reorganization and Liquidation
providing for (i) the transfer of all of the assets and liabilities of
the MSIF Small Cap Value Equity Portfolio to the MAS Funds ("MAS") Mid
Cap Value Portfolio in exchange for shares of the MAS Mid Cap Value
Portfolio; (ii) the distribution of the MAS Mid Cap Value Portfolio
shares so received to shareholders of the MSIF Small Cap Value Equity
Portfolio; and (iii) the termination under state law of the MSIF Small
Cap Value Equity Portfolio.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Not applicable.
The undersigned acknowledges receipt with this proxy of a copy of the Notice of
Special Meeting of Shareholders and the Proxy/Prospectus.
This proxy will, when properly executed, be voted as directed herein by the
signing shareholder. IF NO CONTRARY DIRECTION IS GIVEN WHEN THE DULY EXECUTED
PROXY IS RETURNED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL TO APPROVE AN
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION PROVIDING FOR (i) THE
TRANSFER OF ALL OF THE ASSETS AND LIABILITIES OF THE MSIF SMALL CAP VALUE EQUITY
PORTFOLIO TO THE MAS MID CAP VALUE PORTFOLIO IN EXCHANGE FOR SHARES OF THE MAS
MID CAP VALUE PORTFOLIO; (ii) THE DISTRIBUTION OF THE MAS MID CAP VALUE
PORTFOLIO SHARES SO RECEIVED TO SHAREHOLDERS OF THE MSIF SMALL CAP VALUE EQUITY
PORTFOLIO; AND (iii) THE TERMINATION UNDER STATE LAW OF THE MSIF SMALL CAP VALUE
EQUITY PORTFOLIO, AND WILL BE VOTED IN THE APPOINTED PROXIES' DISCRETION UPON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Your signature(s) on this proxy should be exactly as your name or names appear
on this proxy. If the shares are held jointly, each holder should sign. If
signing is by attorney, executor, administrator, Director or guardian, please
print your full title below your signature.
Dated: _____________, 1998 _____________________________________________
Signature
_____________________________________________
Signature
PLEASE DATE, SIGN AND RETURN PROMPTLY WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING. YOU MAY NEVERTHELESS VOTE IN PERSON IF YOU DO ATTEND THE MEETING.
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
BALANCED PORTFOLIO
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS, MARCH 11, 1998
The undersigned Shareholder(s) of the Balanced Portfolio ("Portfolio") of
Morgan Stanley Institutional Fund, Inc. ("MSIF"), revoking previous proxies,
hereby appoint(s) Michael F. Klein, Harold J. Schaaff, Jr. and Valerie Y. Lewis,
and each of them (each with full power of substitution), as the proxy or proxies
of the undersigned to attend the Special Meeting of Shareholders of the
Portfolio to be held on March 11, 1998, and any adjournment thereof (the
"Meeting"), and to vote all of the shares of the Portfolio that the signer would
be entitled to vote if personally present at the Meeting on the proposal set
forth below respecting the approval of the Agreement and Plan of Reorganization
and Liquidation and, in accordance with their own discretion, on any other
matters properly brought before the Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE FUND WHICH
RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL:
1. Not applicable.
2. To approve the Agreement and Plan of Reorganization and Liquidation
providing for (i) the transfer of all of the assets and liabilities of
the MSIF Balanced Portfolio to the MAS Funds ("MAS") Balanced
Portfolio in exchange for shares of the MAS Balanced Portfolio; (ii)
the distribution of the MAS Balanced Portfolio shares so received to
shareholders of the MSIF Balanced Portfolio; and (iii) the termination
under state law of the MSIF Balanced Portfolio.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned acknowledges receipt with this proxy of a copy of the Notice of
Special Meeting of Shareholders and the Proxy/Prospectus.
This proxy will, when properly executed, be voted as directed herein by the
signing shareholder. IF NO CONTRARY DIRECTION IS GIVEN WHEN THE DULY EXECUTED
PROXY IS RETURNED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL TO APPROVE AN
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION PROVIDING FOR (i) THE
TRANSFER OF ALL OF THE ASSETS AND LIABILITIES OF THE MSIF BALANCED PORTFOLIO TO
THE MAS BALANCED PORTFOLIO IN EXCHANGE FOR SHARES OF THE MAS BALANCED PORTFOLIO;
(ii) THE DISTRIBUTION OF THE MAS BALANCED PORTFOLIO SHARES SO RECEIVED TO
SHAREHOLDERS OF THE MSIF BALANCED PORTFOLIO; AND (iii) THE TERMINATION UNDER
STATE LAW OF THE MSIF BALANCED PORTFOLIO, AND WILL BE VOTED IN THE APPOINTED
PROXIES' DISCRETION UPON SUCH OTHER BUSINESS AS MAY PROPERLY BE BROUGHT BEFORE
THE MEETING.
Your signature(s) on this proxy should be exactly as your name or names appear
on this proxy. If the shares are held jointly, each holder should sign. If
signing is by attorney, executor, administrator, Director or guardian, please
print your full title below your signature.
Dated: _____________, 1998 ___________________________________________
Signature
_____________________________________________
Signature
PLEASE DATE, SIGN AND RETURN PROMPTLY WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING. YOU MAY NEVERTHELESS VOTE IN PERSON IF YOU DO ATTEND THE MEETING.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
February __, 1998
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts, 02208-2798
MAS Funds
One Tower Bridge
West Conshohocken, PA 19428
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Combined Proxy Statement/Prospectus dated
February __, 1998 for the Special Meeting of Shareholders of Morgan Stanley
Institutional Fund, Inc. ("MSIF"), to be held on March 11, 1998. Copies of the
Combined Proxy Statement/Prospectus may be obtained at no charge by calling MSIF
at 1-800-548-7786.
Unless otherwise indicated, capitalized terms used herein and not otherwise
defined have the same meanings as are given to them in the Combined Proxy
Statement/Prospectus.
Further information about Institutional Class shares of MAS Funds is
contained in and incorporated by reference to said Fund's Statement of
Additional Information dated January 31, 1997, as supplemented through June 5,
1997, a copy of which is included herewith. The audited financial statements
and related independent accountant's report for MAS Funds Mid Cap Value and
Balanced Portfolios contained in the Annual Report dated September 30, 1997 are
hereby incorporated herein by reference insofar as they relate to the MAS
Portfolios. No other parts of the Annual Report are incorporated by reference
herein.
Further information about Class A and B shares of the MSIF Portfolios is
contained in and incorporated by reference to MSIF's Statement of Additional
Information dated May 1, 1997 and supplemented through September 26, 1997, a
copy of which is included herewith. The audited financial statements and
related independent accountant's report for the Morgan Stanley Institutional
Fund, Inc. Small Cap Value Equity and Balanced Portfolios ("MSIF Portfolios")
contained in the 1996 Annual Report to Shareholders dated December 31, 1996 are
hereby incorporated herein by reference. The unaudited financial statements for
the MSIF Portfolios contained in the 1997 Semi-Annual Report to Shareholders
dated June 30, 1997 also are incorporated herein by reference. No other parts
of the Annual Report or the subsequent Semi-Annual Report are incorporated by
reference herein.
The date of this Statement of Additional Information is February __, 1998.
<PAGE>
TABLE OF CONTENTS
Page
----
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro Forma Financial Statements . . . . . . . . . . . . . . . . . . . . . . .
2
<PAGE>
MAS FUNDS
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES SECURITY DESCRIPTION VALUE (000)
- ---------------------------------------------------------------------------------------------------------------------------------
MAS MSIF PRO FORMA MAS MSIF PRO FORMA
MID CAP VALUE SMALL CAP VALUE COMBINED SEPTEMBER 30, 1997 MID CAP VALUE SMALL CAP VALUE COMBINED
PORTFOLIO EQUITY PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
87,600 17,000 104,600 AccuStaff, Inc. $ 2,759 $ 535 $ 3,294
17,000 - 17,000 ADC Telecommunications, Inc. 553 - 553
30,400 5,900 36,300 Aeroquip-Vickers, Inc. 1,490 289 1,779
12,400 2,600 15,000 AGCO Corp. 393 82 475
123,300 23,900 147,200 Air Express International Corp. 4,500 872 5,372
9,800 2,000 11,800 Airborne Freight Corp. 594 121 715
23,200 4,700 27,900 Altera Corp. 1,189 241 1,430
14,800 3,000 17,800 AMBAC, Inc. 602 122 724
22,000 4,400 26,400 Apache Corp. 943 189 1,132
43,500 8,400 51,900 Applebee's International, Inc. 1,088 210 1,298
34,700 6,900 41,600 Arbor Drugs, Inc. 807 161 968
- 200 200 Arch Coal, Inc. - 6 6
54,600 11,000 65,600 Arnold Industries, Inc. 1,276 257 1,53
16,000 8,200 24,200 Arvin Industries, Inc. 628 322 950
24,100 - 24,100 Aviation Sales Co. 729 - 729
66,700 - 66,700 Banner Associates, Inc. 684 - 684
28,620 5,600 34,220 Bear Stearns Cos., Inc. 1,259 246 1,505
17,000 3,900 20,900 Biogen, Inc. 551 127 678
38,100 7,300 45,400 BJ Services Co. 2,829 542 3,371
25,200 5,100 30,300 Black Hills Corp. 739 149 888
7,000 1,600 8,600 BMC Software, Inc. 453 104 557
9,100 - 9,100 Bowater, Inc. 464 - 464
10,700 2,100 12,800 Box Hill Systems Corp. 187 37 224
12,600 3,000 15,600 Brylane, Inc. 578 138 716
21,300 4,100 25,400 Cadence Design Systems, Inc. 1,140 219 1,359
19,000 - 19,000 Callaway Golf Co. 663 - 663
21,500 4,600 26,100 Capital One Financial Corp. 984 210 1,194
16,900 3,400 20,300 Case Corp. 1,126 227 1,353
53,600 14,400 68,000 CDI Corp. 2,023 544 2,567
18,000 4,600 22,600 Ceridian Corp. 666 170 836
22,900 5,800 28,700 Champion Enterprises, Inc. 438 111 549
32,200 6,300 38,500 City National Corp. 1,030 202 1,232
23,300 4,700 28,000 CMAC Investment Corp. 1,249 252 1,501
42,100 8,300 50,400 CNF Transportation, Inc. 1,834 362 2,196
8,600 1,600 10,200 Coherent, Inc. 476 89 565
20,100 3,700 23,800 Colonial Bancgroup Inc. 578 106 684
16,800 3,100 19,900 Coltec Industries, Inc. 363 67 430
17,500 3,500 21,000 Columbia Gas System, Inc. 1,225 245 1,470
28,400 5,700 34,100 Comerica, Inc. 2,242 450 2,692
29,000 7,400 36,400 Community First Bankshares, Inc. 1,407 359 1,766
42,000 7,900 49,900 Computer Products, Inc. 1,250 235 1,485
33,100 6,400 39,500 Comverse Technology, Inc. 1,746 338 2,084
14,100 3,600 17,700 Consolidated Cigar Holdings, Inc. 576 147 723
14,200 2,800 17,000 Cooper Cameron Corp. 1,020 201 1,221
12,950 2,500 15,450 Crane Co. 533 103 636
10,100 2,000 12,100 Credence Systems Corp. 492 98 590
41,500 8,200 49,700 Crestar Financial Corp. 1,945 384 2,329
32,100 6,100 38,200 CTB International Corp. 506 96 602
25,000 5,000 30,000 Cullen/Frost Bankers, Inc. 1,184 237 1,421
23,200 4,900 28,100 Culp, Inc. 481 102 583
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
SHARES SECURITY DESCRIPTION VALUE (000)
- ---------------------------------------------------------------------------------------------------------------------------------
MAS MSIF PRO FORMA MAS MSIF PRO FORMA
MID CAP VALUE SMALL CAP VALUE COMBINED SEPTEMBER 30, 1997 MID CAP VALUE SMALL CAP VALUE COMBINED
PORTFOLIO EQUITY PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
37,700 7,100 44,800 CVS Corp. $ 2,144 $ 404 $ 2,548
43,200 7,100 50,300 Danka Business Systems plc ADR 1,922 316 2,238
40,000 8,000 48,000 Datascope Corp. 880 176 1,056
18,600 3,800 22,400 Dean Foods Co. 860 176 1,036
32,600 6,300 38,900 Diamond Offshore Drilling, Inc. 1,799.00 348.00 2,147.00
68,400 17,600 86,000 Dimon, Inc. 1,710 440 2,150
11,200 2,600 13,800 Doncasters plc ADR 336 78 414
11,000 2,100 13,100 Doubletree Corp. 531 101 632
16,400 3,200 19,600 Dura Pharmaceuticals, Inc. 715 140 855
6,200 1,200 7,400 El Paso Natural Gas Co. 375 73 448
35,200 6,800 42,000 Elbit Systems, Ltd. 484 93 577
6,000 1,200 7,200 Electro Scientific Industries, Inc. 366 73 439
8,500 - 8,500 ESS Technology, Inc. 129 - 129
24,600 4,900 29,500 Everest Reinsurance Holdings, Inc. 1,009 201 1,210
19,100 3,600 22,700 EVI, Inc. 1,222 230 1,452
Expeditors International of
24,700 5,000 29,700 Washington, Inc. 1,034 209 1,243
80,600 15,700 96,300 Falcon Drilling Co., Inc. 2,846 554 3,400
- 8,400 8,400 First Alliance Corp. - 265 265
24,800 5,400 30,200 First Financial Corp. 845 184 1,029
30,713 6,000 36,713 First of America Bank Corp. 1,649 322 1,971
28,600 5,800 34,400 Fiserv, Inc. 1,255 254 1,509
15,200 2,900 18,100 Forecenergy, Inc. 590 113 703
53,300 10,400 63,700 FPA Medical Management, Inc. 1,832 357 2,189
43,750 8,300 52,050 Franklin Resources, Inc. 4,074 773 4,847
8,700 2,200 10,900 Fred Meyer, Inc. 463 117 580
12,042 2,400 14,442 Fuller (H.B.) Co. 653 130 783
20,400 4,300 24,700 Furniture Brands International, Inc. 385 81 466
15,000 2,800 17,800 Gateway 2000, Inc. 472 88 560
47,400 9,600 57,000 General Cable Corp. 1,683 341 2,024
31,800 - 31,800 Gibson Greetings, Inc. 823 - 823
6,000 - 6,000 Global Industries Ltd. 239 - 239
8,500 1,700 10,200 Greenpoint Financial Corp. 539 108 647
- - - - - -
13,400 3,200 16,600 Halter Marine Group, Inc. 648 155 803
35,400 7,200 42,600 Harley-Davidson, Inc. 1,033 210 1,243
13,600 2,700 16,300 Hartford Life, Inc., Class A 523 104 627
11,800 2,500 14,300 Health Care and Retirement Corp. 439 93 532
5,900 1,300 7,200 Healthcare Financial Partners, Inc. 182 40 222
127,000 25,300 152,300 Healthdyne Technologies, Inc. 2,365 471 2,836
- 10,100 10,100 Herman Miller, Inc. - 540 540
11,000 1,400 12,400 Hertz Corp., Class A 414 53 467
14,800 3,300 18,100 Hirsch International Corp., Class A 262 58 320
78,700 16,300 95,000 HMT Technology Corp. 1,235 256 1,491
11,700 - 11,700 Hubco, Inc. 371 - 371
52,500 3,450 55,950 Hughes Supply, Inc. 1,585 104 1,689
14,000 2,600 16,600 ICN Pharmaceuticals, Inc. 689 128 817
32,100 6,400 38,500 Inacom Corp. 1,194 238 1,432
4,650 - 4,650 Ingersoll Rand Co. 200 - 200
3,800 700 4,500 Innovex, Inc. 123 23 146
35,800 14,800 50,600 Interim Services, Inc. 1,007 416 1,423
- - - - - -
16,800 3,200 20,000 Interstate Bakeries Corp. 1,152 219 1,371
27,300 7,000 34,300 Intevac, Inc. 386 99 485
27,800 5,600 33,400 IPALCO Enterprises, Inc. 952 192 1,144
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SHARES SECURITY DESCRIPTION VALUE (000)
- ---------------------------------------------------------------------------------------------------------------------------------
MAS MSIF PRO FORMA MAS MSIF PRO FORMA
MID CAP VALUE SMALL CAP VALUE COMBINED SEPTEMBER 30, 1997 MID CAP VALUE SMALL CAP VALUE COMBINED
PORTFOLIO EQUITY PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
10,800 - 10,800 Ivex Packaging Corp. $ 173 $ - $ 173
67,600 25,200 92,800 Journal Register Co. 1,327 495 1,822
13,700 2,700 16,400 Kaydon Corp. 822 162 984
16,900 - 16,900 Kilroy Realty Corp. 456 - 456
14,900 2,800 17,700 KLA Tencor Corp. 1,007.00 189.00 1,196.00
9,300 1,400 10,700 Lancaster Colony Corp. 494 74 568
25,200 5,300 30,500 Lear Corp. 1,241 261 1,502
17,000 - 17,000 Lehman Brothers Holdings, Inc. 912 - 912
30,800 6,200 37,000 LG&E Energy Corp. 683 138 821
1 - 1 Lockheed Martin Corp. - - -
25,500 3,400 28,900 Lone Star Industries, Inc. 1,377 184 1,561
22,100 4,200 26,300 Long Island Bancorp, Inc. 1,039 197 1,236
14,900 3,000 17,900 Lubrizol Corp. 626 126 752
30,100 4,200 34,300 Marquette Medical Systems, Inc., Class A 933 130 1,063
16,500 4,100 20,600 Mascotech, Inc. 338 84 42
26,175 5,100 31,275 McClatchy Newspapers, Inc., Class A 900 175 1,075
122 - 122 Mercantile Bankshares Corp. 4 - 4
15,500 3,100 18,600 Mercury General Corp. 1,356 271 1,627
17,300 3,500 20,800 MGM Grand, Inc. 751 152 903
44,300 8,400 52,700 Microage, Inc. 1,285 244 1,529
50,600 - 50,600 Miller (Herman), Inc. 2,707 - 2,707
32,600 6,200 38,800 Money Store (The), Inc. 929 177 1,106
28,100 5,300 33,400 Nabors Industries, Inc. 1,094 206 1,300
25,400 5,600 31,000 National Commerce Bancorp. 692 153 845
14,400 - 14,400 National Fuel Gas Co. 634 - 634
Nationwide Financial Services,
92,600 17,500 110,100 Inc., Class A 2,581 488 3,069
12,400 2,400 14,800 Neiman Marcus Group (The), Inc. 397 77 474
21,400 4,300 25,700 New Century Energies, Inc. 889 179 1,068
7,000 1,700 8,700 New York Times Co., Class A 368 89 457
52,500 10,200 62,700 Nextel Communications, Inc., Class A 1,516 295 1,811
13,500 2,700 16,200 NICOR, Inc. 506 101 607
13,400 2,600 16,000 Noble Affiliates, Inc. 600 116 716
24,100 4,700 28,800 Noble Drilling Corp. 777 152 929
79,700 16,400 96,100 North Fork Bancorp, Inc. 2,311 476 2,787
19,800 4,000 23,800 Northern Trust Corp. 1,171 236 1,407
24,800 4,800 29,600 NS Group, Inc. 803 155 958
65,600 12,300 77,900 Office Depot, Inc. 1,324 248 1,572
8,500 1,700 10,200 Old Republic International Corp. 332 66 398
300 - 300 Omnicom Group, Inc. 22 - 22
14,647 3,000 17,647 ONEOK, Inc. 478 98 576
16,500 - 16,500 Owens-Illinois, Inc. 560 - 560
37,100 10,000 47,100 P.H. Glatfelter Co. 823 222 1,045
17,400 3,500 20,900 PACCAR, Inc. 974 196 1,170
8,900 1,800 10,700 Pacific Enterprises 301 61 362
3,600 - 3,600 Parker Hannifin Corp. 162 - 162
19,300 3,900 23,200 Personnel Group of America, Inc. 661 134 795
53,250 12,750 66,000 Pier 1 Imports, Inc. 955 229 1,184
23,700 4,700 28,400 Pinnacle West Capital Corp. 797 158 955
7,500 - 7,500 Power-One, Inc. 105 - 105
25,600 5,300 30,900 Precision Castparts Corp. 1,664 344 2,008
22,900 5,200 28,100 Premark International, Inc. 733 166 899
4,300 800 5,100 Prime Bancshares, Inc. 82 15 97
54,800 - 54,800 ProSource, Inc. 356 - 356
- 7,500 7,500 Quaker Chemical Corp. - 141 141
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SHARES SECURITY DESCRIPTION VALUE (000)
- ---------------------------------------------------------------------------------------------------------------------------------
MAS MSIF PRO FORMA MAS MSIF PRO FORMA
MID CAP VALUE SMALL CAP VALUE COMBINED SEPTEMBER 30, 1997 MID CAP VALUE SMALL CAP VALUE COMBINED
PORTFOLIO EQUITY PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
18,900 4,600 23,500 Quantum Corp. $ 724 $ 176 $ 900
28,800 10,300 39,100 Richfood Holdings, Inc. 747 267 1,014
33,800 - 33,800 Reliance Group Holdings, Inc. 458 - 458
7,000 - 7,000 Rohm & Haas Co. 672 - 672
51,800 10,500 62,300 Ross Stores, Inc. 1,768.00 358.00 2,126.00
19,500 3,900 23,400 Rotech Medical Corp. 375 75 450
37,600 7,200 44,800 Russ Berrie & Co., Inc. 1,100 211 1,311
32,100 6,100 38,200 S & P Mid-Cap 400 Depository Receipts 2,070 393 2,463
37,200 4,000 41,200 Schweitzer-Mauduit International, Inc. 1,581 170 1,751
63,000 11,700 74,700 SCI Systems, Inc. 3,122 580 3,702
26,600 5,100 31,700 Security Capital Group, Inc., Class B 914 175 1,089
18,700 3,700 22,400 Semitool, Inc. 470 93 563
53,600 10,400 64,000 ShopKo Stores, Inc. 1,394 270 1,664
20,500 4,000 24,500 SL Green Realty Corp. REIT 530 104 634
27,400 5,800 33,200 Solectron Corp. 1,219 258 1,477
40,000 7,800 47,800 Southdown, Inc. 2,185 426 2,611
30,200 7,800 38,000 Southtrust Corp. 1,487 384 1,871
20,800 - 20,800 SPS Technologies, Inc. 978 - 978
16,200 3,000 19,200 Stage Stores, Inc. 699 129 828
20,100 3,800 23,900 Storage Technology Corp. 961 182 1,143
92,300 15,900 108,200 Sullivan Dental Products, Inc. 2,365 407 2,772
35,838 8,401 44,239 Summit Bancorp. 1,593 373 1,966
12,100 2,400 14,500 Sun Co., Inc. 530 105 635
90,800 17,600 108,400 Symantec Corp. 2,066 400 2,466
27,700 5,700 33,400 Tech Data Corp. 1,274 262 1,536
12,000 - 12,000 Technitrol, Inc. 478 - 478
31,200 6,200 37,400 Technology Modeling Association, Inc. 478 95573
11,100 2,200 13,300 Tektronix, Inc. 749 148 897
32,500 6,200 38,700 Teradyne, Inc. 1,749 334 2,083
60,300 13,500 73,800 Tetra Technologies, Inc. 1,394 312 1,706
108,000 14,000 122,000 TJX Companies, Inc. 3,301 428 3,729
19,300 3,200 22,500 Tommy Hilfiger Corp. 964 160 1,124
20,800 4,400 25,200 Torchmark Corp. 816 173 989
16,300 4,100 20,400 Tower Automotive, Inc. 734 185 919
34,800 6,600 41,400 Trans Financial, Inc. 1,109 210 1,319
15,400 3,000 18,400 Transocean Offshore, Inc. 738 144 882
14,300 2,900 17,200 Trinity Industries, Inc. 690 140 830
19,000 3,800 22,800 Triumph Group, Inc. 635 127 762
26,700 5,500 32,200 Tuboscope Vetco International Corp. 838 172 1,010
25,200 - 25,200 Tyson Foods, Inc., Class A 591 - 591
- 6,600 6,600 U.S. Office Products - 233 233
24,800 5,800 30,600 Union Texas Petro Holdings, Inc. 583 136 719
12,700 2,400 15,100 UnionBanCal Corp. 1,099 208 1,307
20,300 4,000 24,300 United Meridian Corp. 746 147 893
124,400 24,400 148,800 Universal Corp. 4,509 885 5,394
Universal Health Services, Inc.,
25,600 4,500 30,100 Class B 1,107 195 1,302
30,700 5,700 36,400 USA Waste Services, Inc. 1,224 227 1,451
13,800 - 13,800 USCS International, Inc. 309 - 309
27,400 5,600 33,000 USG Corp. 1,313 269 1,582
6,200 4,300 10,500 V.F. Corp. 574 398 972
20,000 4,000 24,000 Valassis Communications, Inc. 638 127 765
10,300 2,000 12,300 Varco International, Inc. 500 97 597
13,800 2,800 16,600 Veritas DGC, Inc. 587 119 706
12,800 2,400 15,200 Vintage Petroleum, Inc. 630 118 748
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SHARES SECURITY DESCRIPTION VALUE (000)
- ---------------------------------------------------------------------------------------------------------------------------------
MAS MSIF PRO FORMA MAS MSIF PRO FORMA
MID CAP VALUE SMALL CAP VALUE COMBINED SEPTEMBER 30, 1997 MID CAP VALUE SMALL CAP VALUE COMBINED
PORTFOLIO EQUITY PORTFOLIO PORTFOLIO PORTFOLIO EQUITY PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
21,300 4,200 25,500 Vishay Intertechnology, Inc. $ 563 $ 111 $ 674
- 11,900 11,900 VIVUS, Inc. - 446 446
2,300 400 2,700 Washington Post Co., Class B 1,031 179 1,210
10,400 2,100 12,500 Watson Pharmaceuticals, Inc. 621 126 747
38,800 7,700 46,500 Weatherford Enterra, Inc. 2,069.00 410 2,47
2,000 - 2,000 Webster Financial Corp. 118 - 118
40,100 9,200 49,300 Wellpoint Health Networks, Inc. 2,323 533 2,856
- 725 725 Wellsford Real Properties, Inc. - 12 12
11,100 2,100 13,200 Western Atlas, Inc. 977 185 1,162
37,400 7,600 45,000 Western National Corp. 1,073 218 1,291
16,300 2,500 18,800 Wilmington Trust Corp. 890 137 1,027
8,200 1,600 9,800 Xilinx, Inc. 415 81 496
20,000 - 20,000 Xomed Surgical Products, Inc. 398 - 398
4,600 - 4,600 York International Corp. 206 - 206
--------------------------------------------
TOTAL COMMON STOCKS - 96.79%
(COST $174,476 AND $34,960,
RESPECTIVELY.) 216,173 42,331 258,504
PAR VALUE
- -------------------------------------------
- $ 648 $ 648 Chase Securities, Inc. 5.75%
dated 9/30/97, due 10/01/97, to
be repurchased at $648
collateralized by U.S. Treasury
Notes, 6.625%, due 3/31/02,
valued at $666 (Cost $648) - 648 648
$ 5,792 - $ 5,792 Chase Securities, Inc. 5.90%, dated
9/30/97, due 10/1/97, to be
repurchased at $5,793,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at $5,847
(Cost $5,792) 5,792 - 5,792
--------------------------------------------
TOTAL SHORT TERM INVESTMENT - 3.21%
(COST $5,792 AND $648, RESPECTIVELY) 5,792 648 6,440
--------------------------------------------
TOTAL INVESTMENTS - 100.00%
(COST $180,268 AND $35,608,
RESPECTIVELY.) $ 221,965 $ 42,979 $ 264,944
--------------------------------------------
--------------------------------------------
</TABLE>
5
<PAGE>
MAS FUNDS
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MAS MSIF
Mid Cap Small Cap Pro Forma
Value Value Equity Combined
Fund Fund
(000) (000) (000)
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS:
Investments, at cost - see accompanying portfolios $ 180,268 $ 35,608 $ 215,876
---------- ---------- ----------
---------- ---------- ----------
Investments, at value 221,965 42,979 264,944
Dividends receivable 109 18 127
Interest receivable 1 - 1
Receivable for investments sold 785 147 932
Receivable for fund shares sold 1,556 - 1,556
Other Assets 3 25 28
---------- ---------- ----------
TOTAL ASSETS 224,419 43,169 267,588
LIABILITIES:
Payable for investments purchased 2,510 348 2,858
Payable for fund shares redeemed 1 - 1
Investment advisory fee payable 337 79 416
Payable for Administrative Fees 14 5 19
Payable for Trustees' Fees 2 3 5
Other Liabilities 57 41 98
---------- ---------- ----------
TOTAL LIABILITIES 2,921 476 3,397
---------- ---------- ----------
NET ASSETS $ 221,498 $ 42,693 $ 264,191
---------- ---------- ----------
---------- ---------- ----------
NET ASSETS consist of:
Undistributed net investment income (loss) $ 310 $ (13) $ 297
Undistributed net realized gain on investments 21,907 7,667 29,574
Unrealized appreciation of investments 41,697 7,371 49,068
Paid-in capital 157,584 27,668 185,252
---------- ---------- ----------
TOTAL NET ASSETS $ 221,498 $ 42,693 $ 264,191
---------- ---------- ----------
---------- ---------- ----------
SHARES:
INSTITUTIONAL CLASS
(MSIF Class A, MAS Institutional Class) Net Assets $220,260 $34,649 $262,953
Shares of Common Stock Outstanding 10,103 2,365 12,061
Net Asset Value Per Share $21.80 $14.65 $ 21.80
---------- ---------- ----------
(MSIF Class B) Net Assets - $8,044
Shares of Common Stock Outstanding - 550
Net Asset Value Per Share - $14.63
----------
INVESTMENT CLASS
Net Assets $1,238 - $1,238
Shares of Common Stock Outstanding 57 - 57
Net Asset Value Per Share $21.75 - $ 21.75
---------- ----------
</TABLE>
SEE NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
6
<PAGE>
MAS FUNDS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDING SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MAS MSIF
Mid Cap Small Cap Pro Forma
Value Value Equity Combined
Fund Fund
(000) (000) Adjustments (000)
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 229 $ 44 $ 273
Dividend income 1,201 558 1,759
--------- --------- ------ ---------
TOTAL INCOME 1,430 602 2,032
EXPENSES:
Investment advisory fees 924 252 (28)(b) 1,148
Less: Waived Fees (28) (118) 37(d) (109)
Administration fees 123 45 (46)(c) 122
Shareholder servicing agent fees-Investment Class 1 - 1
Distribution fee - MSIF Class B - 7 (7)(e) 0
Custodian fees 46 30 76
Audit Fees 12 21 (21)(e) 12
Miscellaneous expenses 62 70 (10)(e) 122
Less: Reimbursement of Expenses-Investment Class (24) - - (24)
--------- --------- ------ ---------
TOTAL EXPENSES 1,116 307 (75) 1,348
Expense Offset (30) - 3 (27)
--------- --------- ------ ---------
NET EXPENSES 1,086 307 (72) 1,321
--------- --------- ------ ---------
NET INVESTMENT INCOME (LOSS) 344 295 72 711
--------- --------- ------ ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss):
Security transactions 24,403 (9,094) 15,309
--------- --------- ---------
Total net realized gain 24,403 (9,094) 15,309
Change in unrealized appreciation
/depreciation on investments 38,391 4,425 42,816
--------- --------- ---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 62,794 (4,669) 58,125
--------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 63,138 $ (4,374) $ 72 $ 58,836
--------- --------- ------ ---------
--------- --------- ------ ---------
</TABLE>
SEE NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
7
<PAGE>
MAS Funds
Notes to the Pro Forma Financial Statements - (Unaudited)
September 30, 1997
Pro Forma Financial information is intended to provide shareholders of MAS Mid
Cap Value Fund and MSIF Small Cap Value Equity Fund with information about the
impact of the proposed merger by indicating how the merger might have affected
the information had the merger been consummated as of September 30, 1997.
The pro forma combined statements of assets and liabilities and results of
operations as of September 30, 1997 have been prepared to reflect the merger of
MAS Mid Cap Value Fund and MSIF Small Cap Value Equity Fund after giving effect
to pro forma adjustments described in the notes below.
(a) Acquisition by MAS Mid Cap Value Fund of MSIF Small Cap Value Equity Fund
and issuance of MAS Mid Cap Value Fund shares in exchange for all of the
outstanding shares of MSIF Small Cap Value Equity Fund.
(b) Investment advisory fees were adjusted to reflect the application of the
fee structure for MAS Mid Cap Value Fund (0.75% of average net assets).
(c) Administration fees were adjusted to reflect the application of the fee
structure in effect as of September 30, 1997 for MAS Mid Cap Value Fund
(0.08% of average net assets).
(d) Waiver of investment advisory fees were adjusted to reflect the advisors
commitment to voluntarily waive fees in excess of 0.88% of average net assets
for Institutional Class shares and 1.10% of average net assets for Investment
Class shares.
(e) Actual expenses incurred by the individual funds, for various expenses
included on a pro forma basis, were reduced to reflect estimated savings arising
from the merger.
8
<PAGE>
MAS FUNDS
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FORM N-14
PART C
OTHER INFORMATION
Item 15. INDEMNIFICATION.
Reference is made to Article V of Registrant's By-Laws dated November 18, 1993,
which is incorporated by reference. Registrant hereby also makes the
undertaking consistent with rule 484 under the Securities Act of 1933, as
amended.
The Trust shall indemnify each of its Trustees and officers (including persons
who serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) (hereinafter referred to as a "Covered Person") against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgements, in compromise or as fines and penalties, and counsel
fees reasonably incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
or whether by or in the right of the Trust, before any court or administrative
or legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or may have
been threatened, while in office or thereafter, by reason of any alleged act or
omission as a Trustee or officer, except with respect to any matter as to which
such Covered Person shall have been finally adjudicated in any such action, suit
or other proceeding not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interest of the Trust and
except that no Covered Person shall be indemnified against any liability to the
Trust or its Shareholders to which such Covered Person would otherwise be
subject by reason of self-dealing, willful misconduct or recklessness.
Expenses, including counsel fees so incurred by any such Covered Person, may be
paid from time to time by the Trust in advance of the final disposition of any
such action, suit or proceeding on the condition that the amounts so paid shall
be repaid to the Trust if it is ultimately determined that indemnification of
such expenses is not authorized under this Article.
Item 16. Exhibits
(1) Amended and Restated Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to the Registrant's
Post-Effective Amendment No. 42 on Form N-1A, as filed on
July 15, 1996.
C-1
<PAGE>
(2) Amended and Restated By-Laws are incorporated by reference
to Exhibit (2) to the Registrant's Post-Effective Amendment
No. 43 on Form N-1A, filed on January 29, 1997.
(3) Inapplicable.
(4) Form of Agreement and Plan of Reorganization and Liquidation
is filed herewith.
(5) Inapplicable.
(6) Investment Advisory Agreement with MAS Funds and Miller
Anderson & Sherrerd, LLP is incorporated by reference to
Exhibit (5)(a) to the Registrant's Post-Effective Amendment
No. 43 on Form N-1A, filed on January 29, 1997.
(7) Distribution Agreement with MAS Fund Distribution, Inc. is
incorporated by reference to Exhibit (6)(a) to the
Registrant's Post-Effective Amendment No. 43 on Form N-1A,
filed on January 29, 1997.
(8) Deferred Compensation Plan for MAS Funds Board of Trustees
is incorporated by reference to Exhibit 8(c) of the
Registrant's Post-Effective Amendment No. 44 on Form N-1A,
filed on June 13, 1997.
(9)(a) Custodian Agreement between Registrant and Morgan Stanley
Trust Company dated September 1, 1993 is incorporated by
reference to Exhibit (8)(a) of Post-Effective Amendment No.
41 on Form N-1A, as filed on January 30, 1996, as originally
filed with Post-Effective Amendment No. 29 on Form N-1A on
December 27, 1993.
(9)(b) Custodian Agreement between Registrant and United States
Trust Company of New York dated July 22, 1994 is
incorporated by reference to Exhibit (8)(b) of
Post-Effective Amendment No. 41 on Form N-1A, as filed on
January 30, 1996.
(9)(c) Amendment dated January 3, 1996 between Registrant and
Morgan Stanley Trust Company is incorporated by reference to
Exhibit (8)(c) of Post-Effective Amendment No. 41 on Form
N-1A, as filed on January 30, 1996.
(10) Distribution Plan relating to the Adviser Class Shares and
pursuant to Rule 12b-1 is incorporated by reference to
Exhibit (15) of of Post-
C-2
<PAGE>
Effective Amendment No. 41 on Form N-1A, as filed on January
30, 1996.
(11) Opinion and consent of Morgan, Lewis & Bockius LLP that
shares will be validly issued, fully paid and non-assessable
is filed herewith.
(12) Opinion and Consent of Morgan, Lewis & Bockius LLP as to tax
matters and consequences is filed herewith.
(13)(a) Sub-Administration Agreement with MAS Funds and United
States Trust Company of New York dated November 13, 1993 is
incorporated by reference to Exhibit (9) of the Registrant's
Post-Effective Amendment No. 29 on Form N-1A as filed on
December 30, 1993.
(13)(b) Transfer Agency Agreement with United States Trust Company
of New York dated November 13, 1993 is incorporated by
reference to Exhibit (9) of the Registrant's Post-Effective
Amendment No. 29 on Form N-1A as filed on December 30, 1993.
(13)(c) Administrative Agreement with MAS Funds and Miller Anderson
& Sherrerd, LLP is incorporated by reference to Exhibit
(9)(d) of Post-Effective Amendment No. 43 on Form N-1A, as
filed on January 29, 1997.
(13)(d) Investment Class Shareholder Service Agreement is
incorporated by reference to Exhibit (15)(a) of
Post-Effective Amendment No. 41 on Form N-1A, as filed on
January 30, 1996.
(13)(e) Investment Class Service Provider Agreement is incorporated
by reference to Exhibit (15)(b) of Post-Effective Amendment
No. 41 on Form N-1A, as filed on January 30, 1996.
(14)(a) Consent of Price Waterhouse LLP is filed herewith.
(14)(b) Consent of Price Waterhouse LLP is filed herewith.
(15) Inapplicable.
(16) Powers of Attorney for Joseph P. Healey, Joseph J. Kearns,
John H. Grady, Jr., Lorraine Truten, C. Oscar Morong, Jr.,
Thomas L. Bennett, James D. Schmid, Vincent R. McLean and
Thomas P. Gerrity are incorporated by reference to Exhibit
(24) of the Registrant's Post-Effective Amendment No. 43 on
Form N-1A, as filed January 29, 1997.
C-3
<PAGE>
(17)(a) Prospectus for MAS Funds' Institutional Class Shares dated
January 31, 1997, as revised June 5, 1997 is filed herewith.
(17)(b) Statement of Additional Information for MAS Funds dated
January 31, 1997, as supplemented on June 5, 1997 is filed
herewith.
(17)(c) Prospectus for Morgan Stanley Institutional Fund, Inc. Small
Cap Value Equity, Value Equity, Balanced, Global Fixed
Income and High Yield Portfolios dated May 1, 1997, as
supplemented September 26, 1997 is filed herewith.
(17)(d) Statement of Additional Information for Morgan Stanley
Institutional Fund, Inc. dated May 1, 1997, as supplemented
September 26, 1997 is filed herewith.
(17)(e) Audited Financial Statements dated September 30, 1997 for
the MAS Funds is filed herewith.
(17)(f) Audited Financial Statements dated December 31, 1996 for the
Morgan Stanley Institutional Fund, Inc. is filed herewith.
(17)(g) Semi-Annual Financial Statements dated June 30, 1997 for the
Morgan Stanley Institutional Fund, Inc. is filed herewith.
Item 17. UNDERTAKINGS.
The registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
The registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
C-4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 this Registration Statement
has been signed on behalf of the Registrant in the District of Columbia on the
8th day of January, 1998.
MAS FUNDS
Registrant
By: *
---------------------------------
James D. Schmid, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity on the dates
indicated.
* Trustee January 8, 1998
- -------------------------------
Thomas L. Bennett
* Trustee January 8, 1998
- -------------------------------
Thomas P. Gerrity
* Trustee January 8, 1998
- -------------------------------
Joseph P. Healey
* Trustee January 8, 1998
- -------------------------------
Joseph J. Kearns
* Trustee January 8, 1998
- -------------------------------
Vincent R. McLean
* Trustee January 8, 1998
- -------------------------------
C. Oscar Morong, Jr.
* President January 8, 1998
- -------------------------------
James D. Schmid
/s/ Michael Leary Principal Financial January 8, 1998
- ------------------------------- Officer
Michael Leary
*By: /s/ John H. Grady, Jr.
---------------------------
John H. Grady, Jr.
Attorney-in-Fact
C-5
<PAGE>
Exhibit Index
1 Amended and Restated Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to the Registrant's
Post-Effective Amendment No. 42 on Form N-1A, as filed on July 15,
1996.
2 Amended and Restated By-Laws are incorporated by reference to
Exhibit (2) to the Registrant's Post-Effective Amendment No. 43 on
Form N-1A, filed on January 29, 1997.
3 Inapplicable
4 Form of Agreement and Plan of Reorganization and Liquidation is
filed herewith.
5 Inapplicable.
6 Investment Advisory Agreement with MAS Funds and Miller Anderson &
Sherrerd, LLP is incorporated by reference to Exhibit (5)(a) to the
Registrant's Post-Effective Amendment No. 43 on Form N-1A, filed on
January 29, 1997.
7 Distribution Agreement with MAS Fund Distribution, Inc. is
incorporated by reference to Exhibit (6)(a) to the Registrant's
Post-Effective Amendment No. 43 on Form N-1A, filed on January 29,
1997.
8 Deferred Compensation Plan for MAS Funds Board of Trustees is
incorporated by reference to Exhibit 8(c) of the Registrant's
Post-Effective Amendment No. 44 on Form N-1A, filed on June 13,
1997.
9(a) Custodian Agreement between Registrant and Morgan Stanley Trust
Company dated September 1, 1993 is incorporated by reference to
Exhibit (8)(a) of Post-Effective Amendment No. 41 on Form N-1A, as
filed on January 30, 1996, as originally filed with Post-Effective
Amendment No. 29 on Form N-1A on December 27, 1993.
9(b) Custodian Agreement between Registrant and United States Trust
Company of New York dated July 22, 1994 is incorporated by reference
to Exhibit (8)(b) of Post-Effective Amendment No. 41 on Form N-1A,
as filed on January 30, 1996.
9(c) Amendment dated January 3, 1996 between the Registrant and Morgan
Stanley Trust Company and is incorporated by reference to Exhibit
(8)(c) of of Post-Effective Amendment No. 41 on Form N-1A, as filed
on January 30, 1996.
C-6
<PAGE>
10 Distribution Plan relating to the Adviser Class Shares and pursuant
to Rule 12b-1 is incorporated by reference to Exhibit (15) of of
Post-Effective Amendment No. 41 on Form N-1A, as filed on January
30, 1996.
11 Opinion and consent of Morgan, Lewis & Bockius LLP that shares will
be validly issued, fully paid and non-assessable is filed herewith.
12 Opinion and Consent of Morgan, Lewis & Bockius LLP as to tax matters
and consequences is filed herewith.
13(a) Sub-Administration Agreement with MAS Funds and United States Trust
Company of New York dated November 13, 1993 is incorporated by
reference to Exhibit (9) of the Registrant's Post-Effective
Amendment No. 29 on Form N-1A as filed on December 30, 1993.
13(b) Transfer Agency Agreement with United States Trust Company of New
York dated November 13, 1993 is incorporated by reference to Exhibit
(9) of the Registrant's Post-Effective Amendment No. 29 on Form N-1A
as filed on December 30, 1993.
13(c) Administrative Agreement with MAS Funds and Miller Anderson &
Sherrerd, LLP is incorporated by reference to Exhibit (9)(d) of
Post-Effective Amendment No. 43 on Form N-1A, as filed on January
29, 1997.
13(d) Investment Class Shareholder Service Agreement is incorporated by
reference to Exhibit (15)(a) of Post-Effective Amendment No. 41 on
Form N-1A, as filed on January 30, 1996.
13(e) Investment Class Service Provider Agreement is incorporated by
reference to Exhibit (15)(b) of Post-Effective Amendment No. 41 on
Form N-1A, as filed on January 30, 1996.
14(a) Consent of Price Waterhouse LLP is filed herewith.
14(b) Consent of Price Waterhouse LLP is filed herewith
15 Inapplicable
16 Powers of Attorney for Joseph P. Healey, Joseph J. Kearns, John H.
Grady, Jr., Lorraine Truten, C. Oscar Morong, Jr., Thomas L.
Bennett, James D. Schmid, Vincent R. McLean and Thomas P. Gerrity
are incorporated by reference to Exhibit (24) of the Registrant's
Post-Effective Amendment No. 43 on Form N-1A, as filed January 29,
1997.
C-7
<PAGE>
17(a) Prospectus for MAS Funds' Institutional Class Shares dated January
31, 1997, as revised June 5, 1997, is filed herewith.
17(b) Statement of Additional Information for MAS Funds dated January 31,
1997, as supplemented June 5, 1997, is filed herewith.
17(c) Prospectus for Morgan Stanley Institutional Fund, Inc. Small Cap
Value Equity, Value Equity, Balanced, Global Fixed Income and High
Yield Portfolios dated May 1, 1997, as supplemented September 26,
1997 is filed herewith.
17(d) Statement of Additional Information for Morgan Stanley Institutional
Fund, Inc. dated May 1, 1997, as supplemented September 26, 1997 is
filed herewith.
17(e) Audited Financial Statements dated September 30, 1997 for the MAS
Funds is filed herewith.
17(f) Audited Financial Statements dated December 31, 1996 for the Morgan
Stanley Institutional Fund, Inc. is filed herewith.
17(g) Semi-Annual Financial Statements dated June 30, 1997 for the Morgan
Stanley Institutional Fund, Inc. is filed herewith.
C-8
<PAGE>
AGREEMENT AND PLAN
OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
January 9, 1998 (the "Agreement"), by and between Morgan Stanley
Institutional Fund, Inc. ("MSIF"), a Maryland corporation, on behalf of the
Small Cap Value Equity and Balanced Portfolios (each an "Acquired Fund," and
collectively, the "Acquired Funds"), and MAS Funds, a Pennsylvania business
trust, on behalf of the Mid Cap Value and Balanced Portfolios (each an
"Acquiring Fund," and collectively, the "Acquiring Funds").
WHEREAS, MSIF was organized under Maryland law as a corporation under
Articles of Incorporation dated September 27, 1988, as amended and restated;
MSIF is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); MSIF has authorized
capital consisting of 38,000,000,000 shares of common stock, par value $.001 per
share, including 1,000,000,000 shares of the Small Cap Value Equity Portfolio,
and 1,000,000,000 shares of the Balanced Portfolio; the Acquired Funds are duly
organized and validly existing series of MSIF; and
WHEREAS, MAS Funds was organized under Pennsylvania law as a business trust
under a Declaration of Trust dated February 15, 1984, as amended and restated;
MAS Funds is an open-end management investment company registered under the 1940
Act; and the Acquiring Funds are duly organized and validly existing series of
MAS Funds;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree to effect (i) the transfer of all of the assets of the
MSIF Small Cap Value Equity Portfolio solely in exchange for (a) the assumption
by the MAS Mid Cap Value Portfolio of all or substantially all of the
liabilities of the MSIF Small Cap Value Equity Portfolio and (b) beneficial
shares of the MAS Mid Cap Value Portfolio, followed by the distribution, at the
Effective Time (as defined in Section 9 of this Agreement), of such beneficial
shares of the MAS Mid Cap Value Portfolio to the holders of shares of common
stock of the MSIF Small Cap Value Equity Portfolio on the terms and conditions
hereinafter set forth in liquidation of the MSIF Small Cap Value Equity
Portfolio; and (ii) the transfer of all of the assets of the MSIF Balanced
Portfolio solely in exchange for (a) the assumption by the MAS Balanced
Portfolio of all or substantially all of the liabilities of the MSIF Balanced
Portfolio and (b) beneficial shares of the MAS Balanced Portfolio, followed by
the distribution, at the Effective Time (as defined in Section 9 of this
Agreement), of such beneficial shares of the MAS Balanced Portfolio to the
holders of shares of common stock of the MSIF Balanced Portfolio on the terms
and conditions hereinafter set forth in liquidation of the MSIF Balanced
Portfolio. For convenience: (x) the MSIF Small Cap Value Equity Portfolio and
the MAS Mid Cap Value Portfolio are referred to generically hereinafter as
"corresponding" Acquired and Acquiring Funds, as are the MSIF Balanced Portfolio
and the MAS Balanced Portfolio; (y) the beneficial shares of the MAS Mid Cap
Value and Balanced
A - 1
<PAGE>
Portfolios that are given in exchange for the assets of the corresponding
Acquired Funds are referred to hereinafter as the "Acquiring Funds Shares"; and
(z) the shares of common stock of the MSIF Small Cap Value Equity and Balanced
Portfolios that are held by the holders of such shares at the Effective Time are
referred to hereinafter as the "Acquired Funds Shares." The parties hereto
covenant and agree as follows:
1. PLAN OF REORGANIZATION. At the Effective Time, each Acquired Fund will
assign, deliver and otherwise transfer all of its assets and good and marketable
title thereto, free and clear of all liens, encumbrances and adverse claims
except as provided in this Agreement, and assign all or substantially all of its
liabilities as are set forth in a statement of assets and liabilities, to be
prepared as of the Effective Time (the "Statement of Assets and Liabilities") to
the corresponding Acquiring Fund and each Acquiring Fund shall acquire all such
assets, and shall assume all such liabilities of the corresponding Acquired
Fund, in exchange for delivery to the corresponding Acquired Fund by such
Acquiring Fund of a number of its Acquiring Funds Shares (both full and
fractional) equivalent in value to the Acquired Funds Shares of the
corresponding Acquired Fund outstanding immediately prior to the Effective Time.
The assets and stated liabilities of each Acquired Fund, as set forth in the
Statement of Assets and Liabilities attached hereto as Exhibit A, shall be
exclusively assigned to and assumed by the corresponding Acquiring Fund. All
debts, liabilities, obligations and duties of each Acquired Fund, to the extent
that they exist at or after the Effective Time and are stated in the Statement
of Assets and Liabilities, shall after the Effective Time attach to the
corresponding Acquiring Fund and may be enforced against the corresponding
Acquiring Fund to the same extent as if the same had been incurred by the
corresponding Acquiring Fund.
2. TRANSFER OF ASSETS. The assets of each Acquired Fund to be acquired by the
corresponding Acquiring Fund shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable) as set forth in the Statement of Assets and Liabilities, as well as
any claims or rights of action or rights to register shares under applicable
securities laws, any books or records of such Acquired Fund and other property
owned by such Acquired Fund at the Effective Time.
3. LIQUIDATION AND DISSOLUTION OF THE ACQUIRED FUNDS. At the Effective Time,
the Acquired Funds will liquidate and the Acquiring Funds Shares (both full and
fractional) received by the Acquired Funds will be distributed to the
shareholders of record of the Acquired Funds as of the Effective Time in
exchange for their respective Acquired Funds Shares and in complete liquidation
of the Acquired Funds. Each shareholder of the Acquired Funds will receive a
number of Acquiring Funds Shares equal in value to the Acquired Funds Shares
held by that shareholder. Such liquidation and distribution will be accompanied
by the establishment of an open account on the share records of the Acquiring
Funds in the name of each shareholder of record of the Acquired Funds and
representing the respective number of Acquiring Funds Shares due such
shareholder. As soon as practicable after the Effective
A - 2
<PAGE>
Time, but not later than April __, 1998, MSIF shall take all steps as shall
be necessary and proper to effect a complete termination of the Acquired Funds.
4. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUNDS. The Acquiring Funds
represent and warrant to the Acquired Funds as follows:
(a) ORGANIZATION, EXISTENCE, ETC. MAS Funds is a business trust duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has the power to carry on its business as
it is now being conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. MAS Funds is registered under the
1940 Act as an open-end management investment company; such registration
has not been revoked or rescinded and is in full force and effect.
(c) FINANCIAL STATEMENTS. The audited financial statements, if any, of
MAS Funds relating to the Acquiring Funds dated as of September 30, 1997
(the "Acquiring Funds Financial Statements"), which will, if available, be
delivered to the Acquired Funds as of the Effective Time, will fairly
present the financial position of the Acquiring Funds as of the date
thereof.
(d) SHARES TO BE ISSUED UPON REORGANIZATION. The Acquiring Funds Shares
to be issued in connection with the Reorganization have been duly
authorized and upon consummation of the Reorganization will be validly
issued, fully paid and nonassessable.
(e) AUTHORITY RELATIVE TO THIS AGREEMENT. MAS Funds, on behalf of the
Acquiring Funds, has the power to enter into this Agreement and to carry
out its obligations hereunder. The execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated
hereby, have been duly authorized by the MAS Funds Board of Trustees, and
no other proceedings by the Acquiring Funds are necessary to authorize its
officers to effectuate this Agreement and the transactions contemplated
hereby. Each of the Acquiring Funds is not a party to or obligated under
any charter, by-law, indenture or contract provision or any other
commitment or obligation, or subject to any order or decree, which would be
violated by its executing and carrying out this Agreement.
(f) LIABILITIES. There are no liabilities of the Acquiring Funds, whether
or not determined or determinable, other than liabilities disclosed or
provided for in the Acquiring Funds Financial Statements, if any, and
liabilities incurred in the ordinary course of business prior to the
Effective Time or otherwise previously disclosed to the Acquired Funds,
none of which has been materially adverse to the business, assets or
results of operations of the Acquiring Funds. MAS Funds' Registration
Statement does not contain any untrue statement of a material fact required
to be stated therein or make the statements therein not misleading.
A - 3
<PAGE>
(g) LITIGATION. Except as previously disclosed to the Acquired Funds,
there are no claims, actions, suits or proceedings pending or, to the
actual knowledge of the Acquiring Funds, threatened which would materially
adversely affect any of the Acquiring Funds or its assets or business or
which would prevent or hinder in any material respect consummation of the
transactions contemplated hereby.
(h) CONTRACTS. Except for contracts and agreements disclosed to the
Acquired Funds, under which no default exists, each of the Acquiring Funds
is not a party to or subject to any material contract, debt instrument,
plan, lease, franchise, license or permit of any kind or nature whatsoever
with respect to the Acquiring Funds.
(i) TAXES. As of the Effective Time, all Federal and other tax returns
and reports of the Acquiring Funds required by law to have been filed shall
have been filed, and all other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of
the Acquiring Funds' knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any of such returns.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRED FUNDS. The Acquired Funds
represent and warrant to the Acquiring Funds as follows:
(a) ORGANIZATION, EXISTENCE, ETC. MSIF is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Maryland and has the power to carry on its business as it is now being
conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. MSIF is registered under the 1940
Act as an open-end management investment company; and such registration has
not been revoked or rescinded and is in full force and effect.
(c) FINANCIAL STATEMENTS. The audited financial statements of MSIF
relating to the Acquired Funds as of December 31, 1996 and the unaudited
financial statements relating to the Acquired Funds as of June 30, 1997
(the "Acquired Funds Financial Statements"), as delivered to the Acquiring
Funds, fairly represent the financial position of the Acquired Funds as of
the respective dates thereof, and the results of their operations and
changes in their net assets for the periods indicated.
(d) MARKETABLE TITLE TO ASSETS. Each of the Acquired Funds will have, at
the Effective Time, good and marketable title to, and full right, power and
authority to sell, assign, transfer and deliver, the assets to be
transferred to the Acquiring Funds. Upon delivery and payment for such
assets, each of the Acquiring Funds will have good and marketable title to
such assets without restriction on the transfer thereof free and clear of
all liens, encumbrances and adverse claims.
(e) AUTHORITY RELATIVE TO THIS AGREEMENT. MSIF, on behalf of the Acquired
Funds, has the power to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this
Agreement, and the consummation
A - 4
<PAGE>
of the transactions contemplated hereby, have been duly authorized by
MSIF's Board of Directors, and no other proceedings by the Acquired Funds
are necessary to authorize its officers to effectuate this Agreement and
the transactions contemplated hereby. Each of the Acquired Funds is not a
party to or obligated under any charter, by-law, indenture or contract
provision or any other commitment or obligation, or subject to any order or
decree, which would be violated by its executing and carrying out this
Agreement.
(f) LIABILITIES. There are no liabilities of the Acquired Funds, whether
or not determined or determinable, other than liabilities disclosed or
provided for in the Acquired Funds Financial Statements and liabilities
incurred in the ordinary course of business prior to the Effective Time or
otherwise previously disclosed to the Acquiring Funds, none of which has
been materially adverse to the business, assets or results of operations of
the Acquired Funds. MSIF's Registration Statement, which is on file with
the Securities and Exchange Commission, does not contain any untrue
statement of a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(g) LITIGATION. Except as previously disclosed to the Acquiring Funds,
there are no claims, actions, suits or proceedings pending or, to the
knowledge of the Acquired Funds, threatened which would materially
adversely affect the Acquired Funds or its assets or business or which
would prevent or hinder in any material respect consummation of the
transactions contemplated hereby.
(h) CONTRACTS. Except for contracts and agreements disclosed to the
Acquiring Funds, under which no default exists, each of the Acquired Funds,
at the Effective Time, is not a party to or subject to any material
contract, debt instrument, plan, lease, franchise, license or permit of any
kind or nature whatsoever.
(i) TAXES. As of the Effective Time, all Federal and other tax returns
and reports of the Acquired Funds required by law to have been filed shall
have been filed, and all other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of
the Acquired Funds' knowledge, no such return is currently under audit and
no assessment has been asserted with respect to any of such returns.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUNDS.
(a) All representations and warranties of the Acquired Funds contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Effective Time, with the same
force and effect as if made on and as of the Effective Time.
A - 5
<PAGE>
(b) The Acquiring Funds shall have received an opinion of counsel for the
Acquired Funds, dated as of the Effective Time, addressed to and in form
and substance satisfactory to counsel for the Acquiring Funds, to the
effect that (i) the Acquired Funds are duly organized and validly existing
series of MSIF under the laws of the State of Maryland; (ii) MSIF is an
open-end management investment company registered under the 1940 Act; (iii)
this Agreement and the Reorganization provided for herein and the execution
of this Agreement have been duly authorized and approved by all requisite
action of each of the Acquired Funds and this Agreement has been duly
executed and delivered by MSIF on behalf of the Acquired Funds and is a
valid and binding obligation of the Acquired Funds, subject to applicable
bankruptcy, insolvency, fraudulent conveyance and similar laws or court
decisions regarding enforcement of creditors' rights generally; (iv) to the
best of counsel's knowledge after reasonable inquiry, no consent, approval,
order or other authorization of any Federal or state court or
administrative or regulatory agency is required for each of the Acquired
Funds to enter into this Agreement or carry out its terms that has not been
obtained other than where the failure to obtain any such consent, approval,
order or authorization would not have a material adverse effect on the
operations of the Acquired Funds; and (v) upon consummation of this
Agreement, the Acquiring Funds shall have acquired all of the Acquired
Funds' assets listed in the Statement of Assets and Liabilities, free and
clear of all liens, encumbrances or adverse claims.
(c) The Acquired Funds shall have delivered to the Acquiring Funds at the
Effective Time the Acquired Funds' Statement of Assets and Liabilities,
prepared in accordance with generally accepted accounting principles
consistently applied, together with a certificate of the Treasurer or
Assistant Treasurer of the Acquired Funds as to the aggregate asset value
of the Acquired Funds' portfolio securities.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUNDS.
(a) All representations and warranties of the Acquiring Funds contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Effective Time, with the same
force and effect as if made on and as of the Effective Time.
(b) The Acquired Funds shall have received an opinion of counsel for the
Acquiring Funds, dated as of the Effective Time, addressed to and in form
and substance satisfactory to counsel for the Acquired Funds, to the effect
that:(i) the Acquiring Funds are duly organized and validly existing series
of MAS Funds under the laws of the Commonwealth of Pennsylvania; (ii) MAS
Funds is an open-end management investment company registered under the
1940 Act; (iii) this Agreement and the Reorganization provided for herein
and the execution of this Agreement have been duly authorized and approved
by all requisite action of each of the Acquiring Funds and this Agreement
has been duly executed and delivered by the Acquiring Funds and is a valid
and binding obligation of the Acquiring Funds, subject to
A - 6
<PAGE>
applicable bankruptcy, insolvency, fraudulent conveyance and similar laws
or court decisions regarding enforcement of creditors' rights generally;
(iv) to the best of counsel's knowledge, no consent, approval, order or
other authorization of any Federal or state court or administrative or
regulatory agency is required for each of the Acquiring Funds to enter into
this Agreement or carry out its terms that has not already been obtained,
other than where the failure to obtain any such consent, approval, order or
authorization would not have a material adverse effect on the operations of
the Acquiring Funds; and (v) the Acquiring Funds Shares to be issued in the
Reorganization have been duly authorized and upon issuance thereof in
accordance with this Agreement will be validly issued, fully paid and
nonassessable.
(c) The Acquiring Funds shall have delivered to the Acquired Funds at the
Effective Time, a certificate of the Treasurer or Assistant Treasurer of
the Acquiring Funds as to the aggregate asset value of the Acquiring Funds'
portfolio securities.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUNDS AND THE
ACQUIRING FUNDS. The obligations of the Acquired Funds and the Acquiring
Funds to effectuate this Agreement shall be subject to the satisfaction of
each of the following conditions:
(a) Such authority from the Securities and Exchange Commission (the "SEC")
as may be necessary to permit the parties to carry out the transactions
contemplated by this Agreement shall have been received.
(b) The Registration Statement on Form N-1A of the Acquiring Funds shall
be effective under the Securities Act of 1933, as amended (the "1933 Act"),
and, to the best knowledge of the Acquiring Funds, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
(c) The Acquiring Funds have filed all documents and paid all fees
required to permit their shares to be offered to the public in all states
of the United States, the Commonwealth of Puerto Rico and the District of
Columbia (except where such qualifications are not required) so as to
permit the transfer contemplated by this Agreement to be consummated.
(d) The Acquired Funds and the Acquiring Funds shall have received on or
before the Effective Time an opinion of counsel satisfactory to the
Acquired Funds and the Acquiring Funds substantially to the effect that for
Federal income tax purposes:
(1) No gain or loss will be recognized to the Acquired Funds
upon the transfer of its assets in exchange solely for the
Acquiring Funds Shares and the assumption by the Acquiring Funds
of the corresponding Acquired Fund's stated liabilities;
A - 7
<PAGE>
(2) No gain or loss will be recognized to the Acquiring Funds on
their receipt of the Acquired Funds' assets in exchange for the
Acquiring Funds Shares and the assumption by the Acquiring Funds
of the corresponding Acquired Fund's liabilities;
(3) The basis of an Acquired Fund's assets in the corresponding
Acquiring Fund's hands will be the same as the basis of those
assets in the Acquired Fund's hands immediately before the
conversion;
(4) The Acquiring Funds' holding period for the assets
transferred to the Acquiring Funds by the Acquired Funds will
include the holding period of those assets in the corresponding
Acquired Fund's hands immediately before the conversion;
(5) No gain or loss will be recognized to the Acquired Funds on
the distribution of the Acquiring Funds Shares to the Acquired
Funds' shareholders in exchange for their Acquired Funds Shares;
(6) No gain or loss will be recognized to the Acquired Funds'
shareholders as a result of the Acquired Funds' distribution of
Acquiring Funds Shares to the Acquired Funds' shareholders in
exchange for the Acquired Funds' shareholders' Acquired Funds
Shares;
(7) The basis of the Acquiring Funds Shares received by the
Acquired Funds' shareholders will be the same as the adjusted
basis of that Acquired Funds' shareholders' Acquired Funds Shares
surrendered in exchange therefor; and
(8) The holding period of the Acquiring Funds Shares received by
the Acquired Funds' shareholders will include the Acquired Funds'
shareholders' holding period for the Acquired Funds'
shareholders' Acquired Funds Shares surrendered in exchange
therefor, provided that said Acquired Funds Shares were held as
capital assets on the date of the conversion.
(e) A vote approving this Agreement and the Reorganization contemplated
hereby shall have been adopted by at least a majority of the outstanding
shares of each of the Acquired Funds entitled to vote at an annual or
special meeting; provided that, if a majority of the shares of only one
Acquired Fund approve the Agreement and the Reorganization, the parties may
execute the Agreement and effect the Reorganization solely with respect to
such Acquired Fund.
(f) The Board of Trustees of MAS Funds, at a meeting duly called for such
purpose, shall have authorized the issuance by each of the Acquiring Funds
of Acquiring Funds
A - 8
<PAGE>
Shares at the Effective Time in exchange for the assets of the Acquired
Funds pursuant to the terms and provisions of this Agreement.
9. EFFECTIVE TIME OF THE REORGANIZATION. The exchange of the Acquired Funds'
assets for Acquiring Funds Shares shall be effective as of close of
business on April __, 1998, or at such other time and date as fixed
by the mutual consent of the parties (the "Effective Time").
10. TERMINATION. This Agreement and the transactions contemplated hereby may
be terminated and abandoned with respect to one or more of the Acquiring
Funds and/or the Acquired Funds without penalty by resolution of the Board
of Directors of MSIF or the Board of Trustees of MAS Funds or at the
discretion of any duly authorized officer of MAS Funds or MSIF, at any time
prior to the Effective Time, if circumstances should develop that, in the
opinion of such Board or officer, make proceeding with the Agreement
inadvisable.
11. AMENDMENT AND WAIVER. This Agreement may be amended, modified or
supplemented in such manner as may be mutually agreed upon in writing by
the parties; PROVIDED, that no such amendment may have the effect of
changing the provisions for determining the number or value of Acquiring
Funds Shares to be paid to the Acquired Funds' shareholders under this
Agreement to the detriment of the Acquired Funds' shareholders without
their further approval. Furthermore, either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations (such waiver to be in writing and authorized by the President
or any Vice President of the waiving party with or without the approval of
such party's shareholders).
12. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland.
13. NOTICES. Any notice, report, statement or demand required or permitted by
any provision of this Agreement shall be in writing and shall be given by
prepaid telegraph, telecopy, certified mail, internet or overnight express
courier addressed as follows:
if to the Acquiring Funds:
Ms. Lorraine Truten
MAS Funds
One Tower Bridge
West Conshohocken, PA 19428
with a copy to:
John H. Grady, Esq.
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
A - 9
<PAGE>
Washington, D.C. 20036
if to the Acquired Funds:
Mr. Harold J. Schaff, Jr.
Morgan Stanley Institutional Fund, Inc.
1221 Avenue of the Americas
New York, NY 10020
with a copy to:
John H. Grady, Jr.
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, D.C. 20036
14. FEES AND EXPENSES.
(a) Each of the Acquiring Funds and the Acquired Funds represents and
warrants to the other that there are no brokers or finders entitled to
receive any payments in connection with the transactions provided for
herein.
(b) Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by each Portfolio will
be borne by such Portfolio. Such expenses include, without limitation, (i)
expenses incurred in connection with the entering into and the carrying out
of the provisions of this Agreement; (ii) expenses associated with the
preparation and filing of the Proxy Statement under the Securities Exchange
Act of 1934, as amended; (iii) registration or qualification fees and
expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Funds Shares to
be issued in connection herewith in each state in which the Acquired Funds'
shareholders are resident as of the date of the mailing of the Proxy
Statement to such shareholders; (iv) postage; (v) printing; (vi) accounting
fees; (vii) legal fees; and (viii) solicitation costs of the transaction.
Each of the Acquiring Funds shall pay its own Federal and state
registration fees.
15. HEADINGS, COUNTERPARTS, ASSIGNMENT.
(a) The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not effect in any way the meaning or
interpretation of this Agreement.
(b) This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
(c) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but no
assignment or transfer hereof
A - 10
<PAGE>
or of any rights or obligations hereunder shall be made by any party
without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any
person, firm or corporation other than the parties hereto and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.
16. ENTIRE AGREEMENT. Each of the Acquiring Funds and the Acquired Funds agree
that neither party has made any representation, warranty or covenant not
set forth herein and that this Agreement constitutes the entire agreement
between the parties. The representations, warranties and covenants
contained herein or in any document delivered pursuant hereto or in
connection herewith shall survive the consummation of the transactions
contemplated hereunder.
17. FURTHER ASSURANCES. Each of the Acquiring Funds and the Acquired Funds
shall take such further action as may be necessary or desirable and proper
to consummate the transactions contemplated hereby.
18. BINDING NATURE OF AGREEMENT. As provided in each of (1) MSIF's Articles of
Incorporation, as amended and supplemented to date, on file with the State
Department of Assessments and Taxation of the State of Maryland; and (2)
MAS Funds Declaration of Trust, as amended and supplemented to date, on
file with the Pennsylvania Corporation Bureau of the Department of State,
this Agreement was executed by the undersigned officers of MAS Funds and
MSIF, on behalf of each of the Acquiring Funds and the Acquired Funds,
respectively, as officers and not individually, and the obligations of this
Agreement are not binding upon the undersigned officers individually, but
are binding only upon the assets and property of the corporation or trust.
Moreover, no series of a corporation or trust shall be liable for the
obligations of any other series of that corporation or trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Morgan Stanley Institutional Fund, Inc., on behalf of its series, Small Cap
Value Equity Portfolio and Balanced Portfolio
By
---------------------------
Name:
Title:
A - 11
<PAGE>
MAS Funds, on behalf of its series, Mid Cap Value Portfolio and Balanced
Portfolio
By
---------------------------
Name:
Title:
A - 12
<PAGE>
January 5, 1998
MAS Funds
One Tower Bridge
West Conshohocken, PA 19428
Re: Shares of Beneficial Interest of MAS Funds
------------------------------------------
Ladies and Gentlemen:
We refer to the Registration Statement on Form N-14 (SEC File No. 002-89729)
(the "Registration Statement") of the MAS Funds (the "Fund") relating to the
registration of an indefinite number of shares of beneficial interest of the
Balanced and Mid Cap Value Portfolios of the Fund (collectively, the "Shares").
We have been requested by the Fund to furnish this opinion as Exhibit 11 to the
Registration Statement.
We have examined such records, documents, instruments, certificates of public
officials and of the Fund, made such inquiries of the Fund, and examined such
questions of law as we have deemed necessary for the purpose of rendering the
opinion set forth herein. We have assumed the genuineness of all signatures and
the authenticity of all items submitted to us as originals and the conformity
with originals of all items submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that:
The issuance of the Shares by the Fund has been duly and validly authorized
by all appropriate action and, upon delivery thereof and payment therefor
in accordance with the Registration Statement, the Shares, when issued,
will be duly authorized, validly issued, fully paid and nonassessable by
the Fund.
<PAGE>
MAS Funds
January 5, 1998
Page 2
We have not reviewed the securities laws of any state or territory in connection
with the proposed offering of Shares and we express no opinion as to the
legality of any offer of sale of Shares under any such state or territorial
securities laws.
This opinion is intended only for your use in connection with the offering of
Shares and may not be relied upon by any other person.
We hereby consent to the inclusion of this opinion as an exhibit to the Fund's
Registration Statement to be filed with the Securities and Exchange Commission.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
Morgan, Lewis & Bockius LLP
<PAGE>
January 8, 1998
Morgan Stanley Institutional Fund, Inc.
1221 Avenue of the Americas
New York, NY 10020
Re: Agreement and Plan of Reorganization
by and between MAS Funds and Morgan Stanley Institutional Fund, Inc.
--------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to MAS Funds, a Pennsylvania business trust, in
connection with the execution and delivery of the Agreement and Plan of
Reorganization (the "Agreement"), dated as of January 9, 1998, by and
between MAS Funds and Morgan Stanley Institutional Fund, Inc. ("MSIF"), a
Maryland corporation, relating to the transfer of all the assets and liabilities
of the MSIF Small Cap Value Equity Fund and the MSIF Balanced Fund
(collectively, the "Acquired Funds"), in exchange for the assumption by the
corresponding series of the MAS Mid Cap Value Fund and the MAS Balanced Fund
(collectively, the "Acquiring Funds") of all or substantially all of the
liabilities of the Acquired Funds and units of beneficial interest of the
corresponding series of the Acquiring Funds ("Acquiring Funds Shares") followed
by the distribution of such Acquiring Funds Shares to the holders of shares of
common stock of the Acquired Funds ("Acquired Funds Shares") in exchange for
such Acquired Funds Shares in complete liquidation of the Acquired Funds (the
"Reorganization"), pursuant to the Agreement. This opinion letter is delivered
to you pursuant to Section 8(d) of the Agreement. Capitalized terms used but
not defined herein shall have the meanings assigned to them in the Agreement.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Agreement, and (ii) such other documents as we have deemed necessary or
appropriate in order to enable us to render the opinion below. In our
examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies. Our
<PAGE>
Morgan Stanley Institutional Fund, Inc.
January 5, 1998
Page 2
opinion is based in part on the facts set forth below. We have not undertaken
an independent investigation or verification of these facts or of the
information set forth either in the aforementioned documents or in other
documents that we have reviewed.
1. The Reorganization will be consummated in compliance with the material
terms of the Agreement, and none of the material terms and conditions
therein have been waived or modified and neither party has any plan or
intention to waive or modify any such material condition.
2. The fair market value of the Acquiring Funds Shares to be received by
each Acquired Funds shareholder in the Reorganization will be
approximately equal to the fair market value of the shares of common
stock in the Acquired Funds surrendered and exchanged therefor.
3. To the knowledge of the Acquired Funds there is no plan or intention
on the part of any shareholder of the Acquired Funds to sell, exchange
or otherwise dispose of a number of Fund Shares received in the
transaction that would reduce the number of Acquiring Funds Shares
held by the shareholders of the Acquired Funds to a number of shares
having a value, as of the date of the Reorganization equal to less
than 50 percent of the value of all the formerly outstanding Acquired
Funds Shares.
4. No consideration other than the Acquiring Funds Shares and the
assumption by the Acquiring Funds of the stated liabilities of the
Acquired Funds will be issued in exchange for shares of common stock
in the Acquired Funds in the Reorganization.
5. The Acquiring Funds have no plan or intention to sell additional
shares of beneficial interest in the Acquiring Funds or to redeem or
otherwise reacquire any of the Acquiring Funds Shares issued in the
Reorganization other than in the ordinary course of their business as
regulated investment companies.
6. The Acquiring Funds have no plan or intention to sell or otherwise
dispose of any of the Acquired Funds assets to be acquired by them in
the Reorganization except for dispositions made in the ordinary course
of their business as regulated investment companies.
7. Following the Reorganization, the Acquiring Funds will continue the
historic businesses of the Acquired Funds or use a significant portion
of the Acquired
<PAGE>
Morgan Stanley Institutional Fund, Inc.
January 5, 1998
Page 3
Funds' assets in business.
8. Immediately following consummation of the Reorganization, the
Acquiring Funds will possess the same liabilities as those possessed
by the Acquired Funds immediately prior to the Reorganization. The
fair market value of the assets of the Acquired Funds acquired by the
Acquiring Funds will exceed the liabilities of the Acquired Funds
assumed by the Acquiring Funds plus the amount of liabilities, if any,
to which the acquired assets are subject.
9. There is no intercorporate indebtedness existing between the Acquiring
Funds and the Acquired Funds that was issued, acquired, or will be
settled at a discount.
10. The Acquiring Funds will meet the requirements of Subchapter M of the
Internal Revenue Code of 1986 for qualification and treatment as a
regulated investment company.
11. The Acquiring Funds do not own nor have they ever owned shares of
common stock in the Acquired Funds.
Our opinion summarizes certain Federal income tax consequences of the
Reorganization to holders of shares of common stock in the Acquired Funds
(individually, a "Shareholder" and, collectively, the "Shareholders"). Our
opinion does not address all aspects of Federal income taxation that may be
relevant to particular Shareholders and may not be applicable to Shareholders
who are not citizens or residents of the United States. Further, our opinion
does not address the effect of any applicable foreign, state, local or other tax
laws.
In rendering our opinion, we have considered the applicable provisions of the
Internal Revenue Code of 1986 (the "Code"), Treasury Regulations, pertinent
judicial authorities, interpretive rulings of the Internal Revenue Service and
such other authorities as we have considered relevant.
Based upon and subject to the foregoing, we are of the opinion that the
Reorganization will, under current law, constitute a tax-free reorganization
under Section 368(a)(1)(C) of the Code, and that the Acquired Funds and
Acquiring Funds will each be a party to the reorganization within the meaning of
Section 368(b) of the Code.
The Reorganization, as a tax-free reorganization, will have the following
Federal income tax consequences for the Shareholders, the Acquired Funds and the
Acquiring Funds:
<PAGE>
Morgan Stanley Institutional Fund, Inc.
January 5, 1998
Page 4
1. No gain or loss will be recognized to the Acquired Funds upon the
transfer of their assets in exchange solely for the Acquiring
Funds Shares and the assumption by the Acquiring Funds of the
corresponding Acquired Funds' stated liabilities;
2. No gain or loss will be recognized to the Acquiring Funds on
their receipt of the Acquired Funds' assets in exchange for the
Acquiring Funds Shares and the assumption by the Acquiring Funds
of the corresponding Acquired Funds' liabilities;
3. The basis of an Acquired Fund's assets in the corresponding
Acquiring Funds' hands will be the same as the basis of those
assets in the Acquired Funds' hands immediately before the
conversion;
4. The Acquiring Funds' holding period for the assets transferred to
the Acquiring Funds by the Acquired Funds will include the
holding period of those assets in the corresponding Acquired
Funds' hands immediately before the conversion;
5. No gain or loss will be recognized to the Acquired Funds on the
distribution of the Acquiring Funds Shares to the Acquired Funds'
shareholders in exchange for their Acquired Funds Shares;
6. No gain or loss will be recognized to the Acquired Funds'
shareholders as a result of the Acquired Funds' distribution of
Acquiring Funds Shares to the Acquired Funds' shareholders in
exchange for the Acquired Funds' shareholders' Acquired Funds
Shares;
<PAGE>
Morgan Stanley Institutional Fund, Inc.
January 5, 1998
Page 5
7. The basis of the Acquiring Funds Shares received by the Acquired
Funds' shareholders will be the same as the adjusted basis of
that Acquired Funds' shareholders' Acquired Funds Shares
surrendered in exchange therefor; and
8. The holding period of the Acquiring Funds Shares received by the
Acquired Funds' shareholders will include the Acquired Funds'
shareholders' holding period for the Acquired Funds'
shareholders' Acquired Funds Shares surrendered in exchange
therefor, provided that said Acquired Funds Shares were held as
capital assets on the date of the conversion.
Except as set forth above, we express no opinion as to the tax consequences
to any party, whether Federal, state, local or foreign, of the Reorganization
or the Agreement or of any transactions related to the Reorganization or the
Agreement or contemplated by the Reorganization or the Agreement. This
opinion is being furnished to you on behalf of the Acquiring Funds in
connection with the Reorganization and the Agreement and solely for your
benefit in connection therewith and may not be used or relied upon for any
other purpose and may not be circulated, quoted or otherwise referred to for
any other purpose without our express written consent.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement and Statement of Additional Information constituting parts of this
registration statement on Form N-14 (the "Registration Statement") of our report
dated November 20, 1997, relating to the financial statements and financial
highlights of MAS Mid Cap Value Portfolio and MAS Balanced Portfolio, each a
portfolio constituting part of MAS Funds appearing in the September 30, 1997
Annual Report to Shareholders of twenty-two of the twenty four portfolios of MAS
Funds. We also consent to the references to us under "Financial Statements" in
the Prospectus/Proxy statement and under the headings, which are also
incorporated by reference in the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and included in
the Prospectus of MAS Funds dated June 5, 1997, which accompanies the
Registration Statement and under the heading "Financial Statements" included in
the Statement of Additional Information of MAS Funds dated June 5, 1997, which
is incorporated by reference into the Registration Statement.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 5, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus and Statement of Additional Information constituting parts
of this registration statement on Form N-14 (File No. 002-89729) of MAS Funds
(the Registration Statement) of our report dated February 10, 1997, relating to
the financial statements and financial highlights of the Small Cap Value Equity
and Balanced Portfolios appearing in the December 31, 1996 Annual Report to
Shareholders of Morgan Stanley Institutional Fund, Inc., which are also
incorporated by reference into the Registration Statement. We also consent to
the reference to us under the heading Financial Statements in the Proxy
Statement/Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 6, 1998
<PAGE>
- ------MAS------------------------------------------------------- PROSPECTUS----
---------
MAS FUNDS
January 31, 1997
As Revised June 5, 1997
Client Services: 1-800-354-8185 Prices and Investment Results: 1-800-522-1525
MAS Funds (the Fund) is a no-load mutual fund consisting of twenty-six
portfolios, twenty-three of which are described in this Prospectus. Each
portfolio in this Prospectus operates as a separate diversified investment
company except the Global Fixed Income and International Fixed Income Portfolios
which are non-diversified investment companies. The investment objective of each
portfolio is described with a summary of investment policies as referenced
below. The Fund's Small Cap Value Portfolio is not currently being offered to
new investors. This Prospectus offers the Institutional Class Shares of the
Fund. The Fund also offers Adviser Class Shares and Investment Class Shares.
Shares of the Cash Reserves Portfolio are neither insured nor guaranteed by the
U.S. Government. The Portfolio seeks to maintain, but there can be no assurance
that it will be able to maintain, a constant net asset value of $1.00 per share.
The High Yield Portfolio will invest primarily, and certain other portfolios of
the Fund may invest to varying degrees, in high yield, high risk securities
which are speculative with regard to payment of interest and return of principal
(commonly referred to as junk bonds); therefore, investments in these portfolios
may not be suitable for all investors. See High Yield Investing in the Glossary
of Strategies for additional information regarding certain risks associated with
investment in such securities.
- --------------------------------------------------------------------------------
<PAGE>
PORTFOLIO PAGE REFERENCE
------------------------
<TABLE>
<S> <C> <C>
How to Use This Prospectus: 3 Fixed Income: Balanced: 35
Cash Reserves 22
Portfolio Summaries: Domestic Fixed Income 23 Multi-Asset-Class: 36
Equity: Fixed Income 24
Equity 19 Fixed Income II 25 Balanced Plus: 37
Growth 19 Global Fixed Income 26
International Equity 20 High Yield 27 Prospectus Glossary:
Mid Cap Growth 20 Intermediate Duration 28 Strategies 38
Mid Cap Value 21 International Fixed Income 29 Investments 43
Small Cap Value 21 Limited Duration 30
Value 22 Mortgage-Backed Securities 31 General Shareholder
Municipal 32 Information: 53
PA Municipal 33
Special Purpose Fixed Income 34 Table of Contents: Back Cover
</TABLE>
This Prospectus, which should be retained for future reference, sets forth
concisely information that you should know before you invest. A Statement of
Additional Information containing additional information about the Fund has been
filed with the Securities and Exchange Commission. Such Statement is dated
January 31, 1997 as revised from time to time, and has been incorporated by
reference into this Prospectus. A copy of the Statement may be obtained, without
charge, by writing to the Fund or by calling the Client Services Group at the
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MILLER
ANDERSON
& SHERRERD, LLP__ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
<PAGE>
EXPENSE SUMMARY - INSTITUTIONAL CLASS SHARES
The following tables illustrate the various expenses and fees that a
shareholder for that portfolio will incur either directly or indirectly. The
expenses and fees set forth below are based on each portfolio's operations
during the fiscal year ended September 30, 1996, except portfolios whose Total
Operating Expenses have been capped. An estimate has been provided for
portfolios with less than 10 months of operations.
Shareholder Transaction Expenses:
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses:
(as a percentage of average net assets after fee waivers)
12b-1 Fees None
Investment Total
Advisory Other Operating
Portfolio Fees Expenses Expenses
- ------------------------------ ------------ ---------- ----------
Equity 0.500% 0.102% 0.602%
Growth 0.500 0.100 0.600
International Equity 0.500 0.190 0.690
Mid Cap Growth 0.500 0.104 0.604
Mid Cap Value 0.564* 0.318 0.882
Small Cap Value 0.750 0.112 0.862
Value 0.500 0.108 0.608
Cash Reserves 0.155* 0.172 0.327
Domestic Fixed Income 0.362* 0.155 0.517
Fixed Income 0.375 0.108 0.483
Fixed Income II 0.375 0.122 0.497
Global Fixed Income 0.375 0.221 0.596
High Yield 0.375 0.116 0.491
Intermediate Duration 0.244* 0.314 0.558
International Fixed Income 0.375 0.159 0.534
Limited Duration 0.300* 0.126 0.426
Mortgage-Backed Securities 0.335* 0.165 0.500
Municipal 0.288* 0.221 0.509
PA Municipal 0.228* 0.278 0.506
Special Purpose Fixed Income 0.375 0.116 0.491
Balanced 0.450 0.124 0.574
Multi-Asset-Class 0.570*+ 0.210 0.780
Balanced Plus 0.550 0.150 0.700
Where applicable as described in Financial Highlights, the Total Operating
Expense ratios reflected in the table above are higher than the ratio of
expenses actually deducted from portfolio assets because of the effect of
expense offset arrangements. The result of such arrangements is to offset
expense that otherwise would be deducted from portolio assets.
* Until further notice, the Adviser has voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary to keep
Total Operating Expenses actually deducted from portfolio assets for the Mid
Cap Value, Cash Reserves, Domestic Fixed Income, Intermediate Duration,
Limited Duration, Mortgage-Backed Securities, Municipal, PA Municipal and
Multi-Asset-Class Portfolios from exceeding 0.88%, 0.32%, 0.50%, 0.52%,
0.42%, 0.50%, 0.50%, 0.50% and 0.780%, respectively. Absent fee waivers and
reimbursements by the Adviser, Total Operating Expenses would be 1.068%,
.422%, .530%, .689%, .540%, .596%, .653% and .860%, for the Mid Cap Value,
Cash Reserves, Domestic Fixed Income, Intermediate Duration, Mortgage-Backed
Securities, Municipal, PA Municipal and Multi-Asset-Class Portfolios,
respectively.
+ On November 21, 1996 shareholders of the Multi-Asset-Class Portfolio approved
an increase in the Advisory Fee from 0.45% to 0.65% of average daily net
assets. The Investment Advisory Fees and Total Operating Expenses have been
adjusted to reflect this change.
- --------------------------------------------------------------------------------
MAS Funds - 2 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
EXAMPLE
The purpose of this table is to assist in understanding the various expenses
that a shareholder in a portfolio will bear directly or indirectly. The
following example illustrates the expenses that an investor would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return, and (2) redemption at the end of each time period. The example should
not be considered a representation of past or future expenses and actual
expenses may be greater or less than those shown. For portfolios with less than
10 months of operations, only the 1 and 3 year examples are shown.
Portfolio 1 year 3 year 5 year 10 year
- ------------------------------ -------- -------- -------- --------
Equity $6 $19 $34 $75
Growth 6 19 -- --
International Equity 7 22 38 86
Mid Cap Growth 6 19 34 76
Mid Cap Value 9 28 49 109
Small Cap Value 9 28 48 106
Value 6 19 34 76
Cash Reserves 3 11 18 41
Domestic Fixed Income 5 17 29 65
Fixed Income 5 16 27 61
Fixed Income II 5 16 28 62
Global Fixed Income 6 19 33 75
High Yield 5 16 27 62
Intermediate Duration 6 18 31 70
International Fixed Income 5 17 30 67
Limited Duration 4 14 24 54
Mortgage-Backed Securities 5 16 28 63
Municipal 5 16 28 64
PA Municipal 5 16 28 64
Special Purpose Fixed Income 5 16 27 62
Balanced 6 18 32 72
Multi-Asset-Class 8 25 43 97
Balanced Plus 7 22 -- --
- --------------------------------------------------------------------------------
HOW TO USE THIS PROSPECTUS
A PROSPECTUS SUMMARY begins on page 4;
FINANCIAL HIGHLIGHTS and a description of YIELD AND TOTAL RETURN begin on page
8;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all
portfolios begins on page 16;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin on
page 19;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments, Policies
and Strategies printed in bold type throughout this Prospectus begins on page
38;
GENERAL SHAREHOLDER INFORMATION begins on page 53.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 3
<PAGE>
PROSPECTUS SUMMARY
EQUITY PORTFOLIOS
Equity - seeks to achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing primarily in
a diversified portfolio of Common Stocks of companies which are deemed by the
Adviser to have earnings growth potential greater than the economy in general
and greater than the expected rate of inflation.
Growth - seeks to achieve long-term capital growth by investing primarily in a
diversified portfolio of Common Stocks of larger size companies that are deemed
by the Adviser to offer long-term growth potential.
International Equity - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of Foreign Equities.
Mid Cap Growth - seeks to achieve long-term capital growth by investing
primarily in a diversified portfolio of Common Stocks of smaller and medium
size companies that are deemed by the Adviser to offer long-term growth
potential.
Mid Cap Value - seeks to achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk, by investing in Common
Stocks with equity capitalizations in the range of the companies represented in
the S&P MidCap 400 Index which are deemed by the Adviser to be relatively
undervalued based on certain proprietary measures of value. The portfolio will
typically exhibit a lower price/earnings value ratio than the S&P MidCap 400
Index.
Small Cap Value - (not currently offered to new investors) seeks to achieve
above-average total return over a market cycle of three to five years,
consistent with reasonable risk, by investing primarily in a diversified
portfolio of Common Stocks with equity capitalizations in the range of
companies represented in the Russell 2000 Index which are deemed by the Adviser
to be relatively undervalued based on certain proprietary measures of value.
The portfolio will typically exhibit lower price/earnings and price/book value
ratios than the Russell 2000.
Value - seeks to achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing primarily in
a diversified portfolio of Common Stocks which are deemed by the Adviser to be
relatively undervalued based on various measures such as price/earnings ratios
and price/book ratios.
FIXED-INCOME PORTFOLIOS
Cash Reserves - seeks to realize maximum current income, consistent with
preservation of capital and liquidity, by investing in a diversified portfolio
of money-market instruments, Cash Equivalents and other short-term securities
having expected maturities of thirteen months or less. The portfolio seeks to
maintain, but does not guarantee, a constant net asset value of $1.00 per
share.
Domestic Fixed Income - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Governments and other investment
grade fixed-income securities of domestic issuers.
Fixed Income - seeks to achieve above-average total return over a market cycle
of three to five years, consistent with reasonable risk, by investing primarily
in a diversified portfolio of U.S. Governments, Corporates, Mortgage
Securities, Foreign Bonds and other Fixed-Income Securities and Derivatives.
The portfolio's average weighted maturity will ordinarily exceed five years.
- --------------------------------------------------------------------------------
MAS Funds - 4 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Fixed Income II - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of U.S. Governments and other investment
grade fixed-income securities.
Global Fixed Income - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in high-grade Fixed-Income Securities, Foreign Bonds and Derivatives
representing securities of United States and foreign issuers. The portfolio's
average weighted maturity will ordinarily exceed five years.
High Yield - seeks to achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing primarily in
a diversified portfolio of High Yield Securities, Corporates and other
Fixed-Income Securities (including bonds rated below investment grade) and
Derivatives. The portfolio's average weighted maturity will ordinarily exceed
five years.
Intermediate Duration - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments and
investment-grade Corporates, Mortgage Securities, Foreign Bonds and other
Fixed-Income Securities and Derivatives. The portfolio will maintain an average
duration of between two and five years.
International Fixed Income - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in high-grade Foreign Bonds and Derivatives. The
portfolio's average weighted maturity will ordinarily exceed five years.
Limited Duration - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of U.S. Governments, Mortgage Securities,
investment-grade Corporates and other Fixed-Income Securities. The portfolio
will maintain an average duration of between one and three years.
Mortgage-Backed Securities - seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of Mortgage Securities and other
Fixed-Income Securities and Derivatives. The portfolio's average weighted
maturity will ordinarily exceed seven years.
Municipal - seeks to realize above-average total return over a market cycle of
three to five years, consistent with conservation of capital and the
realization of current income which is exempt from federal income tax, by
investing primarily in a diversified portfolio of Municipals and other
Fixed-Income Securities and Derivatives, including a limited percentage of
bonds rated below investment grade. The portfolio's average weighted maturity
will ordinarily be between five and ten years.
PA Municipal - seeks to realize above-average total return over a market cycle
of three to five years, consistent with the conservation of capital and the
realization of current income which is exempt from federal income tax and
Pennsylvania personal income tax by investing in a diversified portfolio of PA
Municipals and other Fixed-Income Securities and Derivatives including a
limited percentage of bonds rated below investment grade. The portfolio's
average weighted maturity will ordinarily be between five and ten years.
Special Purpose Fixed Income - seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments, Corporates,
Mortgage Securities, Foreign Bonds and other Fixed-Income Securities and
Derivatives. The portfolio is structured to complement an investment in one or
more of the Fund's Equity Portfolios for investors seeking a balanced
investment. The portfolio's average weighted maturity will ordinarily exceed
five years.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 5
<PAGE>
BALANCED INVESTING
Balanced Portfolio - seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing in
a diversified portfolio of Equity Securities, Fixed-Income Securities and
Derivatives. When the Adviser judges the relative outlook for the equity and
fixed-income markets to be neutral, the portfolio will be invested 60% in
equity securities and 40% in fixed-income securities. The asset mix is actively
managed by the Adviser, with equity securities ordinarily representing between
45% and 75% of the total investment. The average weighted maturity of the
fixed-income portion of the portfolio will ordinarily be greater than five
years.
Multi-Asset-Class Portfolio - seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of Equity Securities, Fixed-
Income Securities and High Yield Securities of United States and foreign
issuers and Derivatives. The asset mix is actively managed by the Adviser.
Balanced Plus Portfolio - seeks to achieve above average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of Common Stocks of domestic and foreign
issuers and Fixed-Income Securities.
RISK FACTORS: Prospective investors in the Fund should consider the following
factors as they apply to each Portfolio's allowable investments and policies.
See the Prospectus Glossary for more information on terms printed in bold type:
- - Each portfolio may invest in Repurchase Agreements, which entail a risk of
loss should the seller default in its obligation to repurchase the security
which is the subject of the transaction;
- - Each portfolio may participate in a Securities Lending program which entails a
risk of loss should a borrower fail financially;
- - Fixed-Income Securities that may be acquired by the Portfolios will be
affected by general changes in interest rates resulting in increases or
decreases in the value of the obligations held by a portfolio. The value of
fixed-income securities can be expected to vary inversely to changes in
prevailing interest rates, i.e., as interest rates decline, market value tends
to increase and vice versa;
- - Investments in Common Stocks are subject to market risks which may cause their
prices to fluctuate over time. Changes in the value of portfolio securities
will not necessarily affect cash income derived from these securities, but
will affect a Portfolio's net asset value.
- - Securities purchased on a When-Issued basis may decline or appreciate in
market value prior to their actual delivery to the portfolio;
- - Each portfolio (except the Cash Reserves Portfolio) may invest a portion of
its assets in Derivatives including Futures & Options. Futures contracts,
options and options on futures contracts entail certain costs and risks,
including imperfect correlation between the value of the securities held by
the portfolio and the value of the particular derivative instrument, and the
risk that a portfolio could not close out a futures or options position when
it would be most advantageous to do so;
- - Each portfolio (except the Cash Reserves Portfolio) may invest in certain
instruments such as Forwards, certain types of Futures & Options, certain
types of Mortgage Securities and When-Issued Securities which require the
portfolio to segregate some or all of its cash or liquid securities to cover
its obligations pursuant to such instruments. As asset segregation reaches
certain levels, a portfolio may lose flexibility in managing its investments
properly, responding to shareholder redemption requests, or meeting other
obligations and may be forced to sell other securities that it wanted to
retain or to realize unintended gains or losses;
- --------------------------------------------------------------------------------
MAS Funds - 6 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
- - Investments in floating rate securities (Floaters) and inverse floating
rate securities (Inverse Floaters) and mortgage-backed securities
(Mortgage Securities), including principal-only and interest-only Stripped
Mortgage-Backed Securities (SMBS), may be highly sensitive to interest rate
changes, and highly sensitive to the rate of principal payments (including
prepayments on underlying mortgage assets);
- - From time to time Congress has considered proposals to restrict or
eliminate the tax-exempt status of Municipals. If such proposals were
enacted in the future, the Municipal Portfolio and the PA Municipal
Portfolio would reconsider their investment objectives and policies;
- - Investments in securities rated below investment grade, generally referred
to as High Yield, high risk or junk bonds, carry a high degree of credit
risk and are considered speculative by the major rating agencies;
- - Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies.
See Foreign Investing. The portfolios investing in foreign securities may
also engage in foreign currency exchange transactions. See Forwards,
Futures & Options, and Swaps; and,
- - The Global Fixed Income and International Fixed Income Portfolios are
Non-Diversified for purposes of the Investment Company Act of 1940, as
amended, meaning that they may invest a greater percentage of assets in
the securities of one issuer than the other portfolios.
HOW TO INVEST: Institutional Class Shares of each portfolio are available to
clients of the Adviser with combined investments of $5,000,000 and Shareholder
Organizations who have a contractual arrangement with the Fund or the Fund's
Distributor, including institutions such as trusts, foundations or
broker-dealers purchasing for the accounts of others. Shares are offered
directly to investors without a sales commission at the net asset value of the
portfolio next determined after receipt of the order. Share purchases may be
made by sending investments directly to the Fund, subject to acceptance by the
Fund. The Fund also offers Investment and Adviser Class Shares which differ
from the Institutional Class Shares in expenses charged and purchase
requirements. Further information relating to the other classes may be obtained
by calling 800-354-8185.
HOW TO REDEEM: Shares of each portfolio may be redeemed at any time at the net
asset value of the portfolio next determined after receipt of the redemption
request. The redemption price may be more or less than the purchase price,
except ordinarily in the case of the Cash Reserves Portfolio which seeks to
maintain, but does not guarantee, a constant net asset value per share of
$1.00. See Redemption of Shares and Shareholder Services.
THE FUND'S INVESTMENT ADVISER: Miller Anderson & Sherrerd, LLP (the "Adviser"
or "MAS") is a Pennsylvania limited liability partnership founded in 1969,
wholly owned by indirect subsidiaries of Morgan Stanley, Dean Witter, Discover
& Co. and is located at One Tower Bridge, West Conshohocken, PA 19428. The
Adviser provides investment counseling services to employee benefit plans,
endowments, foundations and other institutional investors, and as of March 31,
1997 had in excess of $43 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor")
provides distribution services to the Fund.
ADMINISTRATIVE SERVICES: The Adviser provides the Fund directly, or through
third parties, with fund administration services. Chase Global Funds Services
Company, a subsidiary of The Chase Manhattan Bank, serves as Transfer Agent to
the Fund. See Administrative Services.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 7
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
Selected per share data and ratios for a share
outstanding throughout each period
The following information should be read in conjunction with the Fund's
financial statements which are included in the
Annual Report to Shareholders incorporated
by reference in the Statement of Additional Information. The Fund's financial
statements for the year ended September 30, 1996 have been examined by
Price Waterhouse LLP whose opinion thereon (which was unqualified) is also
incorporated by reference in the
Statement of Additional Information.
As of the fiscal year ended September 30, 1996, the Growth and Balanced Plus
Portfolios had not commenced operations.
(Adjusted to reflect at 2.5 for 1 share split as of August 13, 1993 except for
the Mid Cap Value, Cash Reserves, Global Fixed Income,
Intermediate Duration, International Fixed Income and
Multi-Asset-Class Portfolios)
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity Portfolio (Commencement of Operations 11/14/84)##
1996 $24.43 $0.50 $ 3.26 $ 3.76 ($ 0.50) ($ 2.02) --
1995 21.05 0.52 4.55 5.07 (0.52) (1.17) --
1994 22.82 0.44 0.41 0.85 (0.41) (2.21) --
1993 22.04 0.41 1.95 2.36 (0.43) (1.15) --
1992 20.78 0.43 1.86 2.29 (0.42) (0.61) --
1991 15.86 0.44 5.64 6.08 (0.44) (0.72) --
1990 18.65 0.48 (2.57) (2.09) (0.54) (0.16) --
1989 14.48 0.51 4.15 4.66 (0.46) (0.03) --
1988 17.14 0.40 (1.93) (1.53) (0.32) (0.81) --
1987 14.09 0.43 3.67 4.10 (0.41) (0.64) --
International Equity Portfolio (Commencement of Operations 11/25/88)##
1996 $12.51 $0.31 $ 0.77 $ 1.08 ($ 0.29) ($ 0.06) --
1995 14.52 0.19 (0.75) (0.56) -- (1.35) ($ 0.10)+
1994 13.18 0.12 1.63 1.75 (0.16) (0.25) --
1993 11.03 0.21 2.14 2.35 (0.20) -- --
1992 11.56 0.36 (0.33) 0.03 (0.56) -- --
1991 9.83 0.22 1.83 2.05 (0.23) (0.09) --
1990 11.86 0.26 (1.90) (1.64) (0.31) (0.08) --
1989 10.00 0.26 1.75 2.01 (0.15) -- --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Portfolio (Commencement of Operations 11/14/84)##
1996 ($ 2.52) $25.67 16.48% $1,442,261 0.60% 1.95% 67% $0.0557
1995 (1.69) 24.43 26.15 1,597,632 0.61 2.39 67
1994 (2.62) 21.05 4.11 1,193,017 0.60 2.10 41
1993 (1.58) 22.82 11.05 1,098,003 0.59 1.86 51
1992 (1.03) 22.04 11.55 918,989 0.59 2.03 21
1991 (1.16) 20.78 40.18 675,487 0.60 2.36 33
1990 (0.70) 15.86 (11.67) 473,261 0.59 2.66 44
1989 (0.49) 18.65 32.95 602,261 0.59 3.29 29
1988 (1.13) 14.48 (8.41) 385,864 0.62 2.99 51
1987 (1.05) 17.14 30.89 322,803 0.66 2.88 66
International Equity Portfolio (Commencement of Operations 11/25/88)##
1996 ($ 0.35) $13.24 8.87% $ 635,706 0.69% 1.88% 78% $0.0093
1995 (1.45) 12.51 (3.36) 1,160,986 0.70 1.90 112
1994 (0.41) 14.52 13.33 1,132,867 0.64 0.89 69
1993 (0.20) 13.18 21.64 891,675 0.66 1.23 43
1992 (0.56) 11.03 0.37 512,127 0.70 1.41 42
1991 (0.32) 11.56 21.22 274,295 0.67 2.08 51
1990 (0.39) 9.83 (14.38) 126,035 0.65 2.40 45
1989 (0.15) 11.86 20.36 87,083 0.63* 3.05* 4
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
## For the years ended September 30, 1995 and September 30, 1996, the Ratio of
Expenses to Average Net Assets for the Equity and International Equity
Portfolios excludes the effect of expense offsets. If expense offsets were
included, the Ratio of Expenses to Average Net Assets would be 0.60% and
0.66%, respectively for the fiscal year ended September 30, 1995 and 0.60%
and 0.65%, respectively for the fiscal year ended September 30, 1996.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate paid for trades on which commissions
were charged.
- --------------------------------------------------------------------------------
MAS Funds - 8 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
----------- ------------ --------------- ------------ --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Operations 3/30/90)#, ##
1996 $18.60 $ 0.01 $ 4.70 $ 4.71 ($ 0.03) ($ 2.75) --
1995 16.29 0.03 4.21 4.24 (0.03) (1.90) --
1994 18.56 0.02 (0.58) (0.56) (0.01) (1.70) --
1993 14.51 0.01 4.80 4.81 -- (0.76) --
1992 14.92 0.01 0.44 0.45 (0.03) (0.83) --
1991 9.00 0.04 5.91 5.95 (0.03) -- --
1990 10.00 0.02 (1.01) (0.99) (0.01) -- --
Mid Cap Value Portfolio (Commencement of Operations 12/30/94)##
1996 $13.45 $ 0.11 $ 2.52 $ 2.63 ($ 0.55) ($ 1.04) --
1995 10.00 0.55o 2.90 3.45 -- -- --
Small Cap Value Portfolio (Commencement of Operations 7/01/86)#, ##
1996 $18.28 $ 0.18 $ 3.62 $ 3.80 ($ 0.20) ($ 2.24) --
1995 17.67 0.19 2.49 2.68 (0.14) (1.93) --
1994 17.55 0.16 1.14 1.30 (0.24) (0.94) --
1993 12.84 0.18 4.64 4.82 (0.11) -- --
1992 11.45 0.10 1.48 1.58 (0.19) -- --
1991 7.20 0.23 4.21 4.44 (0.19) -- --
1990 10.42 0.28 (3.05) (2.77) (0.45) -- --
1989 8.54 0.34 1.74 2.08 (0.20) -- --
1988 10.24 0.18 (1.42) (1.24) (0.14) (0.32) --
1987 9.35 0.13 0.84 0.97 (0.08) -- --
Value Portfolio (Commencement of Operations 11/05/84)##
1996 $14.89 $ 0.30 $ 2.20 $ 2.50 ($ 0.32) ($ 1.46) --
1995 12.63 0.31 3.34 3.65 (0.31) (1.08) --
1994 12.76 0.30 0.59 0.89 (0.29) (0.73) --
1993 12.67 0.30 1.92 2.22 (0.31) (1.82) --
1992 12.92 0.35 1.05 1.40 (0.38) (1.27) --
1991 10.29 0.44 3.79 4.23 (0.44) (1.16) --
1990 14.56 0.52 (3.14) (2.62) (0.62) (1.03) --
1989 12.42 0.54 2.73 3.27 (0.47) (0.66) --
1988 15.81 0.48 (1.68) (1.20) (0.46) (1.73) --
1987 14.26 0.55 2.47 3.02 (0.53) (0.94) --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio Average
Total End of Total Period to Average to Average Turnover Commission
Distributions Period Return** (thousands) Net Assets Net Assets Rate Rate###
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio (Commencement of Operations 3/30/90)#, ##
1996 ($ 2.78) $20.53 28.81% $ 403,281 0.60% 0.04% 141% $0.0491
1995 (1.93) 18.60 30.56 373,547 0.61 0.21 129
1994 (1.71) 16.29 (3.28) 302,995 0.60 0.12 55
1993 (0.76) 18.56 33.92 309,459 0.59 0.07 69
1992 (0.86) 14.51 2.87 192,817 0.60 0.05 39
1991 (0.03) 14.92 66.26 171,163 0.60 0.29 46
1990 (0.01) 9.00 (9.98) 76,398 0.64* 0.34* 23
Mid Cap Value Portfolio (Commencement of Operations 12/30/94)##
1996 ($ 1.59) $14.49 22.30% $ 50,449 0.88%++ 1.61% 377% $0.0462
1995 -- 13.45 34.50 4,507 0.93*++ 10.13*o 639o
Small Cap Value Portfolio (Commencement of Operations 7/01/86)#, ##
1996 ($ 2.44) $19.64 24.00% $ 585,457 0.86% 0.99% 145% $0.0498
1995 (2.07) 18.28 18.39 430,368 0.87 1.20 119
1994 (1.18) 17.67 8.04 308,156 0.88 0.91 162
1993 (0.11) 17.55 37.72 175,029 0.88 1.33 93
1992 (0.19) 12.84 14.12 105,886 0.86 1.06 50
1991 (0.19) 11.45 63.07 52,182 0.88 1.70 53
1990 (0.45) 7.20 (27.63) 100,848 0.85 1.77 59
1989 (0.20) 10.42 24.85 189,223 0.85 3.48 36
1988 (0.46) 8.54 (11.50) 202,500 0.86 2.32 41
1987 (0.08) 10.24 10.53 201,621 0.92 1.67 38
Value Portfolio (Commencement of Operations 11/05/84)##
1996 ($ 1.78) $15.61 18.41% $1,844,740 0.61% 2.07% 53% $0.0572
1995 (1.39) 14.89 32.58 1,271,586 0.60 2.43 56
1994 (1.02) 12.63 7.45 981,337 0.61 2.40 54
1993 (2.13) 12.76 19.67 762,175 0.59 2.48 43
1992 (1.65) 12.67 12.83 448,329 0.60 2.87 55
1991 (1.60) 12.92 45.54 458,117 0.60 3.67 64
1990 (1.65) 10.29 (19.88) 369,044 0.59 3.87 51
1989 (1.13) 14.56 28.49 726,776 0.59 4.05 35
1988 (2.19) 12.42 (5.40) 619,287 0.59 3.96 47
1987 (1.47) 15.81 22.99 700,538 0.62 3.68 28
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary in
order to keep the total annual operating expenses for the Mid Cap Value
Portfolio from exceeding 0.88%. Voluntarily waived and reimbursed expenses
totalled 2.13%* and 0.18% for the periods ended September 30, 1995 and
September 30, 1996, respectively.
# Formerly Emerging Growth Portfolio (through May 17, 1995) and Small
Capitalization Value Portfolio (through December 23, 1994)
## For the periods ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Mid Cap Growth and Mid Cap Value Portfolios
excludes the effect of expense offsets. If expense offsets were included,
the Ratio of Expenses to Average Net Assets would be 0.60% and 0.60%,
respectively, for the Mid Cap Growth Portfolio and 0.88%* and 0.88%,
respectively, for the Mid Cap Value Portfolio. For the periods ended
September 30, 1995 and 1996, the Ratio of Expenses to Average Net Assets for
the Small Cap Value Portfolio excludes the effect of expense offsets. If
expense offsets were included, the Ratio of Expenses to Average Net Assets
would not significantly differ. For the periods ended September 30, 1995 and
1996, the Ratio of Expenses to Average Net Assets for the Value Portfolio
excludes the effect of expense offsets. If expense offsets were included,
the Ratio of Expenses to Average Net Assets would be 0.60% and 0.60%
respectively.
o Net Investment Income, the Ratio of Net Investment Income to Average Net
Assets and the Portfolio Turnover Rate reflect activity relating to a
nonrecurring initiative to invest in higher-paying dividend income producing
securities.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate paid for trades on which commissions
were charged.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 9
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves Portfolio (Commencement of Operations 8/29/90)##
1996 $1.000 $.052 -- .052 ($.052) -- --
1995 1.000 .055 -- .055 (.055) -- --
1994 1.000 .034 -- .034 (.034) -- --
1993 1.000 .028 -- .028 (.028) -- --
1992 1.000 .038 -- .038 (.038) -- --
1991 1.000 .064 -- .064 (.064) -- --
1990 1.000 .007 -- .007 (.007) -- --
Domestic Fixed Income Portfolio (Commencement of Operations 9/30/87)#, ##
1996 $11.03 $0.56 ($ 0.09) 0.47 ($0.57) -- ($0.04)+
1995 9.87 0.52 0.87 1.39 (0.23) -- --
1994 11.99 0.94 (1.23) (0.29) (0.95) ($ 0.73) (0.15)+
1993 11.80 0.84 0.66 1.50 (0.78) (0.53) --
1992 11.34 0.87 0.76 1.63 (1.00) (0.17) --
1991 10.26 0.92 1.10 2.02 (0.94) -- --
1990 10.90 0.87 (0.45) 0.42 (0.96) (0.10) --
1989 10.78 0.86 0.08 0.94 (0.78) (0.04) --
1988 9.99 0.73 0.52 1.25 (0.45) (0.01) --
1987 10.00 -- (0.01) (0.01) -- -- --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Reserves Portfolio (Commencement of Operations 8/29/90)##
1996 ($.052) $ 1.000 5.35% $78,497 0.33%++ 5.19% N/A
1995 (.055) 1.000 5.57 44,624 0.33++ 5.45 N/A
1994 (.034) 1.000 3.40 37,933 0.32++ 3.70 N/A
1993 (.028) 1.000 2.81 10,717 0.32++ 2.78 N/A
1992 (.038) 1.000 3.89 12,935 0.32++ 3.95 N/A
1991 (.064) 1.000 6.63 24,163 0.32++ 6.57 N/A
1990 (.007) 1.000 0.74 23,285 0.48* 8.31* N/A
Domestic Fixed Income Portfolio (Commencement of Operations 9/30/87)#, ##
1996 ($0.61) $ 10.89 4.41% $95,362 0.52%++ 5.73% 168%
1995 (0.23) 11.03 14.33 36,147 0.51++ 6.80 313
1994 (1.83) 9.87 (2.87) 36,521 0.50++ 7.65 78
1993 (1.31) 11.99 14.08 90,350 0.50 7.15 96
1992 (1.17) 11.80 15.41 98,130 0.47 7.67 136
1991 (0.94) 11.34 20.99 83,200 0.48 8.18 131
1990 (1.06) 10.26 3.90 77,622 0.48 8.35 181
1989 (0.82) 10.90 9.14 68,855 0.49 8.24 219
1988 (0.46) 10.78 12.63 53,236 0.50 8.62 224
1987 -- 9.99 (0.10) 14,981 N/A N/A N/A
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of realized net gains.
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary, if any,
to keep the total annual operating expenses for the Cash Reserves and
Domestic Fixed Income Portfolios from exceeding 0.32% and 0.50%,
respectively. Voluntarily waived fees and reimbursed expenses totalled 0.08%,
0.24%, 0.14%. 0.11% and 0.09% for the years ended September 30, 1992, 1993,
1994, 1995 and 1996, respectively, for the Cash Reserves Portfolio. For 1994,
1995 and 1996, such fees and expenses were 0.03%, 0.09% and 0.01%,
respectively, for the Domestic Fixed Income Portfolio.
# Formerly Select Fixed Income Portfolio (through December 23, 1994)
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Cash Reserves and Domestic Fixed Income Portfolios
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would be 0.32% and 0.32%,
respectively, for the Cash Reserves Portfolio and 0.50% and 0.50%,
respectively, for the Domestic Fixed Income Portfolio.
- --------------------------------------------------------------------------------
MAS Funds - 10 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Operations 11/14/84)##
1996 $11.82 $0.78 $ 0.08 $ 0.86 ($ 0.79) ($ 0.06) --
1995 10.93 0.80 0.69 1.49 (0.60) -- --
1994 12.86 0.77 (1.28) (0.51) (0.82) (0.47) ($ 0.13)+
1993 12.67 0.88 0.75 1.63 (0.83) (0.61) --
1992 12.20 0.90 0.74 1.64 (1.02) (0.15) --
1991 10.94 0.94 1.25 2.19 (0.93) -- --
1990 11.64 0.92 (0.49) 0.43 (1.03) (0.10) --
1989 11.40 0.90 0.11 1.01 (0.76) (0.01) --
1988 10.86 0.97 0.43 1.40 (0.86) -- --
1987 11.95 0.93 (0.61) 0.32 (0.91) (0.50) --
Fixed Income Portfolio II (Commencement of Operations 8/31/90)##
1996 $11.33 $0.70 ($ 0.03) $ 0.67 ($ 0.66) ($ 0.08) ($ 0.03)+
1995 10.42 0.71 0.71 1.42 (0.51) -- --
1994 11.97 0.63 (1.16) (0.53) (0.67) (0.21) (0.14)+
1993 11.67 0.69 0.77 1.46 (0.61) (0.55) --
1992 11.34 0.77 0.61 1.38 (0.81) (0.24) --
1991 10.09 0.81 1.10 1.91 (0.66) -- --
1990 10.00 0.04 0.05 0.09 -- -- --
Global Fixed Income Portfolio (Commencement of Operations 4/30/93)##
1996 $11.05 $0.63 $ 0.09 $ 0.72 ($ 0.71) ($ 0.05) --
1995 10.20 0.71 0.81 1.52 (0.67) -- --
1994 10.67 0.58 (0.61) (0.03) (0.41) (0.03) --
1993 10.00 0.13 0.61 0.74 (0.07) -- --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolio (Commencement of Operations 11/14/84)##
1996 ($ 0.85) $11.83 7.63% $1,790,146 0.48% 6.77% 162%
1995 (0.60) 11.82 14.19 1,487,409 0.49 7.28 140
1994 (1.42) 10.93 (4.43) 1,194,957 0.49 6.79 100
1993 (1.44) 12.86 14.26 909,738 0.47 7.06 144
1992 (1.17) 12.67 14.35 859,712 0.47 7.50 137
1991 (0.93) 12.20 21.12 831,547 0.47 8.25 143
1990 (1.13) 10.94 3.79 666,736 0.46 8.43 209
1989 (0.77) 11.64 9.25 559,995 0.47 8.36 100
1988 (0.86) 11.40 13.43 405,385 0.49 8.91 168
1987 (1.41) 10.86 2.55 290,824 0.52 8.54 202
Fixed Income Portfolio II (Commencement of Operations 8/31/90)##
1996 ($ 0.77) $11.23 6.12% $ 191,740 0.50% 6.06% 165%
1995 (0.51) 11.33 14.13 176,945 0.51 6.75 153
1994 (1.02) 10.42 (4.76) 129,902 0.51 6.07 137
1993 (1.16) 11.97 13.53 94,836 0.51 6.17 101
1992 (1.05) 11.67 13.02 78,302 0.49 7.05 182
1991 (0.66) 11.34 19.59 42,881 0.49 7.76 190
1990 -- 10.09 0.88 20,729 0.52* 8.00* 7
Global Fixed Income Portfolio (Commencement of Operations 4/30/93)##
1996 ($ 0.76) $11.01 6.83% $ 67,282 0.60% 5.25% 133%
1995 (0.67) 11.05 15.54 55,147 0.58++ 6.34 118
1994 (0.44) 10.20 (0.29) 43,066 0.57++ 5.48 117
1993 (0.07) 10.67 7.43 53,164 0.58*++ 5.08* 30
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of realized net gain.
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary, if any,
to keep the total annual operating expenses for the Global Fixed Income
Portfolio from exceeding 0.58%. Voluntarily waived fees and reimbursed
expenses totalled 0.18%* for the Global Fixed Income Portfolio in 1993.
## For the years ended September 30, 1995 and September 30, 1996, the Ratio of
Expenses to Average Net Assets for the Fixed Income, Fixed Income II and
Global Fixed Income Portfolios excludes the effect of expense offsets. If
expense offsets were included, the Ratio of Expenses to Average Net Assets
would be 0.48% and 0.48%, respectively, for the Fixed Income Portfolio; 0.49%
and 0.49%, respectively, for the Fixed Income Portfolio II, and 0.56% and
0.58%, respectively, for the Global Fixed Income Portfolio.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 11
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net Other
of Period Income unrealized) Activities income) capital gains) Distributions
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Operations 2/28/89)#, ##
1996 $ 9.08 $0.88 $ 0.28 $ 1.16 ($ 0.92) -- --
1995 8.97 0.90 0.19 1.09 (0.85) ($ 0.08) ($0.05)+
1994 9.49 0.75 (0.42) 0.33 (0.69) (0.16) --
1993 8.58 0.73 0.90 1.63 (0.72) -- --
1992 7.80 0.74 0.89 1.63 (0.85) -- --
1991 7.07 1.42 0.82 2.24 (1.51) -- --
1990 9.98 1.36 (2.82) (1.46) (1.42) (0.03) --
1989 10.00 0.55 (0.44) 0.11 (0.13) -- --
Intermediate Duration Portfolio (Commencement of Operations 10/3/94)#, ##
1996 $10.68 $0.60 $ 0.03 $ 0.63 ($ 0.65) ($ 0.38) --
1995 10.00 0.69 0.42 1.11 (0.43) -- --
International Fixed Income Portfolio (Commencement of Operations 4/29/94)##
1996 $11.01 $0.52 $ 0.12 $ 0.64 ($ 0.80) ($ 0.08) --
1995 10.05 0.67 0.92 1.59 (0.63) -- --
1994 10.00 0.21 (0.11) 0.10 (0.05) -- --
Limited Duration Portfolio (Commencement of Operations 3/31/92)#, ##
1996 $10.41 $0.58 ($ 0.03) $ 0.55 ($ 0.58) -- --
1995 10.19 0.56 0.22 0.78 (0.55) -- ($0.01)+
1994 10.72 0.56 (0.52) 0.04 (0.51) ($ 0.04) (0.02)+
1993 10.58 0.32 0.22 0.54 (0.32) (0.08) --
1992 10.00 0.19 0.49 0.68 (0.10) -- --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Total End of Total Period to Average to Average Turnover
Distributions Period Return** (thousands) Net Assets Net Assets Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield Portfolio (Commencement of Operations 2/28/89)#, ##
1996 ($ 0.92) $ 9.32 13.83% $289,810 0.49% 10.04% 115%
1995 (0.98) 9.08 13.58 220,785 0.50++ 10.68 96
1994 (0.85) 8.97 3.57 182,969 0.50++ 9.01 112
1993 (0.72) 9.49 20.12 50,396 0.53++ 8.94 99
1992 (0.85) 8.58 22.49 20,491 0.53++ 9.74 148
1991 (1.51) 7.80 36.70 6,453 0.76 19.45 106
1990 (1.45) 7.07 (16.26) 4,820 0.82 16.93 65
1989 (0.13) 9.98 0.91 3,479 0.73* 11.66* 17
Intermediate Duration Portfolio (Commencement of Operations 10/3/94)#, ##
1996 ($ 1.03) $10.28 6.27% $ 12,017 0.56%++ 6.17% 251%
1995 (0.43) 10.68 11.39 19,237 0.52*++ 6.56* 168
International Fixed Income Portfolio (Commencement of Operations 4/29/94)##
1996 ($ 0.88) $10.77 6.13% $143,137 0.53% 5.39% 124%
1995 (0.63) 11.01 16.36 127,882 0.54++ 6.35 140
1994 (0.05) 10.05 1.01 66,879 0.60*++ 5.83* 31
Limited Duration Portfolio (Commencement of Operations 3/31/92)#, ##
1996 ($ 0.58) $10.38 5.47% $123,227 0.43%++ 5.65% 174%
1995 (0.56) 10.41 7.95 100,186 0.43++ 5.96 119
1994 (0.57) 10.19 0.40 62,775 0.41++ 4.16 192
1993 (0.40) 10.72 5.33 128,991 0.42++ 3.92 217
1992 (0.10) 10.58 6.90 13,065 0.49* 4.99* 159
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary, if any,
to keep the total annual operating expenses for the High Yield, Intermediate
Duration, International Fixed Income and Limited Duration Portfolios from
exceeding 0.525%, 0.52%, 0.60%, and 0.42%, respectively. Voluntarily waived
fees and reimbursed expenses totalled 0.22% and 0.09% in 1992 and 1993 for
the High Yield Portfolio; 0.08%* and 0.13% for the periods ended September
30, 1995 and 1996 for the Intermediate Duration Portfolio; 0.11%* in 1994 for
the International Fixed Income Portfolio; and 0.03% and 0.02% for the Limited
Duration Portfolio for the years ended September 30, 1993 and 1995,
respectively.
# Formerly High Yield Securities Portfolio, Intermediate Duration Fixed Income
Portfolio and Limited Duration Fixed Income Portfolio, respectively (through
December 23, 1994).
## For the periods ended September 30, 1995 and September 30, 1996, the Ratio of
Expenses to Average Net Assets for the Intermediate Duration and
International Fixed Income Portfolios excludes the effect of expense offsets.
If expense offsets were included, the Ratio of Expenses to Average Net Assets
would be 0.52% for the Intermediate Duration Portfolio and would not
significantly differ for the International Fixed Income Portfolio. For the
years ended September 30, 1995 and September 30, 1996, the Ratio of Expenses
to Average Net Assets for the High Yield and Limited Duration Portfolios
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would be 0.49% and 0.48%,
respectively, for the High Yield Portfolio and 0.42% and 0.42%, respectively,
for the Limited Duration Portfolio.
- --------------------------------------------------------------------------------
MAS Funds - 12 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net
of Period Income unrealized) Activities income) capital gains)
----------- ------------ --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities Portfolio (Commencement of Operations 1/31/92)##
1996 $10.49 $0.68 ($0.07) $ 0.61 ($ 0.68) --
1995 9.95 0.72 0.47 1.19 (0.65) --
1994 10.95 0.52 (0.83) (0.31) (0.45) ($ 0.21)
1993 10.44 0.63 0.48 1.11 (0.60) --
1992 10.00 0.29 0.28 0.57 (0.13) --
Municipal Portfolio (Commencement of Operations 10/1/92)#, ##
1996 $10.75 $0.51 $ 0.49 $ 1.00 ($ 0.52) --
1995 10.04 0.59 0.71 1.30 (0.59) --
1994 11.15 0.51 (1.01) (0.50) (0.54) --
1993 10.00 0.37 1.04 1.41 (0.26) --
PA Municipal Portfolio (Commencement of Operations 10/1/92)#, ##
1996 $10.91 $0.51 $ 0.46 $ 0.97 ($ 0.51) --
1995 10.13 0.58 0.77 1.35 (0.57) --
1994 11.26 0.56 (1.00) (0.44) (0.64) ($ 0.05)
1993 10.00 0.39 1.17 1.56 (0.30) --
Special Purpose Fixed Income Portfolio (Commencement of Operations 3/31/92) ##
1996 $12.53 $0.83 $ 0.08 $ 0.91 ($ 0.88) ($ 0.30)
1995 11.52 0.91 0.75 1.66 (0.65) --
1994 13.40 0.80 (1.28) (0.48) (0.78) (0.53)
1993 12.72 0.88 0.92 1.80 (0.82) (0.30)
1992 11.80 0.39 0.72 1.11 (0.19) --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Other Total End of Total Period to Average to Average Turnover
Distributions Distributions Period Return** (thousands) Net Assets Net Assets Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities Portfolio (Commencement of Operations 1/31/92)##
1996 -- ($ 0.68) $10.42 6.10% $ 50,925 0.50%++ 6.46% 116%
1995 -- (0.65) 10.49 12.52 49,766 0.50++ 6.35 107
1994 ($ 0.03)+ (0.69) 9.95 (2.95) 119,518 0.50++ 5.30 220
1993 -- (0.60) 10.95 11.03 50,249 0.50++ 6.92 93
1992 -- (0.13) 10.44 5.75 13,601 0.50*++ 8.11* 133
Municipal Portfolio (Commencement of Operations 10/1/92)#, ##
1996 -- ($ 0.52) $11.23 9.46% $ 54,536 0.51%++ 4.66% 78%
1995 -- (0.59) 10.75 13.37 36,040 0.50++ 5.64 58
1994 ($ 0.07)+ (0.61) 10.04 (4.64) 38,549 0.50++ 4.98 34
1993 -- (0.26) 11.15 14.20 26,914 0.50*++ 4.65* 66
PA Municipal Portfolio (Commencement of Operations 10/1/92)#, ##
1996 -- ($ 0.51) $11.37 9.03% $ 28,488 0.51%++ 4.58% 51%
1995 -- (0.57) 10.91 13.74 15,734 0.50++ 5.56 57
1994 -- (0.69) 10.13 (4.08) 23,515 0.50++ 5.39 69
1993 -- (0.30) 11.26 15.81 15,633 0.50*++ 4.74* 94
Special Purpose Fixed Income Portfolio (Commencement of Operations 3/31/92) ##
1996 -- ($ 1.18) $12.26 7.74% $447,646 0.49% 6.75% 151%
1995 -- (0.65) 12.53 14.97 390,258 0.49 7.33 143
1994 ($ 0.09)+ (1.40) 11.52 (4.00) 384,731 0.50 6.66 100
1993 -- (1.12) 13.40 15.19 300,185 0.48 6.84 124
1992 -- (0.19) 12.72 9.47 274,195 0.53* 6.94* 138
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
+ Represents distributions in excess of net realized gains.
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary, if any,
to keep the total annual operating expenses for the Mortgage-Backed
Securities, Municipal and PA Municipal Portfolios from exceeding 0.50%,
0.50%, and 0.50%, respectively. Voluntarily waived fees and reimbursed
expenses totalled 0.30%*, 0.06%, 0.01%, 0.01% and 0.04% for the period ended
September 30, 1992, and the years ended 1993, 1994, 1995 and 1996,
respectively, for the Mortgage-Backed Securities Portfolio; 0.20%*, 0.06%,
0.09% and 0.09% in 1993, 1994, 1995 and 1996 for the Municipal Portfolio; and
0.25%*, 0.09%, 0.19% and 0.15% for 1993, 1994, 1995 and 1996, respectively,
for the PA Municipal Portfolio.
+ Represents distributions in excess of net investment income.
# Formerly Municipal Fixed Income Portfolio and Pennsylvania Municipal Fixed
Income Portfolio, respectively (through December 23, 1994).
## For the periods ended September 30, 1995 and September 30, 1996, the Ratio of
Expenses to Average Net Assets for the Mortgage-Backed Securities, Municipal
and Special Purpose Fixed Income Portfolios excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would not significantly differ for the Mortgage-Backed Securities
Portfolio; would be 0.50% and 0.50%, respectively, for the Municipal
Portfolio; and would be 0.48% and 0.49%, respectively, for the Special
Purpose Fixed Income Portfolio. For the year ended September 30, 1996, the
Ratio of Expenses to Average Net Assets for the PA Municipal Portfolio
excludes the effect of expense offsets. If expense offsets were included, the
Ratio of Expenses to Average Net Assets would be 0.50%. There were no such
offsets for the PA Municipal Portfolio during 1995.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 13
<PAGE>
Financial Highlights -- Fiscal Years Ended September 30
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Gains Dividend
Net Asset or Losses Distributions Capital Gain
Value- Net on Securities Total from (net Distributions
Beginning Investment (realized and Investment investment (realized net
of Period Income unrealized) Activities income) capital gains)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Portfolio (Commencement of Operations 12/31/92)##
1996 $13.06 $0.53 $1.15 $1.68 ($0.50) ($0.43)
1995 11.28 0.54 1.78 2.32 (0.47) (0.07)
1994 11.84 0.47 (0.45) 0.02 (0.43) (0.15)
1993 11.06 0.25 0.66 0.91 (0.13) --
Multi-Asset-Class Portfolio (Commencement of Operations 7/29/94)#, ##
1996 $11.34 $0.46 $ 1.05 $ 1.51 ($0.42) ($0.15)
1995 9.97 0.44 1.33 1.77 (0.40) --
1994 10.00 0.07 (0.10) (0.03) -- --
<CAPTION>
(RESTUBBED TABLE)
Net Asset Net Assets- Ratio of Ratio of
Value- End of Expenses Net Income Portfolio
Other Total End of Total Period to Average to Average Turnover
Distributions Distributions Period Return** (thousands) Net Assets Net Assets Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Portfolio (Commencement of Operations 12/31/92)##
1996 -- ($0.93) $13.81 13.47% $300,868 0.57% 3.85% 110%
1995 -- (0.54) 13.06 21.37 334,630 0.58 4.55 95
1994 -- (0.58) 11.28 0.19 309,596 0.58 4.06 75
1993 -- (0.13) 11.84 8.31 291,762 0.58* 3.99* 62
Multi-Asset-Class Portfolio (Commencement of Operations 7/29/94)#, ##
1996 -- ($0.57) $12.28 13.75% $129,558 0.58%++ 3.82% 122%
1995 -- (0.40) 11.34 18.28 96,839 0.58++ 4.56 112
1994 -- -- 9.97 (0.30) 51,877 0.58*++ 4.39* 20
</TABLE>
* Annualized
** Total return figures for partial years are not annualized.
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and reimburse certain expenses to the extent necessary, if
any, to keep the total annual operating expenses for the Multi-Asset-Class
Portfolio from exceeding 0.58%. Voluntarily waived fees for 1994, 1995 and
1996 were 0.26%*, 0.14% and 0.08%, respectively.
# Formerly known as Global Balanced Portfolio (through December 23, 1994).
## For the years ended September 30, 1995 and 1996, the Ratio of Expenses to
Average Net Assets for the Balanced Portfolio excludes the effect of expense
offsets. If expense offsets were included, the Ratio of Expenses to Average
Net Assets would be 0.57% and 0.57%, respectively. For the years ended
September 30, 1995 and September 30, 1996, the Ratio of Expenses to Average
Net Assets for the Multi-Asset-Class Portfolio excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would not significantly differ.
### For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate paid for trades on which commissions
were charged.
- --------------------------------------------------------------------------------
MAS Funds - 14 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
YIELD AND TOTAL RETURN:
From time to time each portfolio of the Fund advertises its yield and total
return. Both yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The average annual total
return reflects changes in the price of a portfolio's shares and assumes that
any income dividends and/or capital gain distributions made by the portfolio
during the period were reinvested in additional shares of the portfolio.
Figures will be given for one-, five- and ten-year periods ending with the most
recent calendar quarter-end (if applicable), and may be given for other periods
as well (such as from commencement of the portfolio's operations). When
considering average total return figures for periods longer than one year, it
is important to note that a portfolio's annual total return for any one year in
the period might have been greater or less than the average for the entire
period.
In addition to average annual total return, a portfolio may also quote an
aggregate total return for various periods representing the cumulative change
in value of an investment in a portfolio for a specific period. Aggregate total
returns may be shown by means of schedules, charts or graphs and may include
subtotals of the various components of total return (e.g., income dividends or
returns for specific types of securities such as industry or country types).
The yield of a portfolio (other than the Cash Reserves Portfolio) is computed
by dividing the net investment income per share (using the average number of
shares entitled to receive dividends) earned during the 30-day period stated in
the advertisement by the closing price per share on the last day of the period.
For the purpose of determining net investment income, the calculation includes
as expenses of the portfolio all recurring fees and any non recurring charges
for the period stated. The yield formula provides for semiannual compounding,
which assumes that net investment income is earned and reinvested at a constant
rate and annualized at the end of a six-month period. Methods used to calculate
advertised yields are standardized for all stock and bond mutual funds.
However, these methods differ from the accounting methods used by the portfolio
to maintain its books and records, therefore the advertised 30-day yield may
not reflect the income paid to your own account or the yield reported in the
portfolio's reports to shareholders. A portfolio may also advertise or quote a
yield which is gross of expenses.
The Municipal and PA Municipal Portfolios may also advertise or quote
tax-equivalent yields and after-tax total returns. A tax-equivalent yield shows
the level of taxable yield needed to produce an after-tax equivalent to the
portfolio's tax-free yield. This is done by increasing the portfolio's yield
(computed as above) by the amount necessary to reflect the payment of Federal
income tax (and Pennsylvania income tax, in the case of the PA Municipal
Portfolio) at a tax rate stated in the advertisement or quote. An after-tax
return reflects the average annual or cumulative change in value over the
measuring period after the deduction of taxes at rates stated in the
advertisement or quote.
From time to time the Cash Reserves Portfolio may advertise or quote its yield
and effective yield. The yield of the Cash Reserves Portfolio refers to the
income generated by an investment in the portfolio over a stated seven day
period. This income is then annualized. That is, the amount of income generated
by the investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The effective
yield is calculated similarly, but the income earned over the seven day period
by an investment in the portfolio is assumed to be reinvested when the return
is annualized. The "effective yield" will be higher than the yield because of
the compounding effect of this assumed reinvestment.
The performance of a portfolio may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, returns of other investment advisers
and mutual funds, and various indices as further described in the Statement of
Additional Information.
The performance of Institutional Class Shares, Investment Class Shares and
Adviser Class Shares differ because of any class specific expenses paid by each
class and the shareholder servicing fees charged to Investment Class Shares and
distribution fees charged to Adviser Class Shares.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 15
<PAGE>
The Annual Report to Shareholders of the Fund for the Fund's most recent fiscal
year-end contains additional performance information that includes comparisons
with appropriate indices. The Annual Report is available without charge upon
request by writing to the Fund or calling the Client Services Group at the
telephone number shown on the front cover of this Prospectus.
GENERAL INFORMATION:
The following information relates to each portfolio of the Fund and should be
read in conjunction with the specific information about each portfolio.
Objectives: Each portfolio seeks to achieve its investment objective relative
to the universe of securities in which it is authorized to invest and,
accordingly, the total return or current income achieved by a portfolio may not
be as great as that achieved by another portfolio that can invest in a broader
range of securities. Fixed-Income Portfolios will seek to produce total return
by actively trading portfolio securities. The objective of each portfolio is
fundamental and may only be changed with approval of holders of a majority of
the shares of each portfolio. The achievement of any portfolio's objective
cannot be assured.
Suitability: The Fund's portfolios are designed for long-term investors who can
accept the risks entailed in investing in the stock and bond markets, and are
not meant to provide a vehicle for playing short-term swings in the market. The
Fund's portfolios are designed principally for the investments of tax-exempt
fiduciary investors who are entrusted with the responsibility of investing
assets held for the benefit of others. Since such investors are not subject to
Federal income taxes, securities transactions for all portfolios except the
Municipal and PA Municipal Portfolios will not be influenced by the different
tax treatment of long-term capital gains, short-term capital gains, and
dividend income under the Internal Revenue Code. Investments in the Municipal
and PA Municipal Portfolios are suitable for taxable investors who would
benefit from the portfolios' tax-exempt income.
Securities Lending: Each portfolio may lend its securities to qualified
brokers, dealers, banks and other financial institutions for the purpose of
realizing additional income. Loans of securities will be collateralized by
cash, letters of credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities. In addition, a portfolio will
not loan its portfolio securities to the extent that greater than one-third of
its total assets, at fair market value, would be committed to loans at that
time.
Illiquid Securities/Restricted Securities: Each of the portfolios may invest up
to 15% of its net assets (except the Cash Reserves Portfolio, which may invest
up to 10% of its net assets) in securities that are illiquid by virtue of the
absence of a readily available market, or because of legal or contractual
restrictions on resale. This policy does not limit the acquisition of (i)
restricted securities eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933 or (ii) commercial paper
issued pursuant to Section 4(2) under the Securities Act of 1933, that are
determined to be liquid in accordance with guidelines established by the Fund's
Board of Trustees.
Turnover: The Adviser manages the portfolios generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the portfolios will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held.
With respect to the Fixed Income Portfolios and the fixed-income portion of the
Balanced, Multi-Asset-Class and Balanced Plus Portfolios, the annual turnover
rate will ordinarily exceed 100% due to changes in portfolio duration, yield
curve strategy or commitments to forward delivery mortgage-backed securities.
The Balanced Plus Portfolio's annual turnover rate is not expected to exceed
100% with respect to Equity Secur-
ities. The annual turnover rate with respect to the fixed income portion of the
portfolio will ordinarily exceed 100% due to changes in portfolio duration,
yield curve strategy or commitments to forward delivery mortgage-backed
securities.
- --------------------------------------------------------------------------------
MAS Funds - 16 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Portfolio turnover rates for certain portfolios are as follows: Mid Cap Growth
- - 141%, Mid Cap Value - 377%, Small Cap Value - 145%, Domestic Fixed Income -
168%, Fixed Income - 162%, Fixed Income II - 165%, Global Fixed Income - 133%,
High Yield - 115%, Intermediate Duration - 251%, International Fixed Income -
124%, Limited Duration - 174%, Mortgage-Backed Securities - 116%, Special
Purpose Fixed Income - 151%, Balanced - 110% and Multi-Asset-Class - 122%.
High rates of portfolio turnover necessarily result in correspondingly heavier
brokerage and portfolio trading costs which are paid by a portfolio. Trading in
Fixed-Income Securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. In addition to
portfolio trading costs, higher rates of portfolio turnover may result in the
realization of capital gains. To the extent net short-term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes.
Cash Equivalents/Temporary Defensive Investing: Although each portfolio intends
to remain substantially fully invested, a small percentage of a portfolio's
assets are generally held in the form of Cash Equivalents in order to meet
redemption requests and otherwise manage the daily affairs of each portfolio.
In addition, any portfolio may, when the Adviser deems that market conditions
are such that a temporary defensive approach is desirable, invest in cash
equivalents or the Fixed-Income Securities listed for that portfolio without
limit. In addition, the Adviser may, for temporary defensive purposes, increase
or decrease the average weighted maturity or duration of any Fixed-Income
portfolio without regard to that portfolio's usual average weighted maturity.
Concentration: Concentration is defined as investment of 25% or more of a
portfolio's total assets in the securities of issuers operating in any one
industry. Except as provided in a portfolio's specific investment policies, or
as detailed in Investment Limitations, a portfolio will not concentrate
investments in any one industry.
Investment Limitations: Each portfolio is subject to certain limitations
designed to reduce its exposure to specific situations. Some of these
limitations are:
(a) with respect to 75% of its assets, a portfolio will not purchase securities
of any issuer if, as a result, more than 5% of the portfolio's total assets
taken at market value would be invested in the securities of any single issuer
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. This limitation is
not applicable to the Global Fixed Income and International Fixed Income
Portfolios. However, these portfolios will comply with the diversification
requirements imposed by Sub-Chapter M of the Internal Revenue Code;
(b) with respect to 75% of its assets, a portfolio will not purchase a security
if, as a result, the portfolio would hold more than 10% of the outstanding
voting securities of any issuer. This limitation is not applicable to the
Global Fixed Income and International Fixed Income Portfolios. However, these
portfolios will comply with the diversification requirements imposed by
Sub-Chapter M of the Internal Revenue Code;
(c) a portfolio will not acquire any securities of companies within one
industry, if, as a result of such acquisition, more than 25% of the value of
the portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that (1) there shall be no limitation
on the purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; (2) the Cash Reserves Portfolio may invest
without limitation in certificates of deposit or bankers' acceptances of
domestic banks; (3) utility companies will be divided according to their
services, for example, gas, gas transmission, electric and telephone will each
be considered a separate industry; (4) financial service companies will be
classified according to the end users of their services, for example,
automobile finance, bank finance and diversified finance will each be
considered a separate industry; (5) asset-backed securities will be classified
according to the underlying assets securing such securities, and (6) the
Mortgage-Backed Securities Portfolio will concentrate in mortgage-backed
securities.
(d) a portfolio will not make loans except (i) by purchasing debt securities in
accordance with its investment objectives and policies, or entering into
Repurchase Agreements, (ii) by lending its portfolio securities and (iii) by
lending portfolio assets to other portfolios of the Fund, so long as such loans
are not inconsistent with the Invest-
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 17
<PAGE>
ment Company Act of 1940, as amended or the Rules and Regulations, or
interpretations or orders of the Securities and Exchange Commission thereunder;
(e) a portfolio will not borrow money, except (i) as a temporary measure for
extraordinary or emergency purposes or (ii) in connection with reverse
repurchase agreements provided that (i) and (ii) in combination do not exceed
33 1/3% of the portfolio's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings);
(f) Each portfolio may pledge, mortgage or hypothecate assets in an amount up
to 50% of its total assets, provided that each portfolio may also segregate
assets without limit in order to comply with the requirements of Section 18(f)
of the Investment Company Act of 1940, as amended, and applicable
interpretations thereof published from time to time by the Securities and
Exchange Commission and its staff.
(g) a portfolio will not invest its assets in securities of any Investment
Company, except as permitted by the 1940 Act or the rules, regulations,
interpretations or orders of the SEC and its staff thereunder.
Limitations (a), (b), (c), (d) and (e), and certain other limitations described
in the Statement of Additional Information are fundamental and may be changed
only with the approval of the holders of a majority of the shares of each
portfolio. The other investment limitations described here and in the Statement
of Additional Information are not fundamental policies meaning that the Board
of Trustees may change them without shareholder approval. If a percentage
limitation on investment or utilization of assets as set forth above is adhered
to at the time an investment is made, a later change in percentage resulting
from changes in the value or total cost of the portfolio's assets will not be
considered a violation of the restriction, and the sale of securities will not
be required.
- --------------------------------------------------------------------------------
MAS Funds - 18 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Equity Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing primarily in dividend-paying common stocks of
companies which are deemed by the Adviser to demonstrate
long-term earnings growth that is greater than the economy in
general and greater than the expected rate of inflation.
Approach: The Adviser evaluates both short-term and long-term economic
trends and their impact on corporate profits and the relative
value offered by different sectors and securities within the
equity markets. Individual securities are selected based on
fundamental business and financial factors (such as earnings
growth, financial position, price volatility, and dividend
payment records) and the measurement of those factors relative
to the current market price of the security.
Policies: Generally at least 65% invested in Equity Securities
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally greater than $1 billion
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategies: Core Equity Investing
- --------------------------------------------------------------------------------
Growth Portfolio
Objective: To achieve long-term capital growth by investing primarily in
common stocks of large size companies which the Adviser
believes offer long-term growth potential.
Approach: The Adviser selects common stocks which meet certain criteria
which the Adviser believes are related to the stability and
growth of the fundamental characteristics of the company.
Policies: Generally at least 65% invested in Equity Securities of
companies offering long-term growth
potential
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally greater than $1 billion
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Growth Stock Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 19
<PAGE>
International Equity Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in common stocks of companies based outside of the
United States.
Approach: The Adviser evaluates both short-term and long-term
international economic trends and the relative attractiveness
of non-U.S. equity markets and individual securities.
Policies: Generally at least 65% invested in Foreign Equities of issuers
in at least 3 countries other than the U.S.
Derivatives may be used to pursue portfolio strategy
<TABLE>
<S> <C> <C> <C> <C>
Allowable ADRs Eastern European Issuers Investment Companies Structured Notes
Investments: Agencies Emerging Markets Issuers Investment Funds Swaps
Brady Bonds Foreign Bonds Loan Participations U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
Corporates Futures & Options Structured Investments
</TABLE>
Comparative Index: MSCI World Ex-U.S. Index
Strategies: International Equity Investing
Emerging Markets Investing
Foreign Investing
- --------------------------------------------------------------------------------
Mid Cap Growth Portfolio
Objective: To achieve long-term capital growth by investing primarily in
common stocks of smaller and medium size companies which are
deemed by the Adviser to offer long-term growth potential. Due
to its emphasis on long-term capital growth, dividend income
will be lower than for the Equity and Value Portfolios.
Approach: The Adviser uses a four-part process combining quantitative,
fundamental, and valuation analysis with a strict sales
discipline. Stocks that pass an initial screen based on
estimate revisions undergo detailed fundamental research.
Valuation analysis is used to eliminate the most overvalued
securities. Holdings are sold when their estimate-revision
scores fall to unacceptable levels, when fundamental research
uncovers unfavorable trends, or when their valuations exceed
the level that the Adviser believes is reasonable given their
growth prospects.
Policies: Generally at least 65% invested in Equity Securities of mid-cap
companies offering long-term growth potential
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally $300 million to $3 billion
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Growth Stock Investing
- --------------------------------------------------------------------------------
MAS Funds - 20 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Mid Cap Value Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in common stocks with equity capitalizations in the
range of the companies represented in the S&P MidCap 400 Index
which are deemed by the Adviser to be relatively undervalued
based on certain proprietary measures of value. The Portfolio
will typically exhibit a lower price/earnings value ratio than
the S&P MidCap 400 Index.
Approach: The Adviser selects common stocks which are deemed to be
undervalued at the time of purchase, based on proprietary
measures of value. The Portfolio will be structured taking into
account the economic sector weights of the S&P MidCap 400
Index, with sector weights normally being within 5% of the
sector weights of the Index.
Policies: Generally at least 65% invested in Equity Securities of mid-cap
companies deemed to be undervalued
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally matching the S&P MidCap 400 Index (currently
$500 million to $6 billion)
<TABLE>
<S> <C> <C> <C> <C>
Allowable ADRs Corporates Futures & Options Swaps
Investments: Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Equities Preferred Stock Warrants
Common Stock Foreign Currency Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: Value Stock Investing
- --------------------------------------------------------------------------------
Small Cap Value Portfolio (not currently being offered to new investors)
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in common stocks with equity capitalizations in the
range of the companies represented in the Russell 2000 Small
Stock Index which are deemed by the Adviser to be relatively
undervalued based on certain proprietary measures of value. The
Portfolio will typically exhibit lower price/earnings and
price/book value ratios than the Russell 2000. Dividend income
will typically be lower than for the Equity and Value
Portfolios.
Approach: The Adviser selects common stocks which are deemed to be
undervalued at the time of purchase, based on proprietary
measures of value. The Portfolio will be structured taking into
account the economic sector weights of the Russell 2000 Index,
with the portfolio's sector weights normally being within 5% of
the sector weights for the Index.
Policies: Generally at least 65% invested in Equity Securities of
small-cap companies deemed to be undervalued
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally matching the Russell 2000 size distribution
(currently $50 million to $1 billion)
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: Russell 2000 Index
Strategies: Value Stock Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 21
<PAGE>
Value Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in common stocks with equity capitalizations usually
greater than $300 million which are deemed by the Adviser to be
relatively undervalued, based on various measures such as
price/earnings ratios and price/book ratios. While capital
return will be emphasized somewhat more than income return, the
Portfolio's total return will consist of both capital and
income returns. It is expected that income return will be
higher than that of the Equity Portfolio because stocks which
are deemed to be undervalued in the marketplace have, under
most market conditions, provided higher dividend income returns
than stocks which are deemed to have long-term earnings growth
potential which normally sell at higher price/earnings ratios.
Approach: The Adviser selects common stocks which are deemed to be
undervalued relative to the stock market in general as measured
by the Standard & Poor's 500 Index, based on the value measures
such as price/earnings ratios and price/book ratios, as well as
fundamental research.
Policies: Generally at least 65% invested in Equity Securities deemed to
be undervalued
Up to 5% invested in Foreign Equities (excluding ADRs)
Derivatives may be used to pursue portfolio strategy
Capitalization Range: Generally greater than $300 million
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Corporates Futures & Options Swaps
Agencies Foreign Bonds Investment Companies U.S. Governments
Cash Equivalents Foreign Currency Preferred Stock Warrants
Common Stock Foreign Equities Repurchase Agreements When Issued
Convertibles Forwards Rights Zero Coupons
</TABLE>
Comparative Index: S&P 500 Index
Strategy: Value Stock Investing
- --------------------------------------------------------------------------------
Cash Reserves Portfolio
Objective: To realize maximum current income, consistent with the
preservation of capital and liquidity, by investing in money
market instruments and other short-term securities having
expected maturities of thirteen months or less. The Portfolio's
average weighted maturity will not exceed 90 days. The
securities in which the Portfolio will invest may not yield as
high a level of current income as securities of lower quality
or longer maturities which generally have less liquidity,
greater market risk and more price fluctuation. The Portfolio
is designed to provide maximum principal stability for
investors seeking to invest funds for the short term, or, for
investors seeking to combine a long-term investment program in
other portfolios of the Fund with an investment in money market
instruments. The Portfolio seeks to maintain, but there can be
no assurance that it will be able to maintain, a constant net
asset value of $1.00 per share.
Approach: The Adviser selects a diversified portfolio of money market
securities of government and corporate issuers, any of which
may be variable or floating rate, and which have remaining
maturities of thirteen months or less from the date of
purchase. For the purpose of determining remaining maturity on
Floaters, demand features and interest reset dates will be
taken into consideration.
Policies: The Portfolio seeks to maintain, but there can be no assurance
that it will be able to maintain, a constant net asset value of
$1.00 per share.
Quality Specifications: 100% of Commercial Paper Rated in Top Tier
Maturity and Duration: Dollar weighted average maturity less than 90 days
Individual maturities 13 months or less
<TABLE>
<S> <C> <C> <C>
Allowable Investments: Agencies Corporates Repurchase Agreements
Asset-Backeds Floaters U.S. Governments
Cash Equivalents Investment Companies Zero Coupons
</TABLE>
Comparative Index: Lipper Money Market Index
Strategy: Money Market Investing
- --------------------------------------------------------------------------------
MAS Funds - 22 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Domestic Fixed Income Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government
securities and other investment grade fixed-income securities
of domestic issuers.
Approach: The Adviser actively manages the maturity and duration
structure of the portfolio in anticipation of long-term trends
in interest rates and inflation. Investments are diversified
among a wide variety of U.S. Fixed-Income Securities in all
market sectors.
Policies: Generally at least 65% invested in Fixed-Income Securities
100% invested in domestic issuers
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% of securities rated A or higher
May invest up to 20% in securities rated BBB (or its
equivalent)
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Corporates Mortgage Securities Structured Notes
Asset-Backeds Floaters Municipals Swaps
Cash Equivalents Futures & Options Preferred Stock U.S. Governments
CMOs Inverse Floaters Repurchase Agreements When Issued
Convertibles Investment Companies SMBS Zero Coupons
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 23
<PAGE>
Fixed Income Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government
securities, corporate bonds (including bonds rated below
investment grade, commonly referred to as junk bonds), foreign
fixed-income securities and mortgage-backed securities of
domestic issuers and other fixed-income securities. The
Portfolio's average weighted maturity will ordinarily be greater
than five years.
Approach: The Adviser actively manages the maturity and duration
structure of the Portfolio in anticipation of long-term trends
in interest rates and inflation. Investments are diversified
among a wide variety of Fixed-Income Securities in all market
sectors.
Policies: Generally at least 65% invested in Fixed-Income Securities
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% Investment Grade Securities
Up to 20% High Yield
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Fixed Income Investing
Foreign Investing
- --------------------------------------------------------------------------------
MAS Funds - 24 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Fixed Income Portfolio II
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government
securities and other investment grade fixed-income securities.
Approach: The Adviser actively manages the maturity and duration
structure of the portfolio in anticipation of long-term trends
in interest rates and inflation. Investments are diversified
among a wide variety of Fixed-Income Securities in all market
sectors.
Policies: Generally at least 65% invested in Fixed-Income Securities
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 100% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Corporates Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals U.S. Governments
CMOs Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 25
<PAGE>
Global Fixed Income Portfolio - (a non-diversified portfolio)
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in high grade fixed-income securities of United
States and foreign issuers. Total return is the combination of
income and changes in value. The Portfolio's average weighted
maturity will ordinarily be greater than five years.
Approach: The Adviser manages the duration, country, and currency
exposure of the Portfolio by combining fundamental research on
relative values with analyses of economic, interest-rate, and
exchange-rate trends. MAS will invest in mortgage and corporate
bonds when it believes they offer the most value, although most
foreign currency denominated investments are in government and
supranational securities.
Policies: Generally at least 65% invested in Fixed-Income Securities of
issuers in at least 3 countries, one of which may be the U.S.
Derivatives may be used to represent country investments, and
otherwise pursue portfolio strategy
Quality Specifications: 95% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers Inverse Floaters SMBS
Investments: Asset-Backeds Emerging Markets Issuers Investment Companies Structured Notes
Brady Bonds Floaters Mortgage Securities Swaps
Cash Equivalents Foreign Bonds Municipals U.S. Governments
CMOs Foreign Currency Preferred Stock When Issued
Convertibles Forwards Repurchase Agreements Zero Coupons
Corporates Futures & Options
</TABLE>
Comparative Index: Salomon World Government Bond Index
Strategies: Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Foreign Investing
Non-Diversified Status
Emerging Markets Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 26 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
High Yield Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in high yielding corporate fixed-income securities
(including bonds rated below investment grade, commonly referred
to as junk bonds). The Portfolio may also invest in U.S.
Government securities, mortgage-backed securities, investment
grade corporate bonds and in short- term fixed-income
securities, such as certificates of deposit, treasury bills, and
commercial paper. The Portfolio expects to achieve its objective
by earning a high rate of current income, although the Portfolio
may seek capital growth opportunities when consistent with its
objective. The Portfolio's average weighted maturity will
ordinarily be greater than five years.
Approach: The Adviser uses equity and fixed-income valuation techniques
and analyses of economic and industry trends to determine
portfolio structure. Individual securities are selected, and
monitored, by fixed-income portfolio managers who specialize in
corporate bonds and use in-depth financial analysis to uncover
opportunities in undervalued issues.
Policies: Generally at least 65% invested in High Yield securities
(including bonds rated below investment grade, commonly
referred to as junk bonds)
Derivatives may be used to pursue portfolio strategy
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Agencies Emerging Markets High Yield Repurchase Agreements
Investments: Asset-Backeds Issuers Inverse Floaters SMBS
Brady Bonds Floaters Investment Companies Structured Notes
Cash Equivalents Foreign Bonds Loan Participations Swaps
CMOs Foreign Currency Mortgage Securities U.S. Governments
Convertibles Foreign Equities Municipals When Issued
Corporates Forwards Preferred Stock Zero Coupons
Eastern European Issuers Futures & Options
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: High Yield Investing
Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
Emerging Markets Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 27
<PAGE>
Intermediate Duration Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government
securities and investment grade corporate, foreign and other
investment grade fixed-income securities. The Portfolio will
maintain an average duration of between two and five years.
Approach: The Adviser constructs a portfolio with a duration between two
and five years by actively managing the maturity and duration
structure of the portfolio in anticipation of long-term trends
in interest rates and inflation. Investments are diversified
among a wide variety of investment grade Fixed-Income
Securities in all market sectors.
Policies: Generally at least 65% invested in Fixed-Income Securities
Derivatives may be used to pursue portfolio strategy
May invest greater than 50% in Mortgage Securities
Quality Specifications: 100% Investment Grade Securities
Maturity and Duration: Average duration between 2 and 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Corporates Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals U.S. Governments
CMOs Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
</TABLE>
Comparative Index: Lehman Brothers Intermediate Government/Corporate Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
Foreign Fixed Income Investing
Foreign Investing
- --------------------------------------------------------------------------------
MAS Funds - 28 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
International Fixed Income Portfolio - (a non-diversified portfolio)
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing primarily in high-grade fixed-income securities of
foreign issuers.
Approach: The Adviser manages the duration, country, and currency
exposure of the portfolio by combining fundamental research on
relative values with analyses of economic, interest-rate, and
exchange-rate trends. MAS will invest in mortgage and corporate
bonds when it believes they offer the most value, although most
foreign currency denominated investments are in government and
supranational securities.
Policies: Generally at least 80% invested in Fixed-Income Securities of
issuers in at least 3 countries other than the U.S.
Derivatives may be used to represent country investments, and
otherwise pursue portfolio strategy
Quality Specifications: 95% Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers Inverse Floaters SMBS
Investments: Asset-Backeds Emerging Markets Issuers Investment Companies Structured Notes
Brady Bonds Floaters Mortgage Securities Swaps
Cash Equivalents Foreign Bonds Municipals U.S. Governments
CMOs Foreign Currency Preferred Stock When Issued
Convertibles Forwards Repurchase Agreements Zero Coupons
Corporates Futures & Options
</TABLE>
Comparative Index: Salomon World Government Bond Index Except U.S.
Strategies: Foreign Fixed Income Investing
Maturity and Duration Management
Value Investing
Foreign Investing
Non-Diversified Status
Emerging Markets Investing
Mortgage Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 29
<PAGE>
Limited Duration Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government
securities, investment-grade corporate bonds and other
fixed-income securities. The portfolio will maintain an average
duration of between one and three years. Duration is a measure
of the life of the portfolio's debt securities on a
present-value basis and is indicative of a security's price
volatility relative to interest rate changes.
Approach: The Adviser manages the duration of the overall portfolio as a
more effective way to control interest-rate risk than limiting
the maturity of individual securities within the portfolio. In
this way investors can benefit from opportunities across the
entire yield curve as well as in various market sectors, and at
the same time limit the volatility of investment returns. MAS
establishes the duration target through the use of its top-down
view of the economy and analysis of the current level of
interest rates and the shape of the yield curve. MAS then
strives to purchase the most attractively priced portfolio that
meets our duration and investment objectives. When purchasing
securities other than U.S. Governments, MAS evaluates credit,
liquidity, and option risk. When MAS believes the portfolio is
compensated for these risks, it includes agency, mortgage, and
corporate securities which meet the Portfolio's quality
specifications.
Policies: Generally at least 65% invested in Fixed-Income Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 100% Investment Grade Securities
Maturity and Duration: Average duration between 1 and 3 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Agencies CMOs Futures & Options Swaps
Investments: Asset-Backeds Convertibles Investment Companies U.S. Governments
Brady Bonds Corporates Mortgage Securities When Issued
Cash Equivalents Floaters Repurchase Agreements Zero Coupons
Structured Notes
</TABLE>
Comparative Index: Salomon 1-3 Year Index
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 30 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Mortgage-Backed Securities Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing primarily (at least 65% of its assets under normal
circumstances) in mortgage-backed securities. In addition, the
portfolio may also invest in U.S. government securities and in
short-term fixed-income securities such as certificates of
deposit, treasury bills, and commercial paper. The portfolio's
average weighted maturity will ordinarily be greater than seven
years.
Approach: The Adviser sets three portfolio targets: (1) interest-rate
sensitivity; (2) yield-curve sensitivity; and (3) prepayment
sensitivity. The Adviser increases the sensitivity of the
portfolio to changes in interest rates when bonds offer greater
value on the basis of inflation-adjusted interest rates.
Similarly, the Adviser increases yield-curve sensitivity when
long-maturity interest rates offer exceptional value relative
to short-maturity interest rates. Finally, the Adviser
increases prepayment exposure when mortgage yields, adjusted
for probable prepayments, indicate unusual value in
mortgage-backed securities.
Policies: Generally at least 65% invested in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: Securities not guaranteed by the U.S. Government or a
private organization will be rated Investment Grade Securities
Maturity and Duration: Average weighted maturity generally greater than 7 years
Duration generally between 2 and 7 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Futures & Options Municipals Swaps
Asset-Backeds Inverse Floaters Repurchase Agreements U.S. Governments
Cash Equivalents Investment Companies SMBS When Issued
CMOs Mortgage Securities Structured Notes Zero Coupons
Floaters
</TABLE>
Comparative Index: Lehman Mortgage Index
Strategies: Mortgage Investing
Maturity and Duration Management
Value Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 31
<PAGE>
Municipal Portfolio
Objective: To realize above-average total return over a market cycle of
three to five years, consistent with the conservation of
capital and the realization of current income which is exempt
from federal income tax, by investing in a diversified
portfolio of fixed-income securities.
Approach: The Adviser varies portfolio structure--the average duration
and maturity and the amount of the portfolio invested in
various types of bonds--according to its outlook for interest
rates and its analysis of the risks and rewards offered by
different classes of bonds. The portfolio will invest in
taxable bonds only in cases where MAS believes they improve the
risk/reward profile of the portfolio on an after-
tax basis.
Policies: Generally at least 80% invested in Municipals
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% Investment Grade Securities
Up to 20% High Yield
Maturity and Duration: Average weighted maturity generally between 5 and 10
years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Agencies Eastern European Issuers High Yield SMBS
Investments: Asset-Backeds Emerging Markets Issuers Inverse Floaters Structured Notes
Brady Bonds Floaters Investment Companies Swaps
Cash Equivalents Foreign Bonds Mortgage Securities Taxable Investments
CMOs Foreign Currency Municipals U.S. Governments
Convertibles Forwards Preferred Stock When Issued
Corporates Futures & Options Repurchase Agreements Zero Coupons
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
50% Lehman 5-Year Municipal Bond Index
50% Lehman 10-Year Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 32 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
PA Municipal Portfolio
Objective: To realize above-average total return over a market cycle of
three to five years, consistent with the conservation of
capital and the realization of current income which is exempt
from federal income tax and Pennsylvania personal income tax by
investing primarily in a diversified portfolio of fixed-income
securities.
Approach: The Adviser varies portfolio structure--the average duration
and maturity and the amount of the portfolio invested in
various types of bonds--according to its outlook for interest
rates and its analysis of the risks and rewards offered by
different classes of bonds. The portfolio will invest in
federally or Pennsylvania State taxable bonds only in cases
where MAS believes they improve the risk/reward profile of the
portfolio on an after-tax basis for Pennsylvania residents.
Policies: Generally at least 80% invested in Municipal Securities
Generally at least 65% invested in PA Municipal Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: 80% Investment Grade Securities
Up to 20% High Yield
Maturity and Duration: Average weighted maturity generally between 5 and 10
years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Emerging Markets Issuers Inverse Floaters SMBS
Asset-Backeds Floaters Investment Companies Structured Notes
Brady Bonds Foreign Bonds Mortgage Securities Swaps
Cash Equivalents Foreign Currency Municipals Taxable Investments
CMOs Forwards PA Municipals U.S. Governments
Convertibles Futures & Options Preferred Stock When Issued
Corporates High Yield Repurchase Agreements Zero Coupons
Eastern European Issuers
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
50% Lehman 5-Year Municipal Bond Index
50% Lehman 10-Year Municipal Bond Index
Strategies: Municipals Management
Maturity and Duration Management
Value Investing
High Yield Investing
Mortgage Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 33
<PAGE>
Special Purpose Fixed Income Portfolio
Objective: To achieve above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Government
securities, corporate bonds (including bonds rated below
investment grade, commonly referred to as junk bonds), foreign
fixed-income securities and mortgage-backed securities and
other fixed-income securities. The portfolio is structured to
complement an investment in one or more of the Fund's equity
portfolios for investors seeking a balanced investment.
Approach: The Adviser actively manages the maturity and duration
structure of the portfolio in anticipation of long-term trends
in interest rates and inflation. Investments are diversified
among a wide variety of Fixed-Income Securities in all market
sectors. Both duration/maturity strategy and sector allocation
are determined based on the presumption that investors are
combining an investment in the portfolio with an equity
investment.
Policies: Generally at least 65% invested in Fixed-Income Securities
May invest greater than 50% in Mortgage Securities
Derivatives may be used to pursue portfolio strategy
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Loan Participations Structured Notes
Brady Bonds Foreign Currency Mortgage Securities Swaps
Cash Equivalents Forwards Municipals U.S. Governments
CMOs Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates Inverse Floaters
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Fixed Income Investing
Foreign Investing
- --------------------------------------------------------------------------------
MAS Funds - 34 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Balanced Portfolio
Objective: To achieve above average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of common stocks and
fixed-income securities. When the Adviser judges the relative
outlook for the equity and fixed-income markets to be neutral
the portfolio will be invested 60% in common stocks and 40% in
fixed-income securities. The asset mix may be changed, however,
with common stocks ordinarily representing between 45% and 75%
of the total investment. The average weighted maturity of the
fixed-income portion of the portfolio will ordinarily be
greater than five years.
Approach: The Adviser determines investment strategies for the equity and
fixed-income portions of the portfolio separately and then
determines the mix of those strategies expected to maximize the
return available from both the stock and bond markets.
Strategic judgments on the equity/fixed-income asset mix are
based on valuation disciplines and tools for analysis developed
by the Adviser over its twenty-five year history of managing
balanced accounts.
Policies: Generally 45% to 75% invested in Equity Securities
Up to 25% invested in Foreign Bonds and/or Foreign Equities
(excluding ADRs)
Up to 10% invested in Brady Bonds
At least 25% invested in senior Fixed-Income Securities
Derivatives may be used to pursue portfolio strategy
Equity Capitalization: Generally greater than $1 billion
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters Rights
Agencies Floaters Investment Companies SMBS
Asset-Backeds Foreign Bonds Investment Funds Structured Notes
Brady Bonds Foreign Currency Loan Participations Swaps
Cash Equivalents Foreign Equities Mortgage Securities U.S. Governments
CMOs Forwards Municipals Warrants
Common Stock Futures & Options Preferred Stock When Issued
Convertibles High Yield Repurchase Agreements Zero Coupons
Corporates
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
60% S&P 500 Index
40% Salomon Broad Investment Grade Index
Strategies: Asset Allocation Management
Core Equity Investing
Fixed Income Management and Asset Allocation
Maturity and Duration Management
Value Investing
Mortgage Investing
High Yield Investing
Foreign Fixed Income Investing
Foreign Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 35
<PAGE>
Multi-Asset-Class Portfolio
Objective: To achieve above average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of common stocks and
fixed-income securities of United States and Foreign issuers.
Approach: The Adviser determines the mix of investments in domestic and
foreign equity and fixed-income and high yield securities
expected to maximize available total return. Strategic
judgments on the asset mix are based on valuation disciplines
and tools for analysis which have been developed by the Adviser
to compare the relative potential returns and risks of global
stock and bond markets.
Policies: Generally at least 65% invested in issuers located in at least
3 countries, including the U.S.
Derivatives may be used to pursue portfolio strategy
Domestic Equity
Capitalization: Generally greater than $1 billion
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters SMBS
Agencies Emerging Markets Issuers Investment Companies Structured Investments
Asset-Backeds Floaters Investment Funds Structured Notes
Brady Bonds Foreign Bonds Loan Participations Swaps
Cash Equivalent Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stock Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
Corporates High Yield Rights
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
50% S&P 500 Index
14% EAFE-GDP Weighted Index
24% Salomon Broad Investment Grade Index
6% Salomon World Government Bond Index Ex U.S.
6% Salomon High Yield Market Index
Strategies: Asset Allocation Management
Fixed Income Management and Asset Allocation
Maturity and Duration Management
Value Investing
Foreign Fixed Income Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Foreign Investing
Mortgage Investing
- --------------------------------------------------------------------------------
MAS Funds - 36 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Balanced Plus Portfolio
Objective: To achieve above average total return over a market cycle of
three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of common stocks of
domestic and foreign issuers and fixed-income securities.
Approach: The Adviser determines the mix of investments in domestic and
foreign equity and fixed-income securities expected to maximize
available total return. Strategic judgments on the asset mix
are based on valuation disciplines and tools for analysis which
have been developed by the Adviser to compare the relative
potential returns and risks of global stock and bond markets.
When the Adviser believes it to be in the best interests of the
fund, opportunistic investments in both the high yield and
international fixed-income markets will be made.
Policies: Generally at least 65% invested in issuers located in at least
3 countries, including the U.S.
Derivatives may be used to pursue portfolio strategy
At least 25% invested in senior Fixed-Income Securities
Domestic Equity
Capitalization: Generally greater than $1 billion
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5 years
<TABLE>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs Eastern European Issuers Inverse Floaters SMBS
Agencies Emerging Markets Issuers Investment Companies Structured Investments
Asset-Backeds Floaters Investment Funds Structured Notes
Brady Bonds Foreign Bonds Loan Participations Swaps
Cash Equivalent Foreign Currency Mortgage Securities U.S. Governments
CMOs Foreign Equities Municipals Warrants
Common Stock Forwards Preferred Stock When Issued
Convertibles Futures & Options Repurchase Agreements Zero Coupons
Corporates High Yield Rights
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by the
Adviser using:
54% S&P 500 Index
40% Salomon Broad Investment Grade Index
6% MSCI World Ex U.S. Index
Strategies: Asset Allocation Management
Fixed Income Management and Asset Allocation
Maturity and Duration Management
Value Investing
Foreign Fixed Income Investing
Core Equity Investing
International Equity Investing
Emerging Markets Investing
High Yield Investing
Foreign Investing
Mortgage Investing
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 37
<PAGE>
PROSPECTUS GLOSSARY
CHARACTERISTICS AND RISKS OF STRATEGIES AND INVESTMENTS
STRATEGIES
Asset Allocation Management: The Adviser's approach to asset allocation
management is to determine investment strategies for each asset class in a
portfolio separately, and then determine the mix of those strategies expected
to maximize the return available from each market. Strategic judgments on the
mix among asset classes are based on valuation disciplines and tools for
analysis which have been developed over the Adviser's twenty-five year history
of managing balanced accounts.
Tactical asset-allocation shifts are based on comparisons of prospective risks,
returns, and the likely risk-reducing benefits derived from combining different
asset classes into a single portfolio. Experienced teams of equity, fixed-
income, and international investment professionals manage the investments in
each asset class.
Core Equity Investing: The Adviser's "core" or primary equity strategy
emphasizes common stocks of large companies, with targeted investments in small
company stocks that promise special growth opportunities. Depending on MAS's
outlook for the economy and different market sectors, the mix between value
stocks and growth stocks will change.
Emerging Markets Investing: The Adviser's approach to emerging markets
investing is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Currently, investing in many emerging markets is either not feasible or very
costly, or may involve unacceptable political risks. Other special risks
include the possible increased likelihood of expropriation or the return to
power of a communist regime which would institute policies to expropriate,
nationalize or otherwise confiscate investments. A portfolio will focus its
investments on those emerging market countries in which the Adviser believes
the potential for market appreciation outweighs these risks and the cost of
investment. Investing in emerging markets also involves an extra degree of
custodial and/or market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).
Fixed Income Management and Asset Allocation: Within the Balanced,
Multi-Asset-Class, Balanced Plus and Special Purpose Fixed Income Portfolios,
the Adviser selects fixed-income securities not only on the basis of judgments
regarding Maturity and Duration Management and Value Investing, but also on the
basis of the value offered by various segments of the fixed-income securities
market relative to Cash Equivalents and Equity Secur- ities. In this context,
the Adviser may find that certain segments of the fixed-income securities
market offer more or less attractive relative value when compared to Equity
Securities than when compared to other Fixed-Income Securities.
For example, in a given interest rate environment, equity securities may be
judged to be fairly valued when compared to intermediate duration fixed-income
securities, but overvalued compared to long duration fixed-income securities.
Consequently, while a portfolio investing only in fixed-income securities may
not emphasize long duration assets to the same extent, the fixed-income portion
of a balanced investment may invest a percentage of its assets in long duration
bonds on the basis of their valuation relative to equity securities.
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MAS Funds - 38 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Foreign Fixed Income Investing: The Adviser invests in Foreign Bonds and other
Fixed-Income Securities denominated in foreign currencies, where, in the
opinion of the Adviser, the combination of current yield and currency value
offer attractive expected returns. When the total return opportunities in a
foreign bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, currency Futures &
Options, Forwards and Swaps may be used to hedge the currency risk.
Foreign Investing: Investors should recognize that investing in Foreign Bonds
and Foreign Equities involves certain special considerations which are not
typically associated with investing in domestic securities.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to U.S. companies, there may be less publicly available information about
certain foreign securities than about U.S. securities. Foreign Bonds and
Foreign Equities may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Since Foreign Bonds and Foreign Equities may be denominated in foreign
currencies, and since a portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, a portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Although a portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of a portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a portfolio receives from the companies comprising the portfolio's
investments.
Growth Stock Investing: Seeks to invest in Common Stocks generally
characterized by higher growth rates, betas, and price/earnings ratios, and
lower yields than the stock market in general as measured by the S&P 500 Index.
High Yield Investing: Involves investing in high yield securities based on the
Adviser's analysis of economic and industry trends and individual security
characteristics. The Adviser conducts credit analysis for each security
considered for investment to evaluate its attractiveness relative to its risk.
A high level of diversification is also maintained to limit credit exposure to
individual issuers.
To the extent a portfolio invests in high yield securities it will be exposed
to a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High yield securities may be
issued as a consequence of corporate restructuring or similar events. Also,
high yield securities are often issued by smaller, less credit worthy
companies, or by highly leveraged (indebted) firms, which are generally less
able than more established or less leveraged firms to make scheduled payments
of interest and principal. The risks posed by securities issued under such
circumstances are substantial.
The market for high yield securities is still relatively new. Because of this,
a long-term track record for bond default rates does not exist. In addition,
the secondary market for high yield securities is generally less liquid than
that for investment grade corporate securities. In periods of reduced market
liquidity, high yield bond prices may become more volatile, and both the high
yield market and a portfolio may experience sudden and substantial price
declines. This lower liquidity might have an effect on a portfolio's ability to
value or dispose of such securities. Also, there
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 39
<PAGE>
may be significant disparities in the prices quoted for high yield securities
by various dealers. Under such conditions, a portfolio may find it difficult to
value its securities accurately. A portfolio may also be forced to sell
securities at a significant loss in order to meet shareholder redemptions.
These factors add to the risks associated with investing in high yield
securities.
High yield bonds may also present risks based on payment expectations. For
example, high yield bonds may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors.
Certain types of high yield bonds are non-income paying securities. For
example, zero coupon bonds pay interest only at maturity and payment-in-kind
bonds pay interest in the form of additional securities. Payment in the form of
additional securities, or interest income recognized through discount
accretion, will, however, be treated as ordinary income which will be
distributed to shareholders even though the portfolio does not receive periodic
cash flow from these investments.
The table below provides a summary of ratings assigned to all U.S. and foreign
debt holdings of those portfolios with more than 5% invested in High Yield
securities as of September 30, 1996 (not including money market instruments).
These figures are dollar-weighted averages of month-end portfolio holdings and
do not necessarily indicate a portfolio's current or future debt holdings.
Portfolios whose debt holdings total less than 100% also invest in Equity
Securities. The Balanced Plus Portfolio had not commenced operations as of
September 30, 1996.
High Yield Portfolio Fixed Income Portfolio
QUALITY QUALITY
TSY, AGY, AAA 5.28% TSY, AGY, AAA 71.29%
AA 0.00% AA 7.83%
A 0.00% A 5.83%
BAA 3.97% BAA 4.62%
BA 30.28% BA 5.66%
B 47.43% B 2.84%
CAA 5.91% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 7.13% Not Available 1.93%
TOTAL 100.00% TOTAL 100.00%
Special Purpose Fixed Income Portfolio PA Municipal Portfolio
QUALITY QUALITY
TSY, AGY, AAA 66.33% TSY, AGY, AAA 79.70%
AA 10.95% AA 1.65%
A 6.96% A 5.16%
BAA 4.52% BAA 5.28%
BA 5.62% BA 0.99%
B 3.20% B 1.85%
CAA 0.00% CAA 0.00%
CA OR BELOW 0.00% CA OR BELOW 0.00%
Not Available 2.42% Not Available 5.37%
TOTAL 100.00% TOTAL 100.00%
Multi-Asset-Class Portfolio
QUALITY
TSY, AGY, AAA 26.63%
AA 1.73%
A 1.16%
BAA 1.19%
BA 3.43%
B 4.61%
CAA 0.42%
CA OR BELOW 0.00%
Not Available 1.10%
TOTAL 40.27%
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MAS Funds - 40 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
International Equity Investing: The Adviser's approach to international equity
investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S.
equity markets and individual securities.
MAS considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely be
influenced by the relative market capitalizations of different non-U.S. stock
markets and individual securities. Portfolios seek to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, a portfolio may also invest in regulated Investment Companies or
Investment Funds which invest in such countries to the extent allowed by
applicable law.
Maturity and Duration Management: One of two primary components of the
Adviser's fixed-income investment strategy is maturity and duration management.
The maturity and duration structure of a portfolio investing in Fixed-Income
Securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term,
day-to-day movements in the market, but instead are implemented in anticipation
of longer term shifts in the levels of interest rates. Adjustments made to
shorten portfolio maturity and duration are made to limit capital losses during
periods when interest rates are expected to rise. Conversely, adjustments made
to lengthen maturity are intended to produce capital appreciation in periods
when interest rates are expected to fall. The foundation for maturity and
duration strategy lies in analysis of the U.S. and global economies, focusing
on levels of real interest rates, monetary and fiscal policy actions, and
cyclical indicators. See Value Investing for a description of the second
primary component of the Adviser's fixed-income strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations
also have call provisions. Depending on the relative magnitude of these
payments and the nature of the call provisions, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's term-to-maturity has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the interest rate risk or volatility of the security). However,
term-to-maturity measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity.
Duration is a measure of the expected life of a fixed-income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed-income securities. Duration is a
measure of the expected life of a fixed-income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed-income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is the case of mortgage pass-through securities.
The stated final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest rate
exposure. In these and other similar situations, the Adviser will use
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.
Money Market Investing: A money market fund like the Cash Reserves Portfolio
invests in securities which present minimal credit risk and may not yield as
high a level of current income as securities of lower quality or longer
maturities which generally have less liquidity, greater market risk and more
price fluctuation. A money market portfolio is designed to provide maximum
principal stability for investors seeking to invest funds for the short-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 41
<PAGE>
term, or, for investors seeking to combine a long-term investment program in
other portfolios of the Fund with an investment in money market instruments.
However, because the Cash Reserves Portfolio invests in the money market
obligations of private financial and non-financial corporations in addition to
those of the U.S. Government or its agencies and instrumentalities, it offers
higher credit risk and yield potential relative to money market funds which
invest exclusively in U.S. Government securities. The Cash Reserves Portfolio
seeks to maintain, but does not guarantee, a constant net asset value of $1.00
per share.
Mortgage Investing: At times it is anticipated that greater than 50% of a
fixed-income portfolio's assets may be invested in mortgage-related securities.
These include mortgage-backed securities, which represent interests in pools of
mortgage loans made by lenders such as commercial banks, savings and loan
associations, mortgage bankers and others. The pools are assembled by various
organizations, including the Government National Mortgage Association (GNMA),
Federal Home Loan Mortgage Corporation (FHLMC), Fannie Mae, other government
agencies, and private issuers. It is expected that a portfolio's primary
emphasis will be on mortgage-backed securities issued by the various
Government-related organizations. However, a portfolio may invest, without
limit, in mortgage-backed securities issued by private issuers when the Adviser
deems that the quality of the investment, the quality of the issuer, and market
conditions warrant such investments. Securities issued by private issuers will
be rated investment grade by Moody's or Standard & Poor's or be deemed by the
Adviser to be of comparable investment quality.
Municipals Management: MAS manages municipal portfolios in a total return
context. This means that taxable investments will regularly be included in a
portfolio when they have an attractive prospective after-tax total return,
regardless of the taxable nature of income on the security.
MAS Municipals Management emphasizes a diversified portfolio of high grade
municipal debt securities. Under normal circumstances, a portfolio will invest
at least 80% of net assets in municipal securities including AMT Bonds and at
least 80% will be Investment Grade Securities.
Under normal conditions, a portfolio may hold up to 20% of net assets in U.S.
Governments, Agencies, Corporates, Cash Equivalents, Preferred Stocks, Mortgage
Securities, Asset-Backeds, Floaters, and Inverse Floaters and other
Fixed-Income Securities (collectively "Taxable Investments").
Non-Diversified Status: A portfolio may be classified as a non-diversified
investment company under the Investment Company Act of 1940, as amended.
Non-diversified portfolios may invest more than 25% of assets in securities of
individual issuers representing greater than 5% each of a portfolio's total
assets, whereas diversified investment companies may only invest up to 25% of
assets in positions of greater than 5%. Both diversified and non-
diversified portfolios are subject to diversification specifications under the
Internal Revenue Code of 1986, as amended, which require that, as of the close
of each fiscal quarter, (i) no more than 25% of a portfolio's total assets may
be invested in the securities of a single issuer (except for U.S. Government
securities) and (ii) with respect to 50% of its total assets, no more than 5%
of such assets may be invested in the securities of a single issuer (except for
U.S. Government securities) or invested in more than 10% of the outstanding
voting securities of a single issuer. Because of its non-diversified status, a
portfolio may be subject to greater credit and other risks than a diversified
investment company.
Value Investing: One of two primary components of the Adviser's fixed-income
strategy is value investing, whereby MAS seeks to identify undervalued sectors
and securities through analysis of credit quality, option characteristics and
liquidity. Quantitative models are used in conjunction with judgment and
experience to evaluate and select securities with embedded put or call options
which are attractive on a risk- and option-adjusted basis. Successful value
investing will permit a portfolio to benefit from the price appreciation of
individual securities during periods when interest rates are unchanged. See
Maturity and Duration Management for a description of the other key component
of MAS's fixed-income investment strategy.
Value Stock Investing: Emphasizes Common Stocks which are deemed by the Adviser
to be undervalued relative to the stock market in general as measured by the
appropriate market index, based on value measures such as price/earnings ratios
and price/book ratios. Value stocks are generally dividend paying common
stocks. However, non-dividend paying stocks may also be selected for their
value characteristics.
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MAS Funds - 42 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
INVESTMENTS
Each Portfolio may invest in the securities defined below in accordance with
their listing of Allowable Investments and any quality or policy constraints.
ADRs--American Depository Receipts: are dollar-denominated securities which are
listed and traded in the United States, but which represent claims to shares of
foreign stocks. ADRs may be either sponsored or unsponsored. Unsponsored ADR
facilities typically provide less information to ADR holders. ADRs also include
American Depository Shares.
Agencies: are securities which are not guaranteed by the U.S. Government, but
which are issued, sponsored or guaranteed by a federal agency or federally
sponsored agency such as the Student Loan Marketing Association or any of
several other agencies.
Asset-Backeds: are securities collateralized by shorter term loans such as
automobile loans, home equity loans, computer leases, or credit card
receivables. The payments from the collateral are passed through to the
security holder. The collateral behind asset-backed securities tends to have
prepayment rates that do not vary with interest rates. In addition the
short-term nature of the loans reduces the impact of any change in prepayment
level. Due to amortization, the average life for these securities is also the
conventional proxy for maturity.
Possible Risks: Due to the possibility that prepayments (on automobile loans
and other collateral) will alter the cash flow on asset-backed securities, it
is not possible to determine in advance the actual final maturity date or
average life. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the security. In selecting these securities, the Adviser will
look for those securities that offer a higher yield to compensate for any
variation in average maturity.
Brady Bonds: are debt obligations which are created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have
been issued only recently, and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively traded
in the over-the-counter secondary market. For further information on these
securities, see the Statement of Additional Information. Portfolios will only
invest in Brady Bonds consistent with quality specifications.
Cash Equivalents: are short-term fixed-income instruments comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
A portfolio may invest in obligations of U.S. banks, foreign branches of U.S.
banks (Eurodollars), and U.S. branches of foreign banks (Yankee dollars). Euro
and Yankee dollar investments will involve some of the same risks of investing
in international securities that are discussed in the Foreign Investing section
of this Prospectus.
Portfolios will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the princi-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 43
<PAGE>
pal amount of such investment is insured in full by the Federal Deposit
Insurance Corporation, (ii) in the case of U.S. banks, it is a member of the
Federal Deposit Insurance Corporation, and (iii) in the case of foreign
branches of U.S. banks, the security is deemed by the Adviser to be of an
investment quality comparable with other debt securities which may be purchased
by the portfolio.
(2) Each portfolio (except Cash Reserves) may invest in commercial paper rated
at time of purchase by one or more Nationally Recognized Statistical Rating
Organizations ("NRSRO") in one of their two highest categories, (e.g., A-l or
A-2 by Standard & Poor's or Prime 1 or Prime 2 by Moody's), or, if not rated,
issued by a corporation having an outstanding unsecured debt issue rated
high-grade by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or
Fitch). The Cash Reserves Portfolio invests only in commercial paper rated in
the highest category;
(3) Short-term corporate obligations rated high-grade at the time of purchase
by a NRSRO (e.g. A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie
Mae, Federal Financing Bank, the Tennessee Valley Authority, and others;
(6) Repurchase agreements collateralized by securities listed above; and
(7) Investments by the Cash Reserve Portfolio in Cash Equivalents are limited
by the quality, maturity and diversification requirements adopted under Rule
2a-7 of the 1940 Act.
CMOs--Collateralized Mortgage Obligations: are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity - the latest date by which the tranche can be
completely repaid, assuming no prepayments - and has an average life - the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than being paid off entirely at maturity, as would be the case in a straight
debt instrument.
Possible Risks: Due to the possibility that prepayments (on home mortgages and
other collateral) will alter the cash flow on CMOs, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of that movement could
be and to calculate the effect that it will have on the price of the security.
In selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
Like bonds in general, mortgage-backed securities will generally decline in
price when interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages with the result that the average life of
mortgage securities held by a portfolio may be lengthened. This extension of
average life causes the market price of the securities to decrease further than
if their average lives were fixed. In part to compensate for these risks,
mortgages will generally offer higher yields than comparable bonds. However,
when interest rates fall, mortgages may not enjoy as large a gain in market
value due to prepayment risk because additional mortgage prepayments must be
reinvested at lower interest rates.
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MAS Funds - 44 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Common Stocks: are Equity Securities which represent an ownership interest in a
corporation, entitling the shareholder to voting rights and receipt of
dividends paid based on proportionate ownership.
Convertibles: are convertible bonds or shares of convertible Preferred Stock
which may be exchanged for a fixed number of shares of Common Stock at the
purchaser's option.
Corporates--Corporate bonds: are debt instruments issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A portfolio will buy
Corporates subject to any quality constraints. If a security held by a
portfolio is down-graded, the portfolio may retain the security if the Adviser
deems retention of the security to be in the best interests of the portfolio.
Depositary Receipts: include both Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"), in addition to other similar types of
depositary shares, and are securities that can be traded in U.S. or foreign
securities markets but which represent ownership interests in a security or
pool of securities by a foreign or U.S. corporation. Depositary Receipts may be
sponsored or unsponsored. The depositary of unsponsored Depositary Receipts may
provide less information to receipt holders.
Derivatives: A financial instrument whose value and performance are based on
the value and performance of another security or financial instrument. The
Adviser will use derivatives only in circumstances where they offer the most
economic means of improving the risk/reward profile of the portfolio. The
Adviser will not use derivatives to increase portfolio risk above the level
that could be achieved in the portfolio using only traditional investment
securities. In addition, the Adviser will not use derivatives to acquire
exposure to changes in the value of assets or indexes of assets that are not
listed in the applicable Allowable Investments for the portfolio. Any
applicable limitations are described under each investment definition. All of
the portfolios of MAS Funds, except the Cash Reserves Portfolio, may enter into
over-the-counter Derivatives transactions (Swaps, Caps, Floors, Puts, etc., but
excluding CMOs, Forwards, Futures and Options, and SMBS) with counterparties
approved by MAS in accordance with guidelines established by the Board of
Trustees. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties with ratings below AA. Derivatives include, but are not limited
to, CMOs, Forwards, Futures and Options, SMBS, Structured Investments,
Structured Notes and Swaps. See each individual Portfolio's listing of
Allowable Investments to determine which of these the Portfolio may hold.
Eastern European Issuers: The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes during the 1940's, the governments of a number of Eastern
European countries expropriated a large amount of property. The claims of many
property owners against those governments were never finally settled. In the
event of the return to power of the Communist Party, there can be no assurance
that the portfolio's investments in Eastern Europe would not be expropriated,
nationalized or otherwise confiscated.
Emerging Markets Issuers: An emerging market security is one issued by a
company that has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging market, (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in emerging markets, or (iii)
it is organized under the laws of, and has a principal office in, an emerging
market country. The Adviser will base determinations as to eligibility on
publicly available information and inquiries made to the companies. Investing
in emerging markets may entail purchasing securities issued by or on behalf of
entities that are insolvent, bankrupt, in default or otherwise engaged in an
attempt to reorganize or reschedule their obligations, and in entities that
have little or no proven credit rating or credit history. In any such case, the
issuer's poor or deteriorating financial condition may increase the likelihood
that the investing fund will experience losses or diminution in available gains
due to bankruptcy, insolvency or fraud.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 45
<PAGE>
Equity Securities: Commonly include but are not limited to Common Stock,
Preferred Stock, ADRs, Rights, Warrants, Convertibles, and Foreign Equities.
See each individual portfolio listing of Allowable Investments to determine
which of the above the portfolio can hold. Preferred Stock is contained in both
the definition of Equity Securities and Fixed-Income Securities since it
exhibits characteristics commonly associated with each type.
Fixed-Income Securities: Commonly include but are not limited to U.S.
Governments, Zero Coupons, Agencies, Corporates, High Yield, Mortgage
Securities, SMBS, CMOs, Asset-Backeds, Convertibles, Brady Bonds, Floaters,
Inverse Floaters, Cash Equivalents, Repurchase Agreements, Preferred Stock, and
Foreign Bonds. See each individual portfolio listing of Allowable Investments
to determine which securities a portfolio may hold. Preferred Stock is
contained in both the definition of Equity Securities and Fixed-Income
Securities since it exhibits characteristics commonly associated with each type
of security.
Floaters--Floating and Variable Rate Obligations: are debt obligations with a
floating or variable rate of interest, i.e. the rate of interest varies with
changes in specified market rates or indices, such as the prime rate, or at
specified intervals. Certain floating or variable rate obligations may carry a
demand feature that permits the holder to tender them back to the issuer of the
underlying instrument, or to a third party, at par value prior to maturity.
When the demand feature of certain floating or variable rate obligations
represents an obligation of a foreign entity, the demand feature will be
subject to certain risks discussed under Foreign Investing.
Foreign Bonds: are Fixed-Income Securities denominated in foreign currency and
issued and traded primarily outside of the U.S., including: (1) obligations
issued or guaranteed by foreign national governments, their agencies,
instrumentalities, or political subdivisions; (2) debt securities issued,
guaranteed or sponsored by supranational organizations established or supported
by several national governments, including the World Bank, the European
Community, the Asian Development Bank and others; (3) non-government foreign
corporate debt securities; and (4) foreign Mortgage Securities and various
other mortgage and asset-backed securities.
Foreign Currency: Portfolios investing in foreign securities will regularly
transact security purchases and sales in foreign currencies. These portfolios
may hold foreign currency or purchase or sell currencies on a forward basis
(see Forwards).
Foreign Equities: are Common Stock, Preferred Stock, Rights and Warrants of
foreign issuers denominated in foreign currency and traded primarily in
non-U.S. markets. Foreign Equities also include Depositary Receipts. Investing
in foreign companies involves certain special considerations which are not
typically associated with investing in U.S. companies (see Foreign Investing).
Forwards--Forward Foreign Currency Exchange Contracts: are Derivatives which
are used to protect against uncertainty in the level of future foreign exchange
rates. A forward foreign currency exchange contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Such contracts do not eliminate
fluctuations caused by changes in the local currency prices of the securities,
but rather, they establish an exchange rate at a future date. Also, although
such contracts can minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they limit any potential gain that might
be realized.
A portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities denominated in foreign currencies (transaction hedge) or to lock in
the U.S. dollar value of portfolio positions (position hedge). In addition, the
portfolios may cross hedge currencies by entering into a transaction to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a portfolio has or expects to have
portfolio exposure. Portfolios may also engage in proxy hedging which is
defined as entering into positions in one currency to hedge investments
denominated in another currency, where the two currencies are economically
linked. A portfolio's entry into forward contracts, as well as any use of cross
or proxy hedging techniques will generally require the portfolio to hold liquid
securities or cash equal to the portfolio's obligations in a segregated account
throughout the duration of the contract.
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MAS Funds - 46 Terms in bold type are defined in the Prospectus Glossary
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A portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a foreign bond, a portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a portfolio may be
able to lock in the foreign currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S.
dollar-denominated security.
There is a risk in adopting a transaction hedge or position hedge to the extent
that the value of a security denominated in foreign currency is not exactly
matched with a portfolio's obligation under the forward contract. On the date
of maturity, a portfolio may be exposed to some risk of loss from fluctuations
in that currency. Although the Adviser will attempt to hold such mismatching to
a minimum, there can be no assurance that the Adviser will be able to do so.
For proxy hedges, cross hedges or a synthetic position, there is an additional
risk in that these transactions create residual foreign currency exposure. When
a portfolio enters into a forward contract for purposes of creating a position
hedge, transaction hedge, cross hedge or a synthetic security, it will
generally be required to hold liquid securities or cash in a segregated account
with a daily value at least equal to its obligation under the forward contract.
Futures & Options--Futures Contracts, Options on Futures Contracts and
Options: are Derivatives. Futures contracts provide for the sale by one party
and purchase by another party of a specified amount of a specific security, at
a specified future time and price. An option is a legal contract that gives the
holder the right to buy or sell a specified amount of the underlying security
or futures contract at a fixed or determinable price upon the exercise of the
option. A call option conveys the right to buy and a put option conveys the
right to sell a specified quantity of the underlying security.
A portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets. It will maintain assets
sufficient to meet its obligations under such contracts in a segregated account
with the custodian bank or will otherwise comply with the SEC's position on
asset coverage.
Possible Risks: The primary risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of the
securities held by a portfolio and the prices of futures and options relating
to the stocks, bonds or futures contracts purchased or sold by a portfolio; and
(ii) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position which could have an adverse
impact on a portfolio's ability to execute futures and options strategies.
Additional risks associated with options transactions are (i) the risk that an
option will expire worthless; (ii) the risk that the issuer of an over-the-
counter option will be unable to fulfill its obligation to the portfolio due to
bankruptcy or related circumstances; (iii) the risk that options may exhibit
greater short-term price volatility than the underlying security; and (iv) the
risk that a portfolio may be forced to forego participation in the appreciation
of the value of underlying securities, futures contracts or currency due to the
writing of a call option.
High Yield: High yield securities are generally considered to be corporate
bonds, preferred stocks, and convertible securities rated Ba through C by
Moody's or BB through D by Standard & Poor's, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by Standard & Poor's are classified as non-investment grade securities and are
commonly referred to as junk bonds or high yield, high risk securities. Such
securities carry a high degree of risk and are considered speculative by the
major credit rating agencies. The following are excerpts from the Moody's and
Standard & Poor's definitions for speculative-grade debt obligations:
Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered assured," and protection of principal and interest
is "moderate" and "not well safeguarded during both good and bad times in
the future." B-rated bonds "lack characteristics of a desirable
investment" and the assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing" and "may be in default" or
may have "elements of danger with respect to principal or interest."
Ca-rated bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings. C-rated bonds are the "lowest rated" class of bonds, and
issues so
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 47
<PAGE>
rated can be regarded as having "extremely poor prospects" of ever
attaining any real investment standing.
Standard & Poor's: BB-rated bonds have "less near-term vulnerability to
default" than B- or CCC-rated securities but face "major ongoing
uncertainties . . . which may lead to inadequate capacity" to pay interest
or principal. B-rated bonds have a "greater vulnerability to default than
BB-rated bonds and the ability to pay interest or principal will likely be
impaired by adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." C The rating C
is reserved for income bonds on which "no interest is being paid." D - Debt
rated D is in "default", and "payment of interest and/or repayment of
principal is in arrears."
While these securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High yield
securities may be issued as a consequence of corporate restructuring or similar
events. Also, high yield securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) firms, which are generally
less able than more established or less leveraged firms to make scheduled
payments of interest and principal. The price movement of these securities is
influenced less by changes in interest rates and more by the financial and
business position of the issuing corporation when compared to investment grade
bonds.
The risks posed by securities issued under such circumstances are substantial.
If a security held by a portfolio is down-graded, the portfolio may retain the
security.
Inverse Floaters--Inverse Floating Rate Obligations: are Fixed-Income
Securities, which have coupon rates that vary inversely at a multiple of a
designated floating rate, such as LIBOR (London Inter-Bank Offered Rate). Any
rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates) causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
Inverse floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in prepayments. As a
result, the yield to maturity of an inverse floater CMO is sensitive not only
to changes in interest rates but also to changes in prepayment rates on the
related underlying mortgage assets.
Investment Companies: The portfolios are permitted to invest in shares of other
open-end or closed-end investment companies. The Investment Company Act of
1940, as amended, generally prohibits the portfolios from acquiring more than
3% of the outstanding voting shares of an investment company and limits such
investments to no more than 5% of the portfolio's total assets in any one
investment company and no more than 10% in any combination of investment
companies. The 1940 Act also prohibits the portfolios from acquiring in the
aggregate more than 10% of the outstanding voting shares of any registered
closed-end investment company.
To the extent a portfolio invests a portion of its assets in Investment
Companies, those assets will be subject to the expenses of the investment
company as well as to the expenses of the portfolio itself. The portfolios may
not purchase shares of any affiliated investment company except as permitted by
SEC Rule or Order.
Investment Funds: Some emerging market countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging market countries through investment funds. Portfolios that may
invest in these investment funds are subject to applicable law as discussed
under Investment Restrictions and will invest in such investment funds only
where appropriate given that the portfolio's shareholders will bear indirectly
the layer of expenses of the underlying investment funds in addition to their
proportionate share of the expenses of the portfolio. Under certain
circumstances, an investment in an investment fund will be subject to the
additional limitations that apply to investments in Investment Companies.
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MAS Funds - 48 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Investment Grade Securities: are those rated by one or more nationally
recognized statistical rating organization (NRSRO) in one of the four highest
rating categories at the time of purchase (e.g. AAA, AA, A or BBB by Standard &
Poor's Corporation (Standard & Poor's) or Fitch Investors Service, Inc.,
(Fitch) or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. (Moody's)).
Securities rated BBB or Baa represent the lowest of four levels of investment
grade securities and are regarded as borderline between definitely sound
obligations and those in which the speculative element begins to predominate.
Mortgage-backed securities, including mortgage pass-throughs and collateralized
mortgage obligations (CMOs), deemed investment grade by the Adviser, will
either carry a guarantee from an agency of the U.S. Government or a private
issuer of the timely payment of principal and interest (such guarantees do not
extend to the market value of such securities or the net asset value per share
of the portfolio) or, in the case of unrated securities, be sufficiently
seasoned that they are considered by the Adviser to be investment grade
quality. The Adviser may retain securities if their ratings falls below
investment grade if it deems retention of the security to be in the best
interests of the portfolio. Any Portfolio permitted to hold Investment Grade
Securities may hold unrated securities if the Adviser considers the risks
involved in owning that security to be equivalent to the risks involved in
holding an Investment Grade Security.
Loan Participations: are loans or other direct debt instruments which are
interests in amounts owed by a corporate, governmental or other borrower to
another party. They may represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments involve the risk of
loss in case of default or insolvency of the borrower. Direct debt instruments
may offer less legal protection to the portfolio in the event of fraud or
misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. Direct debt
instruments may also include standby financing commitments that obligate the
investing portfolio to supply additional cash to the borrower on demand. Loan
participations involving Emerging Market Issuers may relate to loans as to
which there has been or currently exists an event of default or other failure
to make payment when due, and may represent amounts owed to financial
institutions that are themselves subject to political and economic risks,
including the risk of currency devaluation, expropriation, or failure. Such
loan participations present additional risks of default or loss.
Mortgage Securities--Mortgage-backed securities represent an ownership interest
in a pool of residential and commercial mortgage loans. Generally, these
securities are designed to provide monthly payments of interest and principal
to the investor. The mortgagee's monthly payments to his/her lending
institution are passed through to investors such as the portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer. The pools are assembled by various Governmental, Government-related and
private organizations. Portfolios may invest in securities issued or guaranteed
by the Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), Fannie Mae, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. Mortgage-backed securities issued by non-agency
issuers, whether or not such securities are subject to guarantees, may entail
greater risk. If there is no guarantee provided by the issuer, mortgage-backed
securities purchased by the portfolio will be those which at time of purchase
are rated investment grade by one or more NRSRO, or, if unrated, are deemed by
the Adviser to be of investment grade quality.
There are two methods of trading mortgage-backed securities. A specified pool
transaction is a trade in which the pool number of the security to be delivered
on the settlement date is known at the time the trade is made. This is in
contrast with the typical mortgage security transaction, called a TBA (to be
announced) transaction, in which the type of mortgage securities to be
delivered is specified at the time of trade but the actual pool numbers of the
securities that will be delivered are not known at the time of the trade. The
pool numbers of the pools to be delivered at settlement will be announced
shortly before settlement takes place. The terms of the TBA trade may be made
more specific if desired. Generally, agency pass-through mortgage-backed
securities are traded on a TBA basis.
A mortgage-backed bond is a collateralized debt security issued by a thrift or
financial institution. The bondholder has a first priority perfected security
interest in collateral, usually consisting of agency mortgage pass-through
securities, although other assets, including U.S. Treasuries (including Zero
Coupon Treasury Bonds), agencies, cash equivalent securities, whole loans and
corporate bonds, may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 49
<PAGE>
Possible Risks: Due to the possibility that prepayments on home mortgages will
alter cash flow on mortgage securities, it is not possible to determine in
advance the actual final maturity date or average life. Like bonds in general,
mortgage-backed securities will generally decline in price when interest rates
rise. Rising interest rates also tend to discourage refinancings of home
mortgages, with the result that the average life of mortgage securities held by
a portfolio may be lengthened. This extension of average life causes the market
price of the securities to decrease further than if their average lives were
fixed. However, when interest rates fall, mortgages may not enjoy as large a
gain in market value due to prepayment risk because additional mortgage
prepayments must be reinvested at lower interest rates. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it
is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
Municipals--Municipal Securities: are debt obligations issued by local, state
and regional governments that provide interest income which is exempt from
federal income taxes. Municipal securities include both municipal bonds (those
securities with maturities of five years or more) and municipal notes (those
with maturities of less than five years). Municipal bonds are issued for a wide
variety of reasons: to construct public facilities, such as airports, highways,
bridges, schools, hospitals, mass transportation, streets, water and sewer
works; to obtain funds for operating expenses; to refund outstanding municipal
obligations; and to loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered municipal bonds if
their interest is exempt from federal income tax. Industrial development bonds
are issued by or on behalf of public authorities to obtain funds for various
privately-operated manufacturing facilities, housing, sports arenas, convention
centers, airports, mass transportation systems and water, gas or sewage works.
Industrial development bonds are ordinarily dependent on the credit quality of
a private user, not the public issuer.
General obligation municipal bonds are secured by the issuer's pledge of full
faith, credit and taxing power. Revenue or special tax bonds are payable from
the revenues derived from a particular facility or, in some cases, from a
special excise or other tax, but not from general tax revenue.
Municipal notes are issued to meet the short-term funding requirements of
local, regional and state governments. Municipal notes include bond
anticipation notes, revenue anticipation notes and tax and revenue anticipation
notes. These are short-term debt obligations issued by state and local
governments to aid cash flows while waiting for taxes or revenue to be
collected, at which time the debt is retired. Other types of municipal notes in
which the portfolio may invest are construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar instruments.
Demand notes permit an investor (such as the portfolio) to demand from the
issuer payment of principal plus accrued interest upon a specified number of
days' notice. The portfolios eligible to purchase municipal bonds may also
purchase AMT bonds. AMT bonds are tax-exempt private activity bonds issued
after August 7, 1986, the proceeds of which are directed, at least in part, to
private, for-profit organizations. While the income from AMT bonds is exempt
from regular federal income tax, it is a tax preference item in the calculation
of the alternative minimum tax. The alternative minimum tax is a special
separate tax that applies to a limited number of taxpayers who have certain
adjustments to income or tax preference items.
PA Municipals: are obligations of the Pennsylvania state government, state
agencies and various local governments, including counties, cities, townships,
special districts and authorities. In general, the credit quality and credit
risk of any issuer's debt is contingent upon the state and local economy, the
health of the issuer's finances, the amount of the issuer's debt, the quality
of management and the strength of legal provisions in the debt document that
protect debt holders. Credit risk is usually lower wherever the economy is
strong, growing and diversified, where financial operations are sound and the
debt burden is reasonable.
Concentration of investment in the securities of one state exposes a portfolio
to greater credit risks than would be present in a nationally diversified
portfolio of municipal securities. The risks associated with investment in the
securities of a single state include possible tax changes or a deterioration in
economic conditions and differing levels of supply and demand for the municipal
obligations of that state.
Debt of Government Agencies, Authorities and Commissions: Certain state-created
agencies have statutory authorization to incur debt for which legislation
providing for state appropriations to pay debt service thereon is not
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MAS Funds - 50 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
required. The debt of these agencies is supported by assets of, or revenues
derived from, the various projects financed; it is not an obligation of the
Commonwealth. Some of these agencies, however, such as the Delaware River Joint
Toll Bridge Commission, are indirectly dependent on Commonwealth funds through
various state-assisted programs.
Preferred Stock: are non-voting ownership shares in a corporation which pay a
fixed or variable stream of dividends.
Repurchase Agreements: are transactions by which a portfolio purchases a
security and simultaneously commits to resell that security to the seller (a
bank or securities dealer) at an agreed upon price on an agreed upon date
(usually within seven days of purchase). The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or date of maturity of the purchased security. Such agreements
permit the portfolio to keep all its assets at work while retaining overnight
flexibility in pursuit of investments of a longer term nature. The Adviser will
continually monitor the value of the underlying collateral to ensure that its
value, including accrued interest, always equals or exceeds the repurchase
price.
Pursuant to an order issued by the Securities and Exchange Commission, the
Fund's portfolios may pool their daily uninvested cash balances in order to
invest in repurchase agreements on a joint basis. By entering into repurchase
agreements on a joint basis, it is expected that the portfolios will incur
lower transaction costs and potentially obtain higher rates of interest on such
repurchase agreements. Each portfolio's participation in the income from
jointly purchased repurchase agreements will be based on that portfolio's
percentage share in the total repurchase agreement.
Rights: represent a preemptive right of stockholders to purchase additional
shares of a stock at the time of a new issuance, before the stock is offered to
the general public, allowing the stockholder to retain the same ownership
percentage after the new stock offering.
SMBS--Stripped Mortgage-Backed Securities: are Derivatives in the form of
multi-class mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. One
type of SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of the principal. In some cases, one class will
receive all of the interest (the interest-only or IO class), while the other
class will receive all of the principal (the principal-only or PO class). The
yield to maturity on IOs and POs is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a portfolio yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a portfolio may
fail to fully recoup its initial investment in these securities, even if the
security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, certain of these securities may be deemed illiquid
and subject to a portfolio's limitations on investment in illiquid securities.
Structured Investments: are Derivatives in the form of a unit or units
representing an undivided interest(s) in assets held in a trust that is not an
investment company as defined in the Investment Company Act of 1940. A trust
unit pays a return based on the total return of securities and other
investments held by the trust and the trust may enter into one or more Swaps to
achieve its objective. For example, a trust may purchase a basket of securities
and
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 51
<PAGE>
agree to exchange the return generated by those securities for the return
generated by another basket or index of securities. A portfolio will purchase
Structured Investments in trusts that engage in such Swaps only where the
counterparties are approved by MAS in accordance with credit-risk guidelines
established by the Board of Trustees.
Structured Notes: are Derivatives on which the amount of principal repayment
and or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The use of Structured Notes allows a portfolio to tailor its investments to the
specific risks and returns the Adviser wishes to accept while avoiding or
reducing certain other risks.
Swaps--Swap Contracts: are Derivatives in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term specified index includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed-income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
portfolio may agree to swap the return generated by a fixed-income index for
the return generated by a second fixed-income index. The currency swaps in
which the portfolios may enter will generally involve an agreement to pay
interest streams in one currency based on a specified index in exchange for
receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
A portfolio will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a portfolio receiving or paying, as the case
may be, only the net amount of the two returns. A portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash
or liquid securities. A portfolio will not enter into any swap agreement unless
the counterparty meets the rating requirements set forth in guidelines
established by the Fund's Board of Trustees.
Possible Risks: Interest rate and total rate of return swaps do not involve the
delivery of securities, other underlying assets, or principal. Accordingly, the
risk of loss with respect to interest rate and total rate of return swaps is
limited to the net amount of interest payments that a portfolio is
contractually obligated to make. If the other party to an interest rate or
total rate of return swap defaults, a portfolio's risk of loss consists of the
net amount of interest payments that a portfolio is contractually entitled to
receive. In contrast, currency swaps may involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap may be
subject to the risk that the other party to the swap will default on its
contractual delivery obligations. If there is a default by the counterparty, a
portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Swaps that include caps, floors, and
collars are more recent innovations for which standardized documentation has
not yet been fully developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the portfolios would be less favorable than it would have been if this
investment technique were not used.
Taxable Investments: comprise Fixed-Income Securities and other instruments
which pay income that is not exempt from taxation. Investors may be liable for
tax on the income distributed as a result of the portfolio holding taxable
investments. In this event, shareholders will receive an IRS form 1099
disclosing the taxable income paid for a calendar year.
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MAS Funds - 52 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
U.S. Governments--U.S. Treasury securities: are Fixed-Income Securities which
are backed by the full faith and credit of the U.S. Government as to the
payment of both principal and interest.
Warrants: are options issued by a corporation which give the holder the option
to purchase stock.
When-Issued Securities: are securities purchased at a certain price even though
the securities may not be delivered for up to 90 days. No payment or delivery
is made by a portfolio in a when-issued transaction until the portfolio
receives payment or delivery from the other party to the transaction. Although
a portfolio receives no income from the above described securities prior to
delivery, the market value of such securities is still subject to change. As a
consequence, it is possible that the market price of the securities at the time
of delivery may be higher or lower than the purchase price. A portfolio will
maintain with the custodian a segregated account consisting of cash or liquid
securities in an amount at least equal to these commitments.
Zero Coupons--Zero Coupon Obligations: are Fixed-Income Securities that do not
make regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
imputed interest an investor will earn if the obligation is held until
maturity. Zero coupon obligations may offer investors the opportunity to earn
higher yields than those available on ordinary interest-paying obligations of
similar credit quality and maturity. However, zero coupon obligation prices may
also exhibit greater price volatility than ordinary fixed-income securities
because of the manner in which their principal and interest are returned to
the investor.
GENERAL SHAREHOLDER INFORMATION
PURCHASE OF SHARES
Institutional Class Shares are available to clients of the Adviser with
combined investments of $5,000,000 and Shareholder Organizations who have a
contractual arrangement with the Fund or the Fund's Distributor, including
institutions such as trusts, foundations or broker-dealers purchasing for the
accounts of others.
Institutional Class Shares of each portfolio except for the Cash Reserves
Portfolio may be purchased at the net asset value per share next determined
after receipt of the purchase order. Such portfolios determine net asset value
as described under Other Information-Valuation of Shares each day that the
portfolios are open for business. See Other Information-Closed Holidays and
Valuation of Shares.
The Cash Reserves Portfolio declares dividends daily and, therefore, at the
time of a purchase must have funds immediately available for investment. As a
result, payment for the purchase of shares must be in the form of Federal Funds
(monies credited to the portfolio's Custodian by a Federal Reserve Bank) before
they can be accepted by the portfolio. The portfolio is credited with Federal
Funds on the same day if the investment is made by Federal Funds. Institutional
Class Shares of the Cash Reserves Portfolio may be purchased at the net asset
value next determined after an order is received by the portfolio and Federal
Funds are received by the Custodian. The Cash Reserves Portfolio determines net
asset value as of 12:00 noon (Eastern Time) each day that the portfolios are
open for business. See Other Information-Closed Holidays and Valuation of
Shares.
Initial Purchase by Mail: Subject to acceptance by the Fund, an account may be
opened by completing and signing an Account Registration Form (provided at the
end of the prospectus) and mailing it to MAS Funds c/o Miller Anderson &
Sherrerd, LLP, One Tower Bridge, West Conshohocken, Pennsylvania 19428-0868
together with a check ($5,000,000 minimum) payable to MAS Funds.
The portfolios requested should be designated on the Account Registration Form.
Subject to acceptance by the Fund, payment for the purchase of shares received
by mail will be credited at the net asset value per share of the portfolio next
determined after receipt. Such payment need not be converted into Federal Funds
(monies credited to the Fund's Custodian Bank by a Federal Reserve Bank) before
acceptance by the Fund, except for the Cash Reserves Portfolio. Purchases made
by check in the Cash Reserves Portfolio are ordinarily credited at the net
asset
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 53
<PAGE>
value per share determined two business days after receipt of the check by the
Fund. Please note that purchases made by check in any portfolio are not
permitted to be redeemed until payment of the purchase has been collected,
which may take up to eight business days after purchase. Shareholders can avoid
this delay by purchasing shares by wire.
Initial Purchase by Wire: Subject to acceptance by the Fund, Institutional
Class Shares of each portfolio may also be purchased by wiring Federal Funds to
the Fund's Custodian Bank, The Chase Manhattan Bank (see instructions below). A
completed Account Registration Form should be forwarded to MAS Funds' Client
Services Group in advance of the wire. For all portfolios (except the Cash
Reserves Portfolio), notification must be given to MAS Funds' Client Services
Group at 1-800-354-8185 prior to the determination of net asset value.
Institutional Class Shares will be purchased at the net asset value per share
next determined after receipt of the purchase order. (Prior notification must
also be received from investors with existing accounts.) Instruct your bank to
send a Federal Funds Wire in a specified amount to the Fund's Custodian Bank
using the following wiring instructions:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #910-2-734143
Attn: MAS Funds Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
Purchases in the Cash Reserves Portfolio may also be made by Federal Funds wire
to the Fund's Custodian. If the portfolio receives notification of an order
prior to 12:00 noon (Eastern Time) and funds are received by the Custodian the
same day, purchases of portfolio shares will become effective and begin to earn
income on that business day. Orders received after 12:00 noon (Eastern Time)
will be effective on the next business day upon receipt of funds. Federal Funds
purchases will be accepted only on a day on which the portfolio is open for
business. See Other Information-Closed Holidays.
Additional Investments: Additional investments of Institutional Class Shares at
net asset value may be made at any time (minimum investment $1,000) by mailing
a check (payable to MAS Funds) to MAS Funds' Client Services Group at the
address noted under Initial Purchase by Mail or by wiring Federal Funds to the
Custodian Bank as outlined above. Shares will be purchased at the net asset
value per share next determined after receipt of the purchase order. For all
portfolios, except the Cash Reserves Portfolio, notification must be given to
MAS Funds' Client Services Group at 1-800-354-8185 prior to the determination
of net asset value. For the Cash Reserves Portfolio, notification of a Federal
Funds wire must be received by 12:00 noon (Eastern Time). Purchases made by
check in the Cash Reserves Portfolio are ordinarily credited at the net asset
value per share determined two business days after receipt of the check by the
Fund.
Other Purchase Information: The Fund reserves the right, in its sole
discretion, to suspend the offering of Institutional Class Shares of any of its
portfolios or to reject any purchase orders when, in the judgment of
management, such suspension or rejection is in the best interest of the Fund.
The Fund also reserves the right, in its sole discretion, to waive the minimum
initial and subsequent investment amounts.
Purchases of a portfolio's Institutional Class Shares will be made in full and
fractional shares of the portfolio calculated to three decimal places. In the
interest of economy and convenience, certificates for shares will not be issued
except at the written request of the shareholder. Certificates for fractional
shares, however, will not be issued.
Institutional Class Shares of the Fund's portfolios are also sold to
corporations or other institutions such as trusts, foundations or
broker-dealers purchasing for the accounts of others (Shareholder
Organizations). Investors purchasing and redeeming shares of the portfolios
through a Shareholder Organization may be charged a transaction-based fee or
other fee for the services of such organization. Each Shareholder Organization
is responsible for transmitting to its customers a schedule of any such fees
and information regarding any additional or different conditions
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MAS Funds - 54 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
regarding purchases and redemptions. Customers of Shareholder Organizations
should read this Prospectus in light of the terms governing accounts with their
organization. The Fund does not pay compensation to or receive compensation
from Shareholder Organizations for the sale of Institutional Class Shares.
REDEMPTION OF SHARES
Institutional Class Shares of each portfolio may be redeemed by mail, or, if
authorized, by telephone. No charge is made for redemptions. The value of
Institutional Class Shares redeemed may be more or less than the purchase
price, depending on the net asset value at the time of redemption which is
based on the market value of the investment securities held by the portfolio.
See other Information-Closed Holidays and Valuation of Shares.
By Mail: Each portfolio will redeem Institutional Class Shares at the net asset
value next determined after the request is received in good order. Requests
should be addressed to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One
Tower Bridge, West Conshohocken, PA 19428-0868.
To be in good order, redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which the shares are registered;
(c) Any required signature guarantees (see Signature Guarantees); and
(d) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit sharing
plans and other organizations.
Signature Guarantees: To protect your account, the Fund and the Administrator
from fraud, signature guarantees are required to enable the Fund to verify the
identity of the person who has authorized a redemption from an account.
Signature guarantees are required for (1) redemptions where the proceeds are to
be sent to someone other than the registered shareholder(s) and the registered
address, and (2) share transfer requests. Please contact MAS Funds' Client
Services Group for further details.
By Telephone: Provided the Telephone Redemption Option has been authorized by
the shareholder on the Account Registration Form, a redemption of shares may be
requested by calling MAS Funds' Client Services Group and requesting that the
redemption proceeds be mailed to the primary registration address or wired per
the authorized instructions. Shares cannot be redeemed by telephone if share
certificates are held for those shares.
By Facsimile: Written requests in good order (see above) for redemptions,
exchanges, and transfers may be forwarded to the Fund via facsimile. All
requests sent to the Fund via facsimile must be followed by a telephone call to
MAS Funds' Client Services Group to ensure that the instructions have been
properly received by the Fund. The original request must be promptly mailed to
MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868.
Neither the Distributor nor the Fund will be responsible for any loss,
liability, cost, or expense for acting upon facsimile instructions or upon
telephone instructions that they reasonably believe to be genuine. In order to
confirm that telephone instructions in connection with redemptions are genuine,
the Fund and Distributor will provide written confirmation of transactions
initiated by telephone.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 55
<PAGE>
Payment of the redemption proceeds will ordinarily be made within three
business days after receipt of an order for a redemption. The Fund may suspend
the right of redemption or postpone the date of redemption at times when the
NYSE, the Custodian, or the Fund is closed (see Other Information-Closed
Holidays) or under any emergency circumstances as determined by the Securities
and Exchange Commission.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption proceeds in whole or in part by
a distribution in-kind of readily marketable securities held by a portfolio in
lieu of cash in conformity with applicable rules of the Securities and Exchange
Commission. Investors may incur brokerage charges on the sale of portfolio
securities received in such payments of redemptions.
SHAREHOLDER SERVICES
Exchange Privilege: Each portfolio's Institutional Class Shares may be
exchanged for shares of the Fund's other portfolios offering Institutional
Class Shares based on the respective net asset values of the shares involved.
The exchange privilege is only available, however, with respect to portfolios
that are registered for sale in a shareholder's state of residence. There are
no exchange fees. Exchange requests should be sent to MAS Funds, c/o Miller
Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken, PA 19428-0868.
Because an exchange of shares amounts to a redemption from one portfolio and
purchase of shares of another portfolio, the above information regarding
purchase and redemption of shares applies to exchanges. Shareholders should
note that an exchange between portfolios is considered a sale and purchase of
shares. The sale of shares may result in a capital gain or loss for tax
purposes.
The officers of the Fund reserve the right not to accept any request for an
exchange when, in their opinion, the exchange privilege is being used as a tool
for market timing. The Fund reserves the right to change the terms or
conditions of the exchange privilege discussed herein upon sixty days' notice.
Transfer of Registration: The registration of Fund shares may be transferred by
writing to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge,
West Conshohocken, PA 19428-0868. As in the case of redemptions, the written
request must be received in good order as defined above. Unless shares are
being transferred to an existing account, requests for transfer must be
accompanied by a completed Account Registration Form for the receiving party.
VALUATION OF SHARES
Equity, Growth, International Equity, Mid Cap Growth, Mid Cap Value, Small Cap
Value and Value Portfolios:
Net asset value per share is determined by dividing the total market value of
each portfolio's investments and other assets, less any liabilities, by the
total outstanding shares of that portfolio. Net asset value per share is
determined as of the close of the NYSE (normally 4:00 p.m. Eastern Time) on
each day the portfolio is open for business (See Other Information-Closed
Holidays). Equity Securities listed on a U.S. securities exchange or NASDAQ for
which market quotations are available are valued at the last quoted sale price
on the day the valuation is made. Price information on listed Equity Securities
is taken from the exchange where the security is primarily traded. Equity
Securities listed on a foreign exchange are valued at the latest quoted sales
price available before the time when assets are valued. For purposes of net
asset value per share, all assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at the bid price of such
currencies against U.S. dollars. Unlisted Equity Securities and listed U.S.
Equity Securities not traded on the valuation date for which market quotations
are readily available are valued at the mean of the most recent quoted bid and
asked price. The value of other assets and securities for which no quotations
are readily available (including restricted securities) are determined in good
faith at fair value using methods approved by the Trustees.
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MAS Funds - 56 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Domestic Fixed Income, Fixed Income, Fixed Income Portfolio II, Global Fixed
Income, High Yield, Intermediate Duration, International Fixed Income, Limited
Duration, Mortgage-Backed Securities, Municipal, PA Municipal and Special
Purpose Fixed Income Portfolios:
Net asset value per share is computed by dividing the total value of the
investments and other assets of the portfolio, less any liabilities, by the
total outstanding shares of the portfolio. The net asset value per share is
determined as of one hour after the close of the bond markets (normally 4:00
p.m. Eastern Time) on each day the portfolio is open for business (See Other
Information-Closed Holidays). Bonds and other Fixed-Income Securities listed on
a foreign exchange are valued at the latest quoted sales price available before
the time when assets are valued. For purposes of net asset value per share, all
assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the bid price of such currencies against U.S.
dollars.
Net asset value includes interest on bonds and other Fixed-Income Securities
which is accrued daily. Bonds and other Fixed-Income Securities which are
traded over the counter and on an exchange will be valued according to the
broadest and most representative market, and it is expected that for bonds and
other Fixed-Income Securities this ordinarily will be the over-the-counter
market.
However, bonds and other Fixed-Income Securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service are determined without regard to bid or last sale prices but take into
account institutional size trading in similar groups of securities and any
developments related to specific securities. Bonds and other Fixed-
Income Securities not priced in this manner are valued at the most recent
quoted bid price, or when stock exchange valuations are used, at the latest
quoted sale price on the day of valuation. If there is no such reported sale,
the latest quoted bid price will be used. Securities purchased with remaining
maturities of 60 days or less are valued at amortized cost when the Board of
Trustees determines that amortized cost reflects fair value. In the event that
amortized cost does not approximate market, market prices as determined above
will be used. Other assets and securities, for which no quotations are readily
available (including restricted securities), will be valued in good faith at
fair value using methods approved by the Board of Trustees.
Balanced, Multi-Asset-Class and Balanced Plus Portfolios: Net asset value per
share is computed by dividing the total value of the investments and other
assets of the portfolio, less any liabilities, by the total outstanding shares
of the portfolio. The net asset value per share of the Balanced,
Multi-Asset-Class and Balanced Plus Portfolios is determined as of the later of
the close of the NYSE or one hour after the close of the bond markets on each
day the portfolios are open for business. Equity, fixed-income and other
securities held by the portfolios will be valued using the policies described
above.
Cash Reserves Portfolio: The net asset value per share of the Cash Reserves
Portfolio is calculated daily as of 12:00 noon (Eastern Time) on each day that
the portfolio is open for business (See Other Information-Closed Holidays). The
portfolio determines its net asset value per share by subtracting the
portfolio's liabilities (including accrued expenses and dividends payable) from
the total value of the portfolio's investments and other assets and dividing
the result by the total outstanding shares of the portfolio.
For the purpose of calculating the portfolio's net asset value per share,
securities are valued by the amortized cost method of valuation, which does not
take into account unrealized gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method
provides certainty in valuation, it may result in periods during which value
based on amortized cost is higher or lower than the price the portfolio would
receive if it sold the instrument.
The use of amortized cost and the maintenance of the portfolio's per share net
asset value at $1.00 is based on its election to operate under the provisions
of Rule 2a-7 under the Investment Company Act of 1940, as amended. As
conditions of operating under Rule 2a-7, the portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of thirteen months or less and invest
only in U.S. dollar-denominated securities which are determined by the Trustees
to present minimal credit risks and which are of eligible quality as determined
under the rule.
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 57
<PAGE>
The Trustees have also agreed to establish procedures reasonably designed,
taking into account current market conditions and the portfolio's investment
objective, to stabilize the net asset value per share as computed for the
purposes of sales and redemptions at $1.00. These procedures include periodic
review, as the Trustees deem appropriate and at such intervals as are
reasonable in light of current market conditions, of the relationship between
the amortized cost value per share and a net asset value per share based upon
available indications of market value. In such a review, investments for which
market quotations are readily available are valued at the most recent bid price
or quoted yield equivalent for such securities or for securities of comparable
maturity, quality and type as obtained from one or more of the major market
makers for the securities to be valued. Other investments and assets are valued
at fair value, as determined in good faith by the Trustees.
In the event of a deviation of over 1/2 of 1% between a portfolio's net asset
value based upon available market quotations or market equivalents and $1.00
per share based on amortized cost, the Trustees will promptly consider what
action, if any, should be taken. The Trustees will also take such action as
they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise
from differences between the two. Such action may include redeeming shares in
kind, selling instruments prior to maturity to realize capital gains or losses
or to shorten average maturity, withholding dividends, paying distributions
from capital or capital gains, or utilizing a net asset value per share not
equal to $1.00 based upon available market quotations.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES: Dividends and Capital Gains
Distributions: The Fund maintains different dividend and capital gain
distribution policies for each portfolio. These are:
o The Equity, Value, Growth, Fixed Income, Fixed Income Portfolio II, Special
Purpose Fixed Income, High Yield, Limited Duration, Intermediate Duration,
Mortgage-Backed Securities, Balanced, Multi-Asset-Class, Global Fixed
Income, International Fixed Income, Domestic Fixed Income and Balanced Plus
Portfolios normally distribute substantially all of their net investment
income to shareholders in the form of quarterly dividends.
o The International Equity, Small Cap Value, Mid Cap Value and Mid Cap Growth
Portfolios normally distribute substantially all of their net investment
income in the form of annual dividends.
o The Municipal and the PA Municipal Portfolios normally distribute
substantially all of their net investment income in the form of monthly
dividends.
o The Cash Reserves Portfolio declares dividends daily and normally distributes
substantially all of its investment income in the form of monthly dividends.
If any portfolio does not have income available to distribute, as determined in
compliance with the appropriate tax laws, no distribution will be made.
If any net capital gains are realized from the sale of underlying securities,
the portfolios normally distribute such gains with the last dividend for the
calendar year.
All dividends and capital gains distributions are automatically paid in
additional shares of the portfolio unless the shareholder elects otherwise.
Such election must be made in writing to the Fund and may be made on the
Account Registration Form.
In all portfolios except the Cash Reserves Portfolio, undistributed net
investment income is included in the portfolio's net assets for the purpose of
calculating net asset value per share. Therefore, on the ex-dividend date, the
net asset value per share excludes the dividend (i.e., is reduced by the per
share amount of the dividend). Dividends paid shortly after the purchase of
shares by an investor, although in effect a return of capital, are taxable as
ordinary income.
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MAS Funds - 58 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Certain Mortgage Securities may provide for periodic or unscheduled payments of
principal and interest as the mortgages underlying the securities are paid or
prepaid. However, such principal payments (not otherwise characterized as
ordinary discount income or bond premium expense) will not normally be
considered as income to the portfolio and therefore will not be distributed as
dividends. Rather, these payments on mortgage-backed securities will be
reinvested on behalf of the shareholders by the portfolio in accordance with
its investment objectives and policies.
Special Considerations for the Cash Reserves Portfolio: Net investment income
is computed and dividends declared as of 12:00 noon (Eastern Time), on each
day. Such dividends are payable to Cash Reserves Portfolio shareholders of
record as of 12:00 noon (Eastern Time) on that day, if the portfolio is open
for business. Shareholders who redeem prior to 12:00 noon (Eastern Time) are
not entitled to dividends for that day. Dividends declared for Saturdays,
Sundays and holidays are payable to shareholders of record as of 12:00 noon
(Eastern Time) on the preceding business day on which the portfolio was open
for business.
Net realized short-term capital gains, if any, of the Cash Reserves Portfolio
will be distributed whenever the Trustees determine that such distributions
would be in the best interest of shareholders, but at least once a year. The
portfolio does not expect to realize any long-term capital gains. Should any
such gains be realized, they will be distributed annually.
Federal Taxes: The following summary of Federal income tax consequences is
based on current tax laws and regulations, which may be changed by legislative,
judicial or administrative action. No attempt has been made to present a
detailed explanation of the federal income tax treatment of the portfolio or
its shareholders. In addition, state and local tax consequences of an
investment in the portfolio may differ from the Federal income tax consequences
described below. Accordingly, shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state and local taxes.
Each portfolio of the Fund intends to qualify for taxation as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code") so that
each portfolio will not be subject to Federal income tax to the extent it
distributes investment company taxable income and net capital gain (the excess
of net long-term capital gain over net short-term capital loss) to
shareholders. Each Portfolio is treated as a separate entity for Federal income
tax purposes and is not combined with any of the Funds' other portfolios.
Dividends, either in cash or reinvested in shares, paid by a portfolio, except
for the Municipal and PA Municipal Portfolios (see Special Tax Considerations
for the Municipal and PA Municipal Portfolios) from net investment income will
be taxable to shareholders as ordinary income. In the case of the Equity,
Value, Small Cap Value, Mid Cap Growth, Growth, Balanced, Balanced Plus,
Multi-Asset-Class and Mid Cap Value Portfolios, such dividends paid to
corporate shareholders will generally qualify in part for the dividends
received deduction for corporations to the extent attributable to dividends
received by such portfolios from domestic corporations. The Fund will send each
shareholder a statement each year indicating the amount of the dividend income
which qualifies for such treatment.
Whether paid in cash or additional shares of a portfolio, and regardless of the
length of time the shares in such portfolio have been owned by the shareholder,
distributions from long-term capital gains are taxable to shareholders as such,
and are not eligible for the dividends received deduction for corporations.
Shareholders are notified annually by the Fund as to Federal tax status of
dividends and distributions paid by a portfolio. Such dividends and
distributions may also be subject to state and local taxes.
Exchanges and redemptions of shares in a portfolio are taxable events for
Federal income tax purposes. Individual shareholders may also be subject to
state and municipal taxes on such exchanges and redemptions.
Each portfolio intends to declare and pay dividends and capital gain
distributions so as to avoid imposition of the Federal excise tax. To do so,
each portfolio expects to distribute an amount at least equal to (i) 98% of its
calendar year ordinary income, (ii) 98% of its capital gains net income (the
excess of short and long-term capital gain over short and long-term capital
loss) for the one-year period ending October 31st, and (iii) 100% of any
undistrib-
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Terms in bold type are defined in the Prospectus Glossary MAS Funds - 59
<PAGE>
uted ordinary and capital gain net income from the prior year. Dividends
declared in October, November or December by a portfolio will be deemed to have
been paid by such portfolio and received by shareholders on December 31st of
the declared year provided that the dividends are paid before February 1 of the
following year.
The Fund is required by Federal law to withhold 31% of reportable payments
(which may include dividends, capital gains distributions, and redemptions)
paid to shareholders who have not complied with IRS regulations. In order to
avoid this withholding requirement, you must certify on the Account
Registration Form that your Social Security or Taxpayer Identification Number
provided is correct and that you are not currently subject to back-up
withholding, or that you are exempt from back-up withholding.
Foreign Income Taxes: Investment income received by the portfolios from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The U.S. has entered into Tax Treaties with many foreign countries
which entitle these portfolios to a reduced rate of tax or exemption from tax
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the portfolios' assets to be invested within
various countries is not known. The portfolios intend to operate so as to
qualify for treaty reduced rates of tax where applicable.
The International Equity, Global Fixed Income and International Fixed Income
Multi-Asset-Class and Balanced Plus Portfolios may file an election with the
Internal Revenue Service to pass through to the portfolio's shareholders the
amount of foreign income taxes paid by the portfolio, but may do so only if
more than 50% of the value of the total assets of the portfolio at the end of
the fiscal year is represented by foreign securities. These portfolios will
make such an election only if they deem it to be in the best interests of their
shareholders. The other portfolios will not be able to make this election.
If this election is made, shareholders of the portfolio will be required to:
(i) include in gross income, even though not actually received, their
respective pro rata share of foreign taxes paid by the portfolio; (ii) treat
their pro rata share of foreign taxes as paid by them; and (iii) either deduct
their pro rata share of foreign taxes in computing their taxable income or use
it within the limitations set forth in the Internal Revenue Code as a foreign
tax credit against U.S. income taxes (but not both).
Each shareholder of the portfolio will be notified within 60 days after the
close of each taxable (fiscal) year of the Fund if the foreign taxes paid by
the portfolio will pass through for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the portfolio's gross income from foreign sources. Shareholders who are
not liable for Federal income taxes, such as retirement plans qualified under
Section 401 of the Internal Revenue Code, will not be affected by any such
"pass through" of foreign tax credits.
State and Local Taxes: The Fund is formed as a Pennsylvania Business Trust and
therefore is not liable, under current law, for any corporate income or
franchise tax of the Commonwealth of Pennsylvania. The Fund will provide
Pennsylvania taxable values on a per share basis upon request.
Special Tax Considerations for the Municipal and PA Municipal Portfolios: These
portfolios intend to invest a sufficient portion of their assets in municipal
bonds and notes so that each will qualify to pay exempt-interest dividends to
shareholders. Such exempt-interest dividends are excluded from a shareholder's
gross income for Federal income tax purposes. Tax-exempt dividends received
from the Municipal and PA Municipal Portfolios may be subject to state and
local taxes. However, some states allow shareholders to exclude that portion of
a portfolio's tax-exempt income which is attributable to municipal securities
issued within the shareholder's state of residence. Furthermore, the PA
Municipal Portfolio invests at least 65% of its assets in PA Municipals. As a
result, the income of the portfolio that is derived from PA Municipals and U.S.
Governments will not be subject to the Pennsylvania personal income tax or to
the Philadelphia School District investment net income tax. Distributions by
the PA Municipal Portfolio to a Pennsylvania resident that are attributable to
most other sources may be subject to the Pennsylvania personal income tax and
(for residents of Philadelphia) to the Philadelphia School District investment
net income tax.
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MAS Funds - 60 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
To the extent, if any, that dividends paid to shareholders of the Municipal and
PA Municipal Portfolios are derived from taxable interest or long-term or
short-term capital gains, such dividends will be subject to Federal personal
income tax (whether such dividends are paid in cash or in additional shares)
and may also be subject to state and local taxes. In addition, the Municipal
and PA Municipal Portfolios may invest in private activity municipal
securities, the interest on which is subject to the Federal alternative minimum
tax for corporations and individuals and the Federal environmental tax for
corporations only. Exempt-interest dividends from such private activity
securities issued after August 7, 1986, will generally be an item of tax
preference and therefore potentially subject to the alternative minimum tax
environmental tax. A shareholder may lose the tax exempt status of the accrued
income of these portfolios if they redeem their shares before a dividend has
been declared.
The Municipal and PA Municipal Portfolios may not be appropriate investments
for persons who are "substantial users" (or persons related to "substantial
users") of facilities financed by industrial development bonds or private
activity bonds. Such persons should consult their tax advisers before
purchasing shares.
TRUSTEES OF THE TRUST: The affairs of the Trust are supervised by the Trustees
under the laws governing business trusts in the Commonwealth of Pennsylvania.
The Trustees have approved contracts under which, as described above, certain
companies provide essential management, administrative and shareholder services
to the Trust.
INVESTMENT ADVISER: The Investment Adviser to the Fund, Miller Anderson &
Sherrerd, LLP (the "Adviser"), is a Pennsylvania limited liability partnership
founded in 1969, wholly owned by indirect subsidiaries of Morgan Stanley, Dean
Witter, Discover & Co., and is located at One Tower Bridge, West Conshohocken,
PA 19428. The Adviser provides investment services to employee benefit plans,
endowment funds, foundations and other institutional investors and as of March
31, 1997 had in excess of $43 billion in assets under management. On May 31,
1997, Morgan Stanley Group Inc., then the indirect parent of the Adviser,
merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean Witter,
Discover & Co. In connection with this transaction, the Adviser entered into a
new Investment Management Agreement ("Agreement") with MAS Funds dated May 31,
1997, which Agreement was approved by the shareholders of each portfolio at a
special meeting held on May 1, 1997 or at an adjournment of such meeting held
on May 12, 1997. The Adviser will retain its name and remain at its current
location, One Tower Bridge, West Conshohocken, PA 19428. The Adviser will
continue to provide investment counseling services to employee benefit plans,
endowments, foundations and other institutional investors.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 61
<PAGE>
Under the Agreement with the Fund, the Adviser, subject to the control and
supervision of the Fund's Board of Trustees and in conformance with the stated
investment objectives and policies of each portfolio of the Fund, manages the
investment and reinvestment of the assets of each portfolio of the Fund. In
this regard, it is the responsibility of the Adviser to make investment
decisions for the Fund's portfolios and to place each portfolio's purchase and
sales orders. As compensation for the services rendered by the Adviser under
the Agreement, each portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the portfolio's average daily net assets for the quarter:
Rate
------
Equity Portfolio .500%
Growth Portfolio .500
International Equity Portfolio .500
Mid Cap Growth Portfolio .500
Mid Cap Value Portfolio* .750
Small Cap Value Portfolio* .750
Value Portfolio .500
Cash Reserves Portfolio .250
Domestic Fixed Income Portfolio .375
Fixed Income Portfolio .375
Fixed Income Portfolio II .375
Global Fixed Income Portfolio .375
High Yield Portfolio .375
Intermediate Duration Portfolio .375
International Fixed Income Portfolio .375
Limited Duration Portfolio .300
Mortgage-Backed Securities Portfolio .375
Municipal Portfolio .375
PA Municipal Portfolio .375
Special Purpose Fixed Income Portfolio .375
Balanced Portfolio .450
Multi-Asset-Class Portfolio .650
Balanced Plus Portfolio .550
* Advisory fees in excess of 0.750% of average net assets are considered higher
than normal for most investment companies, but are not unusual for
portfolios that invest primarily in small capitalization stocks or in
countries with emerging market economies.
Until further notice, the Adviser has voluntarily agreed to waive its advisory
fees and reimburse certain expenses to the extent necessary to keep Total
Operating Expenses actually deducted from portfolio assets for the Mid Cap
Value, Cash Reserves, Domestic Fixed Income, Intermediate Duration, Limited
Duration, Mortgage-Backed Securities, Municipal, PA Municipal and
Multi-Asset-Class Portfolios from exceeding 0.88%, 0.32%, 0.50%, 0.52%, 0.42%,
0.50%, 0.50%, 0.50% and 0.78%, respectively.
- --------------------------------------------------------------------------------
MAS Funds - 62 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
For the fiscal year ended September 30, 1996, the Adviser received the
following as compensation for its services:
Rate
------
Equity Portfolio .500%
International Equity Portfolio .500%
Mid Cap Growth Portfolio .500%
Mid Cap Value Portfolio .564%
Small Cap Value Portfolio .750%
Value Portfolio .500%
Cash Reserves Portfolio .155%
Domestic Fixed Income Portfolio .362%
Fixed Income Portfolio .375%
Fixed Income Portfolio II .375%
Global Fixed Income Portfolio .375%
High Yield Portfolio .375%
Intermediate Duration Portfolio .244%
International Fixed Income Portfolio .375%
Limited Duration Portfolio .300%
Mortgage-Backed Securities Portfolio .335%
Municipal Portfolio .288%
PA Municipal Portfolio .228%
Special Purpose Fixed Income Portfolio .375%
Balanced Portfolio .450%
Multi-Asset-Class Portfolio .372%
Balanced Plus Portfolio N/A
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 63
<PAGE>
PORTFOLIO MANAGEMENT
The investment professionals who are primarily responsible for the day-to-day
management of the Fund's portfolios are as follows:
Equity Portfolio: Arden C. Armstrong, Kurt A. Feuerman, James J. Jolinger,
Nicholas J. Kovich, Robert J. Marcin and Gary G. Schlarbaum;
Value Portfolio: Robert J. Marcin, Richard M. Behler and Nicholas J. Kovich;
Small Cap Value and Mid Cap Value Portfolios: Gary G. Schlarbaum, Bradley S.
Daniels and William B. Gerlach;
Mid Cap Growth Portfolio: Arden C. Armstrong and Abhi Y. Kanitkar;
Growth Portfolio: Arden C. Armstrong and Gary G. Schlarbaum;
Fixed Income, Domestic Fixed Income, Special Purpose Fixed Income, and Fixed
Income II Portfolios: Thomas L. Bennett, Kenneth B. Dunn and Richard B. Worley;
Mortgage-Backed Securities Portfolio: Kenneth B. Dunn and Scott F. Richard;
High Yield Portfolio: Stephen F. Esser, Thomas L. Bennett and Robert E.
Angevine;
Cash Reserves Portfolio: Abigail Jones Feder and Ellen D. Harvey;
Limited Duration and Intermediate Duration Portfolios: Ellen D. Harvey, Scott
F. Richard and Christian G. Roth;
Municipal and PA Municipal Portfolios: Steven K. Kreider, Kenneth B. Dunn and
Scott F. Richard;
Balanced Portfolio: Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley;
Multi-Asset-Class Portfolio: Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras and Richard B. Worley;
International Equity Portfolio: Horacio A. Valerias and Hassan Elmasry;
Global Fixed Income and International Fixed Income Portfolios: J. David
Germany, Michael Kushma, Paul F. O'Brien and Richard B. Worley;
Balanced Plus Portfolio: Thomas L. Bennett, John D. Connolly, Gary G.
Schlarbaum, Horacio A. Valeiras, Richard B. Worley and J. David Germany.
A description of their business experience during the past five years is as
follows:
- --------------------------------------------------------------------------------
MAS Funds - 64 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He assumed responsibility for the High Yield Portfolio in
1996.
Arden C. Armstrong, Managing Director, Morgan Stanley, joined MAS in 1986. She
assumed responsibility for the Mid Cap Growth Portfolio in 1990, the Growth
Portfolio in 1993 and the Equity Portfolio in 1994.
Richard M. Behler, Principal, Morgan Stanley, joined MAS in 1995. He served as
a Portfolio Manager from 1992 through 1995 for Moore Capital Management and as
Senior Vice President for Merrill Lynch Economics from 1987 through 1992. He
assumed responsibility for the Value Portfolio in 1996.
Thomas L. Bennett, Managing Director, Morgan Stanley, joined MAS in 1984. He
assumed responsibility for the Fixed Income Portfolio in 1984, the Domestic
Fixed Income Portfolio 1987, the High Yield Portfolio in 1985, the Fixed Income
Portfolio II in 1990, the Special Purpose Fixed Income and Balanced Portfolios
in 1992 and the Multi-Asset-Class Portfolio in 1994.
John D. Connolly, Principal, Morgan Stanley, joined MAS in 1990. He assumed
responsibility for the Balanced Portfolio in 1992 and the Multi-Asset-Class
Portfolio in 1994.
Bradley S. Daniels, Vice President, Morgan Stanley, joined MAS in 1985. He
assumed responsibility for the Small Cap Value Portfolio in 1986 and the Mid
Cap Value Portfolio in 1994.
Kenneth B. Dunn, Managing Director, Morgan Stanley, joined MAS in 1987. He
assumed responsibility for the Fixed Income and the Domestic Fixed Income
Portfolios in 1987, the Fixed Income II Portfolio in 1990, the Mortgage-Backed
Securities and Special Purpose Fixed Income Portfolios in 1992, and the
Municipal and PA Municipal Portfolios in 1994.
Hassan Elmasry, Principal, Morgan Stanley, joined MAS in 1995. He served as
First Vice President & International Equity Portfolio Manager from 1987 through
1995 for Mitchell Hutchins Asset Management. He assumed responsibility for the
International Equity Portfolio in 1996.
Stephen F. Esser, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the High Yield Portfolio in 1989.
Abigail Jones Feder, Principal, Morgan Stanley, joined Morgan Stanley in 1985.
She assumed responsibility for the Cash Reserves Portfolio in 1996.
Kurt Feuerman, Managing Director, Morgan Stanley, joined Morgan Stanley in
1990. He assumed responsibility for the Equity Portfolio in 1996.
William B. Gerlach, Vice President, Morgan Stanley, joined MAS in 1991. He
assumed responsibility for the Small Cap Value and Mid Cap Value Portfolios in
1996.
J. David Germany, Managing Director, Morgan Stanley, joined MAS in 1991. He
served as Vice President & Senior Economist for Morgan Stanley & Co. from 1989
to 1991. He assumed responsibility for the Global Fixed Income and
International Fixed Income Portfolios in 1993 and the Multi-Asset-Class
Portfolio in 1994.
Ellen D. Harvey, Principal, Morgan Stanley, joined MAS in 1984. She assumed
responsibility for the Cash Reserves Portfolio in 1990, the Limited Duration
Portfolio in 1992 and the Intermediate Duration Portfolio in 1994.
James J. Jolinger, Vice President, Morgan Stanley, joined MAS in 1994. He
served as Equity Analyst for Oppenheimer Capital from 1987-1994. He assumed
responsibility for the Equity Portfolio in 1997.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 65
<PAGE>
Abhi Y. Kanitkar, Vice President, Morgan Stanley, joined MAS in 1994. He served
as an Investment Analyst from 1993 through 1994 for Newbold's Asset Management
and as Director & Investment Analyst from 1990 through 1993 for Kanitkar
Investment Services, Inc. He assumed responsibility for the Mid Cap Growth
Portfolio in 1996.
Nicholas J. Kovich, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Equity Portfolio in 1994 and the Value Portfolio
in 1997.
Steven K. Kreider, Principal, Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the Municipal and the PA Municipal Portfolios in 1992.
Michael Kushma, Principal, Morgan Stanley, joined Morgan Stanley in 1988. He
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1996.
Robert J. Marcin, Managing Director, Morgan Stanley, joined MAS in 1988. He
assumed responsibility for the Value Portfolio in 1990 and the Equity Portfolio
in 1994.
Paul F. O'Brien, Principal, Morgan Stanley, joined MAS in 1996. He served as
Head of European Economics from 1993 through 1995 for JP Morgan and as
Principal Administrator from 1991 through 1992 for the Organization for
Economic Cooperation and Development. He assumed responsibility for the Global
Fixed Income and International Fixed Income Portfolios in 1996.
Scott F. Richard, Managing Director, Morgan Stanley, joined MAS in 1992. He
served as Vice President, Head of Fixed Income Research & Model Development for
Goldman, Sachs & Co. from 1987 to 1991 and as Head of Mortgage Research in
1992. He assumed responsibility for the Mortgage-Backed Securities Portfolio in
1992, the Limited Duration, Intermediate Duration, Municipal and PA Municipal
Portfolios in 1994 and the Advisory Mortgage Portfolio in 1995.
Christian G. Roth, Principal, Morgan Stanley, joined MAS in 1991. He assumed
responsibility for the Limited Duration and Intermediate Duration Portfolios in
1994.
Gary G. Schlarbaum, Managing Director, Morgan Stanley; Director, MAS Fund
Distribution, Inc.; joined MAS in 1987. He assumed responsibility for the
Equity and Small Cap Value Portfolios in 1987, the Balanced Portfolio in 1992
and the Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
Horacio A. Valeiras, Principal, Morgan Stanley, joined MAS in 1992. He served
as an International Strategist from 1989 through 1992 for Credit Suisse First
Boston and as Director-Equity Research in 1992. He assumed responsibility for
the International Equity Portfolio in 1992, the Emerging Markets Portfolio in
1993, the Multi-Asset-Class Portfolio in 1994 and the Balanced Portfolio in
1996.
Richard B. Worley, Managing Director, Morgan Stanley, joined MAS in 1978. He
assumed responsibility for the Fixed Income Portfolio in 1984, the Domestic
Fixed Income Portfolio in 1987, the Fixed Income Portfolio II in 1990, the
Balanced and Special Purpose Fixed Income Portfolios in 1992, the Global Fixed
Income and International Fixed Income Portfolios in 1993 and the
Multi-Asset-Class Portfolio in 1994.
ADMINISTRATIVE SERVICES: MAS serves as Administrator to the Fund pursuant to an
Administration Agreement dated as of November 18, 1993. Under its
Administration Agreement with the Fund, MAS receives an annual fee, accrued
daily and payable monthly, of 0.08% of the Fund's average daily net assets, and
is responsible for all fees payable under any sub-administration agreements.
Chase Global Funds Services Company, a subsidiary of The Chase Manhattan Bank,
73 Tremont Street, Boston MA 02108-3913, serves as Transfer Agent to the Fund
pursuant to an agreement also dated as of November 18, 1993, and provides fund
accounting and other services pursuant to a sub-administration agreement with
MAS as Administrator.
- --------------------------------------------------------------------------------
MAS Funds - 66 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
GENERAL DISTRIBUTION AGENT: Shares of the Fund are distributed exclusively
through MAS Fund Distribution, Inc., a wholly-owned subsidiary of the Adviser.
PORTFOLIO TRANSACTIONS: The investment advisory agreement authorizes the
Adviser to select the brokers or dealers that will execute the purchases and
sales of investment securities for each of the Fund's portfolios and directs
the Adviser to use its best efforts to obtain the best execution with respect
to all transactions for the portfolios. In doing so, a portfolio may pay higher
commission rates than the lowest available when the Adviser believes it is
reasonable to do so in light of the value of the research, statistical, and
pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in the
purchase of shares of the portfolios for their clients.
Some securities considered for investment by each of the Fund's portfolios may
also be appropriate for other clients served by the Adviser. If purchase or
sale of securities consistent with the investment policies of a portfolio and
one or more of these other clients served by the Adviser is considered at or
about the same time, transactions in such securities will be allocated among
the portfolio and clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Fund's
Trustees. MAS may use its broker dealer affiliates, including Morgan Stanley &
Co., a wholly owned subsidiary of Morgan Stanley. Dean Witter, Discover & Co.,
the parent of MAS's general partner and limited partner, to carry out the
Fund's transactions, provided the Fund receives brokerage services and
commission rates comparable to those of other broker dealers.
OTHER INFORMATION: Description of Shares and Voting Rights: The Fund was
established under Pennsylvania law by a Declaration of Trust dated February 15,
1984, as amended and restated as of November 18, 1993. The Fund is authorized
to issue an unlimited number of shares of beneficial interest, without par
value, from an unlimited number of series (portfolios) of shares. Currently the
Fund consists of twenty-six portfolios.
The shares of each portfolio of the Fund are fully paid and non-assessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each portfolio of the Fund have no preemptive rights.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so. Shareholders are entitled
to one vote for each full share held (and a fractional vote for each fractional
share held), then standing in their name on the books of the Fund.
Meetings of shareholders will not be held except as required by the Investment
Company Act of 1940, as amended, and other applicable law. A meeting will be
held to vote on the removal of a Trustee or Trustees of the Fund if requested
in writing by the holders of not less than 10% of the outstanding shares of the
Fund. The Fund will assist in shareholder communication in such matters to the
extent required by law.
As of January 2, 1997, The Northern Trust Co. (Chicago, IL) owned a controlling
interest (as that term is defined by the Investment Company Act of 1940, as
amended) of the Cash Reserves Portfolio; the Inglis House Foundation
(Philadelphia, PA) owned a controlling interest in the Mortgage-Backed
Securities Portfolio; Richard B. Worley (West Conshohocken, PA) owned a
controlling interest in the PA Municipal Portfolio; Wendell & Co. (New York,
NY) owned a controlling interest in the Balanced Portfolio; the Charles A Dana
Foundation (New York, NY) owned a controlling interest in the Global Fixed
Income Portfolio and the Morgan Stanley Group, Inc. (New York, NY) owned a
controlling interest in the Intermediate Duration Portfolio.
Custodians: The Chase Manhattan Bank, New York, NY and Morgan Stanley Trust
Company (NY), Brooklyn, NY serve as custodians for the Fund. The custodians
hold cash, securities and other assets as required by the 1940 Act.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 67
<PAGE>
Transfer and Dividend Disbursing Agent: Chase Global Funds Services Company, a
subsidiary of The Chase Manhattan Bank, 73 Tremont Street, Boston, MA
02108-3913, serves as the Funds' Transfer Agent and dividend disbursing agent.
Reports: Shareholders receive semi-annual and annual financial statements.
Annual financial statements are audited by Price Waterhouse LLP, independent
accountants.
Litigation: The Fund is not involved in any litigation.
Closed Holidays: Currently, the weekdays on which the Fund is closed for
business are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,
the Cash Reserves Portfolio will be closed on Martin Luther King Day, Columbus
Day and Veteran's Day.
- --------------------------------------------------------------------------------
MAS Funds - 68 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
TRUSTEES AND OFFICERS
The following is a list of the Trustees and the principal executive officers of
the Fund and a brief statement of their present positions and principal
occupations during the past five years:
Thomas L. Bennett,* Chairman of the Board of Trustees; Managing Director,
Morgan Stanley; Portfolio Manager and member of the Executive Committee, Miller
Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.; Director,
Morgan Stanley Universal Funds, Inc.
Thomas P. Gerrity, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business, University of Pennsylvania;
Director, Digital Equipment Corporation; Director, Sun Company, Inc.; Director,
Federal National Mortgage Association; Director, Reliance Group Holdings;
Director, Melville Corporation.
Joseph P. Healey, Trustee; Headmaster, Haverford School; formerly Dean, Hobart
College; Associate Dean, William & Mary College.
Joseph J. Kearns, Trustee; Vice President and Treasurer, The J. Paul Getty
Trust; Director, Electro Rent Corporation; Trustee, Southern California Edison
Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
Vincent R. McLean, Trustee; Director, Alexander and Alexander Services, Inc.,
Director, Legal and General America, Inc., Director, William Penn Life
Insurance Company of New York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the Executive Committee of Sperry
Corporation (now part of Unisys Corporation).
C. Oscar Morong, Jr., Trustee; Managing Director, Morong Capital Management;
Director, Ministers and Missionaries Benefit Board of American Baptist
Churches, The Indonesia Fund, The Landmark Funds; formerly Senior Vice
President and Investment Manager for CREF, TIAA-CREF Investment Management,
Inc.
*Trustee Bennett is deemed to be an "interested person" of the Fund as that
term is defined in the Investment Company Act of 1940, as amended.
- --------------------------------------------------------------------------------
James D. Schmid, President, MAS Funds; Principal, Morgan Stanley; Head of
Mutual Funds, Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution,
Inc.; Chairman of the Board of Directors, The Minerva Fund, Inc.; formerly Vice
President, The Chase Manhattan Bank.
Lorraine Truten, CFA, Vice President, MAS Funds; Principal, Morgan Stanley;
Head of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS
Fund Distribution, Inc.
Douglas W. Kugler, CFA, Treasurer, MAS Funds; Vice President, Morgan Stanley;
Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP; formerly
Assistant Vice President, Provident Financial Processing Corporation.
John H. Grady, Jr., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius,
LLP; formerly Attorney, Ropes & Gray.
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 69
<PAGE>
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- --------------------------------------------------------------------------------
MAS Funds - 70 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
MAS ACCOUNT REGISTRATION FORM
- ---------
MAS FUNDS MAS Fund Distribution, Inc.
General Distribution Agent
- -------------------------------------------------------------------------------
1 REGISTRATION/PRIMARY
MAILING ADDRESS
Confirmations and month-end statements will be mailed to this address.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Attention
---------------------------------------------------------------------
Street or P.O. Box
------------------------------------------------------------
City State Zip
---------------------------- --------------------- -------------
Telephone No.
-----------------------
Type of Account:
/ / Defined Benefit Plan / / Defined Contribution Plan
/ / Profit Sharing/Thrift Plan
/ / Other Employee Benefit Plan
-----------------------------------------------
/ / Endowment / / Foundation / / Taxable / / Other (Specify)
-------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien,
Indicate Country of Residence
------------------
===============================================================================
2 INTERESTED PARTY OPTION
In addition to the account statement sent to the above registered address,
the Fund is authorized to mail duplicate statements to the name and address
provided at right.
For additional interested party mailings, please attach a separate sheet.
Attention
---------------------------------------------------------------------
Company
(If Applicable)
----------------------------------------------------------------
Street or P.O. Box
------------------------------------------------------------
City State Zip
---------------------------- --------------------- -------------
Telephone No.
-----------------------
===============================================================================
3 INVESTMENT
For Purchase of:
<TABLE>
<S> <C> <C>
/ / Equity Portfolio / / Fixed Income Portfolio / / InternationalEquity Portfolio
/ / Value Portfolio / / Fixed Income Portfolio II / / Emerging Markets Portfolio
/ / Growth Portfolio / / Special Purpose Fixed Income Portfolio / / International Fixed Income Portfolio
/ / Mid Cap Growth Portfolio / / High Yield Portfolio / / Global Fixed Income Portfolio
/ / Mid Cap Value Portfolio / / Limited Duration Portfolio / / Municipal Portfolio
/ / Balanced Portfolio / / Intermediate Duration Portfolio / / PA Municipal Portfolio
/ / Multi-Asset-Class Portfolio / / Mortgage-Backed Securities Portfolio
/ / Balanced Plus Portfolio / / Cash Reserves Portfolio
/ / Domestic Fixed Income Portfolio
</TABLE>
===============================================================================
4 TAXPAYER IDENTIFICATION NUMBER
Part 1.
Social Security Number
---------------------
or
Employer Identification Number
------------------------------
Part 2. BACKUP WITHHOLDING
/ / Check the box if the account is subject to Backup Withholding under
the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code.
- -------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct
taxpayer identification number. Accounts that have a missing or incorrect
taxpayer identification number will be subject to backup withholding at a 31%
rate on ordinary income and capital gains distribution as well as redemptions.
Backup withholding is not an additional tax; the tax liability of person subject
to backup withholding will be reduced by the amount of tax withheld.
You may be notified that you are subject to backup withholding under section
3406(a)(1)(C) because you have underreported interest or dividends or you were
required to, but failed to, file a return which would have included a reportable
interest or dividend payment. If you have been so notified, check the box in
PART 2 at left.
- -------------------------------------------------------------------------------
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -------------------------------------------------------------------------------
SIDE ONE OF TWO
<PAGE>
MAS
- ---------
MAS FUNDS
- -------------------------------------------------------------------------------
5 TELEPHONE REDEMPTION OPTION
Please sign below if you wish to redeem or exchange shares by telephone.
Redemption proceeds requested by phone may only be mailed to the account's
primary registration address or wired according to bank instructions provided
in writing. A signature guarantee is required if the bank account listed below
is not registered identically to your Fund Account.
The Fund and its agents shall not be liable for reliance on phone instructions
reasonably believed to be genuine. The Fund will maintain procedures designed to
authenticate telephone instructions received.
Telephone requests for redemptions or exchanges will not be honored unless
signature appears below.
(X)
- ---------------------------------------------
Signature Date
===============================================================================
6 WIRING INSTRUCTIONS -- The instructions provided below may only be changed by
written notification.
Please check appropriate box(es):
/ / Wire redemption proceeds
/ / Wire distribution proceeds (please complete box 7 below)
- -------------------------------------------- ------------------------
Name of Commercial Bank (Net Savings Bank) Bank Account No.
- -----------------------------------------------------------------------------
Name(s) in which your Bank Account is Established
- -----------------------------------------------------------------------------
Bank's Street Address
- ------------------------------------------------ --------------------------
City State Zip Routing/ABA Number
===============================================================================
7 DISTRIBUTION OPTION -- Income dividends and capital gains distributions (if
any) will be reinvested in additional shares unless either box below is
checked. The instructions provided below may only be changed by written
notification.
/ / Income dividends and capital gains to be paid in cash.
/ / Income dividends to be paid in cash and capital gains distribution in
additional shares.
/ / Income dividends and capital gains to be reinvested in additional shares.
If cash option is chosen, please indicate instructions below:
/ / Mail distribution check to the name and address in which account is
registered.
/ / Wire distribution to the same commercial bank indicated in Section 6
above.
===============================================================================
8 WIRING INSTRUCTIONS
For purchasing Shares by wire, please send a Fedwire payment to:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, NY 10081
ABA# 021000021
DDA# 910-2-734143
Attn: MAS Funds Subscription Account
Ref. (Portfolio name, your Account number, your Account name)
===============================================================================
SIGNATURE(S) OF ALL HOLDERS AND TAXPAYER CERTIFICATION
The undersigned certify that I/we have full authority and legal capacity to
purchase shares of the Fund and affirm that I/we have received a current MAS
Funds Prospectus and agree to be bound by its terms. Under penalties of
perjury I/we certify that the information provided in Section 4 above is true,
correct and complete. The Internal Revenue Service does not require your
consent to any provision of this document other than the certifications
required to avoid backup withholding.
(X)
------------------------------------------------------------------
Signature Date
(X)
------------------------------------------------------------------
Signature Date
(X)
------------------------------------------------------------------
Signature Date
(X)
------------------------------------------------------------------
Signature Date
-----------------------------------------------------------------------
FOR INTERNAL USE ONLY
(X)
----------------------------------------------------------------
Signature Date
----------------------------------------------------------------
O / / F / / OR / / S / /
------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE o WEST CONSHOHOCKEN, PA 19428 o 800-354-8185
- -------------------------------------------------------------------------------
SIDE TWO OF TWO
<PAGE>
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- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 73
<PAGE>
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- --------------------------------------------------------------------------------
MAS Funds - 74 Terms in bold type are defined in the Prospectus Glossary
<PAGE>
(This page intentionally left blank)
- --------------------------------------------------------------------------------
Terms in bold type are defined in the Prospectus Glossary MAS Funds - 75
<PAGE>
- ------MAS------------------------------------------------------- PROSPECTUS----
---------
MAS FUNDS
January 31, 1997
As Revised June 5, 1997
Investment Adviser and Administrator: Transfer Agent:
Miller Anderson & Sherrerd, LLP Chase Global Funds Services Company
One Tower Bridge 73 Tremont Street
West Conshohocken, Boston, Massachusetts 02108-0913
Pennsylvania 19428-2899
General Distribution Agent:
MAS Fund Distribution, Inc.
One Tower Bridge
P.O. Box 868
West Conshohocken,
Pennsylvania 19428-0868
-------------------------------------------------------------------------------
Table of Contents
Page Page
Fund Expenses 2 General Shareholder Information
Prospectus Summary 4 Purchase of Shares 53
Financial Highlights 8 Redemption of Shares 55
Yield and Total Return 15 Shareholder Services 56
Investment Suitability 16 Valuation of Shares 56
Investment Limitations 17 Dividends, Capital Gains
Portfolio Summaries 19 Distributions and Taxes 58
Equity Investments 19 Investment Adviser 61
Fixed-Income Investments 22 Portfolio Management 64
Prospectus Glossary: Administrative Services 66
Strategies 38 General Distribution Agent 67
Investments 43 Portfolio Transactions 67
Other Information 67
Trustees and Officers 69
<PAGE>
MAS FUNDS
SUPPLEMENT DATED JUNE 5, 1997 TO THE STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 31, 1997
This supplement provides new and additional information beyond that contained in
the Statement of Additional Information and should be retained and read in
conjunction with such Statement of Additional Information.
- --------------------------------------------------------------------------------
The following information replaces the fifth paragraph of the Portfolio
Transactions section located on page 32 of the Statement of Additional
Information:
On May 31, 1997, Morgan Stanley Group Inc., then the indirect parent of the
Adviser, merged with Dean Witter, Discover & Co. to form Morgan Stanley, Dean
Witter, Discover & Co. As an indirect subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., the Adviser is affiliated with certain U.S.-registered
broker-dealers and foreign broker-dealers (collectively, the "Affiliated
Brokers"). The Adviser may, in the exercise of its discretion under its
investment management agreement, effect transactions in securities or other
instruments for the Fund through the Affiliated Brokers. The Fund paid $453,834
in brokerage commissions to affiliates for $191,758,624 of brokered transactions
for the fiscal year ended September 30, 1996.
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MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 31, 1997
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-six
portfolios offering a variety of investment alternatives. This Statement of
Additional Information sets forth information about the Fund applicable to each
of the twenty-six portfolios.
This Statement is not a Prospectus but should be read in conjunction with the
Fund's Prospectuses dated January 31, 1997, each as revised from time to
time. To obtain either of these Prospectuses, please call the Client Services
Group.
Client Services Group: 1-800-354-8185
Prices and Investment Results: 1-800-522-1525
TABLE OF CONTENTS
Page
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Business History 3
Strategies and Investments 3
Repurchase Agreements 3
Securities Lending 3
Foreign Investments 4
Futures Contracts 5
Restrictions on the Use of Futures Contracts 6
Risk Factors in Futures Transactions 6
Options 7
Options on Foreign Currencies 7
Combined Transactions 9
Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies 9
Swap Contracts 10
Foreign Currency Exchange-Related Securities 11
Municipal Bonds 12
Duration 13
Mortgage-Backed Securities 14
Stripped Mortgage-Backed Securities 16
U.S. Government Securities 16
Zero Coupon Bonds 17
Eurodollar and Yankee Obligations 17
Brady Bonds 18
Cash Reserves Portfolio 18
Tax Considerations 19
Purchase of Shares 20
Redemption of Shares 20
Shareholder Services 20
Investment Limitations 21
Management of the Fund 23
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Distribution Plans 28
Shareholder Service Agreement 28
Investment Adviser 28
Administration 31
Distributor for Fund 32
Custodians 32
Portfolio Transactions 32
Portfolio Turnover 33
General Information 34
Performance Information 35
Comparative Indices 41
Financial Statements 46
Appendix-Description of Securities and Ratings 46
Description of Bond Ratings 46
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BUSINESS HISTORY
MAS Funds (formerly MAS Pooled Trust Fund) is an open end management investment
company established under Pennsylvania law as a Pennsylvania business trust
under an Amended and Restated Agreement and Declaration of Trust dated November
18, 1993. The Fund was originally established as The MAS Pooled Trust Fund, a
Pennsylvania business trust, in February, 1984.
STRATEGIES AND INVESTMENTS
The following information supplement the characteristics and risks of strategies
and investments set forth in the Fund's Prospectuses:
REPURCHASE AGREEMENTS
Each of the Fund's Portfolios may invest in repurchase agreements collateralized
by U.S. Government securities, certificates of deposit and certain bankers'
acceptances. Repurchase agreements are transactions by which a Portfolio
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. In these
transactions, the securities purchased by a Portfolio have a total value in
excess of the value of the repurchase agreement and are held by the Portfolio's
custodian bank until repurchased. Such agreements permit a Portfolio to keep all
its assets at work while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. The Adviser and the Fund's Administrator
will continually monitor the value of the underlying securities to ensure that
their value always equals or exceeds the repurchase price.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, a
Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of a Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that a Portfolio may not be able to substantiate its interest in the underlying
securities. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through stringent security selection criteria and
careful monitoring procedures.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Portfolio. Each Portfolio may lend its investment securities to qualified
brokers, dealers, domestic and foreign banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act of 1940, as amended, or the Rules
and Regulations or interpretations of the Securities and Exchange Commission
(the "Commission") thereunder, which currently require that (a) the borrower
pledge and maintain with the Portfolio collateral consisting of cash, an
irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the United States Government having a value at all times
not less than 100% of the value of the securities loaned, (b) the borrower add
to such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Portfolio at any time, and (d) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities
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and any increase in their market value. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights may
pass with the loaned securities, but if a material event were to occur affecting
an investment on loan, the loan must be called and the securities voted.
FOREIGN INVESTMENTS
Investors should recognize that investing in foreign securities involves certain
special considerations which are not typically associated with investing in
domestic securities. Since the securities of foreign issuers are frequently
denominated in foreign currencies, and since the Portfolios may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Portfolios will
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
between various currencies. The investment policies of the Portfolios (except
for the Domestic Fixed Income, Limited Duration, Mortgage-Backed Securities,
Advisory Mortgage and Cash Reserves Portfolios) permit them to enter into
forward foreign currency exchange contracts in order to hedge their respective
holdings and commitments against changes in the level of future currency rates.
Such contracts involve an obligation to purchase or sell a specific currency at
a future date at a price set at the time of the contract.
As non-U.S. companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to domestic issuers, there may be less publicly available information about
certain foreign securities than about domestic securities. Securities of some
foreign issuers are generally less liquid and more volatile than securities of
comparable domestic companies. There is generally less government supervision
and regulation of stock exchanges, brokers and listed issuers than in the U.S.
In addition, with respect to certain foreign countries, there is the possibility
of expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Although the Portfolios will endeavor to achieve most favorable execution costs
in its portfolio transactions, fixed commissions on many foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges. In addition,
it is expected that the expenses for custodian arrangements of the Portfolio's
foreign securities will be somewhat greater than the expenses for the custodian
arrangements for handling the U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and interest
income. Although in some countries a portion of these taxes are recoverable, the
non-recovered portion of foreign withholding taxes will reduce the income
received from investments in such countries. However, these foreign withholding
taxes are not expected to have a significant impact on those Portfolios for
which the investment objective is to seek long-term capital appreciation and any
income should be considered incidental.
The International Equity, Emerging Markets, International Fixed Income, Advisory
Foreign Fixed Income, Global Fixed Income, Multi-Asset-Class, High Yield,
Municipal, PA Municipal, Balanced Plus and Balanced Portfolios may invest in the
securities of issuers in Eastern European and other developing markets. The
economies of these countries are currently suffering both from the stagnation
resulting from centralized economic planning and control and the higher prices
and unemployment associated with the transition to market economies. Unstable
economic and political conditions may adversely affect security values. Upon the
accession to power of Communist regimes approximately 40 years ago, the
governments of a number of Eastern European countries expropriated a large
amount of property. The claims of many property owners against those governments
were never finally settled. In
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the event of the return to power of the Communist Party, there can be no
assurance that the portfolio's investments in Eastern Europe would not also be
expropriated, nationalized or otherwise confiscated.
In addition, the Equity, Growth, International Equity, Mid Cap Growth, Mid Cap
Value, Small Cap Value, Value, Balanced. Multi-Asset-Class and Balanced Plus
portfolios may invest in Global Depositary Receipts ("GDRs") and European
Depositary Receipts ("EDRs") to the extent that they come available. GDRs and
EDRs are typically issued by foreign depositaries, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation.
Holders of unsponsored GDRs and EDRs generally bear all the costs associated
with establishing the unsponsored GDRs and EDRs. The depositary of unsponsored
GDRs and EDRs is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored GDRs and EDRs voting rights with respect to the deposited securities
or pool of securities. GDRs and EDRs are not necessarily denominated in the
same currency as the underlying securities to which they may be connected.
Generally, GDRs or EDRs in registered form are designed for use in the U.S.
securities market and GDRs or EDRs in bearer form are designed for use in
securities markets outside the United States. The Funds may invest in sponsored
and unsponsored GDRs and EDRs. The purposes of the Funds' investment policies,
a Funds' investments in GDRs or EDRs will be deemed to be investments in the
underlying securities.
FUTURES CONTRACTS
Each Portfolio, except the Cash Reserves Portfolio, may enter into futures
contracts, options, and options on futures contracts. Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. Futures contracts which are standardized as to maturity date and
underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. A Portfolio's margin deposits will be placed in a
segregated account maintained by the Fund's Custodian or with a Futures
Commission Merchant as approved by the Fund's Board.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Fund expects to earn
interest income on its margin deposits.
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Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
value of the underlying securities. Regulations of the CFTC applicable to the
Fund require that the aggregate initial margins and premiums required to
establish non-hedging positions not exceed 5% of the liquidation value of a
Portfolio.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Portfolio's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of its total assets, and will maintain assets
sufficient to meet its obligations under such contracts in a segregated account
with the custodian bank or will otherwise comply with the SEC's position on
asset coverage.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Portfolio would continue to be required
to make daily cash payments to maintain its required margin. In such situations,
if the Portfolio has insufficient cash, it may have to sell portfolio securities
to meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the Portfolio may be required to make delivery of the
instruments underlying interest rate futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on a
Portfolio's ability to effectively hedge. A Portfolio will minimize the risk
that it will be unable to close out a futures contract by only entering into
futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. A Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit
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establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
OPTIONS
Investments in options involve some of the same considerations that are involved
in connection with investments in futures contracts (e.g., the existence of a
liquid secondary market). In addition, the purchase of an option also entails
the risk that changes in the value of the underlying security or contract will
not be fully reflected in the value of the option purchased. Depending on the
pricing of the option compared to either the futures contract or securities, an
option may or may not be less risky than ownership of the futures contract or
actual securities. In general, the market prices of options can be expected to
be more volatile than the market prices on the underlying futures contract or
securities.
OTC Options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC Option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolios expect generally to enter into OTC Options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor of credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC Option will be
satisfied. The staff of the SEC currently takes the position that OTC Options
purchased by the Portfolios or sold by them (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Portfolio's
limitation on investing in illiquid securities.
The Portfolios may also write covered-call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is designed to protect against a decline in the
U.S. dollar value of a currency due to the changes of exchange rates vis a vis
the U.S. dollar and the option is written for a currency other than the currency
in which the security is denominated. In such circumstances, the Portfolios
will follow the coverage requirements as described in the preceding paragraph.
OPTIONS ON FOREIGN CURRENCIES
All Portfolios except the Cash Reserves, Domestic Fixed Income, Limited
Duration, Mortgage-Backed Securities and Advisory Mortgage Portfolios, may
purchase and write options on foreign currencies in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminution in the value of portfolio securities, a
Portfolio may purchase put options on the foreign currency. If the
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value of the currency does decline, a Portfolio will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Portfolio may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to a Portfolio derived from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Portfolios could sustain losses on transactions in
foreign currency options which would require them to forego a portion or all of
the benefits of advantageous changes in such rates.
The Portfolios may write options on foreign currencies for the same purposes.
For example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the anticipated decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolios to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolios would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Portfolio also may be required to forego all
or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolios may only write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call, an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if a Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash,
U.S. Government securities or other high grade liquid debt securities in a
segregated account with the Custodian, or (c) maintains in a segregated account
cash, U.S. Government securities or other high-grade liquid debt securities in
an amount not less than the value of the underlying foreign currency in U.S.
dollars, marked-to-market daily.
The Portfolios may also write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which a Portfolio owns or has the right to acquire
due to an adverse change in the exchange rate and which is denominated in the
currency underlying the option. In such circumstances, the Portfolio will either
"cover" the transaction as described above or collateralize the option by
maintaining in a segregated account with the Custodian, cash or liquid
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
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COMBINED TRANSACTIONS
The Portfolios may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions, instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of the Portfolio to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.
RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON
FOREIGN CURRENCIES
Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchase of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost. Moreover, the option writer and a trader of
forward contracts could lose amounts substantially in excess of their initial
investments, due to the margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Furthermore, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options of foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decision, (iii) delays in the
Portfolio's ability to act upon economic events occurring in
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foreign markets during non business hours in the United States, (iv) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lesser trading volume.
SWAP CONTRACTS
All Portfolios, except the Cash Reserves Portfolio, may enter into Swap
Contracts. A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon notional
amount. The term "specified index" includes currencies, fixed interest rates,
prices, total return on interest rate indices, fixed income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, a Portfolio may agree to swap the
return generated by a fixed-income index for the return generated by a second
fixed-income index. The currency swaps in which the portfolios may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon national amount.
The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to a swap defaults, a Portfolio's risk of
loss consists of the net amount of payments that a Portfolio is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Portfolios
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors, and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash,
U.S. Government securities, or high grade debt obligations, to avoid any
potential leveraging of the Portfolio. To the extent that these swaps, caps,
floors, and collars are entered into for hedging purposes, the Adviser believes
such obligations do not constitute "senior securities" under the Investment
Company Act of 1940 and, accordingly, will not treat them as being subject to a
Portfolio's borrowing restrictions. All of the portfolios of MAS Funds except
the Cash Reserves Portfolio may enter into OTC Derivatives transactions (Swaps,
Caps, Floors, Puts, etc., but excluding foreign exchange contracts) with
counterparties that are approved by the Adviser in accordance with guidelines
established by the Board of Trustees. These guidelines provide for a minimum
credit rating for each counterparty and various credit enhancement techniques
(for example, collateralization of amounts due from counterparties) to limit
exposure to counterparties with ratings below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
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FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign currency warrants--Foreign currency warrants are warrants which entitle
the holder to receive from their issuer an amount of cash (generally, for
warrants issued in the United States, in U.S. dollars) which is calculated
pursuant to a predetermined formula and based on the exchange rate between a
specified foreign currency and the U.S. dollar as of the exercise date of the
warrant. Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants have been
issued in connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the OCC. Unlike foreign
currency options issued by the OCC, the terms of foreign exchange warrants
generally will not be amended in the event of governmental or regulatory actions
affecting exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial public
offering price of foreign currency warrants is generally considerably in excess
of the price that a commercial user of foreign currencies might pay in the
interbank market for a comparable option involving significantly larger amounts
of foreign currencies. Foreign currency warrants are subject to complex
political or economic factors.
Principal exchange rate linked securities--Principal exchange rate linked
securities are debt obligations the principal on which is payable at maturity in
an amount that may vary based on the exchange rate between the U.S. dollar and a
particular foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign currency to
which the security is linked appreciates against the U.S. dollar, and is
adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based of the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
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Performance indexed paper--Performance indexed paper is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is between the
U.S. dollar and a designated currency as of or about that time (generally, the
index maturity two days prior to maturity). The yield to the investor will be
within a range stipulated at the time of purchase of the obligation, generally
with a guaranteed minimum rate of return that is below, and a potential maximum
rate of return that is above, market yields on U.S. dollar-denominated
commercial paper, with both the minimum and maximum rates of return on the
investment corresponding to the minimum and maximum values of the spot exchange
rate two business days prior to maturity.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and their
political subdivisions, and duly constituted authorities and corporations, to
obtain Funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain Funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" or "special tax" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue or special tax bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other tax, but not from
general tax revenues. The Municipal and PA Municipal Portfolios ("the
Portfolios") may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper.
Industrial revenue bonds in most cases are revenue bonds and generally do not
have the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
Short-Term Discount Notes. Project Notes are instruments issued by the
Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
Project notes, they are also secured by the full faith and credit of the United
States.
Note obligations with demand or put options may have a stated maturity in excess
of one year, but permit any holder to demand payment of principal plus accrued
interest upon a specified number of days' notice. Frequently, such obligations
are secured by letters of credit or other credit support arrangements provided
by banks. The issuer of such notes normally has a corresponding right, after a
given period, to repay at its discretion the outstanding principal of the note
plus accrued interest upon a specific number of days' notice to the bondholders.
The interest rate on a demand note may be based upon a known lending rate, such
as the prime lending rate, and be adjusted when such rate changes, or the
interest rate on a demand note may be a market rate that is adjusted at
specified intervals. Each note purchased by the Portfolios will meet the quality
criteria set out in the Prospectus for the Portfolios.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and Standard & Poor's represent their opinions of
the quality of the Municipal Bonds rated by them. It should be emphasized that
such ratings are general and are not absolute standards of quality.
Consequently, Municipal Bonds with the same maturity, coupon and rating may have
different yields, while
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Municipal Bonds of the same maturity and coupon, but with different ratings may
have the same yield. It will be the responsibility of the investment management
staff to appraise independently the fundamental quality of the bonds held by the
Portfolios.
Municipal Bonds are sometimes purchased on a "when-issued" basis meaning the
Portfolio has committed to purchase certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Portfolios to achieve
their investment objectives. In that event, the Fund's Trustees and officers
would reevaluate its investment objective and policies and consider recommending
to its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of the Portfolio to achieve its investment objective. In that event,
the Fund's Trustees and officers would reevaluate its investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
DURATION
The Limited Duration and Intermediate Duration Portfolios seek to achieve their
objective by investing in the types of fixed income securities described in the
Prospectus and by maintaining an average duration of between one and three years
and two and five years, respectively. Duration is one of the fundamental tools
used by the Adviser in security selection for the Portfolios and any other
Portfolio which invests in fixed income securities.
Duration is a measure of the expected life of a fixed income security that was
developed as a more precise alternative to the concept of the "term of
maturity." Duration incorporates a bond's yield, coupon interest payments, final
maturity and call features into one measure.
Most debt obligations provide interest ("coupon") payments in addition to a
final ("par") payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates.
Traditionally, a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a debt security provides its final
payment, taking no account of the pattern of the security's payments prior to
maturity. Duration is a measure of the expected life of a fixed income security
on a present value basis. Duration takes the length of the time intervals
between the present time and the time that the interest and principal payments
are scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being the same, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more
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years; however, their interest rate exposure is not properly captured by
duration in the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to investors. Fixed
Income, Domestic Fixed Income, Fixed Income Portfolio II, Special Purpose Fixed
Income, Limited Duration, High Yield, Intermediate Duration Fixed Income,
Mortgage-Backed Securities, Advisory Mortgage, International Fixed Income,
Advisory Foreign Fixed Income, Global Fixed Income, Multi-Asset-Class,
Municipal, PA Municipal, Balanced Plus and Balanced Portfolios may invest in
Mortgage-Backed Securities. Most issuers or poolers provide guarantees of
payments, regardless of whether or not the mortgagor actually makes the payment.
The guarantees made by issuers or poolers are individual loan, title, pool and
hazard insurance purchased by the issuer. There can be no assurance that the
private issuers can meet their obligations under the policies. Mortgage-backed
securities issued by private issuers, whether or not such securities are subject
to guarantees, may entail greater risk. If there is no guarantee provided by the
issuer, mortgage-backed securities purchased by the Portfolios will be rated
investment grade by Moody's or Standard & Poor's, or, if unrated, deemed by the
Adviser to be of investment grade quality.
Underlying Mortgages
Pools consist of whole mortgage loans or participation in loans. The majority of
these loans are made to purchasers of 1-4 family homes. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. For example, in addition to fixed-rate fixed-term
mortgages, the Portfolios may purchase pools of adjustable rate mortgages (ARM),
growing equity mortgages (GEM), graduated payment mortgage (GPM) and other types
where the principal and interest payment procedures vary. ARM's are mortgages
which reset the mortgage's interest rate with changes in open market interest
rates. The Portfolios' interest income will vary with changes in the applicable
interest rate on pools of ARM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Portfolios' net asset values since the prices at which these securities are
valued each day will reflect the payment procedures.
All poolers apply standards for qualifications to local lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
Average Life
The average life of pass-through pools varies with the maturities, coupon rates,
and type of the underlying mortgage instruments. In addition, a pool's term may
be shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
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Returns of Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted based on
a prepayment assumption derived from the coupon and maturity of the underlying
instruments. Actual pre-payment experience may cause the realized return to
differ from the assumed yield. Reinvestment of pre-payments may occur at higher
or lower interest rates than the original investment, thus affecting the
realized returns of the Portfolios. The compounding effect from reinvestment of
monthly payments received by each Portfolio will increase its return to
shareholders, compared to bonds that pay interest semi-annually.
About Mortgage-Backed Securities
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments resulting from the sale of the
underlying residential property, refinancing or foreclosure net of fees or costs
which may be incurred. Some mortgage-backed securities are described as
"modified pass-through." These securities entitle the holders to receive all
interest and principal payments owed on the mortgages in the pool, net of
certain fees, regardless of whether or not the mortgagors actually make payment.
Residential mortgage loans are pooled by the Federal Home Loan Mortgage
Corporation (FHLMC). FHLMC is a corporate instrumentality of the U.S. Government
and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. FHLMC issues
Participation Certificates ("PC's") which represent interests in mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal.
The Federal National Mortgage Association (FNMA) is a Government-sponsored
corporation owned entirely by private stockholders. It is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller/servicers which include
state and federally-chartered savings and loan associations, mutual savings,
banks, commercial banks and credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA.
The principal Government guarantor of mortgage-backed securities is the
Government National Mortgage Association (GNMA). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
Government and Government-related pools because there are no direct or indirect
Government guarantees of payments in the former pools. However, timely payment
of interest and principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance purchased by the issuer. The insurance and guarantees are issued by
Governmental entities, private insurers and the mortgage poolers. There can be
no assurance that the private insurers can meet their obligations under the
policies. Mortgage-backed securities purchased for the Portfolios will, however,
be rated of investment grade quality by Moody's and/or Standard & Poor's or, if
unrated, deemed by the Adviser to be of investment grade quality.
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It is expected that Governmental or private entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payment
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
the Portfolios will, consistent with their investment objective and policies,
consider making investments in such new types of securities.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities ("SMBS") are derivative multiclass mortgage
securities. SMBS may be issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Portfolio yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, certain of these securities may be deemed "illiquid"
and subject to a Portfolio's limitations on investment in illiquid securities.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities which
are issued or guaranteed by the United States Government, and by various
instrumentalities which have been established or sponsored by the United States
Government. U.S. Treasury securities are backed by the "full faith and credit"
of the United States.
Agency Securities: Securities issued or guaranteed by Federal agencies and
U.S. Government sponsored instrumentalities may or may not be backed by the
full faith and credit of the United States. In the case of securities not
backed by the full faith and credit of the United States, the investor must
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are backed by the full faith and
credit of the United States include the Export Import Bank, Farmers Home
Administration, Federal Financing Bank, and others. Certain debt issued by
Resolution Funding Corporation has both its principal and interest backed by
the full faith and credit of the U.S. Treasury in that its principal is
defeased by U.S. Treasury zero coupon issues, while the U.S. Treasury is
explicitly required to advance funds sufficient to pay interest on it, if
needed. Certain agencies and instrumentalities, such as the Government
National Mortgage Association, are, in effect, backed by the full faith and
credit of the United States through provisions in their charters that they
may make "indefinite and unlimited" drawings on the Treasury, if needed to
service its debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Federal National Mortgage
Association, are not guaranteed by the United States, but those institutions
are protected by the discretionary authority of the U.S. Treasury to purchase
certain amounts of their securities to assist the institution
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in meeting its debt obligations. Finally, other agencies and instrumentalities,
such as the Farm Credit System and the Federal Home Loan Mortgage Corporation,
are federally chartered institutions under Government supervision, but their
debt securities are backed only by the credit worthiness of those institutions,
not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized under
Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and the Federal National Mortgage Association.
ZERO COUPON BONDS
Zero Coupon bonds, are a term used to describe notes and bonds which have been
stripped of their unmatured interest coupons, or the coupons themselves, and
also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
these instruments remains guaranteed by the "full faith and credit" of the
United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a substantial
discount to its "face value"--what it will be worth at maturity. The difference
between a security's issue or purchase price and its face value represents the
imputed interest an investor will earn if the security is held until maturity.
For tax purposes, a portion of this imputed interest is deemed as income
received by zero coupon bondholders each year. The Fund, which expects to
qualify as a regulated investment company, intends to pass along such interest
as a component of the Portfolio's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields than
those available on U.S. Treasury bonds of similar maturity. However, zero coupon
bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
Zero Coupon Treasury Bonds are sold under a variety of different names, such as:
Certificate of Accrual on Treasury Securities (CATS), Treasury Receipts (Trs),
Separate Trading of Registered Interest and Principal of Securities (STRIPS) and
Treasury Investment Growth Receipts (TIGERS).
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit and
time deposits issued outside the U.S. capital markets by foreign branches of
U.S. banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers. However, Eurodollar and
Yankee obligations held in the Cash Reserves Portfolio will undergo the same
credit analysis as domestic issues in which the Cash Reserves Portfolio invests,
and will have at least the same financial strength as the domestic issuers
approved for the Cash Reserves Portfolio.
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BRADY BONDS
A portion of certain of the Fund's fixed-income investments may be invested in
certain debt obligations customarily referred to as "Brady Bonds", which are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to Collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady bonds are to be viewed as speculative.
Brady Plan debt restructurings totaling approximately $73 billion have been
implemented to date in Argentina, Costa Rica, Mexico, Nigeria, the Philippines,
Uruguay and Venezuela, with the largest proportion of Brady Bonds having been
issued to date by Mexico and Venezuela. Brazil has announced plans to issue
Brady Bonds aggregating approximately $35 billion, based on current estimates.
There can be no assurance that the circumstances regarding the issuance of Brady
Bonds by these countries will not change.
CASH RESERVES PORTFOLIO
A-1 and Prime-1 Commercial Paper Ratings: Commercial paper rated A-1 by
Standard & Poor's has the following characteristics: (1) liquidity ratios are
adequate to meet cash requirements; (2) long-term senior debt is rated "A" or
better; (3) the issuer has access to at least two additional channels of
borrowing; (4) basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances; (5) typically, the issuer's industry is well
established and the issuer has a strong position within the industry; and (6)
the reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper is
A-1, A-2, or A-3. The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and the appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
18
<PAGE>
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
TAX CONSIDERATIONS
In order for a Portfolio to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or foreign currencies, or other income derived with respect to its business of
investing in such securities or currencies. In addition, gains realized on the
sale or other disposition of securities or foreign currencies not directly
related to the company's principal business of investing in securities held for
less than three months must be limited to less than 30% of the Portfolio's
annual gross income. It is anticipated that any net gain realized from the
closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In order to avoid realizing excessive gains on securities held less
than three months, the Portfolio may be required to defer the closing out of
futures contracts beyond the time when it would otherwise be advantageous to do
so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Portfolio's fiscal
year and which are recognized for tax purposes, will not be considered gains on
securities held less than three months for the purpose of the 30% test.
Each Portfolio of the Fund will distribute to shareholders annually any net
capital gains which have been recognized for Federal income tax purposes
including unrealized gains at the end of the Portfolio's fiscal year on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised of the nature of the payments.
The 30% limit on gains from the disposition of certain options, futures, forward
contracts, and swap contracts held less than three months, and the qualifying
income and diversification requirements applicable to a Portfolio's assets, may
limit the extent to which a Portfolio will be able to engage in these
transactions.
Some of the options, futures contracts, forward contracts, and swap contracts
entered into by the Portfolios may be "Section 1256 contracts." Section 1256
contracts held by a Portfolio at the end of its taxable year (and, for purposes
of the 4% excise tax, on certain other dates as prescribed under the Code) are
"marked to market" with unrealized gains or losses treated as though they were
realized. Any gains or losses, including "marked to market" gains or losses, on
Section 1256 contracts other than forward contracts are generally 60% long-term
and 40% short-term capital gains or losses ("60/40") although all foreign
currency gains and losses from such contracts may be treated as ordinary in
character absent a special election.
Generally, hedging transactions and certain other transactions in options,
futures, forward contracts and swap contracts undertaken by a Portfolio, may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gain or loss realized by a Portfolio. In addition,
losses realized by a Portfolio on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, and swap agreements to a Portfolio are not entirely clear.
The transactions may increase the amount of short-term capital gain realized by
a Portfolio. Short-term capital gain is taxed as ordinary income when
distributed to shareholders.
A Portfolio may make one or more of the elections available under the Code which
are applicable to straddles. If a Portfolio makes any of the elections, the
amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules
19
<PAGE>
applicable under certain of the elections operate to accelerate the recognition
of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a Portfolio that did not engage in such hedging transactions.
PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares (ii) to reject purchase orders, (iii) to reduce or waive
the minimum for initial and subsequent investments. The Officers of the Fund may
from time to time waive the minimum initial and subsequent investment
requirements in connection with investments in the Fund by employees of the
Adviser and its affiliates.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the rules of the Commission as a
result of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission pursuant to Rule 18f-1 under
the Investment Company Act of 1940 to pay in cash all redemptions requested by
any shareholder of record limited in amount during any 90-day period to the
lesser of $250,000 or 1% of the net assets of the Portfolio at the beginning of
such period. Such commitment is irrevocable without the prior approval of the
Commission. Redemptions in excess of the above limits may be paid in whole or in
part in investment securities or in cash, as the Trustees may deem advisable;
however, payment will be made wholly in cash unless the Trustees believe that
economic or market conditions exist which would make such a practice detrimental
to the best interests of the Fund. If redemptions are paid in investment
securities, such securities will be valued as set forth in the Fund's Prospectus
under "Valuation of Shares" and a redeeming shareholder would normally incur
brokerage expenses in converting these securities to cash.
No charge is made by a Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
SHAREHOLDER SERVICES
Exchange Privilege
The exchange privilege is only available with respect to Portfolios that are
registered for sale in a shareholder's state. Exchange requests should be sent
to MAS Funds, c/o Miller Anderson & Sherrerd, LLP, One Tower Bridge, West
Conshohocken, PA 19428-0868. Any such exchange will be based on the respective
net asset values of the shares involved. Before making an exchange, a
shareholder should consider the investment objectives of the Portfolio to be
purchased. Exchange requests may be made either by mail or telephone. Telephone
exchanges (referred to as "expedited exchanges") will be accepted only if the
certificates for the shares to be exchanged are held by the Fund for the account
of the shareholder and the registration of the two accounts are identical.
Requests for expedited exchanges received prior to 12:00 p.m. for the Cash
Reserves Portfolio and prior to 4:00 p.m. (Eastern time) for all other
Portfolios will be processed as of the close of business on the same day.
Requests received after these times will be processed on the next business day.
Expedited exchanges may also be subject
20
<PAGE>
to limitations as to amounts or frequency, and to other restrictions established
by the Board of Trustees to assure that such exchanges do not disadvantage the
Fund and its shareholders. The officers of the Fund reserve the right not to
accept any request for an exchange when, in their opinion, the exchange
privilege is being used as a tool for market timing.
For Federal income tax purposes, an exchange between Portfolios of the Fund is a
taxable event, and, accordingly, a capital gain or loss may be realized. In a
revenue ruling relating to circumstances similar to the Fund's, an exchange
between a series of a Fund was also deemed to be a taxable event. It is likely,
therefore, that a capital gain or loss would be realized on an exchange between
Portfolios; you may want to consult your tax adviser for further information in
this regard. The exchange privilege may be modified or terminated at any time.
Transfer of Shares
Shareholders may transfer shares of the Fund's Portfolios to another person by
written request to the Client Services Group at the address noted above. The
request should clearly identify the account and number of shares to be
transferred and include the signature of all registered owners and all share
certificates, if any, which are subject to the transfer. The signature on the
letter of request, the share certificate or any stock power must be guaranteed
in the same manner as described under "Redemption of Shares." As in the case of
redemptions, the written request must be received in good order before any
transfer can be made.
INVESTMENT LIMITATIONS
Each Portfolio of the Fund is subject to the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio.
As a matter of fundamental policy, each Portfolio will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are secured
by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subjects to the limitations described in non-fundamental limitation (7), below,
(ii) by lending its portfolio securities, and (iii) by lending portfolio assets
to other Portfolios of the Fund, so long as such loans are not inconsistent with
the Investment Company Act of 1940, as amended (the "1940 Act"), or the Rules
and Regulations, or interpretations or orders of the Securities and Exchange
Commission thereunder;
(4) with respect to 75% of its assets, purchase a security if, as a result, it
would hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any issuer (this restriction is not applicable
to the Global Fixed Income, International Fixed Income, Advisory Foreign Fixed
Income or the Emerging Markets Portfolios);
(5) with respect to 75% of its assets, purchase securities of any issuer if, as
a result, more than 5% of the Portfolio's total assets, taken at market value at
the time of such investment, would be invested in the securities of such issuer
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies
21
<PAGE>
or instrumentalities (this restriction does not apply to the Global Fixed
Income, International Fixed Income, Advisory Foreign Fixed Income or the
Emerging Markets Portfolios);
(6) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes, and (ii) in connection with reverse repurchase agreements,
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Portfolio's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings);
(7) underwrite the securities of other issuers (except to the extent that the
fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in connection with the disposition of restricted securities);
(8) acquire any securities of companies within one industry, other than
mortgage-backed securities in the case of the Mortgage-Backed Securities and
Advisory Mortgage Portfolios, if as a result of such acquisition, more than 25%
of the value of the Portfolio's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, when any such Portfolio adopts a
temporary defensive position. Additionally, the Cash Reserves Portfolio may
invest without limitation in obligations of the U.S. Government or its agencies
and instrumentalities or certificates of deposit or bankers' acceptance of
domestic banks;
Each Portfolio is also subject to the following restrictions which may be
changed by the Board of Trustees without shareholder approval.
As a matter of non-fundamental policy, no Portfolio will:
(1) enter into futures contracts to the extent that each Portfolio's
outstanding obligations to purchase securities under these contracts in
combination with its outstanding obligations with respect to options
transactions would exceed 50% of each Portfolio's total assets, and will
maintain assets sufficient to meet its obligations under such contracts in a
segregated account with the custodian bank or will otherwise comply with the
SEC's position on asset coverage;
(2) write put or call options except to the extent described above in (1);
(3) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, provided that each
Portfolio may make margin deposits in connection with transactions in options,
futures, and options on futures;
(4) sell short unless, the Portfolio (i) by virtue of its ownership of other
securities, has the right to obtain securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is made upon the
same conditions, or (ii) maintains in a segregated account on the books of the
Fund's custodian an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the current
market value of the security sold short or such other amount as the SEC or its
staff may permit by rule, regulation, order or interpretation (transactions in
futures contracts and options, however, are not deemed to constitute selling
securities short);
(5) borrow money other than from banks or other Portfolios of MAS Funds,
provided that a Portfolio may borrow from banks or other Portfolios of MAS Funds
so long as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or
purchase additional securities when borrowings exceed 5% of total (gross)
assets;
22
<PAGE>
(6) pledge, mortgage or hypothecate assets in an amount greater than 50% of its
total assets, provided that each Portfolio may segregate assets without limit in
order to comply with the requirements of Section 18(f) of the 1940 Act and
applicable rules, regulations or interpretations of the SEC and its staff;
(7) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities provided that this
limitation shall not apply to any investment in securities that are not
registered under the 1933 Act but that can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act and are determined to
be liquid securities under guidelines or procedures adopted by the Board of
Directors;
(8) invest for the purpose of exercising control over management of any
company; and
(9) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the value or
total cost of the Portfolio's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
MANAGEMENT OF THE FUND
Trustees and Officers
The Fund's officers, under the supervision of the Board of Trustees, manage the
day-to-day operations of the Fund. The Trustees set broad policies for the Fund
and choose its officers. The following is a list of the Trustees and officers of
the Fund and a brief statement of their present positions and principal
occupations during the past 5 years:
THOMAS L. BENNETT,* Chairman of the Board of Trustees; Managing Director, Morgan
Stanley; Portfolio Manager and member of the Executive Committee, Miller
Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.; Director,
Morgan Stanley Universal Funds, Inc.
THOMAS P. GERRITY, Trustee; Dean and Reliance Professor of Management and
Private Enterprise, Wharton School of Business , University of Pennsylvania;
Director, Digital Equipment Corp.; Director, Sun Company, Inc.; Director,
Federal National Mortgage Association; Director, Reliance Group Holdings;
Director, Melville Corporation.
JOSEPH P. HEALEY, Trustee; Headmaster, Haverford School; formerly Dean, Hobart
College; Associate Dean, William & Mary College.
JOSEPH J. KEARNS, Trustee; Vice President and Treasurer, The J. Paul Getty
Trust; Director, Electro Rent Corporation; Trustee, Southern California Edison
Nuclear Decommissioning Trust; Director, The Ford Family Foundation.
VINCENT R. MCLEAN, Trustee; Director, Alexander and Alexander Services, Inc.;
Director, Legal and General America, Inc.; Director, William Penn Life Insurance
Company of New York; formerly Executive Vice President, Chief Financial Officer,
Director and Member of the Executive Committee of Sperry Corporation (now part
of Unisys Corporation).
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<PAGE>
C. OSCAR MORONG, JR., Trustee; Managing Director, Morong Capital Management;
Director, Ministers and Missionaries Benefit Board of American Baptist Churches,
The Indonesia Fund, The Landmark Funds; formerly Senior Vice President and
Investment Manager for CREF, TIAA-CREF Investment Management, Inc.
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the Investment Company Act of 1940, as amended.
- --------------------------------------------------------------------------------
JAMES D. SCHMID, President, MAS Funds; Principal, Morgan Stanley; Head of Mutual
Funds, Miller Anderson & Sherrerd, LLP; Director, MAS Fund Distribution, Inc.,
Chairman of the Board of Directors, The Minerva Fund, Inc.; formerly Vice
President, The Chase Manhattan Bank.
LORRAINE TRUTEN, CFA, Vice President, MAS Funds; Principal, Morgan Stanley; Head
of Mutual Fund Services, Miller Anderson & Sherrerd, LLP; President, MAS Fund
Distribution, Inc.
DOUGLAS W. KUGLER, CFA, Treasurer, MAS Funds; Vice President, Morgan Stanley;
Head of Mutual Fund Administration, Miller Anderson & Sherrerd, LLP; formerly
Assistant Vice President, Provident Financial Processing Corporation.
JOHN H. GRADY, JR., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius, LLP;
formerly Attorney, Ropes & Gray.
Remuneration of Trustees and Officers
The Fund pays each Trustee, who is not also an officer or affiliated person, a
fee for each Board of Trustees Meeting attended plus travel and other expenses
incurred in attending such meetings. Trustees who are also officers or
affiliated persons receive no remuneration for their service as Trustees. The
Fund's officers and employees are paid by the Adviser or Sub-Administrator.
During the fiscal year ended September 30, 1996, the Fund paid $255,969 in fees
and expenses to its "non-interested" Trustees.
The Fund maintains an unfunded Deferred Compensation Plan ("Plan") which allows
each independent Trustee to defer payment of his or her retainer and fees to a
later date. The Fund's policy is for each Trustee to defer at least twenty-five
percent (25%) of his or her retainer and fees received annually from the Fund.
To that end, the Plan requires that each Eligible Trustee (defined by the Plan
as a member of the Board of Trustees who is not an "interested person" of the
Fund, as such term is defined under Section 2(a)(19) of the Investment Company
Act of 1940) defer his or her entire retainer, which is deemed a deferral of
twenty-five percent (25%) of the Trustee's retainer and fees received from the
Fund for the year. The Plan also permits the Eligible Trustee to defer all, or
a portion, of the fees received for attending meetings of the Board of Trustees
throughout the year. Amounts deferred by each Eligible Trustee are credited
with a return equal to what those amounts would have received if they had been
invested in portfolios of the Fund selected by that Trustee. Any deferred
amounts will not be available to Eligible Trustees for a period of two (2) years
and distributions may not be deferred beyond the Eligible Trustee's membership
on the Board of Trustees. Distributions to an Eligible Trustee are either in
the form of a lump sum or equal annual installments over a period of five (5)
years and commence within ninety (90) days after the last date during the
deferral period on which the Fund makes a valuation of the Eligible Trustee's
deferred compensation. The Fund intends that the Plan shall be maintained at all
times on an unfunded basis for federal income tax purposes under the Internal
Revenue Code of 1986. The rights of an Eligible Trustee and the beneficiaries
to the amounts held under the Plan are unsecured and such amounts are subject to
the claims of the creditors of the Fund. The Plan became effective May 23,
1996. There were no payments under the plan during the fiscal year ended
September 30, 1996.
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<PAGE>
The aggregate compensation paid by the Fund to each of the Trustees during its
fiscal year ended September 30, 1996 is set forth below.
<TABLE>
<CAPTION>
Aggregate Pension or Benefits Total
Compensation Accrued As Part Compensation
Name of Trustee from the Fund# of Fund Expenses from the Fund
- ------------------- -------------- ------------------- -------------
<S> <C> <C> <C>
Thomas L. Bennett* $ -0- $ -0- $ -0-
David P. Eastburn** $22,000 $ -0- $22,000
Thomas P. Gerrity*** $ -0- $ -0- $ -0-
Joseph P. Healey $40,000## $ -0- $40,000
Joseph J. Kearns $40,000## $ -0- $40,000
Vincent R. McLean**** $27,000## $ -0- $27.000
C. Oscar Morong, Jr. $40,000## $ -0- $40,000
</TABLE>
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the Investment Company Act of 1940, as amended.
**David P. Eastburn retired as Trustee of the Fund on February 29, 1996.
***Thomas P. Gerrity became a Trustee of the Fund after the fiscal year end of
September 30, 1996.
****Vincent R. McLean became a Trustee of the Fund on February 29, 1996.
# Includes amounts deferred from quarterly meeting fees at the election of
Trustees under the Deferred Compensation Plan.
## In addition, each Trustee has deferred his retainer of $12,000 under the
Deferred Compensation Plan.
Principal Holders of Securities
As of January 2, 1997 following persons owned of record or beneficially 5% or
more of the shares of a Portfolio:
INSTITUTIONAL CLASS:
EMERGING MARKETS PORTFOLIO: Ministers and Missionaries, New York, NY, 42.18%;
Smithsonian Institution, New York, NY, 26.65%; Checking and Co., Boston, MA,
10.03%; KMPG Peat Marwick, Montval, New Jersey, 8.93%.
INTERNATIONAL EQUITY PORTFOLIO: Western Metal, West Conshohoken, PA, 9.51%;
Ministers and Missionaries, New York, NY, 8.41%.
MID CAP GROWTH PORTFOLIO: J Paul Getty Trust, Chicago, IL, 18.75%; New York
State Common, Albany, NY, 8.22%;
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<PAGE>
MID CAP VALUE PORTFOLIO: Fishnet & Company, Boston, MA, 15.41%; Hearst
Corporation, New York NY, 15.41%; Georgetown Memorial Hospital, Georgetown, SC,
14.95%; Berklee College of Music, Boston, MA, 11.61%; Charles Schwab & Co, San
Francisco, CA, 6.96%;
SMALL CAP VALUE PORTFOLIO: J Paul Getty Trust, Chicago, IL, 10.98%; Silicon
Graphics, Chicago, IL, 8.77%; American Red Cross, Falls Church, VA, 6.87%;
Fishnet & Company, Boston, MA, 5.33%;
VALUE PORTFOLIO: Charles Schwab, San Francisco, CA, 10.06%;
CASH RESERVES PORTFOLIO: The Northern Trust Company, Morgan Stanley, Chicago,
IL, 31.77%; Salkeld & Co., New York, NY, 19.75%; Hans A. Wolf or Elizabeth Wolf,
Palo Alto, CA, 8.36%; Association for Information & Image Management, Silver
Spring, MD, 5.16%;
DOMESTIC FIXED INCOME PORTFOLIO: Saxon & Co., Philadelphia, PA, 19.74%; Hartford
Foundation For Public Giving , Hartford, CT, 13.07%; Philadelphia Orchestra,
Philadelphia, PA, 10.17%; Saxon & Co., Philadelphia, PA, 6.41%; Paintmakers
Money Accumulation, Portland, OR, 5.60%; Fox Chase Cancer Center, Philadelphia,
PA, 5.10%;
FIXED INCOME PORTFOLIO II: Sheet Metal Workers, Suitland, MD, 11.34%; Johns
Hopkins University, Jersey City, NJ, 10.85%; Diocese of Camden, Camden, NJ,
9.08%; Northwestern Memorial Hospital, Chicago, IL, 7.83%; Sandoz Corp Savings
Plan, Chicago, IL, 7.68%; Sarah Lawrence College, Bronxville, NY, 5.21%;
GLOBAL FIXED INCOME PORTFOLIO: Charles A. Dana Foundation, New York, NY, 26.64%;
Hudson-Webber Foundation, Detroit, MI, 11.67%; "All For Her," Albany, NY,
11.00%; Abilene Christian University, Abilene, TX, 8.71%; Pitney Bowes, Inc.,
Stamford, CT, 8.08%; Forest Oil Corp. Pension Trust, Boston, MA, 7.16%;
Rockefeller Family Fund, New York, NY, 5.60%;
HIGH YIELD SECURITIES PORTFOLIO: Western Metal, West Conshohoken, PA, 8.88%;
John & Catherine MacArthur, Chicago, IL, 6.30%; Charles Schwab, San
Francisco, CA, 6.24%; Carnegie Corp., New, NY, 5.59%; Armco Master
Pension, Pittsburgh, PA, 5.09%; Connelly Foundation, West Conshohoken, PA,
5.08%; KPMG Peat Marwick, Montvale, NJ, 5.03%;
INTERMEDIATE DURATION PORTFOLIO: Morgan Stanley Group Inc., New York, NY;
31.77%; Jaffe Family Foundation, Suffern, NY, 22.42%; Los Angeles
Hotel-Restaurant Employees, Los Angeles, CA, 19.94%; Northumberland County
Employee, Altoona, PA, 18.96%; Union Local 1034 Severance Trust, Abington, PA,
6.04%;
INTERNATIONAL FIXED INCOME PORTFOLIO: Armco, Pittsburgh, PA, 23.82%; J. Paul
Getty, Chicago, IL, 16.64%; Children's Hospital, Philadelphia, PA, 15.62%;
Western Metal, West Conshohoken, PA, 12.47%; Smithsonian Institution, New York,
NY, 6.38%;
LIMITED DURATION PORTFOLIO: Cannon Hourly Retirement Plan, New York, NY,
13.42%; A. .Hotel & Restaurant Union Welfare, Calabasas, CA, 12.04%; Northern
California Bakery Drivers, San Francisco, CA, 8.70%; Paper Converters,
Philadelphia, PA, 6.06%; Benedictine Abbey of Newark, Newark, NJ, 5.52%; Batrus
& Company, New York, NY, 5.28%;
MORTGAGE-BACKED SECURITIES PORTFOLIO: Inglis House Foundation, Philadelphia,
PA, 31.41%; Northwestern University, Evanston, IL, 22.86%; Cives Corp. Savings &
Profit Sharing, Roswell, GA, 16.40%; Teamsters Local 641, Philadelphia, PA,
11.23%; The Paper Magic Group, Scranton, PA, 11.00%;
26
<PAGE>
MUNICIPAL PORTFOLIO: Union Electric Employees, Pittsburgh, PA, 16.50%; Robert
A. Fox, Jenkintown, PA, 10.57%; Jesse J. Thompson, Charlotte, NC, 10.54%; Union
Electric Employees, Pittsburgh, PA, 9.53%; Batrus & Co., New York, NY, 5.22%;
PA MUNICIPAL PORTFOLIO: Richard Worley, West Conshohoken, PA, 25.91%; Kenneth
B. Dunn & Pamela R. Dunn, Bala Cynwyd, PA, 18.97%; R&S Roberts, Philadelphia,
PA, 15.64%; John JF Sherrerd, Bryn Mawr, PA, 8.13%; Morris Williams Jr. & Ruth
W. Williams, Gladwyne, PA, 6.26%;
BALANCED PORTFOLIO: Wendel & Co., New York, NY, 28.84%; A&P Savings, New York,
NY, 8.16%; Bay Area Rapid Transit, Calabasas, CA, 6.65%; Bay Area Rapid Transit,
Calabasas, CA, 6.18%;
MULTI-ASSET-CLASS PORTFOLIO: KPMG Peat Marwick, Montvale, NJ, 20.14%; The
Library Co of Philadelphia, Philadelphia, PA, 9.74%; Milbank Tweed Hadley &
McCloy, Brooklyn, NY, 7.82%; National Center For State Courts, Williamsburg, VA,
5.83%; The W-S Foundation, Winston-Salem, NC, 5.51%;
ADVISORY FOREIGN FIXED INCOME PORTFOLIO: Minnesota State Board of Inv., St.
Paul, MN, 9.83%; Kaiser Foundation, Oakland, CA, 7.18%; Johns Hopkins
University, Baltimore, MD, 5.34%;
ADVISORY MORTGAGE PORTFOLIO: Children's Hospital, Philadelphia, PA, 5.54%;
INVESTMENT CLASS
EQUITY PORTFOLIO: Roanoke Electric Steel, Charlotte, NC, 57.73%; Philadelphia
Marine Trade Association, Philadelphia, PA, 35.75%; Insurance Trust of Penn,
Philadelphia, PA, 6.52%;
VALUE PORTFOLIO: Mac & Co., Pittsburgh, PA, 27.39%; Washington Jane Smith HM,
Chicago, IL, 12.88%; Institute of Nuclear Power, Atlanta, GA, 12.19%; Trust
Company of America, Englewood, CA, 9.85%; Roanoke Electric Steel, Charlotte, NC,
9.58%; IBEW Local 223 Deferred Income Fund, Lakeville, MA, 5.26%; Doctors
Community Hospital, Lanham, MD, 5.23%;
FIXED INCOME PORTFOLIO: Thomas Build Buses, Dallas, TX, 38.51%; Woodlawn
Cemetery Care Fund, Chicago, IL, 30.41%; Thomas Built Buses, Dallas, TX, 13.09%;
Roanoke Electric Steel, Charlotte, NC, 11.11%; Philadelphia Marine Trade
Association, Philadelphia, PA, 6.89%;
INTERNATIONAL EQUITY PORTFOLIO: Doctors Community Hospital, Lanham, MD, 57.30%;
J. Richard Jones, Radnor, PA, 27.19%; Insurance Trust of Penn., Philadelphia,
PA, 8.19%; Richard Jones, Radnor, PA, 7.32%;
HIGH YIELD PORTFOLIO: National Academy of Sciences, Washington, D.C., 42.03%;
Noblehouse International, Chicago, IL, 15.40%; Harvey & Bernice Jones, Little
Rock, AR, 14.83%; Standish, Ayer & Wood , Rochester, NY, 14.66%; Lou Weisbach
Revocable Trust, Niles, IL, 13.08%;
MID CAP VALUE PORTFOLIO: J. Richard Jones, Radnor, PA, 79.03%; J. Richard
Jones, Radnor, PA, 20.97%;
SPECIAL PURPOSE FIXED INCOME PORTFOLIO: Doctors Community Hospital, Lanham, MD,
87.45%; Insurance Trust of Penn., Philadelphia, PA, 12.55%;
MULTI- ASSET-CLASS PORTFOLIO: Kano-Zimmerman Profit Sharing, Nashville, TN,
51.49%; English Speaking Union, Winter Park, FL, 48.51%;
27
<PAGE>
ADVISER CLASS:
VALUE PORTFOLIO: IBJ Distributor Inc., New York, NY, 85.93%; Fidelity
Investments, Covington, KY, 6.18%;
FIXED INCOME PORTFOLIO: IBJ Distributor Inc., New York, NY, 100%;
BALANCED PORTFOLIO: Fidelity Investments Institutions, Covington, KY, 100%
The persons listed above as owning 25% or more of the outstanding shares of each
Portfolio may be presumed to "control" (as that term is defined in the
Investment Company Act of 1940, as amended) such Portfolios. As a result, those
persons would have the ability to vote a majority of the shares of the
Portfolios on any matter requiring the approval of shareholders of such
Portfolios.
DISTRIBUTION PLANS
The Fund's Distribution Plan provides that the Adviser Class Shares will pay MAS
Fund Distribution, Inc. (the "Distributor") an annualized fee of .25% of the
average daily net assets of each Portfolio attributable to Adviser Class Shares,
which the Distributor can use to compensate broker/dealers and service providers
which provide distribution services to Adviser Class Shareholders or their
customers who beneficially own Adviser Class Shares.
The Fund has adopted the Distribution Plan in accordance with the provisions of
Rule 12b-1 under the 1940 Act which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the
distribution of its shares. Continuance of the Plan must be approved annually by
a majority of the Trustees of the Fund and the Trustees who are not "interested
persons" of the Fund within the meaning of the Investment Company Act of 1940.
The Plan requires that quarterly written reports of amounts spent under the Plan
and the purposes of such expenditures be furnished to and reviewed by the
Trustees. The Plan may not be amended to increase materially the amount which
may be spent thereunder without approval by a majority of the outstanding
Adviser Class Shares of the Fund. All material amendments of the Plan will
require approval by a majority of the Trustees of the Fund and of the Trustees
who are not "interested persons" of the Fund. For the fiscal year ended
September 30, 1996, the Value Portfolio paid $855 in distribution fees pursuant
to the Distribution Plan.
SHAREHOLDER SERVICE AGREEMENT
The Fund has entered into a Shareholder Service Agreement with the Distributor
whereby the Distributor will compensate service providers who provide certain
services to clients who beneficially own Investment Class shares of the
Portfolios described in the Investment Class prospectus. Each Portfolio will
pay to the Distributor a fee at the annual rate of .15% of the average daily net
assets of such Portfolio attributable to the shares serviced by the service
provider, which fee will be computed daily and paid monthly. During the fiscal
year ended September 30, 1996, the Fund paid $5,739 to compensate the
Distributor under this Shareholder Service Agreement.
INVESTMENT ADVISER
Under an Investment Advisory Agreement ("Agreement") with the Fund, the Adviser,
subject to the control and supervision of the Fund's Board of Trustees and in
conformance with the stated investment objectives and policies of each Portfolio
of the Fund, manages the investment and reinvestment of the assets of each
Portfolio of the Fund. In this regard, it is the responsibility of the Adviser
to make investment decisions for the Fund's Portfolios and to place each
Portfolio's purchase and sales orders for investment securities.
28
<PAGE>
As compensation for the services rendered by the Adviser under the Agreement and
the assumption by the Adviser of the expenses related thereto (other than the
cost of securities purchased for the Portfolios and the taxes and brokerage
commissions, if any, payable in connection with the purchase and/or sale of such
securities), each Portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Portfolio's average daily net assets for the quarter:
Rate
----
Emerging Markets Portfolio .750%
Equity Portfolio .500
Growth Portfolio .500
International Equity Portfolio .500
Mid Cap Growth Portfolio .500
Mid Cap Value Portfolio .750
Small Cap Value Portfolio .750
Value Portfolio .500
Cash Reserves Portfolio .250
Domestic Fixed Income Portfolio .375
Fixed Income Portfolio .375
Fixed Income Portfolio II .375
Global Fixed Income Portfolio .375
High Yield Portfolio .375
Intermediate Duration Portfolio .375
International Fixed Income Portfolio .375
Limited Duration Portfolio .300
Mortgage-Backed Securities Portfolio .375
Municipal Portfolio .375
PA Municipal Portfolio .375
Special Purpose Fixed Income Portfolio .375
Balanced Portfolio .450
Multi-Asset-Class Portfolio .650
Balanced Plus .550
Advisory Foreign Fixed Income Portfolio .375
Advisory Mortgage Portfolio .375
In cases where a shareholder of any of the Portfolios has an investment
counseling relationship with the Adviser, the Adviser may, at its discretion,
reduce the shareholder's investment counseling fees by an amount equal to the
pro-rata advisory fees paid by the Fund. This procedure will be utilized with
clients having contractual relationships based on total assets managed by Miller
Anderson & Sherrerd, LLP to avoid situations where excess advisory fees might be
paid to the Adviser. In no event will a client pay higher total advisory fees as
a result of the client's investment in the Fund. In addition, the Adviser has
voluntarily agreed to waive its advisory fees to the extent necessary, if any,
to keep the Institutional Class Shares of the Emerging Markets, Mid Cap Value,
Cash Reserves, Domestic Fixed Income, Intermediate Duration, Limited Duration,
Mortgage-Backed Securities, Municipal, PA Municipal, Multi-Asset-Class, Advisory
Foreign Fixed Income and Advisory Mortgage Portfolios' total annual operating
expenses from exceeding 1.180%, .880%, .320%, .500%, .520%, .420%, .500%, .500%,
.500%, .780%, .150% and .080% of its average daily net assets, respectively.
29
<PAGE>
For the fiscal years ended September 30, 1994, 1995 and 1996, the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
1994 1995 1996 1994 1995 1996
Fund (000) (000) (000) (000) (000) (000)
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Portfolio * 85 286 * 52 42
Equity Portfolio 5,933 6,840 7,785 0 0 0
Growth Portfolio * * * * * *
International Equity Portfolio 5,412 5,437 3,458 0 0 0
Mid Cap Growth Portfolio 1,593 1,504 1,986 0 0 0
Mid Cap Value Portfolio * 0 188 * 14 46
Small Cap Value Portfolio 1,833 2,683 3,464 0 0 0
Value Portfolio 4,764 5,078 7,716 0 0 0
Cash Reserves Portfolio 21 51 138 28 39 52
Domestic Fixed Income Portfolio 187 75 257 13 23 8
Fixed Income Portfolio 3,997 4,893 5,917 0 0 0
Fixed Income II Portfolio 457 567 773 0 0 0
Global Fixed Income Portfolio 193 190 205 0 0 0
High Yield Portfolio 503 764 1,073 0 0 0
Intermediate Duration Portfolio * 57 52 * 17 18
International Fixed Income Portfolio 64 395 555 26 0 0
Limited Duration Portfolio 348 206 351 0 11 0
Mortgage-Backed Securities Portfolio 362 348 177 5 5 21
Municipal Portfolio 112 110 167 22 37 38
PA Municipal Portfolio 62 32 77 19 31 30
Special Purpose Fixed Income Portfolio 1,233 1,574 1,517 0 0 0
Balanced Portfolio 1,388 1,385 1,521 0 0 0
Multi-Asset-Class Portfolio 16 220 635 22 100 112
Balanced Plus Portfolio * * * * * *
Advisory Foreign Fixed Income Portfolio * 0 1,933 * 1,631 1,933
Advisory Mortgage Portfolio * 0 6,056 * 1,711 6,056
</TABLE>
* Not in operation during the period.
The Agreement continues for successive one year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Trustees, including the
affirmative votes of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as defined in the 1940 Act, as amended) of
any such party in person at a meeting called for the purpose of considering such
approval. In addition, the question of continuance of the Agreement may be
presented to the shareholders of the Fund; in such event, continuance shall be
effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of each Portfolio of the Fund. If the holders of
any Portfolio fail to approve the Agreement, the Adviser may continue to serve
as investment adviser to each Portfolio which approved the Agreement, and to any
Portfolio which did not approve the Agreement until new arrangements have been
made. The Agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) by vote of the
Board of Trustees or by vote of the outstanding voting securities of the
Portfolio (2) or sixty (60) days' written notice to the Adviser, or (3) by the
Adviser upon ninety (90) days' written notice to the Fund.
The Fund bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator and dividend
disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs
incidental to meetings of its shareholders and Trustees, the cost of filing its
registration statements under Federal and State securities
30
<PAGE>
laws, reports to shareholders, and custodian fees. These Fund expenses are, in
turn, allocated to each Portfolio, based on their relative net assets. Each
Portfolio bears its own advisory fees and brokerage commissions and transfer
taxes in connection with the acquisition and disposition of its investment
securities.
ADMINISTRATION
MAS also serves as Administrator to the Fund pursuant to an Administration
Agreement dated as of November 18, 1993. Chase Global Funds Services (formerly
Mutual Fund Services Company, or MFSC), an affiliate of The Chase Manhattan
Bank, serves as transfer agent and provides fund accounting and other services
pursuant to a sub-administration agreement.
For the fiscal years ended September 30, 1994, 1995 and 1996, the Fund paid the
following administrative fees:
Administrative Fees Paid
1994 1995 1996
(000) (000) (000)
-----------------------------
Emerging Markets Portfolio * 14 38
Equity Portfolio 949 1,094 1,246
Growth Portfolio * * *
International Equity Portfolio 875 870 553
Mid Cap Growth Portfolio 256 241 318
Mid Cap Value Portfolio * 1 20
Small Cap Value Portfolio 207 286 369
Value Portfolio 762 812 1,235
Cash Reserves Portfolio 15 29 44
Domestic Fixed Income Portfolio 43 21 55
Fixed Income Portfolio 843 1,044 1,262
Fixed Income II Portfolio 99 121 165
Global Fixed Income Portfolio 41 41 44
High Yield Portfolio 108 163 229
Intermediate Duration Portfolio * 16 11
International Fixed Income Portfolio 27 84 118
Limited Duration Portfolio 93 58 93
Mortgage-Backed Securities Portfolio 80 75 38
Municipal Portfolio 37 31 36
PA Municipal Portfolio 24 13 16
Special Purpose Fixed Income Portfolio 261 336 323
Balanced Portfolio 259 246 271
Multi-Asset-Class Portfolio 8 57 113
Balanced Plus Portfolio * * *
Advisory Foreign Fixed Income Portfolio * 357 412
Advisory Mortgage Portfolio * 374 1,292
* Not in operation during the period.
31
<PAGE>
DISTRIBUTOR FOR FUND
MAS Fund Distribution, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Adviser, with its principal office at One Tower Bridge, West Conshohocken,
Pennsylvania 19428, distributes the shares of the Fund. Under the Distribution
Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts
as sole distributor of the Fund's shares. The Distribution Agreement which
continues in effect so long as such continuance is approved at least annually by
the Fund's Board of Trustees, including a majority of those Trustees who are not
parties to such Distribution Agreement nor interested persons of any such party.
The Distribution Agreement provides that the Fund will bear the costs of the
registration of its shares with the SEC and various states and the printing of
its prospectuses, statements of additional information and reports to
shareholders.
CUSTODIANS
The Chase Manhattan Bank, New York, NY and Morgan Stanley Trust Company (NY),
Brooklyn, NY serve as custodians for the Fund. The Custodians hold cash,
securities, and other assets of the Fund as required by the 1940 Act. Morgan
Stanley Trust Company is an affiliated person, as defined in the 1940 Act, of
the Adviser and is compensated for its services as custodian on a per account
basis plus out of pocket expenses.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for each of the Fund's Portfolios and directs the Adviser to use its best
efforts to obtain the best execution with respect to all transactions for the
Portfolios. In so doing, the Adviser will consider all matters it deems
relevant, including the following: the Adviser's knowledge of negotiated
commission rates and spreads currently available; the nature of the security or
instrument being traded; the size and type of the transaction; the nature and
character of the markets for the security or instrument to be purchased or sold;
the desired timing of the transaction; the activity existing and expected in the
market for the particular security or instrument; confidentiality; the
execution, clearance, and settlement capabilities of the broker or dealer
selected and other brokers or dealers considered; the reputation and perceived
soundness of the broker or dealer selected and other brokers or dealers
considered; the Adviser's knowledge of any actual or apparent operational
problems of a broker or dealer; and the reasonableness of the commission or its
equivalent for the specific transaction.
Although the Adviser generally seeks competitive commission rates and dealer
spreads, a Portfolio will not necessarily pay the lowest available commission on
brokerage transactions or markups on principal transactions. Transactions may
involve specialized services on the part of the broker or dealer involved, and
thereby justify higher commissions or markups than would be the case with other
transactions requiring more routine services. In addition, a Portfolio may pay
higher commission rates than the lowest available when the Adviser believes it
is reasonable to do so in light of the value of the research, statistical,
pricing, and execution services provided by the broker effecting the
transaction. The Adviser does not attempt to put a specific dollar value on the
research services rendered or to allocate the relative costs or benefits of
those services among its clients, believing that the research it receives will
help the Adviser to fulfill its overall duty to its clients. The Adviser uses
research services obtained in this manner for the benefit of all of its clients,
though each particular research service may not be used to service each client.
As a result, the Fund may pay brokerage commissions that are used, in part, to
purchase research services that are not used to benefit the Fund.
It is not the Fund's practice to allocate brokerage or principal business on the
basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in the
purchase of shares of the Portfolios for their clients. During the fiscal years
ended September 30, 1994, 1995 and 1996, the Fund paid brokerage commissions of
$8,785,671, $13,457,075 and $18,252,335 respectively.
32
<PAGE>
Some securities considered for investment by each of the Fund's Portfolios may
also be appropriate for other clients served by the Adviser. If purchases or
sales of securities consistent with the investment policies of a Portfolio and
one or more of these other clients serviced by the Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Trustees.
On January 3, 1996, affiliates of Morgan Stanley Group Inc. acquired the
Adviser. As a result of this transaction, the Adviser became affiliated with
certain U.S.-registered broker-dealers and foreign broker-dealers, including
Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. International Limited,
Morgan Stanley Securities Ltd., Morgan Stanley Japan Ltd., and Morgan Stanley
Asia Ltd. (collectively, "Morgan Stanley"). The Adviser may, in the exercise of
its discretion under its investment management agreement, effect transactions in
securities or other instruments for the Fund through Morgan Stanley. The Fund
paid $453,834 in brokerage commissions to affiliates for $191,758,624 of
brokered transactions for the fiscal year ended September 30,1996.
PORTFOLIO TURNOVER
The Portfolio turnover rate for each Portfolio for the past two fiscal years
ended September 30 was as follows:
Portfolio 1995 1996
- --------- ---- ----
Emerging Markets 63% 108%
Equity 67% 67%
Growth N/A N/A
International Equity 112% 78%
Mid Cap Growth 129% 141%
Mid Cap Value 639% 377%
Small Cap Value 119% 145%
Value 56% 53%
Domestic Fixed Income 313% 168%
Fixed Income 140% 162%
Fixed Income II 153% 165%
Global Fixed Income 118% 133%
High Yield 96% 115%
Intermediate Duration 168% 251%
International Fixed Income 140% 124%
Limited Duration 119% 174%
Mortgage-Backed Securities 107% 116%
Municipal 58% 78%
PA Municipal 57% 51%
Special Purpose Fixed Income 143% 151%
Balanced 95% 110%
Multi-Asset-Class 112% 122%
Balanced Plus N/A N/A
Advisory Mortgage 110% 139%
Advisory Foreign Fixed Income 96% 170%
N/A -- Portfolio had not commenced operations as of September 30, 1996.
33
<PAGE>
GENERAL INFORMATION
Description of Shares and Voting Rights
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest, without par value, from an unlimited number of
series ("Portfolios") of shares. Currently the Fund is offering shares of
twenty-six Portfolios.
The shares of each Portfolio of the Fund are fully paid and non-assessable,
except as set forth below, and have no preference as to conversion, exchange,
dividends, retirement or other features. The shares of each Portfolio of the
Fund have no preemptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A Shareholder of a Class is entitled to one vote for each full
Class Share held (and a fractional vote for each fractional Class Share held) of
the Shareholder's name on the books of the Fund. Shareholders of a Class have
exclusive voting rights regarding any matter submitted to shareholders that
relates solely to that Class of Shares (such as a distribution plan or service
agreement relating to that Class), and separate voting rights on any other
matter submitted to shareholders in which the interests of the shareholders of
that Class differ from the interests of holders of any other Class.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio of the
Fund outstanding, the Trustees may sell or convert the assets of such Portfolio
to another investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets of such
Portfolio and distribute such assets ratably among the shareholders of such
Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless otherwise
required by law, the Trustees may combine the assets of any two or more
Portfolios into a single Portfolio so long as such combination will not have a
material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any Portfolio as provided in paragraphs 1), 2), and 3) above, that
Portfolio shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be canceled and discharged with regard to that Portfolio.
Dividend and Capital Gains Distributions
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax on undistributed income
and capital gains (see discussion under "Dividends, Capital Gains Distributions
and Taxes" in the Prospectus). The amounts of any income dividends or capital
gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution,
except for the Cash Reserves Portfolio. Furthermore, such dividends or
distributions, although in effect a return of capital, are subject to income
taxes as set forth in the Prospectus.
34
<PAGE>
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gain distributions are automatically received
in additional shares of that Portfolio of the Fund at net asset value (as of the
business day following the record date). This will remain in effect until the
Fund is notified by the shareholder in writing at least three days prior to the
record date that either the Income Option (income dividends in cash and capital
gains distributions in additional shares at net asset value) or the Cash Option
(both income dividends and capital gain distributions in cash) has been elected.
An account statement is sent to shareholders whenever an income dividend or
capital gain distribution is paid.
Each Portfolio of the Fund is treated as a separate entity (and hence, as a
separate "regulated investment company") for federal tax purposes. Any net
capital gains recognized by a Portfolio are distributed to its investors without
need to offset (for federal income tax purposes) such gains against any net
capital losses of another Portfolio.
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust such as the Fund may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees, but this disclaimer may
not be effective in some jurisdictions or as to certain types of claims. The
Declaration of Trust further provides for indemnification out of the Funds
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
Pursuant to the Declaration of Trust, the Trustees may also authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed Portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class (subject only to
the rights of creditors of the Fund) and would be subject to the liabilities
related thereto. Pursuant to the 1940 Act, as amended, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies relating thereto.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate
the past performance of its Portfolios. Performance quotations by investment
companies are subject to rules adopted by the Securities and Exchange Commission
("SEC"), which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information computed
as required by the SEC. An explanation of the methods for computing performance
follows.
35
<PAGE>
Total Return
A Portfolio's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5, and 10 year periods (or, if
shorter, the period since inception of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1, 5, and 10 year period (or, if shorter, the period since inception of the
Portfolio) and the deduction of all applicable Fund expenses on an annual basis.
Average annual total return is calculated according to the following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV =ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the stated period
The average annual total return of each Institutional Class Portfolio of the
Fund for the periods noted is set forth below:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Inception
ended ended ended to Inception
9/30/96 9/30/96 9/30/96 9/30/96 Date
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Emerging Markets Portfolio 6.21 -- -- 14.25 02/28/95
Equity Portfolio 16.48 13.64 14.10 15.95 11/14/84
Growth Portfolio* N/A N/A -- -- N/A
International Equity Portfolio 8.87 7.80 -- 7.92 11/25/88
Mid Cap Growth Portfolio 28.81 17.51 -- 20.45 03/30/90
Mid Cap Value Portfolio 22.30 -- -- 32.88 12/30/94
Small Cap Value Portfolio 24.00 20.04 13.64 12.55 07/01/86
Value Portfolio 18.41 17.89 14.79 16.86 11/05/84
Cash Reserves Portfolio 5.35 4.19 -- 4.66 08/29/90
Domestic Fixed Income Portfolio 4.41 8.83 -- 10.00 09/30/87
Fixed Income Portfolio 7.63 8.94 9.38 10.92 11/14/84
Fixed Income Portfolio II 6.12 8.16 -- 10.00 08/31/90
Global Fixed Income Portfolio 6.83 -- -- 8.51 04/30/93
High Yield Portfolio 13.83 14.52 -- 11.45 02/28/89
Intermediate Duration Portfolio 6.27 -- -- 8.84 10/03/94
International Fixed Income Portfolio 6.13 -- -- 9.55 04/29/94
Limited Duration Portfolio 5.47 -- -- 5.77 03/31/92
Mortgage-Backed Securities Portfolio 6.10 -- -- 6.82 01/31/92
Municipal Portfolio 9.46 -- -- 7.83 10/01/92
PA Municipal Portfolio 9.03 -- -- 8.35 10/01/92
Special Purpose Fixed Income Portfolio 7.74 -- -- 9.42 03/31/92
Balanced Portfolio 13.47 -- -- 11.31 12/31/92
Multi-Asset-Class Portfolio 13.75 -- -- 14.48 07/29/94
Balanced Plus Portfolio* N/A -- -- -- N/A
Advisory Foreign Fixed Income Portfolio 16.47 -- -- 14.42 10/07/94
Advisory Mortgage Portfolio 6.56 -- -- 8.68 04/12/95
</TABLE>
* The Growth and Balanced Plus Portfolios had not commenced operations as of
September 30, 1996.
36
<PAGE>
The average annual total return of each Investment Class Portfolio of the fund
for the periods noted is set forth below:
<TABLE>
<CAPTION>
Inception
1 Year 5 Years 10 Years Inception Date of
ended ended ended to Investment
9/30/96 9/30/96 9/30/96 9/30/96 CLASS
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Value Portfolio -- -- -- 4.78 05/6/96
Equity Portfolio -- -- -- 6.02 04/10/96
International Equity Portfolio -- -- -- 1.61 04/10/96
Mid Cap Value Portfolio -- -- -- 5.61 05/10/96
High Yield Portfolio -- -- -- 5.33 05/21/96
Special Purpose Fixed Income Portfolio -- -- -- 4.25 04/10/96
Multi-Asset-Class Portfolio -- -- -- 1.75 06/10/96
Balanced Plus Portfolio* -- -- -- -- N/A
</TABLE>
* The Balanced Plus Portfolio had not commenced operations as of September 30,
1996.
The average annual total return of each Adviser Class Portfolio of the Fund for
the periods noted is set forth below:
Inception
1 Year 5 Years 10 Years Inception Date of
ended ended ended to Adviser
9/30/96 9/30/96 9/30/96 9/30/96 Class
------- ------- ------- ------- -----
Value Portfolio -- -- -- 10.63 07/17/96
The Portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:
Aggregate Total Return = [ ( ERV ) - 1 ]
--------------------------
P
The aggregate total return of each Portfolio for the periods noted is set forth
below. One year aggregate total return figures and Portfolio inception dates are
reflected under the annual total return figures provided above.
5 Years
ended Inception to
9/30/96 9/30/96
-------- -------------
Emerging Markets Portfolio N/A 23.52
Equity Portfolio 89.49 479.86
Growth Portfolio** N/A N/A
International Equity Portfolio 45.57 81.84
Mid Cap Growth Portfolio 124.09 235.40
Mid Cap Value Portfolio N/A 64.49
Small Cap Value Portfolio 149.25 235.21
Value Portfolio 127.75 538.61
Cash Reserves Portfolio 22.83 31.95
Domestic Fixed Income Portfolio 52.64 135.68
Fixed Income Portfolio 53.46 242.49
Fixed Income Portfolio II 48.02 78.57
Global Fixed Income Portfolio N/A 32.23
High Yield Portfolio 97.01 127.57
Intermediate Duration Portfolio N/A 18.38
International Fixed Income Portfolio N/A 24.73
Limited Duration Portfolio N/A 28.72
Mortgage-Backed Securities Portfolio N/A 36.03
Municipal Portfolio N/A 35.14
PA Municipal Portfolio N/A 37.77
Special Purpose Fixed Income Portfolio N/A 49.96
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Balanced Portfolio N/A 49.44
Multi-Asset-Class Portfolio N/A 34.14
Balanced Plus Portfolio** N/A N/A
Advisory Foreign Fixed Income Portfolio N/A 30.58
Advisory Mortgage Portfolio N/A -
* The above performance information relates solely to the Institutional
Class. Performance for the Investment Class and Adviser Class would be lower
because of the Shareholder Servicing fees and 12b-1 fees charged to the
Investment Class and Adviser Class, respectively.
** The Growth and Balanced Plus Portfolios had not commenced operations as of
September 30, 1996.
The Portfolios may also calculate a total return gross of all expenses which
reflects the cumulative percentage change in value over the measuring period
prior to the deduction of all fund expenses. The formula for calculating the
total return gross of all expenses can be expressed as follows:
Total Return Gross of all Expenses = ((ERV + E)/P) -1)
E = Fund expenses deducted from the ending redeemable value during the measuring
period.
The annualized since inception gross of fees returns of the Fund's portfolios
are set forth below:
Annualized Since
Inception
Period Ended:
9/30/96
MAS EQUITY FUNDS (Gross of Fees)*
INCEPTION DATE
11/14/84 Equity Portfolio 16.67
11/05/84 Value Portfolio 17.59
07/01/86 Small Cap Value Portfolio 13.53
03/30/90 Mid Cap Growth Portfolio 21.17
11/25/88 International Equity Portfolio 8.59
12/30/94 Mid Cap Value 33.87
02/28/95 Emerging Markets Portfolio 15.62
MAS FIXED INCOME FUNDS
11/14/84 Fixed Income Portfolio 11.44
09/30/87 Domestic Fixed Income Portfolio 10.50
03/31/92 Special Purpose Income Portfolio 9.14
03/31/92 Limited Duration Portfolio 6.18
01/31/92 Mortgage-Backed Portfolio 7.45
02/28/89 High Yield Portfolio 12.15
10/01/92 Municipal Portfolio 8.41
10/01/92 PA Municipal Portfolio 8.87
04/30/93 Global Fixed Income Portfolio 9.15
04/29/94 International Fixed Income Portfolio 10.20
10/07/94 Advisory Foreign Fixed Income Portfolio 17.95
10/03/94 Intermediate Duration Portfolio 9.50
04/12/95 Advisory Mortgage Portfolio 8.71
MAS BALANCED FUNDS
12/31/92 Balanced Portfolio 11.93
07/29/94 Multi-Asset-Class Portfolio 15.18
*Annualized
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The Municipal Portfolio and the PA Municipal Portfolio may also calculate a
total return which reflects the cumulative percentage change in value over the
measuring period after the deduction of income taxes. The formula for
calculating the total after tax return can be expressed as follows:
Total After Tax Return = (((((ERV-M)/P) x T) + (M/P)) -1)
M = Portion of ending redeemable value which was derived from tax exempt income.
T = Applicable tax rate.
The after tax returns are as follows for the Municipal Portfolio and the PA
Municipal Portfolio for the period 10/1/92 (inception of the Funds) through
9/30/96:
Pre-tax return Post-tax return
PA Municipal Portfolio 8.35*/37.77** 8.04*/36.25**
Municipal Portfolio 7.82*/35.14** 7.69*/34.51**
*Annualized
**Cumulative
The tax rates used were 31% federal and 2.8% Pennsylvania. All Municipal
Interest was considered exempt from federal taxes and interest from treasuries
was considered exempt from Pennsylvania.
Yield
In addition to total return, each portfolio of the Fund (except the Cash
Reserves Portfolio) may quote performance in terms of a 30-day yield. The yield
figures provided will be calculated according to a formula prescribed by the
Securities and Exchange Commission and can be expressed as follows:
to the power
of 6
Yield = 2 [ ( (a-b/cd) + 1) - 1 ]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by a Portfolio at a discount or premium,
the formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
value of the debt obligations. The 30-day yield figures for each of the Fund's
fixed-income and equity portfolios is set forth below:
Period ending
9/30/96
-------
Emerging Markets Portfolio 2.27%
Equity Portfolio 1.96
International Equity Portfolio 1.90
Mid Cap Growth Portfolio 0.06
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Mid Cap Value Portfolio 0.22
Small Cap Value Portfolio 0.72
Value Portfolio 1.97
Domestic Fixed Income Portfolio 5.91
Fixed Income Portfolio 7.14
Fixed Income Portfolio II 6.23
Global Fixed Income Portfolio 5.50
High Yield Portfolio 10.07
Intermediate Duration Portfolio 6.51
International Fixed Income Portfolio 5.52
Limited Duration Portfolio 6.17
Mortgage-Backed Securities Portfolio 8.16
Municipal Portfolio 4.84
PA Municipal Portfolio 4.69
Special Purpose Fixed Income Portfolio 7.16
Balanced Portfolio 4.09
Multi-Asset-Class Portfolio 3.86
Advisory Foreign Fixed Income Portfolio 6.44
Advisory Mortgage Portfolio 7.07
As of the date of this Statement of Additional Information, the Growth and
Balanced Plus Portfolios, had not commenced operations.
* The above performance information relates solely to the Institutional Class.
Performance for the Investment Class and Adviser Class would be lower because of
the Shareholder Servicing fees and 12b-1 fees charged to the Investment Class
and Adviser Class, respectively.
Yield of the Cash Reserves Portfolio
The current yield of the Cash Reserves Portfolio is calculated daily on a base
period return of a hypothetical account having a beginning balance of one share
for a particular period of time (generally 7 days). The return is determined by
dividing the net change (exclusive of any capital changes) in such account by
the value of the account at the beginning of the period and then multiplying it
by 365/7 to get the annualized current yield. The calculation of net change
reflects the value of additional shares purchased with the dividends by the
Portfolio, including dividends on both the original share and on such additional
shares. An effective yield, which reflects the effects of compounding and
represents an annualizing of the current yield with all dividends reinvested,
may also be calculated for the Portfolio by dividing the base period return by
7, adding 1 to the quotient, raising the sum to the 365th power, and subtracting
1 from the results.
Set forth below is an example, for purposes of illustration only, of the current
and effective yield calculations for the Cash Reserves Portfolio for the 7 day
base period ending September 30, 1996.
Period ending
9/30/96
-------
Value at beginning of period 1.000000
Value at end of period 1.000992
Net change in account value 0.000992
Annualized current yield 5.17%
Effective yield 5.31%
The net asset value of the Cash Reserves Portfolio is $1.00 and has remained at
that amount since the initial offering of the Portfolio. The yield of the
Portfolio will fluctuate. The annualizing of a week's dividend is not a
representation by the Portfolio as to what an investment in the Portfolio will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Portfolio
invests in, changes in interest rates on instruments, changes in the expenses of
the Fund and other factors. Yields are one basis investors may use to analyze
the Portfolios of the Fund and other investment vehicles; however, yields of
other investment vehicles may not
40
<PAGE>
be comparable because of the factors set forth in the preceding sentence,
differences in the time periods compared and differences in the methods used in
valuing portfolio instruments, computing net asset value and calculating yield.
The performance of a Portfolio, as well as the composite performance of all
Fixed-Income Portfolios and all Equity Portfolios, may be compared to data
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.,
Morningstar, Inc., the Donoghue Organization, Inc. or other independent services
which monitor the performance of investment companies, and may be quoted in
advertising in terms of their rankings in each applicable universe. In addition,
the Fund may use performance data reported in financial and industry
publications, including Barron's, Business Week, Forbes, Fortune, Investor's
Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal
and USA Today.
COMPARATIVE INDICES
Each portfolio of the Fund may from time to time use one or more of the
following unmanaged indices for performance comparison purposes:
Consumer Price Index
The Consumer Price Index is published by the US Department of Labor and is a
measure of inflation.
Financial Times Actuaries World Ex US Index
The FT-A World Ex US Index is a capitalization-weighted price index, expressed
in dollars, after dividend withholding taxes, of foreign stock prices. This
index is calculated daily and reflects price changes in 24 major foreign equity
markets. It is jointly compiled by the Financial Times, Ltd., Goldman, Sachs &
Co., and County NatWest/Wood Mackenzie in conjunction with the Institute of
Actuaries and the Faculty of Actuaries.
First Boston High Yield Index
The First Boston High Yield Index was constructed to mirror the public high
yield debt market. The index is a market weighted, trader priced index, tracked
by the First Boston Corporation. There are approximately 475 securities in the
index with a total market value of approximately $93 billion.
JP Morgan Traded Government Bond Index
The JP Morgan Traded Government Bond Index is designed to provide a
comprehensive measure of total return performance of the domestic Government
bond market of 13 countries. The index is maintained by JP Morgan Securities,
Inc. and includes only liquid issues.
Lehman Brothers 5-Year Municipal Bond Index
Lehman Brothers 5-Year Municipal Bond Index is a total return performance
benchmark for the intermediate investment grade tax exempt bond market. the
index includes general obligation bonds, revenue bonds, insured bonds and
prefunded bonds with maturities between 4 and 6 years.
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<PAGE>
Lehman Brothers 10-Year Municipal
Lehman Brothers 10-Year Municipal Bond Index is a total return performance
benchmark for the long term, investment grade tax exempt bond market. The index
includes general obligation bonds, revenue bonds, insured bonds and prefunded
bonds with maturities between 8 and 12 years.
Lehman Brothers Aggregate Index
The Lehman Brothers Aggregate Index is a fixed income market value-weighted
index that combines the Lehman Brothers Government/Corporate Index and the
Lehman Brothers Mortgage-Backed Securities Index. It includes fixed rate issues
of investment grade (BBB) or higher, with maturities of at least one year and
outstanding par values of at least $100 million for U. S. Government issues and
$25 million for others.
Lehman Brothers Government/Corporate Index
The Lehman Brothers Government/Corporate Index is a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U. S. Treasury, issues of Government agencies, and corporate
debt backed by the U. S. Government. The Corporate Bond Index includes
fixed-rate nonconvertible corporate debt. Also included are Yankee Bonds and
nonconvertible debt issued by or guaranteed by foreign or international
governments and agencies. All issues are investment grade (BBB) or higher, with
maturities of at least one year and an outstanding par value of at least $100
million for U. S. Government issues and $25 million for others. Any security
downgraded during the month is held in the index until month-end and then
removed. All returns are market value weighted inclusive of accrued income.
Lehman Brothers Intermediate Government/Corporate Index
The Lehman Brothers Intermediate Government/Corporate Index is a combination of
the Government and Corporate Bond Indices. All issues are investment grade (BBB)
or higher, with maturities of one to ten years and an outstanding par value of
at least $100 million for U. S. Government issues and $25 million for others.
The Government Index includes public obligations of the U. S. Treasury, issues
of Government agencies, and corporate debt backed by the U. S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate debt. Also
included are Yankee Bonds and nonconvertible debt issued by or guaranteed by
foreign or international governments and agencies. Any security downgraded
during the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
Lehman Brothers Long Municipal Bond Index
The Lehman Brothers Long Municipal Bond Index is a total return for the
long-term, investment-grade tax-exempt bond market for bonds. The index includes
municipal bonds with maturities of 22 years or more.
Lehman Brothers Mortgage-Backed Securities Index
The Lehman Brothers Mortgage-Backed Securities Index includes fixed rate
mortgage securities backed by GNMA, FHLMC, and FNMA. Graduated Payment Mortgages
(GPM's) are included. All issues are AAA, with maturities of at least one year
and outstanding par values of at least $100 million. Returns are market value
weighted inclusive of accrued income.
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<PAGE>
Lipper Growth & Income Fund Index
The Lipper Growth & Income Fund Index is a net asset value weighted index of the
30 largest Funds within the Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distributions as of the ex-dividend dates.
Lipper High Current Yield Fund Average
The Lipper High Current Yield Fund Average reports the average return of all the
Funds tracked by Lipper Analytical Services, Inc. classified as high yield
funds. The number of Funds tracked varies. As a result, reported returns for
longer time periods do not always match the linked product of shorter period
returns.
Salomon World Government Bond Index ex US
The Salomon World Government Bond Index ex US is designed to provide a
comprehensive measure of total return performance of the domestic government
bond markets of 12 countries outside the United States. The index has been
constructed with the aim of choosing "an inclusive" universe of institutionally
traded fixed rate bonds. The selection of security types to be included in the
index is made with the aim of being as comprehensive as possible, while
satisfying the criterion of reasonable availability to domestic and
international institutions and the existence of complete pricing and market
profile data.
International Finance Corporation Emerging Markets Index
The IFC Emerging Markets Index is an index designed to measure the total return
in either US or local currency terms of developing markets as defined by the
World Bank. The selection of stocks is made based on size, liquidity and
industry. The weight given to any stock is determined by its market
capitalization.
Lipper Money Market Average
The Lipper Money Market Average reports the average return of all the Funds
tracked by Lipper Analytical Services, Inc., classified as money market Funds
for any given period. The number of Funds tracked varies. As a result, reported
returns for longer time periods do not always match the linked product of
shorter period returns.
Merrill Lynch Corporate & Government Bond Index
The Merrill Lynch Corporate & Government Bond Index includes over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparison for partial
month periods.
Morgan Stanley Capital International World ex USA Index
The Morgan Stanley Capital International World ex USA Index is a
capitalization-weighted price index expressed in dollars. The index reflects the
performance of over 1,100 companies in 19 foreign equity markets. The index
includes dividends, net of foreign withholding taxes.
Morgan Stanley Capital International EAFE Index
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
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<PAGE>
Morgan Stanley Capital International EAFE-GDP Weighted Index
The EAFE-GDP index is an arithmetic average of the performance of over 900
securities listed on the stock exchanges of countries in Europe, Australia and
the Far East. The index is weighted by the Grow Domestic Product of the various
countries in the index.
Morgan Stanley Capital International Emerging Markets Free Index
The MSCI Emerging Markets Free Index is a capitalization weighted index of over
800 stocks from 17 different emerging market countries.
NASDAQ Industrials Index
The NASDAQ Industrials Index is a measure of all NASDAQ National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The index is exclusive of
warrants, and all domestic common stocks traded in the regular NASDAQ market
which are not part of the NASDAQ National Market System. The NASDAQ Industrials
Index is market value weighted.
Russell 1000
The Russell 1000 Index consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85 billion.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 1,000 stocks in the Russell 1000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
Russell 2000
The Russell 2000 Index consists of the 2,000 smallest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,000 stocks in the Russell 2000 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
Russell 2500
The Russell 2500 Index consists of the 2,500 smallest of the 3,000 largest
stocks. Market capitalization is typically between $1.7 billion and $57 million.
The list is rebalanced each year on June 30. If a stock is taken over or goes
bankrupt, it is not replaced until rebalancing. Therefore, there can be fewer
than 2,500 stocks in the Russell 2500 Index. The index is an equity market
capitalization weighted index available from Frank Russell & Co. on a monthly
basis.
Russell 3000
The Russell 3000 Index is a combination of the Russell 1000 Index and the
Russell 2000 Index.
Salomon 1-3 Year Treasury/Government Sponsored Index
The Salomon 1-3 Year Treasury/Government Sponsored Index includes U.S. Treasury
and agency securities with maturities one year or greater and less than three
years. Securities with amounts outstanding of at least $25 million are included
in the index.
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Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index
The Salomon 1-3 Year Treasury/Government Sponsored/Corporate Index includes U.S.
Treasury, agency and investment grade (BBB or better) securities with maturities
one year or greater and less than three years. Securities with amounts
outstanding of at least $25 million are included in the index.
Salomon Broad Index
The Salomon Broad Index, also known as the Broad Investment Grade (BIG) Index,
is a fixed income market capitalization-weighted index, including U. S.
Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans; the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements, and derivatives (e. g., U. S. Treasury zeros, CMOs, mortgage
strips). Every issue is trader-priced at month-end and the index is published
monthly.
Salomon High-Yield Market Index
The Salomon High-Yield Market Index includes public, non-convertible corporate
bond issues with at least one year remaining to maturity and $50 million in par
amount outstanding which carry a below investment-grade quality rating from
either Standard & Poor's or Moody's rating services.
Salomon Mortgage Index
The Salomon Mortgage Index includes agency pass-throughs (GNMA, FHLMC, FNMA) and
FHA and GNMA project loans. Pools with remaining terms shorter than 25 years are
seasoned; pools with longer terms are classified as new. The index is published
monthly.
Salomon One To Three Year Treasury Index
The Salomon One To Three Year Treasury Index includes only U.S. Treasury Notes
and Bonds with maturities one year or greater and less than three years.
Salomon World Government Bond Index
The Salomon World Government Bond Index is designed to provide a comprehensive
measure of total return performance of the domestic Government bond market of
thirteen countries. The index has been constructed with the aim of choosing an
"all inclusive" universe of institutionally traded fixed-rate bonds. The
selection of security types to be included in the index is made with the aim of
being as comprehensive as possible, while satisfying the criterion of reasonable
availability to domestic and international institutions and the existence of
complete pricing and market profile data.
S&P 500
The S&P 500 is a portfolio of 500 stocks designed to mimic the overall equity
market's industry weightings. Most, but not all, large capitalization stocks are
in the index. There are also some small capitalization names in the index. The
list is maintained by Standard & Poor's Corporation. It is market capitalization
weighted. Unlike the Russell indices, there are always 500 names in the S&P 500.
Changes are made by Standard & Poor's as needed.
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S&P Mid Cap 400 Index
The S&P Mid Cap 400 Index consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is also a market-value
weighted index and was the first benchmark of mid cap stock price movement.
S&P/BARRA Mid Cap 400 Growth Index
The S&P/BARRA Mid Cap 400 Growth Index is constructed by dividing the stocks in
the S&P MidCap 400 Index according to a single attribute: price-to-book ratios.
The MidCap 400 Growth Index is composed of firms with higher price-to-book
ratios. Like the MidCap 400, the MidCap 400 Growth Index is
capitalization-weighted, meaning that each stock is weighted in the appropriate
index in proportion to its market value.
S&P 500 Ex South Africa Index
The S&P 500 Ex South Africa Index is the same as the S&P 500 Index excluding
companies that are on the Investor Responsibility Research Center (IRRC) list of
companies doing business in South Africa. This index is maintained by Wilshire
Associates.
Wilshire 5000 Equity Index
The Wilshire 5000 Equity Index measures performance of all US headquartered
equity securities with readily available price data. Approximately 6,000
capitalization weighted security returns are used to calculate the index.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1996,
including notes thereto and the report of Price Waterhouse LLP thereon are
incorporated herein by reference. A copy of the 1996 Annual Report will
accompany the delivery of this Statement of Additional Information.
APPENDIX-DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc.'s Corporate Bond Ratings:
Aaa: judged to be the best quality; carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; Baa: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; Ba: B: protection of interest and
principal payments is questionable.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation's Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection as to
principal and interest; AA: also qualify as high grade obligations, and in the
majority of instances differs from AAA issues only in small degree; A: regarded
as upper medium grade; have considerable investment strength but are not
entirely free from adverse effects of changes in economic and trade conditions.
Interest and principal are regarded as safe; BBB: regarded as borderline between
definitely sound obligations and those where the speculative element begins to
predominate; this group is the lowest which qualifies for commercial bank
investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
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B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD", or "D" categories.
Excerpts from Duff & Phelps Corporate Bond Ratings:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protections
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearage.
Description of Bond Ratings
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Excerpts from Moody's Investors Service, Inc.'s Preferred Stock Ratings
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. aa: An issue which
is rated aa is considered a high-grade preferred stock. This rating indicates
that there is reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future. a: An issue which
is rated a is considered to be an upper medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless expected to be maintained at
adequate levels. baa: An issue which is rated baa is considered to be medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time. ba: an issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class. b: An
issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small. caa: An issue which is rated
caa is likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payment. ca: An issue which is
rated ca is speculative in a high degree an is likely to be in arrears on
dividends with little likelihood of eventual payment. c: This is the lowest
rated class of preferred of preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1,2 and 3 in each rating
classification from "aa "through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Excerpts from Standard & Poor's Corporation's Preferred Stock Ratings
AAA: This is the highest rating that may be assigned by S&P's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. AA: A preferred stock issue rated AA also qualifies as a high
quality fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA. A: An
issue rated A is backed by a sound capacity to pay the preferred stock
obligations , although it is somewhat more susceptible to the adverse effect of
the changes in circumstances and economic conditions. BBB: An issue rated BBB is
regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameter, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than
for issues in the A category. BB,B,CCC: Preferred stock rated BB, B, and CCC are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. Bb indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse conditions. CC: The
rating CC is reserved for a preferred stock in arrears on dividends or sinking
fund payments but that is currently paying. C: A preferred stock rated C is a
non-paying issue. D: A preferred stock rated D is a non-paying issue with the
issuer in default on debt instruments.
Plus(+) or Minus(-): The ratings from "AA" for "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch Investors Services, Inc. Preferred Stock Ratings:
AAA: Preferred stocks assigned this rating are the highest quality. Strong asset
protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
"AAA" rating.
49
<PAGE>
AA: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
BBB: Preferred or preference issues assigned this rating are reasonably safe but
lack the protections of the "A" to "AAA" categories. Current results should be
watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The loner-term financial capacities of the enterprises cannot be predicted with
assurance.
B: Issues assigned this rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The outlook
for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects for
future payments are remote.
D: Issuer is in default on its debt obligations and has filed for reorganization
or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and
"D" categories.
50
<PAGE>
SUPPLEMENT DATED SEPTEMBER 26, 1997
TO PROSPECTUS DATED MAY 1, 1997
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS
02208-2798
-------------
The Prospectus is being amended and supplemented to: (i) reflect changes to
the parent of the investment adviser, administrator and the distributor; (ii)
reflect changes in the portfolio managers of the Small Cap Value Equity and
Global Fixed Income Portfolios; (iii) to reflect a clarification of the market
capitalizations of the issuers in which the Small Cap Value Equity Portfolio
primarily intends to invest; (iv) detail the Portfolios' revised investment
policies with respect to certain derivative instruments; (v) reflect a change in
the definition of high yield securities with respect to the High Yield
Portfolio; (vi) reflect changes to the High Yield Portfolio's investment policy
with respect to investment in the securities of foreign issuers; and (vii)
reflect changes to the High Yield Portfolio's investment policy with respect to
liquid Restricted Securities. The Prospectus is amended and supplemented as
follows:
--------------
On May 31, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
merged to form Morgan Stanley, Dean Witter, Discover & Co. Prior thereto, Morgan
Stanley Group Inc. was the direct parent of Morgan Stanley Asset Management Inc.
(the "Adviser") and Morgan Stanley & Co. Incorporated ("Morgan Stanley"). The
Adviser and Morgan Stanley are now subsidiaries of Morgan Stanley, Dean Witter,
Discover & Co.
--------------
J. David Germany, Michael B. Kushma, Paul F. O'Brien, Robert M. Smith and
Richard B. Worley now share primary responsibility for managing the assets of
the Global Fixed Income Portfolio. Accordingly, the fourth full paragraph on
page 26 is deleted and replaced with the following:
GLOBAL FIXED INCOME PORTFOLIO -- J. DAVID GERMANY, MICHAEL B.
KUSHMA, PAUL F. O'BRIEN, ROBERT M. SMITH AND RICHARD B. WORLEY. J.
David Germany shares primary responsibility for managing the Portfolio's
assets. He joined the Adviser in 1996 and has been a portfolio manager
with the Adviser's affiliate, Miller Anderson & Sherrerd, LLP ("MAS")
since 1991. He was Vice President & Senior Economist for Morgan Stanley
from 1989 to 1991. He assumed responsibility for the Global Fixed Income
and International Fixed Income Portfolios of the MAS-advised MAS Funds
in 1993 and the MAS Fund's Multi-Asset-Class Portfolio in 1994. Mr.
Germany was Senior Staff Economist (International Finance and
Macroeconomics) to the Council of Economic Advisers -- Executive Office
of the President from 1986 through 1987 and an Economist with the Board
of
<PAGE>
Governors of the Federal Reserve System -- Division of International
Finance from 1983 through 1987. He holds an A.B. degree (Valedictorian)
from Princeton University and a Ph.D. in Economics from the
Massachusetts Institute of Technology. Michael B. Kushma, a Principal at
Morgan Stanley, joined the firm in 1987. He shares primary
responsibility for managing the Portfolio's assets. He was a member of
Morgan Stanley's global fixed income strategy group in the fixed income
division from 1987-1995 where he became the division's senior government
bond strategist. He joined the Adviser in 1995 where he took
responsibility for the global fixed income bond strategist. Mr. Kushma
received an A.B. in economics from Princeton University in 1979, and M.
Sc. in economics from Columbia University in 1983. Paul F. O'Brien
shares primary responsibility for managing the Portfolio's assets. He
joined the Adviser and MAS in 1996. He was head of European Economics
from 1993 through 1995 for JP Morgan and as Principal Administrator from
1991 through 1992 for the Organization for Economic Cooperation and
Development. He assumed responsibility for the MAS-advised MAS Funds'
Global Fixed Income and International Fixed Income Portfolios in 1996.
Mr. O'Brien holds a B.S. degree from the Massachusetts Institute of
Technology and a Ph.D. in Economics from the University of Minnesota.
Robert Smith, a Principal of Morgan Stanley, joined the Adviser in June
1994. Prior to joining the Adviser, he spent eight years as Senior
Portfolio Manager -- Fixed Income at the State of Florida Pension Fund.
Mr. Smith's responsibilities included active total rate-of-return
management of long term portfolios and supervision of other fixed income
managers. A graduate of Florida State University with a B.S. in
Business, Mr. Smith also received an M.B.A. -- Finance from Florida
State and holds a Chartered Financial Analyst (CFA) designation. Richard
B. Worley, a Managing Director of Morgan Stanley, joined MAS in 1978. He
assumed responsibility for the MAS Funds Fixed Income Portfolio in 1984,
the MAS Funds Domestic Fixed Income Portfolio in 1987, the MAS Funds
Fixed Income Portfolio II in 1990, the MAS Funds Balanced and Special
Purpose Fixed Income Portfolios in 1992, the MAS Funds Global Fixed
Income and International Fixed Income Portfolios in 1993 and the MAS
Funds Multi-Asset-Class Portfolio in 1994. Mr. Worley received a B.A. in
Economics from University of Tennessee and attended the Graduate School
of Economics at University of Texas.
--------------
Gary D. Haubold no longer serves as portfolio manager for the Small Cap
Value Equity Portfolio. William B. Gerlach and Gary G. Schlarbaum now share
primary responsibility for managing the assets of the Small Cap Value Equity
Portfolio. Accordingly, the second full paragraph on Page 26 of the Prospectus
is deleted and replaced with the following paragraph:
SMALL CAP VALUE EQUITY PORTFOLIO -- WILLIAM B. GERLACH AND GARY G.
SCHLARBAUM. Mr. Gerlach joined the Adviser in July 1996 and has worked
with the Adviser's affiliate, Miller Anderson & Sherrerd, LLP ("MAS")
since 1991. Previously, he was with Alphametrics Corporation and Wharton
Econometric Forecasting Associates. Mr. Gerlach received a B.A. in
Economics from Haverford College. Gary G. Schlarbaum, a Managing
Director of Morgan Stanley, joined MAS in 1987. He assumed
responsibility for the MAS Funds Equity and Small Cap Value Portfolios
in 1987, the MAS Funds Balanced Portfolio in 1992 and the MAS Funds
Multi-Asset-Class and Mid Cap Value Portfolios in 1994. Mr. Schlarbaum
also is a Director of MAS Fund Distribution, Inc. Previously, he was
with First Chicago Investment Advisers and was a Professor at the
Krannert Graduate School at Purdue University. Mr. Schlarbaum holds a
B.A. in Economics from Coe College and a Ph.D. in Applied Economics from
University of Pennsylvania. Mr. Gerlach and Mr. Schlarbaum have had
primary responsibility for managing the Small Cap Value Equity Portfolio
since June 1997.
--------------
<PAGE>
The second, third and fourth sentences under "THE SMALL CAP VALUE EQUITY
PORTFOLIO" on page 14, are hereby deleted and replaced with the following:
The Fund invests primarily in corporations domiciled in the United
States with equity market capitalizations in the range of the companies
represented in the Russell 2500 Small Company Index, but may invest in
similar sized foreign companies. Such range is currently $70 million to
$1.3 billion, but the range fluctuates over time with the equity market.
Under normal circumstances, the Fund will invest at least 65% of the
value of its total assets in equity securities of issuers whose market
capitalizations are within the range represented in the Index.
--------------
The section entitled "FUTURES CONTRACTS AND OPTIONS OF FUTURES CONTRACTS" on
pages 21-22 is deleted.
The section entitled "OPTIONS TRANSACTIONS" on page 23 is deleted.
After the section entitled "WHEN-ISSUED AND DELAYED DELIVERY SECURITIES" on
page 24, the following sections are inserted:
DERIVATIVE INSTRUMENTS
The Portfolios are permitted to invest in various derivative
instruments for both hedging and non-hedging purposes. Derivatives
instruments include options, futures and options on futures, structured
investments and structured notes, caps, floors, collars and swaps.
Additionally, the Portfolios may invest in other derivative instruments
that are developed over time if their use would be consistent with the
objectives of the Portfolios. Each Portfolio will limit its use of
derivative instruments to 33 1/3% of its total assets measured by the
aggregate notional amount of outstanding derivative instruments. The
Portfolios' investments in forward foreign currency contracts and
derivatives used for hedging purposes are not subject to the limit
described above.
The Portfolios may use derivative instruments under a number of
different circumstances to further their investment objectives. The
Portfolios may use derivatives when doing so provides more liquidity
than the direct purchase of the securities underlying such derivatives.
For example, a Portfolio may purchase derivatives to quickly gain
exposure to a market in response to changes in the Portfolio's
investment policy or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities
market. A Portfolio may also use derivatives when it is restricted from
directly owning the underlying securities due to foreign investment
restrictions or other reasons or when doing so provides a price
advantage over purchasing the underlying securities directly, either
because of a pricing differential between the derivatives and securities
markets or because of lower transaction costs associated with the
derivatives transaction. Derivatives may also be used by a Portfolio for
hedging purposes and in other circumstances when a Portfolio's portfolio
managers believe it advantageous to do so consistent with the
Portfolio's investment objective. The Portfolios will not, however, use
derivatives in a manner that creates leverage, except to the extent that
the use of leverage is expressly permitted by a particular Portfolio's
investment policies, and then only in a manner consistent with such
policies.
Some of the derivative instruments in which the Portfolios may
invest and the risks related thereto are described in more detail below.
<PAGE>
CAPS, FLOORS AND COLLARS
The Portfolios may invest in caps, floors and collars, which are
instruments analogous to options. In particular, a cap is the right to
receive the excess of a reference rate over a given rate and is
analogous to a put option. A floor is the right to receive the excess of
a given rate over a reference rate and is analogous to a call option.
Finally, a collar is an instrument that combines a cap and a floor. That
is, the buyer of a collar buys a cap and writes a floor, and the writer
of a collar writes a cap and buys a floor. The risks associated with
caps, floors and collars are similar to those associated with options.
In addition, caps, floors and collars are subject to risk of default by
the counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Portfolios may purchase and sell futures contracts and options
on futures contracts, including but not limited to securities index
futures, foreign currency exchange futures, interest rate futures
contracts and other financial futures. Futures contracts provide for the
sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket thereof, at a specific future
date and at a specified price. An option on a futures contract is a
legal contract that gives the holder the right to buy or sell a
specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Portfolios may sell securities index futures contracts and/or
options thereon in anticipation of or during a market decline to attempt
to offset the decrease in market value of investments in its portfolio,
or purchase securities index futures in order to gain market exposure.
Subject to applicable laws, the Portfolios may engage in transactions in
securities index futures contracts (and options thereon) which are
traded on a recognized securities or futures exchange, or may purchase
or sell such instruments in the over-the-counter market. There currently
are limited securities index futures and options on such futures in many
countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency
exchange futures contracts. Such contracts involve an obligation to
purchase or sell a specific currency at a specified future date and at a
specified price. The Portfolios may engage in such transactions to hedge
their respective holdings and commitments against changes in the level
of future currency rates or to adjust their exposure to a particular
currency.
The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to
purchase or sell a specific debt security, instrument or basket thereof
at a specified future date at a specified price. The value of the
contract rises and falls inversely with changes in interest rates. The
Portfolios may engage in such transactions to hedge their holdings of
debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial
instruments, such as U.S. Government securities, foreign currencies, and
certificates of deposit. Such contracts involve an obligation to
purchase or sell a specific security, instrument or basket thereof at a
specified future date at a specified price. Like interest rate futures
contracts, the value of financial futures contracts rises and falls
inversely with changes in interest rates. The Portfolios may engage in
financial futures contracts for hedging and non-hedging purposes.
<PAGE>
Under rules adopted by the Commodity Futures Trading Commission,
each Portfolio may enter into futures contracts and options thereon for
both hedging and non-hedging purposes, provided that not more than 5% of
such Portfolio's total assets at the time of entering the transaction
are required as margin and option premiums to secure obligations under
such contracts relating to non-hedging activities.
Gains and losses on futures contracts and options thereon depend on
the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks
associated with the use of futures and options are (i) imperfect
correlation between the change in market value of investments held by a
Portfolio and the prices of futures and options relating to investments
purchased or sold by the Portfolio, and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Portfolio will be unable to
close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions for which
there appears to be a liquid exchange or secondary market. The risk of
loss in trading on futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the
extremely high degree of leverage involved in futures pricing.
OPTIONS TRANSACTIONS
The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which such
Portfolios may invest, as well as with respect to foreign currency.
Purchasing a put option gives a Portfolio the right to sell a specified
security, currency or basket of securities or currencies at the exercise
price until the expiration of the option. Purchasing a call option gives
a Portfolio the right to purchase a specified security, currency or
basket of securities or currencies at the exercise price until the
expiration of the option.
Each Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign
currency. A Portfolio that has written an option receives a premium,
which increases the Portfolio's return on the underlying security or
instrument in the event the option expires unexercised or is closed out
at a profit. However, by writing a call option, a Portfolio will limit
its opportunity to profit from an increase in the market value of the
underlying security or instrument above the exercise price of the option
for as long as the Portfolio's obligation as writer of the option
continues. The Portfolios may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as
the writer of the option, it will earmark or segregate sufficient liquid
assets to cover its obligations under the option or own (i) the
underlying security or instrument subject to the option, (ii) securities
or instruments convertible or exchangeable without the payment of any
consideration into the security or instrument subject to the option, or
(iii) a call option on the same underlying security with a strike price
no higher than the price at which the underlying instrument was sold
pursuant to a short option position.
By writing (or selling) a put option, a Portfolio incurs an
obligation to buy the security or instrument underlying the option from
the purchaser of the put at the option's exercise price at any time
during the option period, at the purchaser's election. The Portfolios
may also write options that may be exercised by the purchaser only on a
specific date. A Portfolio that has written a put option will earmark or
segregate sufficient liquid assets to cover its obligations under the
option or will own a put option on the same underlying security with an
equal or higher strike price.
<PAGE>
The Portfolios may engage in transactions in options which are
traded on recognized exchanges or over-the-counter. There currently are
limited options markets in many countries, particularly emerging
countries such as Latin American countries, and the nature of the
strategies adopted by the Adviser and the extent to which those
strategies are used will depend on the development of such options
markets. The primary risks associated with the use of options are (i)
imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of options
relating to such investments, and (ii) possible lack of a liquid
secondary market for an option.
STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal
repayment and/or interest payments is based upon the movement of one or
more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and
LIBOR) and stock indices such as the S&P 500 Index. In some cases, the
impact of the movements of these factors may increase or decrease
through the use of multipliers or deflators. The Portfolios may use
structured notes to tailor their investments to the specific risks and
returns the Adviser wishes to accept while avoiding or reducing certain
other risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract
or other similar instrument in which two parties agree to exchange the
returns generated by a security, instrument, basket or index thereof for
the returns generated by another security, instrument, basket thereof or
index. The payment streams are calculated by reference to a specific
security, index or instrument and an agreed upon notional amount. The
relevant indices include but are not limited to, currencies, fixed
interest rates, prices and total return on interest rate indices, fixed
income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index
for the return generated by a second fixed income index. The currency
swaps in which the Portfolios may enter will generally involve an
agreement to pay interest streams in one currency based on a specified
index in exchange for receiving interest streams denominated in another
currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
A Portfolio will usually enter into swaps on a net basis, i.e., the
two return streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with a Portfolio receiving or
paying, as the case may be, only the net amount of the two returns. A
Portfolio's obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued, but
unpaid, net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash or liquid
securities. A Portfolio will not enter into any swap agreement unless
the counterparty meets the rating requirements set forth in guidelines
established by the Fund's Board of Directors.
Interest rate and total rate of return swaps do not involve the
delivery of securities, other underlying assets, or principal.
Accordingly, the risk of loss with respect to interest rate and total
rate of return swaps is limited to the net amount of payments that a
Portfolio is contractually obligated to make. If the other party to an
interest rate or total rate of return swap defaults, a Portfolio's risk
of loss consists of the net amount of payments that a Portfolio is
contractually entitled to receive. In contrast,
<PAGE>
currency swaps may involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap may be subject
to the risk that the other party to the swap will default on its
contractual delivery obligations. If there is a default by the
counterparty, a Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swaps market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swaps market
has become relatively liquid. Swaps that include caps, floors and
collars are more recent innovations for which standardized documentation
has not yet been fully developed and, accordingly, they are less liquid
than "traditional" swaps.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect
in its forecasts of market values, interest rates, and currency exchange
rates, the investment performance of the Portfolios would be less
favorable than it would have been if this investment technique were not
used.
--------------
The fifth bullet point under the heading "THE FUND" on page 10 of the
Prospectus is deleted and replaced with the following:
- The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the four
highest rating categories of the recognized rating services.
--------------
The third sentence in the third paragraph under "THE HIGH YIELD PORTFOLIO"
on page 17, is hereby deleted.
--------------
Under the heading "NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND
RESTRICTED SECURITIES" on page 22, the second paragraph is deleted and replaced
with the following:
As a general matter, the Portfolio may not invest more than 15% of
its net assets in illiquid securities, including securities for which
there is no readily available secondary market. Nor, as a general
matter, may the Portfolio invest more than 10% of its total assets in
securities that are restricted from sale to the public without
registration ("Restricted Securities") under the Securities Act of 1933,
as amended (the "1933 Act"). However, the Portfolio may invest without
limit in liquid Restricted Securities that can be offered and sold to
qualified institutional buyers under Rule 144A under the 1933 Act ("Rule
144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the
liquidity of Rule 144A Securities. Rule 144A Securities may become
illiquid if qualified institutional buyers are not interested in
acquiring the securities.
--------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Small Cap Value Equity, Value Equity, Balanced, Global Fixed Income and High
Yield Portfolios (each, a "Portfolio," and collectively, the "Portfolios"). The
Class A and Class B shares currently offered by the Portfolios have different
minimum investment requirements and fund expenses. Shares of the portfolios are
offered with no sales charge, exchange fee or redemption fee, (except that the
International Small Cap Portfolio may impose a transaction fee).
THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD
SECURITIES."
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information", dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:
<TABLE>
<CAPTION>
GLOBAL
FIXED HIGH
SMALL CAP VALUE VALUE EQUITY BALANCED INCOME YIELD
SHAREHOLDER TRANSACTION EXPENSES EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------ ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A................................. None None None None None
Class B................................. None None None None None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A................................. None None None None None
Class B................................. None None None None None
Deferred Sales Load
Class A................................. None None None None None
Class B................................. None None None None None
Redemption Fees
Class A................................. None None None None None
Class B................................. None None None None None
Exchange Fees
Class A................................. None None None None None
Class B................................. None None None None None
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
FIXED HIGH
ANNUAL FUND OPERATING EXPENSES SMALL CAP VALUE VALUE EQUITY BALANCED INCOME YIELD
- --------------------------------------- EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(AS A PERCENTAGE OF AVERAGE NET ASSETS) ----------------- ------------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)**
Class A................................. 0.53% 0.42% 0.00% 0.18% 0.375%
Class B................................. 0.53% 0.42% 0.00% 0.18% 0.375%
12b-1 Fees
Class A................................. None None None None None
Class B................................. 0.25% 0.25% 0.25% 0.15%* 0.25%
Other Expenses
Class A................................. 0.47% 0.28% 0.70% 0.32% 0.32%
Class B................................. 0.47% 0.28% 0.70% 0.32% 0.32%
------ ------ ----------- -------- --------
Total Operating Expenses (Net of Fee
Waivers)**
Class A................................. 1.00% 0.70% 0.70% 0.50% 0.695%
Class B................................. 1.25% 0.95% 0.95% 0.65% 0.945%
------ ------ ----------- -------- --------
------ ------ ----------- -------- --------
</TABLE>
- --------------------------
*The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.
**The Adviser has agreed to waive its management fee and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management of the
Fund." Set forth below, for each Portfolio, are the management fees and
total operating expenses absent such fee waivers and/or expense
reimbursements as a percent of the average daily net assets of the Class A
shares and Class B shares, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEE ------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------ -------------------- ---------- ------------
<S> <C> <C> <C>
Small Cap Value Equity...................................... 0.85% 1.32% 1.69%
Value Equity................................................ 0.50% 0.78% 1.03%
Balanced.................................................... 0.50% 1.32% 1.68%
Global Fixed Income......................................... 0.40% 0.72% 0.86%
High Yield.................................................. 0.375% 0.695% 0.945%
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted above, the Portfolios charge no redemption
fees of any kind. The following example is based on total operating expenses of
the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Small Cap Value Equity Portfolio
Class A.......................................................... $ 10 $ 32 $ 55 $ 122
Class B.......................................................... 13 40 69 151
Value Equity Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Balanced Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Global Fixed Income
Class A.......................................................... 5 16 28 63
Class B.......................................................... 7 21 36 81
High Yield Portfolio
Class A.......................................................... 8 24 42 93
Class B.......................................................... 10 32 55 122
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares for each of the Portfolios for the periods presented. The audited
financial highlights for the Portfolios' shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1996 Annual Report to Shareholders and which are incorporated by
reference in the Fund's Statement of Additional Information. The Portfolios'
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference in the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------ ------------
PERIOD FROM PERIOD FROM
DECEMBER 17, JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1996
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00 $ 11.95
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.32 0.30 0.28 0.24 0.01 0.23
Net Realized and Unrealized Gain
(Loss) on Investments................ 2.36 1.82 (0.01) 0.90 0.13 2.38
Total from Investment Operations.... 2.68 2.12 0.27 1.14 0.14 2.61
DISTRIBUTIONS
Net Investment Income................. (0.32) (0.38) (0.27) (0.18) -- (0.30)
Net Realized Gain..................... (3.38) (0.63) (0.30) -- -- (3.38)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions................. (3.70) (1.01) (0.57) (0.18) -- (3.68)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.88
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN............................ 22.99% 20.63% 2.53% 11.33% 1.40% 22.33%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $23,970 $51,919 $40,033 $26,775 $ 5,974 $ 1,689
Ratio of Expenses to Average Net
Assets (1)........................... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.24%**
Ratio of Net Investment Income to
Average Net Assets (1)............... 2.20% 2.60% 2.67% 2.56% 1.64%** 1.93%**
Portfolio Turnover Rate............... 32% 36% 22% 29% 0% 32%
Average Commission Rate#.............. $0.0402 N/A N/A N/A N/A $0.0402
</TABLE>
- ------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net in-
vestment income............ $0.04 $0.02 $0.03 $0.06 $0.13 $0.05
Ratios before expense
limitation:
Expenses to Average Net As-
sets....................... 1.32% 1.21% 1.26% 1.68% 23.14%** 1.69%**
Net Investment Income (Loss)
to Average Net Assets...... 1.89% 2.39% 2.41% 1.88% (20.50)%** 1.50%**
</TABLE>
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.
5
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 13.94 $ 11.50 $ 12.63 $ 11.31
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.41 0.38 0.40 0.37
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.27 3.30 (0.55) 1.31
------------ ------------ ------------ ------------
Total from Investment
Operations.......... 2.68 3.68 (0.15) 1.68
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.41) (0.47) (0.40) (0.36)
Net Realized Gain...... (2.32) (0.77) (0.58) --
------------ ------------ ------------ ------------
Total
Distributions....... (2.73) (1.24) (0.98) (0.36)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 13.89 $ 13.94 $ 11.50 $ 12.63
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN............. 19.73% 33.69% (1.29)% 15.14%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $106,128 $147,365 $73,406 $54,598
Ratio of Expenses to
Average Net Assets
(1)................... 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)............ 2.62% 3.01% 3.37% 3.23%
Portfolio Turnover
Rate.................. 42% 43% 33% 51%
Average Commission
Rate#................. $0.0434 N/A N/A N/A
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net investment
income............ $0.01 $0.01 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average
Net Assets........ 0.78% 0.77% 0.80% 0.95%
Net Investment
Income to
Average Net
Assets............ 2.55% 2.94% 3.27% 2.98%
<CAPTION>
CLASS B
------------
PERIOD FROM
TWO MONTHS JANUARY 2,
ENDED YEAR ENDED 1996*** TO
DECEMBER 31, OCTOBER 31, DECEMBER 31,
1992 1992 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.71 $ 10.24 $ 14.06
------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.08 0.38 0.29
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 0.52 0.48 2.25
------------ ------------ ------------
Total from Investment
Operations.......... 0.60 0.86 2.54
------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ -- (0.39) (0.39)
Net Realized Gain...... -- -- (2.32)
------------ ------------ ------------
Total
Distributions....... -- (0.39) (2.71)
------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 11.31 $ 10.71 $ 13.89
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN............. 5.60% 8.51% 18.57%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $27,541 $25,013 $ 2,555
Ratio of Expenses to
Average Net Assets
(1)................... 0.70%** 0.70% 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 4.41%** 3.72% 2.33%**
Portfolio Turnover
Rate.................. 9% 56% 42%
Average Commission
Rate#................. N/A N/A $0.0434
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net investment
income............ $0.01 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets........ 1.20%** 0.84% 1.03%**
Net Investment
Income to
Average Net
Assets............ 3.91%** 3.58% 2.26%**
</TABLE>
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were paid, during the period.
6
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A ------------
----------------------------------------------------------------------------- PERIOD FROM
TWO MONTHS JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1992 1996
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61 $ 10.02
------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.52 0.39 0.42 0.44 0.10 0.58 0.34
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.54 1.62 (0.64) 0.79 0.21 0.42 0.65
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Operations.......... 1.06 2.01 (0.22) 1.23 0.31 1.00 0.99
------------ ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.48) (0.50) (0.49) (0.41) -- (0.58) (0.46)
In Excess of Net
Investment Income..... 0.00+ -- -- (0.08) -- -- (2.37)
Net Realized Gain...... (2.37) (0.49) (1.46) (0.06) -- (0.03) (2.83)
In Excess of Net
Realized Gain......... -- -- -- (0.86) -- -- $ 8.18
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
Distributions....... (2.85) (0.99) (1.95) (1.41) -- (0.61) 10.24%
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN............. 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57% 10.24%
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands).... $ 5,992 $ 22,642 $ 18,492 $ 29,684 $ 39,984 $ 40,332 $ 2,197
Ratio of Expenses to
Average Net Assets
(1)................... 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70% 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21% 3.73%**
Portfolio Turnover
Rate.................. 22% 26% 44% 136% 4% 40% 22%
Average Commission
Rate#................. $0.0397 N/A N/A N/A N/A N/A $0.0397
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net investment
income........... $0.08 $0.03 $0.03 $0.04 $0.01 $0.01 $0.07
Ratios before
expense limitation:
Expenses to
Average Net
Assets........... 1.32% 1.02% 0.95% 1.02% 1.00** 0.79% 1.68%**
Net Investment
Income to Average
Net Assets....... 3.31% 3.78% 3.88% 3.56% 4.99** 5.12% 3.00%**
</TABLE>
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.
7
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
-------
PERIOD
FROM
CLASS A JANUARY
--------------------------------------------------------------------------- 2,
TWO MONTHS 1996***
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER DECEMBER
31, 31, 31, 31, 31, 31, 31,
1996 1995 1994 1993 1992 1992 1996
---------- ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61 $11.23
---------- ---------- ---------- ---------- ---------- ---------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.61 0.76 0.70 0.69 0.14 0.53 0.48
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 0.08 1.15 (1.38) 0.90 (0.29) 0.55 0.18
---------- ---------- ---------- ---------- ---------- ---------- -------
Total from Investment
Operations.......... 0.69 1.91 (0.68) 1.59 (0.15) 1.08 0.66
---------- ---------- ---------- ---------- ---------- ---------- -------
DISTRIBUTIONS
Net Investment
Income................ (0.61) (0.98) (0.40) (0.79) -- (0.27) (0.60)
In Excess of Net
Investment Income..... -- -- -- (0.22) -- -- --
Net Realized Gain...... -- -- (0.31) (0.16) -- (0.01) --
---------- ---------- ---------- ---------- ---------- ---------- -------
Total
Distributions....... (0.61) (0.98) (0.71) (1.17) -- (0.28) (0.60)
---------- ---------- ---------- ---------- ---------- ---------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $11.29
---------- ---------- ---------- ---------- ---------- ---------- -------
---------- ---------- ---------- ---------- ---------- ---------- -------
TOTAL RETURN............. 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29% 6.12%
---------- ---------- ---------- ---------- ---------- ---------- -------
---------- ---------- ---------- ---------- ---------- ---------- -------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $112,888 $102,852 $130,675 $172,468 $ 92,897 $ 94,847 $1,559
Ratio of Expenses to
Average Net Assets
(1)................... 0.50% 0.50% 0.50% 0.50% 0.50%** 0.50% 0.65%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92% 5.28%**
Portfolio Turnover
Rate.................. 258% 207% 171% 108% 9% 144% 258%
</TABLE>
- ----------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income................ $0.02 $0.02 $0.02 $0.02 $0.01 $0.03 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets................ 0.72% 0.71% 0.66% 0.70% 0.90%** 0.86% 0.86%**
Net Investment Income
to Average Net
Assets................ 5.29% 6.58% 6.18% 5.79% 6.59%** 6.56% 5.08%**
</TABLE>
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
8
<PAGE>
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------------------- -----------
PERIOD FROM PERIOD FROM
TWO MONTHS SEPTEMBER JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 28, 1992* 1996*** TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER TO DECEMBER
31, 31, 31, 31, 31, OCTOBER 31, 31,
1996 1995 1994 1993 1992 1992 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00 $ 10.49
----------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)..... 1.03 1.14 0.97 0.90 0.14 0.08 0.98
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.47 0.97 (1.40) 1.21 0.19 (0.31) 0.45
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations............... 1.50 2.11 (0.43) 2.11 0.33 (0.23) 1.43
----------- ----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income....... (1.05) (1.20) (0.97) (0.90) (0.15) -- (1.02)
In Excess of Net Investment
Income..................... (0.00)+ -- -- -- -- -- --
Net Realized Gain........... -- -- (0.21) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Distributions....... (1.05) (1.20) (1.18) (0.90) (0.15) -- (1.02)
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD....................... $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.90
TOTAL RETURN.................. 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)% 14.37%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ 95,663 $ 62,245 $ 97,223 $ 74,500 $ 20,194 $ 16,950 $ 5,665
Ratio of Expenses to Average
Net Assets (1)............. 0.75% 0.75% 0.75% 0.75% 0.75%** 0.75%** 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%** 9.49%**
Portfolio Turnover Rate..... 117% 90% 74% 104% 24% 9% 117%
</TABLE>
- ----------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income.......... $ 0.01 $ 0.01 $ 0.001 $ 0.02 $ 0.01 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets..................... 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%** 1.05%**
Net Investment Income to
Average Net Assets......... 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%** 9.44%**
</TABLE>
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
9
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
10
<PAGE>
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
- The U.S. REAL ESTATE PORTFOLIO seeks to provide 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.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
11
<PAGE>
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its Portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The Distributor
has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the Global
Fixed Income Portfolio. Share purchases may be made by sending investments
directly to the Fund or through the Distributor. The minimum initial investment,
generally, is $500,000 for Class A shares of each Portfolio and $100,000 for
Class B shares of each Portfolio. The minimum initial investment amount is
reduced for certain categories of investors. For additional information on how
to purchase shares and minimum initial investments, see "Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions that
cause the value of an account to remain for a continuous 60-day period below the
minimum investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and
"Redemption of Shares."
12
<PAGE>
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio may invest
in securities of foreign issuers and foreign currency forward contracts to hedge
currency risk associated with investments in non-U.S. dollar-denominated
securities, which are subject to certain risks not typically associated with
U.S. securities. The High Yield Portfolio may invest in non-publicly traded
securities, private placements and restricted securities and in lower rated and
unrated securities which are subject to additional risk factors. In particular:
(1) adverse economic and corporate changes and changes in interest rates may
have a greater impact on issuers of lower rated securities and may lead to
greater price volatility, and (2) such securities may be more difficult to value
accurately or sell in the secondary market. Because the Small Cap Value Equity
Portfolio seeks high long-term total return by investing primarily in small- to
medium-sized corporations which are more vulnerable to financial risks and other
risks than larger corporations, investments may involve a higher degree of risk
and price volatility than investments in the general equity markets. In
addition, each Portfolio may invest in repurchase agreements, lend its portfolio
securities and purchase securities on a when-issued or delayed delivery basis
and invest in money market instruments. The Portfolios may invest in certain
derivatives, including futures and options on futures and, except in the case of
the High Yield Portfolio, options. These investments entail certain costs and
risks, including imperfect correlation between the value of securities held by a
Portfolio and the value of the particular derivative instrument, and the risk
that a Portfolio could not close out a derivatives position when it would be
most advantageous to do so. Each Portfolio, except the Global Fixed Income and
High Yield Portfolios, may also invest indirectly in securities through
Depositary Receipts. Each Portfolio may invest in short-term or medium-term debt
securities or hold cash or cash equivalents for temporary defensive purposes.
Each of these investment strategies involves specific risks which are described
under "Investment Objectives and Policies" and "Additional Investment
Information" herein and under "Investment Objectives and Policies" in the
Statement of Additional Information.
13
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Porfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE SMALL CAP VALUE EQUITY PORTFOLIO
The investment objective of the Small Cap Value Equity Portfolio is to
provide high long-term total return by investing in equity securities of small-
to medium-sized corporations that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. The Portfolio
invests primarily in corporations domiciled in the U.S. with market
capitalizations that range generally from $70 million up to $1 billion, but may
from time to time invest in similar size foreign corporations. Under normal
circumstances, the Portfolio will invest at least 65% of the value of its total
assets in equity securities of corporations whose equity market capitalization
is up to $1 billion. The Portfolio may invest up to 35% of the value of its
total assets in equity securities of corporations which are generally smaller
than the 500 largest corporations in the United States. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, and similar equity
interests, such as trusts or partnership interests. These investments may or may
not carry voting rights. The portfolio may, on occasion, invest in equity
securities of foreign issuers that trade on a U.S. exchange or over-the-counter
in the form of Depositary Receipts or common stocks.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued, small- to medium-sized companies will provide high total return in
the long run.
Companies considered attractive will have the following characteristics:
1. The market prices of the stocks will be undervalued relative to the
normal earning power of the companies;
2. Stock prices will be low relative to the intrinsic value of the
companies' assets;
3. Stocks will most often have yields distinctly above the average of
companies with similar capitalizations; and
4. Stocks will be of high quality, in the Adviser's judgment, as
evaluated by the companies' balance sheets, income statements, franchises
and product competitiveness.
The thrust of this approach is to seek investments in stocks for which
investor enthusiasm is currently low, as reflected in their valuation, but which
have the financial and fundamental features, which, according to the Adviser's
assessment, will allow the stocks to achieve a higher valuation. Value is
achieved and exposure is reduced for the Portfolio when the investment
community's perceptions improve and the stocks approach what the Adviser
believes is fair valuation.
14
<PAGE>
THE VALUE EQUITY PORTFOLIO
The investment objective of the Value Equity Portfolio is to achieve high
total return (i.e., long-term growth of capital and high current income) by
investing in equity securities that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. It seeks
superior market cycle total returns, with an emphasis on strong relative
performance in falling markets. The Portfolio invests primarily in equity
securities of large capitalization companies mainly domiciled in the United
States. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, and rights and warrants to purchase
common stocks. Under normal circumstances, the Portfolio will invest at least
65% of the value of its total assets in equity securities.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued equity securities will outperform the market over the long term, as
well as preserve principal in difficult market environments. Companies
considered attractive will have the following characteristics: 1) stocks most
often will have distinctly above average dividend yields, 2) the market prices
of the stocks will be undervalued relative to the normal earning power of the
company, 3) many stocks will sell at close to or below the replacement value of
their assets and 4) most stocks' market prices will have underperformed the
general market due to a lower level of investor expectations regarding the
company outlook. The thrust of this approach is to seek investments where
current investor enthusiasm is low, as reflected in their valuations. Exposure
is reduced when the investment community's perceptions improve and the company
approaches fair valuation.
The Adviser takes a long-term investment approach by placing a strong
emphasis on its ability to determine attractive values and does not try to
determine short-term changes in the general market level. The Portfolio will
maintain diversity among industries by not investing more than 25% of its total
assets in equity securities of issuers in any one industry. The Portfolio may
invest up to 25% of its total assets in the equity securities of foreign
issuers, including Depositary Receipts.
THE BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to achieve high total
return while preserving capital by investing in a combination of undervalued
equity securities and fixed income securities. The Portfolio seeks strong total
returns in all market conditions, with a special emphasis on minimizing interim
declines during falling equity markets. It primarily invests in large
capitalization equity securities, intermediate-maturity bonds and cash
equivalents.
The Adviser uses a valuation-driven balanced portfolio philosophy which
combines separate equity, fixed income and asset allocation strategies. The
equity investment approach is the same as that used for the Value Equity
Portfolio. This produces a portfolio of stocks with low price-to-earnings and
price-to-book ratios and high dividend yields. The fixed income strategy values
bonds using historical yield differentials. Short and intermediate government,
corporate and mortgage bonds are used exclusively to implement the Portfolio's
fixed income strategy. The asset allocation strategy shifts the stock/bond/cash
equivalent mix relative to calculated risk and return levels. All three
strategies use historical capital market behavior to reach conclusions.
The Portfolio will typically maintain between 35% and 65% of its total
assets invested in equity securities, depending upon the Adviser's assessment of
market conditions. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, and rights and warrants to
purchase common
15
<PAGE>
stocks. In overvalued equity markets, the common stock exposure will be at the
low end of this range. It is expected that equity exposure will average
approximately 55% over time. Up to 25% of the Portfolio's total assets may be
invested in the securities of foreign issuers.
Fixed income securities in which the Portfolio may invest include U.S.
Government securities, mortgage-backed securities, corporate bonds, bank
obligations and other short-term money market instruments. The average maturity
of the fixed income securities in the Portfolio will, under normal
circumstances, be approximately five years, although this will vary with
changing market conditions.
THE GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities of
U.S. and foreign issuers denominated in U.S. dollars and in other currencies.
The Portfolio seeks to achieve its objectives by investing in U.S. government
securities, foreign government securities, securities of supranational entities,
Eurobonds, and corporate bonds with varying maturities. In selecting portfolio
securities, the Adviser evaluates the currency, market, and individual features
of the securities being considered for investment. At least 65% of the total
assets of the Portfolio will be invested in fixed income securities under normal
circumstances.
The Adviser seeks to minimize investment risk by investing only in high
quality debt securities. U.S. Government securities that the Portfolio may
invest in include obligations issued by the U.S. Government, such as U.S.
Treasury securities, as well as those guaranteed or backed by the full faith and
credit of the United States, such as obligations of the Government National
Mortgage Association and The Export-Import Bank. The Portfolio may also invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment. The Portfolio may invest in
obligations issued or guaranteed by foreign governments and their political
subdivisions, authorities, agencies or instrumentalities, and by supranational
entities (such as the World Bank, The European Economic Community, The Asian
Development Bank and the European Coal and Steel Community). Investment in
foreign government securities will be limited to those of developed nations
which the Adviser believes pose limited credit risk. These countries currently
include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland,
Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, The United Kingdom and Germany. Corporate and supranational
obligations which the Portfolio will invest in will be limited to those rated A
or better by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or IBCA Ltd., or if unrated, to those that are of
comparable quality in the determination of the Board of Directors and the
Adviser.
The Adviser's approach to multicurrency fixed income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Adviser's assessment of the bond markets and currencies is based on an analysis
of real interest rates. Current nominal yields of securities are adjusted for
inflation prevailing in each currency sector using an analysis of past and
projected inflation rates. The Portfolio's aim is to invest in bond markets
which offer the most attractive real returns relative to inflation.
The Portfolio will have a neutral investment position in medium-term
securities (i.e., those with a remaining maturity of between three and seven
years) and will respond to changing interest rate levels by shortening or
lengthening portfolio maturity through investment in longer- or shorter-term
instruments. For example, the Portfolio will respond to high levels of real
interest rates through a lengthening in portfolio maturity. Current
16
<PAGE>
and historical yield spreads among the three main market segments -- the
Government, Foreign and Euro markets -- guide the Adviser's selection of markets
and particular securities within those markets. The analysis of currencies is
made independent of the analysis of markets. Value in foreign exchange is
determined by relative purchasing power parity of a given currency. The
Portfolio seeks to invest in currencies currently undervalued based on
purchasing power parity. The Adviser analyzes current account and capital
account performance and real interest rates to adjust for shorter-term currency
flows.
THE HIGH YIELD PORTFOLIO
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a yield
above that generally available on debt securities in the four highest rating
categories of the recognized rating services. The Portfolio normally invests
between 80% and 100% of its total assets in these higher yielding securities,
which generally entails increased credit and market risk. To mitigate these
risks the Portfolio will diversify its holdings by issuer, industry and credit
quality, but investors should carefully review the section below entitled "Risk
Factors Relating to Investing in High Yield Securities."
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Adviser will
consider ratings, it will perform its own analysis and will not rely principally
on ratings. The Adviser will consider, among other things, the price of the
security and the financial history and condition, the prospects and the
management of an issuer in selecting securities for the Portfolio. The Portfolio
may buy unrated securities that the Adviser believes are comparable to rated
securities and are consistent with the Portfolio's objective and policies. The
Adviser may vary the average maturity of the securities in the Portfolio without
limit and there is no restriction on the maturity of any individual security.
The Portfolio may acquire fixed income securities of both U.S. and foreign
issuers, including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales contracts,
commercial paper and obligations issued or guaranteed by the U.S. Government,
any foreign government with which the United States maintains relations or any
of their respective political subdivisions, agencies or instrumentalities) and
preferred stock. The Portfolio may not invest more than 5% of its total assets
at time of acquisition in either (1) equipment lease certificates, equipment
trust certificates and conditional sales contracts or (2) limited partnership
interests. The Portfolio may neither invest more than 10% of its total assets in
foreign securities nor invest more than 5% of its total assets in foreign
governmental issuers in any one country. The Portfolio's fixed income securities
may have equity features, such as conversion rights or warrants, and the
Portfolio may invest up to 10% of its total assets in equity securities other
than preferred stock (e.g., common stocks, warrants and rights and limited
partnership interests). The Portfolio may invest up to 20% of its total assets
in fixed income securities that are investment grade (i.e., rated in one of the
top four categories or comparable) and have maturities of one year or less. The
Portfolio may invest in or own securities of companies in various stages of
financial restructuring, bankruptcy or reorganization which are not currently
paying interest or dividends. The total value, at time of purchase, of the sum
of all such securities will not exceed 10% of the value of the Portfolio's total
assets.
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<PAGE>
The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities. Zero coupon securities are securities that are sold at a
discount to par value and securities on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received "phantom
income" annually. Because the Portfolio will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares of the Portfolio, it
will have fewer assets with which to purchase income producing securities. The
Portfolio accrues income with respect to these securities prior to the receipt
of cash payments. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk), and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react to movements in the general level of
interest rates primarily. The market values of fixed-income securities tend to
vary inversely with the level of interest rates. Yields and market values of
high yield securities will fluctuate over time, reflecting not only changing
interest rates, but the market's perception of credit quality and the outlook
for economic growth. When economic conditions appear to be deteriorating, medium
to lower rated securities may decline in value due to heightened concern over
credit quality, regardless of prevailing interest rates. Fluctuations in the
value of the Portfolio's investments will be reflected in the Portfolio's net
asset value per share. The Adviser considers both credit risk and market risk in
making investment decisions for the Portfolio. Investors should carefully
consider the relative risks of investing in high yield securities and understand
that such securities are not generally meant for short-term investing.
The high yield market is still relatively new and its recent growth
parallels a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for high yield securities, and severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. As a result, the Adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Portfolio's net asset value.
Prices for high yield securities may be affected by legislative and
regulatory developments. These developments could adversely affect the
Portfolio's net asset value and investment practices, the secondary market for
high yield securities, the financial condition of issuers of these securities
and the value of outstanding high yield
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<PAGE>
securities. For example, federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in high
yield bonds and limiting the deductibility of interest by certain corporate
issuers of high yield bonds adversely affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of high yield
securities.
The table below provides a summary of ratings assigned by S&P to debt
obligations in the High Yield Portfolio. These figures are dollar-weighted
averages of month-end portfolio holdings during the fiscal year ended December
31, 1996, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
S&P
- ----------------
AVERAGE
PERCENT
OF
PORTFOLIO
RATING HOLDINGS
- ------- -------
<S> <C>
AAA 0.00%
-------
AA 0.00%
-------
A 0.21%
-------
BBB 1.53%
-------
BB 39.73%
-------
B 37.48%
-------
CCC 2.14%
-------
CC 0.00%
-------
Unrated 18.91%
-------
</TABLE>
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. Each Portfolio, except the Global Fixed Income and
High Yield Portfolios, is permitted to invest in Depositary Receipts, including
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and other Depositary Receipts (which,
together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as
"Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary
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Receipts are typically issued by foreign depositaries, although they may also be
issued by U.S. depositaries, and evidence ownership interests in a security or
pool of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. Forward contracts may also be used as a protective
measure against the effects of fluctuating rates of currency exchange and
exchange control regulations. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Investment in obligations of foreign issuers involves
somewhat different investment risks than those affecting obligations of U.S.
issuers. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the United States. Many foreign securities markets have
substantially less volume than U.S. national securities exchanges, and
securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies, and it is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign governmental
restrictions such as exchange controls. Also, it may be more difficult to obtain
a judgment in a court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies and the Portfolios may temporarily hold uninvested reserves
in bank deposits in foreign currencies. Therefore, the value of each Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolios may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket thereof, at a specific future date and
at a specified price. An option on a futures contract is a legal contract that
gives the holder the right to buy or sell a specified amount of futures
contracts at a fixed or determinable price upon the exercise of the option.
The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolios may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency
exchange futures contracts. Such contracts involve an obligation to purchase or
sell a specific currency at a specified future date and at a specified price.
The Portfolios may engage in such transactions to hedge their respective
holdings and commitments against changes in the level of future currency rates
or to gain exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolios'
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona-fide" hedging. No Portfolio, except the
Global Fixed Income Portfolio, will enter into futures contracts to the extent
that its outstanding obligations to purchase securities under such contracts, in
combination with its outstanding obligations with respect to options
transactions (including options to purchase securities or instruments) would
exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments
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<PAGE>
held by a Portfolio and the prices of futures and options relating to
investments purchased or sold by the Portfolio, and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on futures contracts
in some strategies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved in futures pricing.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. Securities lending entails certain risks of delay in recovery or
loss of rights in collateral in the event of the insolvency of the borrower.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. See
"Temporary Investments." The money market investments permitted for the
Portfolios include: obligations of the U.S. Government and its agencies and
instrumentalities; other debt securities; commercial paper; bank obligations;
certificates of deposit (including Eurodollar certificates of deposit); and
repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The High Yield Portfolio may invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including privately
placed securities. Such unlisted equity securities may involve a higher degree
of business and financial risk that can result in substantial losses. As a
result of the absence of a public trading market for these securities, they may
be less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio or less than
what may be considered the fair value of such securities. Further, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Nor as a general matter, may the Portfolio
invest more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest up to 20% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
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OPTIONS TRANSACTIONS. Each Portfolio, except the High Yield Portfolio, may
seek to increase its returns or may hedge its portfolio investments through
options transactions with respect to securities, instruments, indices or baskets
thereof in which such Portfolios may invest, as well as with respect to foreign
currency. Purchasing a put option gives a Portfolio the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Portfolio the right to purchase a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. A Portfolio may not purchase call and put options to the extent that the
value of its aggregate investment in options, excluding options on futures
contracts, exceeds 5% of its total assets.
The Portfolios also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolios may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, a Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolios may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of options relating to
such investments, and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. Each Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more
23
<PAGE>
than seven days to maturity if, as a result, more than 15% of the market value
of the Portfolio's net assets are invested in these agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which a
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (c) floating rate securities and other instruments denominated in any
currency issued by international development agencies; (d) finance company and
corporate commercial paper and other short-term corporate debt obligations of
U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (e) repurchase agreements with banks and broker-dealers with
respect to such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of or
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments and delayed delivery
commitments exceeding in the aggregate 15% of the market value of the
Portfolio's total assets less liabilities other than the obligations created by
these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio, except the Global Fixed
Income Portfolio, is subject to the following limitations: (a) as to 75% of its
total assets, a Portfolio may not invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the United States Government
and its agencies and instrumentalities, and (b) a Portfolio may not own more
than 10% of the outstanding voting securities of any one issuer.
The Global Fixed Income Portfolio is a non-diversified investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means the Global Fixed Income Portfolio is not limited by the 1940 Act in the
proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, the Global Fixed Income Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. Nevertheless, the Global Fixed Income Portfolio intends to comply
with the more limited diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
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Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each Portfolio's
investments. Set forth below as an annual percentage of average daily net assets
are the management fees payable to the Adviser quarterly by each Portfolio
pursuant to the terms of the Investment Advisory Agreement. The Adviser has
agreed to a reduction in the fees payable to it and to reimburse the Portfolios,
if necessary, if such fees would cause total annual operating expenses of the
Portfolios to exceed the maximums set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES
AFTER FEE WAIVERS
MANAGEMENT ----------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Small Cap Value Equity Portfolio 0.85% 1.00% 1.25%
Value Equity Portfolio 0.50% 0.70% 0.95%
Balanced Portfolio 0.50% 0.70% 0.95%
Global Fixed Income 0.40% 0.50% 0.65%
High Yield 0.375% 0.75% 1.00%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
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<PAGE>
PORTFOLIO MANAGERS. The following individuals have primary portfolio management
responsibility for the Portfolios noted below:
SMALL CAP VALUE EQUITY PORTFOLIO -- CHRISTIAN K. STADLINGER. Mr. Stadlinger
is a Vice President of the Adviser and manages the small-cap value equity
product of the Adviser's Chicago affiliate. He became a member of the Adviser's
Chicago large cap value portfolio management team, specializing in quantitative
and fundamental research, upon completion of his doctoral dissertation at
Northwestern University in April 1989. Mr. Stadlinger was the catalyst in the
development of the Adviser's small-cap value product, and he continues to
research and develop structured valuation techniques in the area of small cap
investing. Mr. Stadlinger has a degree in Computer Science and Economics from
the University of Vienna, a Ph.D. in Economics from Northwestern University, and
is a Certified Financial Analyst.
VALUE EQUITY AND BALANCED PORTFOLIOS -- STEPHEN C. SEXAUER AND ALFORD E.
ZICK, JR. Mr. Sexauer is a Principal of Morgan Stanley and is a member of the
investment management team of the Adviser's Chicago affiliate as well as Vice
President of the Adviser. In addition to portfolio management, his equity
research responsibilities include aerospace, industrials, capital goods,
transportation, and diversified financial companies. Mr. Sexauer joined the firm
in July 1989 after three years as a Vice President at Salomon Brothers.
Previously, he was with Merrill Lynch Economics and Wharton Econometrics. Mr.
Sexauer received a B.S. in Economics from the University of Illinois and an
M.B.A. in Economics and Statistics from the University of Chicago. Mr. Zick is a
Principal of Morgan Stanley and is a member of the investment management team of
the Adviser's Chicago affiliate. In addition to portfolio management, his equity
research responsibilities include consumer staples, retail and insurance
companies. He became a member of the Adviser's Chicago investment management
team in August 1989, after an extensive career in asset management with Chicago
Pacific Corporation, Staley Continental, Inc., and A.E. STALEY Manufacturing
Company. Mr. Zick has a degree in accounting from the University of Illinois.
Mr. Sexauer and Mr. Zick have had primary responsibility for managing the Value
Equity and Balanced Portfolios since their inception in January and February,
1990, respectively.
GLOBAL FIXED INCOME PORTFOLIO -- J. DAVID GERMANY, MICHAEL B. KUSHMA, PAUL
F. O'BRIEN AND ROBERT M. SMITH. J. David Germany shares primary responsibility
for managing the Portfolio's assets. He joined the Adviser in 1996 and has been
a portfolio manager with the Adviser's affiliate, Miller Anderson & Sherrerd,
LLP ("MAS") since 1991. He was Vice President & Senior Economist for Morgan
Stanley from 1989 to 1991. He assumed responsibility for the Global Fixed Income
and International Fixed Income Portfolios of the MAS-advised MAS Funds in 1993
and the MAS Fund's Multi-Asset-Class Portfolio in 1994. Mr. Germany was Senior
Staff Economist (International Finance and Macroeconomics) to the Council of
Economic Advisors -- Executive Office of the President from 1986 through 1987
and an Economist with the Board of Governors of the Federal Reserve System --
Division of International Finance from 1983 through 1987. He holds an A.B.
degree (Valedictorian) from Princeton University and a Ph.D. in Economics from
the Massachusetts Institute of Technology. Michael B. Kushma, a Principal at
Morgan Stanley, joined the firm in 1987. He shares primary responsibility for
managing the Portfolio's assets. He was a member of Morgan Stanley's Global
fixed income strategy group in the fixed income division from 1987-1995 where he
became the divisions' senior government bond strategist. He joined the Adviser
in 1995 where he took responsibility for the global fixed income portfolios. Mr.
Kushma received an A.B. in economics from Princeton University in 1979, and M.
Sc. in economics from the London School of Economics in 1981 and an M.Phil. in
economics from Columbia University in 1983. Paul F. O'Brien shares primary
responsibility for managing the Portfolio's assets. He joined
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<PAGE>
the Adviser and MAS in 1996. He was head of European Economics from 1993 through
1995 for JP Morgan and as Principal Administrator from 1991 through 1992 for the
Organization for Economic Cooperation and Development. He assumed responsibility
for the MAS-advised MAS Funds' Global Fixed Income and International Fixed
Income Portfolios in 1996. Mr. O'Brien holds a B.S. degree from the
Massachusetts Institute of Technology and a Ph.D. in Economics from the
University of Minnesota. Robert Smith, a Principal of Morgan Stanley, joined the
Adviser in June 1994 and has shared primary responsibility for managing the
Portfolio's assets since July 1994. Prior to joining the Adviser he spent eight
years as Senior Portfolio Manager -- Fixed Income at the State of Florida
Pension Fund. Mr. Smith's responsibilities included active total-rate-of-return
management of long term portfolios and supervision of other fixed income
managers. A graduate of Florida State University with a B.S. in Business, Mr.
Smith also received an M.B.A. -- Finance from Florida State and holds a
Chartered Financial Analyst (CFA) designation.
HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE, THOMAS L. BENNETT AND STEPHEN F.
ESSER. ROBERT ANGEVINE is a Principal of the Adviser and the Portfolio Manager
for high yield investments. He shares primary responsibility for managing the
Portfolio's assets. Prior to joining the Adviser in October 1988, he spent over
eight years at Prudential Insurance where he was responsible for the largest
open-end high yield mutual fund in the country. Mr. Angevine also manages high
yield assets for one of the largest corporate pension funds in the country. His
other experience includes international treasury operations at a major
pharmaceutical company and commercial banking. Mr. Angevine received an M.B.A
from Fairleigh Dickinson University and a B.A. in Economics from Lafayette
College. He served two years as a Lieutenant in the U.S. Army. Thomas L. Bennett
shares responsibility for managing the Portfolio's assets. He joined the Adviser
in 1996 and has been a portfolio manager with MAS since 1984. Mr. Bennett
assumed responsibility for the MAS-advised MAS Funds' Fixed Income Portfolio in
1984, the Domestic Fixed Income Portfolio in 1987, the High Yield Portfolio in
1985, the Fixed Income Portfolio II in 1990, the Special Purpose Fixed Income
and Balanced Portfolios in 1992 and the Multi-Asset-Class Portfolio in 1994. Mr.
Bennett also is the Chairman of the MAS Funds and has a B.S degree (Chemistry)
and an M.B.A. from the University of Cincinnati. Stephen F. Esser shares primary
responsibility for managing the Portfolio's assets. He joined the Adviser in
1996 and has been a portfolio manager with MAS since 1988. He assumed
responsibility for the MAS-advised MAS Funds' High Yield Portfolio in 1989. Mr.
Esser is a member of the New York Society of Security Analysts and has a B.S.
degree (Summa Cum Laude; Phi Beta Kappa) from the University of Delaware.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
27
<PAGE>
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund. The Distributor has agreed to waive 0.10% of the 0.25% distribution
fee it is entitled to receive from the Global Fixed Income Portfolio.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolios. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares of each Portfolio. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by
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Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts") may
purchase Class A shares without being subject to a minimum initial investment or
minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A shares subject to
conditions, including a lower minimum initial investment, established by
Officers of the Fund.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
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Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 minimum for Class B shares of
each Portfolio, with certain exceptions for Morgan Stanley employees and
select customers) payable to "Morgan Stanley Institutional Fund, Inc. --
[portfolio name]," to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment in other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus, your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of each Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the regular
close of the NYSE will be executed at the price computed the next day the NYSE
is open as long as the Transfer Agent receives payment by check or in Federal
Funds prior to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each Portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
help to ensure that your wire orders are invested promptly, you are requested to
notify one of the Fund's representatives (toll free 1-800-548-7786) prior to the
wire date. Additional investments will be applied to purchase additional shares
in the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will
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generally be lower than the net asset value of Class A shares as a result of the
distribution expense charged to Class B shares. It is expected, however, that
the net asset value per share of the two classes will tend to converge
immediately after the recording of dividends which will differ by approximately
the amount of the distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts, managed or advised by the Adviser
and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or
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current income objectives. After using TFM criteria to determine your long-term
investment and/or current income objectives, you can choose one of several TFM
investment strategies. Based on your chosen strategy, your initial investment
will be allocated among a number of the Class A or Class B shares of the
Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of each Portfolio at the next determined net
asset value of shares of their applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of each
of the Portfolios is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of each Portfolio may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by a Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request
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should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer Agent listed under
"General Information." The Fund and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
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If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in any Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names(s) of the portfolio(s) and class(es) of shares into which you intend
to exchange shares, and the signatures of all registered account holders. Send
the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
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TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such a class, less any liabilities attributable
to such a class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size, trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted securities and unlisted foreign
securities) and those securities the prices for which it is inappropriate to
determine the prices in accordance with the above-stated procedures are
determined in good faith at fair value using methods determined by the Board of
Directors. For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be translated into
U.S. dollars at the mean of the bid and asked price of such currencies against
the U.S. dollar last quoted by any major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Small Cap Value Equity, Value Equity and Balanced Portfolios. In addition,
from time to time the Fund may advertise "yield" for the Global Fixed Income and
High Yield Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
Each Portfolio may advertise "total return" which shows what an investment
in a class of a Portfolio would have earned over a specified period of time
(such as one, five or ten years) assuming that all distributions and dividends
by the Portfolio were reinvested in the same class on the reinvestment dates
during the period. Total return does not take into account any federal or state
income taxes that may be payable on dividends and distributions or on
redemption. The "yield" of the Global Fixed Income and High Yield Portfolios
refers to the income generated by an investment in the Portfolio over a month or
30-day period. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day period is assumed income
generated each 30-day period for twelve periods, and is shown as a percentage of
the investment. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating service and market indices. For further information concerning these
figures, see "Calculation of Yield and Total Return"in the Statement of
Additional Information.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to tax.
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Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio, except the High Yield and Global
Equity Portfolios, will generally qualify for the 70% dividends-received
deduction for corporate shareholders to the extent of the aggregate qualifying
dividend income received by the Portfolio from U.S. corporations. Dividends paid
by the High Yield and Global Equity Portfolios will generally not qualify for
the 70% dividends-received deduction for corporate shareholders.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio will send reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
loss, including any available capital loss carry-forwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to
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backup withholding by the Internal Revenue Service, or (3) who has not certified
to the Fund that such shareholder is not subject to backup withholding. This
backup withholding is not an additional tax, and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1996,
the Global Fixed
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Income and High Yield Portfolios had portfolio turnover rates of 258% and 117%,
respectively. As portfolio turnover increases, the Portfolios may expect to pay
correspondingly increased brokerage and trading costs. In addition to
transaction costs, higher portfolio turnover may result in the realization of
capital gains. As discussed under "Taxes," to the extent net short-term capital
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolio which offer only Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data are also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
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DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modifier 2 indicates a mid-range rating and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
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<S> <C>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY, VALUE EQUITY, BALANCED, GLOBAL FIXED INCOME AND HIGH YIELD PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
ACCOUNT INFORMATION
Fill in where applicable
If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all items except signature, and mail to the Fund at the address
above.
A) REGISTRATION
1. INDIVIDUAL
First Name Initial Last Name
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS TENANCY IN COMMON IS INDICATED)
First Name Initial Last Name
First Name Initial Last Name
3. CORPORATIONS, TRUSTS AND OTHERS
Please call the Fund for additional documents that may be required to set up account and to authorize transactions.
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR
PERMITTED)
/ / TRUST ________________________ / / OTHER (Specify) ________________________
B) MAILING ADDRESS
Please fill in completely, including telephone number(s).
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City Country
Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City Country
Postal Code
Home Telephone No. Business Telephone No.
C) TAXPAYER IDENTIFICATION NUMBER
Enter your Taxpayer Identification Number. For most individual taxpayers, this is your Social Security Number.
1. INDIVIDUAL
TAXPAYER IDENTIFICATION NUMBER ("TIN") OR SOCIAL SECURITY NUMBER ("SSN")
2. JOINT TENANTS (RIGHTS OF SURVIVORSHIP PRESUMED UNLESS TENANCY IN COMMON IS INDICATED)
For Custodian account of a minor (Uniform Gifts/Transfers to Minor Acts), give the Social Security Number of the minor
TIN OR SSN
TIN OR SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on dividends, distributions and
other payments. If you have not provided us with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
<PAGE>
D) PORTFOLIO AND CLASS SELECTION
(Class A shares minimum $500,000 for each Portfolio and Class B shares minimum $100,000 for each Portfolio. Please indicate
Portfolio, class and amount.
For Purchase of the following Portfolio(s):
Small Cap Value Equity Portfolio / / Class A Shares $___ / / Class B Shares $___
Value Equity Portfolio / / Class A Shares $___ / / Class B Shares $___
Balanced Portfolio / / Class A Shares $___ / / Class B Shares $___
Global Fixed Income Portfolio / / Class A Shares $___ / / Class B Shares $___
High Yield Portfolio / / Class A Shares $___ / / Class B Shares $___
Total Initial Investment $_____________
E) METHOD OF INVESTMENT
Please indicate portfolio, manner of payment.
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
/ / Exchange $ ______________ From _________________
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on _________
Date Account No. (Check
(Previously Digit)
assigned by
the Fund)
F) DISTRIBUTION OPTION
Income dividends and capital gains distributions (if any) to be reinvested in additional shares unless either box below is
checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if any) to be paid in cash.
G) TELEPHONE REDEMPTION AND EXCHANGE OPTION
Please select at time of initial application if you wish to redeem or exchange shares by telephone. A SIGNATURE GUARANTEE IS
REQUIRED IF BANK ACCOUNT IS NOT REGISTERED IDENTICALLY TO YOUR FUND ACCOUNT.
TELEPHONE REQUESTS FOR REDEMPTIONS OR EXCHANGE WILL NOT BE HONORED UNLESS THE BOX IS CHECKED.
/ / I/we hereby authorize the Fund and its agents to honor any telephone requests to wire redemption proceeds to the
commercial bank indicated at right and/or mail redemption proceeds to the name and address in which my/our fund account
is registered if such requests are believed to be authentic.
The Fund and the Fund's Transfer Agent will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures include requiring the investor to provide certain personal identification information
at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide additional telecopied written instructions of
transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that it reasonably believes to be genuine.
__________________________________________ ________________
Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No.
________________
Bank ABA No.
_____________________________________________________________________________
Name(s) in which your Bank Account is Established
_____________________________________________________________________________
Bank's Street Address
_____________________________________________________________________________
City State Zip
H) INTERESTED PARTY OPTION
In addition to the account statement sent to my/our registered address, I/we hereby authorize the Fund to mail duplicate
statements to the name and address provided at right.
_____________________________________________________________________________
Name
_____________________________________________________________________________
_____________________________________________________________________________
Address
_____________________________________________________________________________
City State Zip Code
I) DEALER INFORMATION
___________________ __________________ ___________
Representative Name Representative No. Branch No.
J) SIGNATURE OF ALL HOLDERS AND TAXPAYER CERTIFICATION
The undersigned certify that I/we have full authority and legal capacity to purchase and redeem shares of the Fund and affirm
that I/we have received a current Prospectus of the Morgan Stanley Institutional Fund, Inc. and agree to be bound by its
terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS
COMPLETE AND CORRECT AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE
TO REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH
MY/OUR CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND
REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH FORM BY CALLING CGFSC AT
800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN
PERSONS AS DEFINED BY THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS
REQUIRED TO AVOID BACKUP WITHHOLDING.
Sign Here >
(X) (X)
________________________________________________ ____________________________________________________________
Signature Date Signature (if joint account, both must sign) Date
</TABLE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 10
Investment Objectives and Policies................ 14
Additional Investment Information................. 19
Investment Limitations............................ 24
Management of the Fund............................ 25
Purchase of Shares................................ 28
Redemption of Shares.............................. 33
Shareholder Services.............................. 35
Valuation of Shares............................... 36
Performance Information........................... 37
Dividends and Capital Gains Distributions......... 37
Taxes............................................. 38
Portfolio Transactions............................ 39
General Information............................... 40
Account Registration Form
</TABLE>
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O BOX 2798, BOSTON, MA 02208-2798
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<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and non-diversified series
("Portfolios"). The Fund currently consists of thirty-two Portfolios offering a
broad range of investment choices. The Fund is designed to provide clients with
attractive alternatives for meeting their investment needs. Each Portfolio,
except the Money Market, Municipal Money Market, International Small Cap and
China Growth Portfolios, offers two classes of shares, the Class A shares and
the Class B shares (each, a "Multiclass Portfolio"). The Class A shares and the
Class B shares currently offered by each Multiclass Portfolio have different
minimum investment requirements and fund expenses. Shares of each Portfolio are
offered with no sales charge or exchange or redemption fee (except that the
International Small Cap Portfolio may impose a transaction fee). This Statement
of Additional Information ("SAI") addresses information of the Fund applicable
to all of the Fund's Portfolios.
This SAI is not a prospectus but should be read in conjunction with the
several prospectuses of the Fund's Portfolios (the "Prospectuses"). To obtain
any of the Prospectuses, please call the Morgan Stanley Institutional Fund, Inc.
Services Group at 1-800-548-7786.
----------
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . 3
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
GENERAL REGULATED INVESTMENT COMPANY QUALIFICATIONS. . . . . . . . . . . 20
GENERAL TAX TREATMENT OF QUALIFYING RICS AND SHAREHOLDERS. . . . . . . . 20
SPECIAL TAX CONSIDERATIONS RELATING TO MUNICIPAL BOND AND MUNICIPAL
MONEY MARKET PORTFOLIOS. . . . . . . . . . . . . . . . . . . . . . . . 22
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS . . . . . . . 23
TAXES AND FOREIGN SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . 23
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 22
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS. . . . . . . . . . . . . . 24
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . 24
NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS. . . . . . . . . . . . . . . 33
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 34
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . 42
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 43
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997 AS SUPPLEMENTED THROUGH
SEPTEMBER 26, 1997
Prospectus for the European Real Estate Portfolio, Asian Real Estate
Portfolio and U.S. Real Estate Portfolio, dated September 26, 1997
Prospectus for the Asian Equity Portfolio and Japanese Equity
Portfolio, dated May 1, 1997, as supplemented through September 26,
1997
Prospectus for the Emerging Markets Portfolio, Emerging Markets Debt
Portfolio and Latin American Portfolio, dated May 1, 1997, as
supplemented through September 26, 1997
Prospectus for the Global Equity Portfolio, International Equity
Portfolio, International Small Cap Portfolio and European Equity
Portfolio, dated May 1, 1997, as supplemented through September 26,
1997
Prospectus for the U.S. Equity Plus Portfolio, dated July 21, 1997
Prospectus for the International Magnum Portfolio, dated May 1, 1997
Prospectus for the Fixed Income Portfolio, Municipal Bond Portfolio,
Mortgage-Backed Securities Portfolio, Money Market Portfolio and
Municipal Money Market Portfolio, dated May 1, 1997
Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio,
MicroCap Portfolio and Aggressive Equity Portfolio, dated May 1, 1997
Prospectus for the Small Cap Value Equity Portfolio, Value Equity
Portfolio, Balanced Portfolio, Global Fixed Income Portfolio and High
Yield Portfolio, dated May 1, 1997
Prospectus for the Active Country Allocation Portfolio, dated May 1,
1997
Prospectus for the Technology Portfolio, dated May 1, 1997
Prospectus for the Gold Portfolio, dated May 1, 1997
Prospectus for the China Growth Portfolio, dated May 1, 1995
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies
set forth in the Fund's Prospectuses:
BRADY BONDS. The Emerging Markets Debt Portfolio may invest in certain debt
obligations customarily referred to as "Brady Bonds," which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market. The Portfolio may
purchase Brady Bonds either in the primary or secondary market. The price and
yield of Brady Bonds purchased in the secondary market will reflect the market
conditions at the time of purchase, regardless of the stated face amount and the
stated interest rate. With respect to Brady Bonds with no or limited
collateralization, the Portfolio will rely for payment of interest and principal
primarily on the willingness and ability of the issuing government to make
payment in accordance with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments;
- 2 -
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and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
Brady Plan debt restructuring totalling approximately $73 billion has been
implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of
Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and
Poland have announced plans to issue Brady Bonds aggregating approximately $52
billion, based on current estimates. There can be no assurance that the
circumstances regarding the issuance of Brady Bonds by these countries will not
change.
EMERGING COUNTRY EQUITY AND DEBT SECURITIES
GENERAL. Each of the Latin American, International Magnum, Active Country
Allocation, Global Equity, Technology, International Equity, International Small
Cap, Asian Equity, European Equity, Emerging Markets, Emerging Markets Debt,
European Real Estate and Asian Real Estate Portfolios' definition of emerging
country equity or debt securities includes securities of companies that may have
characteristics and business relationships common to companies in a country or
countries other than an emerging country. As a result, the value of the
securities of such companies may reflect economic and market forces applicable
to other countries, as well as to an emerging country. The Adviser believes,
however, that investment in such companies will be appropriate because the
Portfolio will invest only in those companies which, in its view, have
sufficiently strong exposure to economic and market forces in an emerging
country that their value will tend to reflect developments in such emerging
country to a greater extent than developments in another country or countries.
For example, the Portfolio may invest in companies organized and located in
countries other than an emerging country, including companies having their
entire production facilities outside of an emerging country, when securities of
such companies meet one or more elements of the Portfolio's definition of an
emerging country equity or debt security and so long as the Adviser believes at
the time of investment that the value of the company's securities principally
reflects conditions in such emerging country.
The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the emerging country debt securities it holds; those maturities
may range from overnight to 30 years. The value of debt securities held by the
Portfolio generally will vary inversely to changes in prevailing interest rates.
The Portfolio's investments in fixed-rated debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
shorter-term obligations. Debt obligations acquired at a discount are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which are not subject to such
discount.
Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may be
unable or unwilling to repay the principal and/or interest when due in
accordance with the terms of such debt. As a result of the foregoing, a
government obligor may default on its obligations. If such an event occurs, the
Portfolio may have limited legal recourse against the issuer and/or guarantor.
Remedies must, in some cases, be pursued in the courts of the defaulting party
itself, and the ability of the holder of foreign government debt securities to
obtain recourse may be subject to the political climate in the relevant country.
In addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign government debt
obligations in the event of default under their commercial bank loan agreements.
EQUITY-LINKED SECURITIES
The Aggressive Equity, U.S. Real Estate, Asian Real Estate, European Real
Estate and Technology Portfolios may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how
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equity-linked securities will trade in the secondary market, although the market
for such securities is fairly developed and generally liquid. The market for
such securities may be shallow, however, and high volume trades may be possible
only with discounting. In addition to the foregoing risks, the return on such
securities depends on the creditworthiness of the issuer of the securities,
which may be the issuer of the underlying securities or a third party investment
banker or other lender. The creditworthiness of such third party issuer of
equity-linked securities may, and often does, exceed the creditworthiness of the
issuer of the underlying securities. The advantage of using equity-linked
securities over traditional equity and debt securities is that the former are
income producing vehicles that may provide a higher income than the dividend
income on the underlying equity securities while allowing some participation in
the capital appreciation of the underlying equity securities. Another advantage
of using equity-linked securities is that they may be used for hedging to reduce
the risk of investing in the generally more volatile underlying equity
securities.
The following are three examples of equity-linked securities. The
Portfolios may invest in the securities described below or other similar
equity-linked securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically is
preferred stock with some characteristics of common stock. PERCS are mandatorily
convertible into common stock after a period of time, usually three years,
during which the investors' capital gains are capped, usually at 30%. Commonly,
PERCS may be redeemed by the issuer at any time or if the issuer's common stock
is trading at a specified price level or better. The redemption price starts at
the beginning of the PERCS duration period at a price that is above the cap by
the amount of the extra dividends the PERCS holder is entitled to receive
relative to the common stock over the duration of the PERCS and declines to the
cap price shortly before maturity of the PERCS. In exchange for having the cap
on capital gains and giving the issuer the option to redeem the PERCS at any
time or at the specified common stock price level, the Portfolio may be
compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors, such as the Portfolios, that seek current
income find PERCS attractive because PERCS provide a higher dividend income than
that paid with respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt securities,
in that the principal amount received at maturity is not fixed but is based on
the price of the issuer's common stock. ELKS are debt securities commonly issued
in fully registered form for a term of three years under an indenture trust. At
maturity, the holder of ELKS will be entitled to receive a principal amount
equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater
than the current price of the issuer's common stock, or the average closing
price per share of the issuer's common stock, subject to adjustment as a result
of certain dilution events, for the 10 trading days immediately prior to
maturity. Unlike PERCS, ELKS are commonly not subject to redemption prior to
maturity. ELKS usually bear interest during the three-year term at a
substantially higher rate than the dividend yield on the underlying common
stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, a Portfolio may be
compensated with higher yield, contingent on how well the underlying common
stock does. Investors, such as the Portfolios, that seek current income, find
ELKS attractive because ELKS provide a higher dividend income than that paid
with respect to a company's common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolios will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount to the date of redemption, which amounts to the lower-than-market
yield. The Portfolios will receive only the lower-than-market yield unless the
underlying common stock increases in value at a substantial rate. LYONs are
attractive to investors like the Portfolios when it appears that they will
increase in value due to the rise in value of the underlying common stock.
FOREIGN CURRENCY FORWARD CONTRACTS
The U.S. dollar value of the assets of the Global Equity, International
Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity,
Latin American, International Magnum, Global Fixed Income, Active Country
Allocation, China Growth, Emerging Markets, Emerging Markets Debt, Gold,
European Real Estate and Asian Real Estate Portfolios and, to the extent they
invest in securities denominated in foreign currencies, the assets of the Equity
Growth, Emerging Growth, MicroCap, Aggressive Equity, Small Cap Value Equity,
Value Equity, Balanced, Fixed Income, High Yield and Technology Portfolios may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Portfolios may incur costs in
connection with conversions between various currencies. The Portfolios will
conduct their foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market,
or through entering into forward contracts
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to purchase or sell foreign currencies. A foreign currency forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for such trades. The Gold Portfolio may also enter into precious metals
forward contracts. See "Precious Metals Forward and Futures Contracts and
Options on Futures Contracts" below.
The Portfolios may enter into foreign currency forward contracts in several
circumstances. When a Portfolio enters into a contract for the purchase or sale
of a security denominated in a foreign currency, or when a Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Portfolio may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Portfolio will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when any of these Portfolios anticipates that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios intend to enter
into such forward contracts to protect the value of portfolio securities on a
continuous basis. The Portfolios will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate such Portfolio to deliver an amount of foreign currency
in excess of the value of such Portfolio's securities or other assets
denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Fund believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of each Portfolio will thereby be served. Except under circumstances where a
segregated account is not required under the Investment Company Act of 1940, as
amended (the "1940 Act") or the rules adopted thereunder, the Fund's Custodian
will place cash or liquid securities into a segregated account of a Portfolio in
an amount equal to the value of such Portfolio's total assets committed to the
consummation of forward currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be equal to the amount of such Portfolio's commitments with
respect to such contracts.
The Portfolios generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a Portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolios are not required to enter into such transactions with regard
to their foreign currency-denominated securities. It also should be realized
that this method of protecting the value of portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which one can achieve at some
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future point in time. Additionally, although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time, they tend to limit any potential gain which might result should the value
of such currency increase. For a discussion of the special risks associated with
foreign currency transactions, see "Risks Associated With Foreign Currency
Transactions," below in this SAI.
RISKS ASSOCIATED WITH FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currency forward contracts, foreign currency
futures contracts and options thereon, and options on foreign currencies, are
subject to the risk of governmental actions affecting trading in or the prices
of currencies underlying such contracts, which could restrict or eliminate
trading and could have a substantial adverse effect on the value of positions
held by the Portfolios permitted to engage in such hedging transactions. In
addition, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will be
based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing a Portfolio from responding to such events in a timely
manner.
Settlement of over-the-counter ("OTC") forward contracts or the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, OTC options
on foreign currencies and foreign currency forward contracts are not traded on
contract markets or national securities exchanges regulated by the Commodity
Futures Trading Commission ("CFTC") or the Securities and Exchange Commission
(the "Commission"), respectively. In an OTC trading environment, many of the
protections associated with transactions on exchanges will not be available.
For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which a Portfolio is a party.
In addition, OTC transactions can only be entered into with a financial
institution willing to take the opposite side, as principal, of a Portfolio's
position unless the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with such Portfolio. Where no
such counterparty is available, it will not be possible to enter into a desired
transaction. There also may be no liquid secondary market in the trading of OTC
contracts, and a Portfolio may be unable to close out options purchased or
written, or forward contracts entered into, until their exercise, expiration or
maturity. This in turn could limit a Portfolio's ability to realize profits or
to reduce losses on open positions and could result in greater losses.
Furthermore, OTC transactions are not backed by the guarantee of an
exchange's clearing corporation. A Portfolio will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving as
its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting a Portfolio's ability to enter into desired hedging transactions. A
Portfolio will enter into OTC transactions only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
OTC options on foreign currencies are within the exclusive regulatory
jurisdiction of the CFTC. The CFTC currently permits the trading of such
options, but only subject to a number of conditions regarding the commercial
purpose of the purchaser of such options. The Portfolios are not able to
determine at this time whether or to what extent the CFTC may impose additional
restrictions on the trading of over-the-counter options on foreign currencies at
some point in the future, or the effect that any restrictions may have on the
hedging strategies to be implemented by the Portfolios. Forward contracts and
currency swaps are not presently subject to regulation by the CFTC, although the
CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, a Portfolio's ability to utilize forward contracts
and currency swaps in the manner set forth above and in the applicable
Prospectus could be restricted.
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Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default. Further,
a liquid secondary market in options traded on a national securities exchange
may be more readily available than in the OTC market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
FOREIGN INVESTMENTS
The Active Country Allocation, International Equity, International Fixed
Income, Global Equity, Global Fixed Income, Asian Equity, European Equity,
Japanese Equity, International Small Cap, Latin American and China Growth
Portfolios will invest, and the Emerging Growth, Emerging Markets, Emerging
Markets Debt, Value Equity, Equity Growth, MicroCap, Balanced, Small Cap Value
Equity, International Magnum, Fixed Income, High Yield, Aggressive Equity, Gold,
European Real Estate, Asian Real Estate and Technology Portfolios may invest in
securities of foreign issuers. Investors should recognize that investing in such
foreign securities involves certain special considerations which are not
typically associated with investing in U.S. issuers. For a description of the
effect on the Portfolios of currency exchange rate fluctuation, see "Foreign
Currency Forward Contracts" above. As foreign issuers are not generally subject
to uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers, there may be less
information available about certain foreign companies than about domestic
issuers. Securities of some foreign issuers are generally less liquid and more
volatile than securities of comparable domestic issuers. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
issuers than in the United States. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries. Foreign securities not listed on a
recognized domestic or foreign exchange are regarded as not readily marketable
and therefore such investments will be limited to 15% of a Portfolio's net asset
value at the time of purchase.
Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the International Equity, Global Equity, European Equity, Japanese Equity, Asian
Equity, Global Fixed Income, International Fixed Income, International Magnum,
International Small Cap, Latin American and China Growth Portfolios, it is not
expected that a Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. However, these
foreign withholding taxes may not have a significant impact on such Portfolios,
because each Portfolio's investment objective is to seek long-term capital
appreciation and any dividend or interest income should be considered
incidental.
FUTURES CONTRACTS
The Portfolios, except the Global Equity, International Equity,
International Small Cap, European Equity, Money Market and Municipal Money
Market Portfolios, may enter into futures contracts and options on futures
contracts. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts, which are
standardized as to maturity date and underlying financial instrument, are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the CFTC.
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Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on their margin deposits. With respect to each
long position in a futures contract or option thereon, the underlying commodity
value of such contract will always be covered by cash and cash equivalents set
aside plus accrued profits held at the futures commission merchant.
Portfolios may purchase and write call and put options on futures contracts
which are traded on a U.S. exchange or on any recognized securities or futures
exchange to the extent permitted by the CFTC and enter into closing transactions
with respect to such options to terminate an existing position. An option on a
futures contract gives the purchaser the right (in return for the premium paid)
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) at a specified exercise price
at any time during the term of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolios intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolios will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
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RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, each Portfolio will limit its use
of derivative instruments, including futures contracts, to 33 1/3% of its total
assets measured by the aggregate notional amount of outstanding derivative
instruments.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolios will minimize the risk that they will be unable to close out
a futures contract by generally entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market, however the Portfolios may enter into
over-the-counter futures transactions to the extent permitted by applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if, at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the Portfolios engage in futures strategies only for hedging
purposes, the Adviser does not believe that the Portfolios are subject to the
risks of loss frequently associated with futures transactions. A Portfolio
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying security or currency and sold it
after the decline.
Utilization of futures transactions by the Portfolios does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event of
bankruptcy of a broker with whom the Portfolio has an open position in a futures
contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. For a discussion of the special risks associated
with foreign currency transactions, see "Risks Associated with Foreign Currency
Transactions" in this SAI.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Emerging Markets and Emerging Markets Debt Portfolios may also 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"). The Portfolio's investments in Loans are expected in
most instances to be in the form of participations in Loans ("Participations")
and assignments of all or a portion of Loans ("Assignments") from third parties.
The Portfolio's investment in Participations typically will result in the
Portfolio having a contractual relationship only with the Lender and not with
the borrower. The Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Portfolio
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Portfolio may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Portfolio may be subject to the credit risk of both the borrower and
the Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Portfolio may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. Certain Participations may be structured in a manner designed
to avoid purchasers
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of Participations being subject to the credit risk of the Lender with respect to
the Participation, but even under such a structure, in the event of the Lender's
insolvency, the Lender's servicing of the Participation may be delayed and the
assignability of the Participation impaired. The Portfolio will acquire
Participations only if the Lender interpositioned between the Portfolio and the
borrower is determined by the Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, 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. The assignability of certain sovereign debt obligations
is restricted by the governing documentation as to the nature of the assignee
such that the only way in which the Portfolio may acquire an interest in a loan
is through a Participation and not an Assignment. The Portfolio may have
difficulty disposing of Assignments and Participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, the Portfolio anticipates that such securities could
be sold only to a limited number of institutional investors. The lack of a
liquid secondary market may have an adverse impact on the value of such
securities and the Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet the Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Portfolio
to assign a value to these securities for purposes of valuing the Portfolio's
securities and calculating its net asset value.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The investment objective of the Active Country Allocation Portfolio and the
International Magnum Portfolio is to provide long-term capital appreciation. The
Active Country Allocation Portfolio seeks to achieve its objective by investing
in equity securities of non- U.S. issuers which, in the aggregate, replicate
broad country indices, in accordance with country weightings determined by the
Adviser. The Adviser utilizes a top-down approach in selecting investments for
the Active Country Allocation Portfolio that emphasizes country selection and
weighing rather than individual stock selection. The Active Country Allocation
Portfolio invests, INTER ALIA, in industrialized countries throughout the world
that comprise the Morgan Stanley Capital International EAFE (Europe, Australia
and the Far East) Index (the "EAFE Index"). The International Magnum Portfolio
seeks to achieve its objective by investing primarily in equity securities of
non-U.S. issuers domiciled in EAFE countries (defined below). After establishing
regional allocation strategies, the Adviser then selects equity securities among
issuers of a region. The International Magnum Portfolio invests primarily in
countries comprising the EAFE Index (each an "EAFE country").
The EAFE Index is one of seven International Indices, twenty National
Indices and thirty-eight International Industry Indices making up the Morgan
Stanley Capital International Indices. The EAFE Index is based on the share
prices of 1,066 companies listed on the stock exchanges of Europe, Australia,
New Zealand and the Far East. "Europe" includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. "Far East" includes Japan, Hong Kong and
Singapore/Malaysia.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Mortgage-backed securities include collateralized mortgage
obligations, pass-through securities issued or guaranteed by agencies or
instrumentalities of the U.S. government or by private sector entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage Pass-Through
Securities (discussed below) or whole loans (all such assets, the "Mortgage
Assets") and are evidenced by a series of bonds or certificates issued in
multiple classes or "tranches." The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S. government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued
after 1991 must elect to be treated as a REMIC or it will be taxable as a
corporation under rules regarding taxable mortgage pools.
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In a CMO, a series of bonds or certificates are issued in multiple classes.
Each tranche may be issued with a specific fixed or floating coupon rate and has
a stated maturity or final scheduled distribution date. Principal prepayments on
the underlying Mortgage Assets may cause the CMOs to be retired substantially
earlier than their stated maturities or final scheduled distribution dates.
Interest is paid or accrues on CMOs on a monthly, quarterly or semi-annual
basis. The principal of and interest on the Mortgage Assets may be allocated
among the several classes of a CMO in many ways. The general goal in allocating
cash flows on Mortgage Assets to the various classes of a CMO is to create
certain tranches on which the expected cash flows have a higher degree of
predictability than the underlying Mortgage Assets. As a general matter, the
more predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on Mortgage-Backed Securities with similar
average lives. Because of the uncertainty of the cash flows on these tranches,
the market prices of and yields on these tranches are more volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of
CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in which the
Mortgage-Backed Securities Portfolio may invest include pass-through securities
issued or guaranteed by agencies or instrumentalities of the U.S. government or
by private sector entities. Mortgage pass-through securities issued or
guaranteed by private sector originators of or investors in mortgage loans and
are structured similarly to governmental pass-through securities. Because
private pass-throughs typically lack a guarantee by an entity having the credit
status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. Federal
National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac") obligations are not backed by
the full faith and credit of the U.S. government as Government National Mortgage
Association ("GNMA" or "Ginnie Mae") certificates are, but FNMA and FHLMC
securities are supported by the instrumentalities' right to borrow from the U.S.
Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders. Each of GNMA and FNMA also guarantees timely
distributions of scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however, FHLMC
now issues Mortgage-Backed Securities (FHLMC Gold Pcs) which also guarantee
timely payment of monthly principal reductions. REFCORP obligations are backed,
as to principal payments, by zero coupon U.S. Treasury bonds, and as to interest
payment, ultimately by the U.S. Treasury. Obligations issued by such U.S.
governmental agencies and instrumentalities are described more fully below.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie
Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the United States government is pledged to the
payment of all amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is authorized to
borrow from the U.S. Treasury with no limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or
more of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgag-backed serial notes.
All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed by
the full faith and credit of the U.S. government.
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Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the U.S.
government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one-to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically by
the entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties (referred
to herein as "third party credit support"), through various means of structuring
the transaction or through a combination of such approaches. The Mortgage-Backed
Securities Portfolio will not pay any additional fees for such credit support,
although the existence of credit support may increase the price the Portfolio
pays for a security.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with defaults on the underlying assets being borne first
by the holders of the most subordinated class), creation of "reserve funds"
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.
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Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term municipal
obligations issued by states, cities, municipalities or municipal agencies
include Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation
Notes, Construction Loan Notes and Short-term Discount Notes. Project Notes are
instruments guaranteed by the Department of Housing and Urban Development but
issued by a state or local housing agency. While the issuing agency has the
primary obligation on such Project Notes, they are also secured by the full
faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and may be
adjusted when such rate changes, or the interest rate on a demand note may be a
market rate that is adjusted at specified intervals. The demand notes in which
the Municipal Money Market Portfolio will invest are payable on not more than
one year's notice.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality of
the Municipal Bonds. It should be emphasized that such ratings are general and
are not absolute standards of quality. Consequently, Municipal Bonds with the
same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the buyer has committed to purchasing certain specified securities at an
agreed-upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of either the Municipal
Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate its
investment objective and policies and consider recommending to its shareholders
changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
OPTIONS TRANSACTIONS
GENERAL INFORMATION. The Portfolios, except the Global Equity, International
Equity, International Small Cap, European Equity, Money Market and Municipal
Money Market Portfolios, may purchase and sell options on portfolio securities
and securities indices. Additional information with respect to option
transactions is set forth below. Call and put options on equity securities are
listed on various U.S. and foreign securities exchanges ("listed options") and
are written in over-the-counter transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they trade
or by a clearing corporation, such as Options Clearing Corporation ("OCC") in
the United States. Ownership of a listed call option gives the fund the right to
buy from the clearing corporation or exchange, the underlying security covered
by the option at the state exercise price (the price per unit of the underlying
security or currency) by filing an exercise notice prior to the expiration date
of the option. The writer (seller) of the option would then have the obligation
to sell to the clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of the current market price. Ownership of a listed put option would
give the Portfolio the right to sell the underlying security or currency to the
clearing corporation or exchange at the state exercise price. Upon notice of
exercise of
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the put option, the writer of the option would have the obligation to purchase
the underlying security from the clearing corporation or exchange at the
exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.
COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. Each of the Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy the
security underlying the option from the purchaser of the put at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and OTC options written by the Portfolio will be exercisable by
the purchaser only on a specific date). Generally, a put option is "covered" if
the Portfolio maintains cash or other liquid securities equal to the exercise
price of the option or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price.
Each of the Portfolios may write put options to receive the premiums paid
by purchasers; when the Adviser (and also the Sub-Adviser with respect to the
Gold Portfolio) wishes to purchase the security underlying the option at a price
lower than its current market price, in which case it will write the covered put
at an exercise price reflecting the lower purchase price sought; and to close
out long put option positions.
PURCHASE OF PUT AND CALL OPTIONS. When the Portfolio purchases a call option it
acquires the right to purchase a designated security at a designated price (the
"exercise price"), and when the Portfolio purchases a put option it acquires the
right to sell a designated security at the exercise price, in each case on or
before a specified date (the "termination date"), usually not more than nine
months from the date the option is issued.
The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself against a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
OPTIONS ON SECURITIES INDICES. The Portfolios may purchase and write put and
call options on securities indices and enter into related closing transactions
in order to hedge against the risk of market price fluctuations or to increase
income to the Portfolio.
Call and put options on indices are similar to options on securities except
that, rather than the right to purchase or sell particular securities at a
specified price, options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of
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cash is equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars multiplied by a specified
number. Thus, unlike options on individual securities, all settlements are in
cash, and gain or loss depends on price movements in the particular market
represented by the index generally (or in a particular industry or segment of
the market) rather than the price movements in individual securities.
All options written on indices must be covered. When the Portfolio writes
an option on an index, it will establish a segregated account containing cash or
liquid securities with its custodian in an amount at least equal to the market
or value of the option and will maintain the account while the option is open or
will otherwise cover the transaction.
The Portfolio may choose to terminate an option position by entering into a
closing transaction. The ability of the Portfolio to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.
OPTIONS ON CURRENCIES. The Portfolios may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Portfolio's exposure to changes in
dollar exchange rates. Call options on foreign currency written by the Portfolio
will be "covered," which means that the Portfolio will own an equal amount of
the underlying foreign currency. With respect to put options on foreign currency
written by the Portfolio, the Portfolio will establish a segregated account with
the Fund's Custodian consisting of cash or liquid securities in an amount equal
to the amount the Portfolio would be required to pay upon exercise of the put.
RISK FACTORS IN OPTIONS TRANSACTIONS. The use of options also involves
additional risks. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Portfolio
because the maximum amount of risk is the premium paid for the option. The
writing of a call option generates a premium which may partially offset a
decline in the value of a Portfolio's portfolio assets. By writing a call
option, the Portfolio becomes obligated to sell the underlying instrument, which
may have a value higher than the exercise price. Conversely, the writing of a
put option generates a premium, but the Portfolio becomes obligated to purchase
the underlying instrument, which may have a value lower than the exercise price.
Thus, the loss incurred by a Portfolio in writing options may exceed the amount
of the premium received.
The effective use of options strategies is dependent, among other things,
on a Portfolio's ability to terminate options positions at a time when the
portfolio manager deems it desirable to do so. Although a Portfolio will enter
into options positions only if the portfolio manager believes that a liquid
secondary market exists for such options, there is no assurance that the
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price.
A Portfolio's purchase or sale of put or call options will be based upon
predictions as to anticipated market trends and/or interest rate movements by
the portfolio manager, which could prove to be inaccurate. Even if the
expectations of the portfolio manager are correct, there may be an imperfect
correlation between the change in the value of the options and of the
Portfolio's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both, in the case
of a written put option, will permit the Portfolio to write another put option
to the extent that the exercise price thereof is secured by depositing liquid
assets. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other Portfolio investments. If the Portfolio desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
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A Portfolio will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Portfolio will realize
a loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the
Portfolio.
An options position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might be possible to effect a closing transaction in particular options with
the result that the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (1) there may be insufficient trading interest in certain options,
(2) restrictions may be imposed by an exchange on opening transactions or
closing transactions, or both, (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (4) unusual or unforeseen circumstances may
interrupt normal operation on an exchange, (5) the facilities of an exchange or
OCC may not at all times be adequate to handle current trading volume, or (6)
one or more exchange could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by OCC as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Portfolios may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Portfolios will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Portfolios may purchase call options to hedge against an increase in
the price of securities that the Portfolios anticipate purchasing in the future.
The premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option may
expire worthless.
Options may also be traded OTC ("OTC Options"). In an OTC trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. The Portfolios may purchase or write OTC Options deemed
creditworthy by the Adviser. OTC Options are illiquid and it may not be possible
for the Portfolios to dispose of such options they have purchased or terminate
their obligations under an option they have written at a time when the Adviser
and portfolio manager believe it would be advantageous to do so. Accordingly,
OTC Options are subject to the Portfolios' limitation that a maximum of 15% of
its net assets be invested in illiquid securities. In the event of the
bankruptcy of the writer of an OTC Option, the Portfolios could experience a
loss of all or part of the value of the option.
For a discussion regarding the special risks of foreign currency options,
see "Risks Associated with Foreign Currency Transactions," in this SAI.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when a Portfolio deems it appropriate to purchase
or sell securities for the Portfolio.
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Gold Portfolio may enter into futures contracts on precious metals
("precious metals futures") as a hedge against changes in the prices of precious
metals held or intended to be acquired by the Portfolio, but not for speculation
or for achieving leverage. The Portfolio's hedging activities may include
purchases of futures contracts as an offset against the effect of anticipated
increases in the price of a precious metal which the Portfolio intends to
acquire ("anticipatory hedge") or sales of futures contracts as an offset
against the effect of anticipated declines in the price of precious metal which
the Portfolio owns ("hedge against an existing position").
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<PAGE>
The Portfolio will enter into precious metals forward contracts which are
similar to precious metals futures contracts, in that they provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. Unlike the futures contract market, which is regulated by the CFTC and
by the regulations of the commodity exchanges, the forward contract market is
unregulated. The Portfolio will use forward contracts for the same hedging
purposes as those applicable to futures contracts, as described above. When the
Portfolio enters into a forward contract it will establish with the custodian a
segregated account consisting of cash, liquid assets or bullion equal to the
market value of the forward contract purchased.
Precious metals futures and forward contract prices can be volatile and are
influenced principally by changes in spot market prices, which in turn are
affected by a variety of political and economic factors. In addition,
expectations of changing market conditions may at times influence the prices of
such futures and forward contracts, and changes in the cost of holding physical
precious metals, including storage, insurance and interest expense, will also
affect the relationship between spot and futures or forward prices. While the
correlation between changes in prices of futures and forward contracts and
prices of the precious metals being hedged by such contracts has historically
been very strong, the correlation may at times be imperfect and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected precious metals price trends. To the extent that interest rates move
in a direction opposite to that anticipated, the Portfolio may realize a loss on
a futures transaction not offset by an increase in the value of portfolio
securities. Moreover there is a possibility of a lack of a liquid secondary
market for closing out a futures position or futures option. The success of any
hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in
predicting the direction of a market. If these predictions are incorrect, the
Portfolio may realize a loss.
The Portfolio may also purchase (buy) and write (sell) covered call or put
options on precious metals futures contracts. Such options would be purchased
solely for hedging purposes similar to those applicable to the purchase and sale
of futures contracts. Call options might be purchased to hedge against an
increase in the price of precious metals the Portfolio intends to acquire, and
put options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options on
precious metals futures may facilitate the Portfolio's acquisition of precious
metals or permit the Portfolio to defer disposition of precious metals for tax
or other purposes. The Portfolio may not purchase options on precious metals and
precious metals futures contracts if the premiums paid for all such options,
together with margin deposits on precious metals future contracts, would exceed
5% of the Portfolio's total assets at the time the option is purchased.
One of the risks which may arise in employing futures contracts to protect
against the price volatility of the Portfolio's assets is that the price of
precious metals subject to futures contracts (and thereby the futures contracts'
prices) may correlate imperfectly with the prices of such assets. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Portfolio. Each Portfolio may lend its investment securities to
qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the 1940 Act, or the Rules and Regulations or
interpretations of the Commission thereunder, which currently require that (a)
the borrower pledge and maintain with the portfolio collateral consisting of
cash, an irrevocable letter of credit issued by a domestic U.S. bank, or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time, and (d) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. There may be risks of delay in recovery of the securities or
even loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will only be made to borrowers deemed by the Adviser
or Sub-Adviser to be of good standing and when, in the judgment of the Adviser
or Sub-Adviser, the consideration which can be earned currently from such
securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors of the Fund.
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<PAGE>
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SHORT SALES
The Emerging Markets Debt, Latin American, Aggressive Equity and Technology
Portfolios may from time to time sell securities short without limitation but
consistent with applicable legal requirements. A short sale is a transaction in
which the Portfolio would sell securities it owns or has the right to acquire at
no added cost (i.e., "against the box") or does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the
Portfolio makes a short sale of borrowed securities, the proceeds it receives
from the sale will be held on behalf of a broker until the Portfolio replaces
the borrowed securities. To deliver the securities to the buyer, the Portfolio
will need to arrange through a broker to borrow the securities and, in so doing,
the Portfolio will become obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The
Portfolio may have to pay a premium to borrow the securities and must 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 be secured by collateral deposited with the broker that
consists of cash or liquid securities. In addition, if the short sale is not
"against the box," the Portfolio will place in a segregated account with its
custodian, or designated sub-custodian, an amount of cash or liquid securities
equal to the difference, if any, between the market value of the securities sold
short and any cash or liquid securities deposited as collateral with the broker
in connection with the short sale. Until it replaces the borrowed securities,
the Portfolio will maintain the segregated account daily at a level so that the
amount deposited in the account plus the amount deposited with the broker will
equal the current market value of the securities sold short.
Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities, such
as the GNMA, are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury, if needed to service debt. Debt from
certain other agencies and instrumentalities, including the Federal Home Loan
Bank and FNMA, are not guaranteed by the United States, but those institutions
are protected by the discretionary authority for the U.S. Treasury to purchase
certain amounts of their securities to assist the institution in meeting its
debt obligations. However, the U.S. Treasury has no lawful obligation to assume
the financial liabilities of these agencies or others. Finally, other agencies
and instrumentalities, such as the Farm Credit System and the FHLMC, are
federally chartered institutions under Government supervision, but their debt
securities are backed only by the creditworthiness of those institutions, not
the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and the FNMA.
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TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectuses is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
GENERAL REGULATED INVESTMENT COMPANY QUALIFICATIONS
Each Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, each Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio's taxable year, (i) at least 50% of the market value of the
Portfolio's total assets is represented by cash and cash items, United States
Government securities, securities of other RICs, and other securities, with such
other securities limited, in respect to any one issuer, to an amount not greater
than 5% of the value of the Portfolio's total assets or 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
which the Portfolio controls and which are engaged in the same, similar, or
related trades or business. For purposes of the 90% of gross income requirement
described above, foreign currency gains which are not directly related to a
Portfolio's principal business of investing in stock or securities (or options
or futures with respect to stock or securities) may be excluded from income that
qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, a Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, for each tax
year, if any, to its shareholders. If a Portfolio meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
GENERAL TAX TREATMENT OF QUALIFYING RICS AND SHAREHOLDERS
Each Portfolio will decide whether to distribute or to retain all or part
of any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit.
A gain or loss realized by a shareholder on the sale, exchange or
redemption of shares of a Portfolio held as a capital asset will be capital gain
or loss, and such gain or loss will be long-term if the holding period for the
shares exceeds 18 months, will be mid-term if the holding period exceeds 12
months, but does not exceed 18 months, and otherwise will be short-term. Any
loss realized on a sale, exchange or redemption of shares of a Portfolio will be
disallowed to the extent the shares disposed of are replaced within the 61-day
period beginning 30 days before and ending 30 days after the shares are disposed
of. Any loss realized by a shareholder on the disposition of shares held 6
months or less is treated as a long-term capital loss to the extent of any
distributions of net long-term capital gains received by the shareholder with
respect to such shares or any inclusion of undistributed capital gain with
respect to such shares.
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<PAGE>
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Each Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short-and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
Each Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
A Section 1256 position held by a Fund will generally be marked-to-market
(i.e., treated as if it were sold for fair market value) on the last business
day of a Fund's fiscal year, and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within a Fund. The acceleration of income on Section 1256 positions may
require a Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, a Fund may be required to dispose of portfolio securities that they
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income earned and in turn distributed
to shareholders by a Fund.
As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts will
therefore generally be qualifying income for purposes of the 90% requirement.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains from
foreign currencies and from foreign currency options, foreign currency futures
and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies are currently considered to be qualifying
income for purposes of determining whether the Fund qualifies as a regulated
investment company. It is currently unclear, however, who will be treated as the
issuer of certain foreign currency instruments or how foreign currency options,
futures, or forward foreign currency contracts will be valued for purposes of
the regulated investment company diversification requirements applicable to the
Fund. The Fund may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts", and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed- income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The U.S.
Treasury issued proposed regulation section 1.1291-8 which establishes a
mark-to-market regime which allows investment companies investing in PFICs to
avoid most, if not all, of the difficulties posed by the PFIC rules. In any
event, it is not anticipated that any taxes on the Fund with respect to
investments in PFICs would be significant.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally
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<PAGE>
producing a long-term or short-term capital gain or loss upon exercise, lapse or
closing out of the option or sale of the underlying stock or security. By
contrast, a Fund's treatment of certain other options, futures and forward
contracts entered into by a Fund is generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
SPECIAL TAX CONSIDERATIONS RELATING TO MUNICIPAL BOND AND
MUNICIPAL MONEY MARKET PORTFOLIOS
Each of the Municipal Bond Portfolio and the Municipal Money Market
Portfolio will qualify to pay "exempt-interest dividends" to its shareholders
provided that, at the close of each quarter of its taxable year at least 50% of
the value of its total assets consists of obligations the interest on which is
exempt from federal income tax. Current federal tax law limits the types and
volume of bonds qualifying for federal income tax exemption of interest, which
may have an effect on the ability of these Portfolios to purchase sufficient
amounts of tax-exempt securities to satisfy this requirement. Any loss on the
sale or exchange of shares of the Municipal Bond Portfolio or the Municipal
Money Market Portfolio held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the selling shareholder with
respect to such shares.
As noted in the Prospectus for the Municipal Bond Portfolio and the
Municipal Money Market Portfolio, exempt-interest dividends are excludable from
a shareholder's gross income for regular Federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative minimum
tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code or the
environmental tax (the "Environmental Tax") imposed by Section 59A of the Code.
The Alternative Minimum Tax is imposed at the rate of up to 28% in the case of
non corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies only to corporate
taxpayers. The Alternative Minimum Tax and the Environmental Tax may be affected
by the receipt of exempt-interest dividends in two circumstances. First,
exempt-interest dividends derived from certain "private activity bonds" issued
after August 7, 1986, will generally be an item of tax preference and therefore
potentially subject to the Alternative Minimum Tax and the Environmental Tax.
The Portfolios intend, when possible, to avoid investing in private activity
bonds. Second, in the case of exempt-interest dividends received by corporate
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they are derived from private
activity bonds, will be included in the corporation's "adjusted current
earnings," as defined in Section 56(g) of the Code, in calculating the
corporation's alternative minimum taxable income for purposes of determining the
Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest dividends" will
be determined for each year for the Municipal Bond Portfolio and the Municipal
Money Market Portfolio and will be applied uniformly to all dividends declared
with respect to the Portfolios during that year. This percentage may differ from
the actual percentage for any particular day.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Municipal Bond Portfolio or the Municipal Money Market
Portfolio will not be deductible for federal income tax purposes. The deduction
otherwise allowable to property and casualty insurance companies for "losses
incurred" will be reduced by an amount equal to a portion of exempt-interest
dividends received or accrued during any taxable year. Foreign corporations
engaged in a trade or business in the United States will be subject to a "branch
profits tax" on their "dividend equivalent amount" for the taxable year, which
will include exempt-interest dividends. Certain Subchapter S corporations may
also be subject to taxes on their "passive investment income," which could
include exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends) plus
one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio.
"Substantial user" is defined generally for these purposes as including a
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of such bonds.
- 21 -
<PAGE>
Issuers of bonds purchased by the Municipal Bond Portfolio (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date thereof
if such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time a Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of a
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that each Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and a Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of a Portfolio's total assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for U.S. federal income tax purposes as paid directly by its
shareholders. A Portfolio will make such an election only if it deems it to be
in the best interest of its shareholders and will notify shareholders in writing
each year if it makes an election and of the amount of foreign income taxes, if
any, to be treated as paid by the shareholders. If a Portfolio makes the
election, shareholders will be required to include in income their proportionate
shares of the amount of foreign income taxes treated as imposed on the Portfolio
and will be entitled to claim either a credit (subject to the limitations
discussed below) or, if they itemize deductions, a deduction, for their shares
of the foreign income taxes in computing their federal income tax liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Portfolio, including the potential application of the provisions
of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended.
- 22 -
<PAGE>
PURCHASE OF SHARES
The purchase price of the Class A shares of each Portfolio of the Fund,
except the Money Market and Municipal Money Market Portfolios, and the Class B
shares of each Multiclass Portfolio of the Fund is the net asset value next
determined after Federal Funds are received. The International Small Cap
Portfolio may impose a 1% transaction fee on share purchases. For each Portfolio
of the Fund other then the Money Market or Municipal Money Market Portfolios, an
order received prior to the regular close of the New York Stock Exchange (the
"NYSE") will be executed at the price computed on the date of receipt; and an
order received after the regular close of the NYSE will be executed at the price
computed on the next day the NYSE is open as long as the Fund's transfer agent
receives payment by check or in Federal Funds prior to the regular close of the
NYSE on such day. Shares of the Money Market and Municipal Money Market
Portfolios may be purchased at the net asset value per share at the price next
determined after Federal Funds are available to such Portfolios. Shares of the
Fund may be purchased on any day the NYSE is open. The NYSE will be closed on
the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares. The
International Equity and the Emerging Markets Portfolios are currently closed to
new investors with the exception of certain Morgan Stanley customers, employees
of Morgan Stanley, certain tax-qualified retirement plans and other investment
companies advised by Morgan Stanley Asset Management Inc. and its affiliates.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Portfolio to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
No charge is made by any Portfolio for redemptions except for the 1%
transaction fee that may be assessed upon redemption of the International Small
Cap Portfolio. Any redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to verify
the identity of the person who has authorized a redemption from your account.
Signature guarantees are required in connection with: (1) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owner(s) and/or registered address; and (2) share
transfer requests.
An "eligible guarantor institution" guarantor may include a bank, a trust
company, a credit union or savings and loan association, a member firm of a
domestic stock exchange, or a foreign branch of any of the foregoing. Notaries
public are not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
The Fund has made an election with the Commission pursuant to Rule 18f-1
under the 1940 Act to pay in cash all redemptions requested by any shareholder
of record limited in amount during any 90-day period to the lesser of $250,000
or 1% of the net assets of a Portfolio at the beginning of such period. Such
commitment is irrevocable without the prior approval of the Commission.
Redemptions in excess of the above limits may be paid in whole or in part in
investment securities or in cash, as the Board of Directors may deem advisable
as being in the best interests of the Fund. If redemptions are paid in
investment securities, such securities will be valued as set forth in the Fund's
Prospectus under "Valuation of Shares" and a redeeming shareholder would
normally incur brokerage expenses in converting these securities to cash.
- 23 -
<PAGE>
SHAREHOLDER SERVICES
EXCHANGE FEATURES
Shares of each Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity and Emerging
Markets Portfolios, which are closed to new investors). In exchanging for shares
of a Portfolio with more than one class, the class of shares a shareholder
receives in exchange will be determined in the same manner as any other purchase
of shares and will not be based on the class of shares surrendered for the
exchange. Consequently, the same minimum initial investment and minimum account
size for determining the class of shares received in the exchange will apply.
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or sales charge of any kind.
Before making an exchange, a shareholder should consider the investment
objectives of the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange
requests by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O.
Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the two accounts will be
identical. Requests for exchanges received prior to 10:00 a.m. (Eastern Time)
for the Municipal Money Market Portfolio, 11:00 a.m. (Eastern Time) for the
Money Market Portfolio, and 4:00 p.m. (Eastern Time) for the remaining
Portfolios will be processed as of the close of business on the same day.
Requests received after these times will be processed on the next business day.
Exchanges may be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Fund and its shareholders.
For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days' notice to shareholders.
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another person
by making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares". As in the case of redemptions, the written request must be received
in good order before any transfer can be made. Transferring shares may affect
the eligibility of an account for a given class of the Portfolio's shares and
may result in involuntary conversion or redemption of such shares.
INVESTMENT LIMITATIONS
Each current Portfolio has adopted the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities),
and except that the Gold Portfolio may invest in gold bullion in accordance with
its investment objectives and policies;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) except with respect to the Global Fixed Income, Emerging Markets,
Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive
Equity, European Real Estate, Asian Real Estate, Technology and U.S. Real Estate
Portfolios (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer and (ii) purchase securities of an issuer (except
- 24 -
<PAGE>
obligations of the U.S. Government and its agencies and instrumentalities) if as
a result, with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets, at market value, would be invested in the securities
of such issuer;
(5) issue senior securities and will not borrow, except from banks and as
a temporary measure for extraordinary or emergency purposes and then, in no
event, in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings), except that each of the Emerging
Markets Debt, Latin American and Technology Portfolios may borrow from banks and
other entities in amount not in excess of 33 1/3% of its total assets (including
the amount borrowed) less liabilities in accordance with its investment
objectives and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or (in the case of the Money Market Portfolio or the
Municipal Money Market Portfolio) instruments issued by U.S. Banks, except that
(i) the Latin American Portfolio may invest more than 25% of its total assets in
companies involved in the telecommunications industry or financial services
industry, (ii) the Gold Portfolio may invest more than 25% of its total assets
in securities of companies in the group of industries involved in gold-related
or precious-metals-related activities, as described in its prospectus, and may
invest more than 25% of its total assets in one or more of the industries, as
described in its prospectus, (iii) each of the Asian Real Estate, European Real
Estate and U.S. Real Estate Portfolios will invest more than 25% of its total
assets in the Asian, European and U.S. real estate industries, respectively, as
described in their prospectuses, and (iv) the Technology Portfolio may invest
more than 25% of its assets in securities of companies in the technology or
technology-related industries; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below and in their respective Prospectuses.
Such limitations may be changed without shareholder approval. Each current
Portfolio of the Fund will not:
(1) purchase on margin or sell short, except (i) that the Emerging Markets
Debt, Latin American, Aggressive Equity and Technology Portfolios may from time
to time sell securities short without limitation but consistent with applicable
legal requirements as stated in its Prospectus, (ii) that each Portfolio, except
the Money Market and Municipal Money Market Portfolios may enter into option
transactions and futures contracts as described in its Prospectus, and (iii) as
specified above in fundamental investment limitation number (1) above;
(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(3) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder;
(6) except for the U.S. Real Estate, European Real Estate and Asian Real
Estate Portfolios, invest in real estate limited partnership interests, and the
U.S. Real Estate, European Real Estate and Asian Real Estate Portfolios may not
invest in such interests that are not publicly traded;
(7) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder;
(8) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its
- 25 -
<PAGE>
total assets, except that the Latin American, Emerging Markets Debt and
Technology Portfolios may borrow in accordance with Fundamental Restriction No.
(5) above; and
(9) invest in fixed time deposits with a duration of over seven calendar
days or invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
The Balanced, Fixed Income and Value Equity Portfolios will only issue
shares for securities or assets other than cash in a bona fide reorganization,
statutory merger, or in other acquisitions of portfolio securities (except for
municipal debt securities issued by state political subdivisions or their
agencies or instrumentalities) which (i) meet their respective investment
objectives; and (ii) are acquired for investment and not for resale.
Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt,
China Growth, Latin American, Aggressive Equity, European Real Estate, Asian
Real Estate and U.S. Real Estate Portfolios will diversify its holdings so that,
at the close of each quarter of its taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash (including cash
items and receivables), U.S. Government securities, and other securities, with
such other securities limited, in respect of any one issuer, for purposes of
this calculation to an amount not greater than 5% of the value of the
Portfolio's total assets and 10% of the outstanding voting securities of such
issuer; and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities).
With respect to fundamental investment limitation number (7), the Fund will
determine industry concentration in accordance with the classifications of
industries based on the Industry Numbers from the Standard Industrial
Classification Manual as prepared by the Office of Management and Budget, except
that, with respect to the Money Market and Municipal Money Market Portfolios,
(i) financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (ii) asset-backed
securities will be classified according to the underlying assets securing such
securities.
In accordance with fundamental investment limitation number (7), the Latin
American Portfolio will only invest more than 25% of its total assets in
companies involved in the telecommunications industry or financial services
industry if the Board of Directors determines that the Latin American markets
are dominated by securities of issuers in such industries and that, in light of
the anticipated return, investment quality, availability and liquidity of the
issuers in such industries, the Portfolio's ability to achieve its investment
objective would, in light of the investment policies and limitations, be
materially adversely affected if the Portfolio was not able to invest greater
than 25% of its total assets in such industries. As stated in the Prospectus,
the Board of Directors has made the foregoing determination and, accordingly,
the Latin American Portfolio will invest between 25% and 40% of its assets in
securities of issuers engaged in the telecommunications industry.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Future Portfolios of the Fund may adopt
different limitations.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a Government
Obligation with a variable rate of interest readjusted no less frequently than
annually may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate; (b) an instrument with a variable
rate of interest, the principal amount of which is scheduled on the face of the
instrument to be paid in one year or less, may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate;
(c) an instrument with a variable rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (d) an
instrument with a floating rate of interest that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
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<PAGE>
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its officers. Two Directors and all of the officers of
the Fund are directors, officers or employees of the Fund's adviser, distributor
or administrative services provider. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies managed,
administered, advised or distributed by Morgan Stanley Asset Management Inc.
("MSAM" or the "Adviser") or its affiliates. The other Directors have no
affiliation with the Fund's adviser, distributor or administrative services
provider. A list of the Directors and officers of the Fund and a brief statement
of their present positions and principal occupations during the past five years
is set forth below:
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------- ------------------ -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman, Director and Managing Director of
1221 Avenue of the Americas Morgan Stanley Asset Management Inc. and Morgan Stanley Asset
New York, NY 10020 Management Limited; Managing Director of Morgan Stanley & Co.
11/26/32 Incorporated; Director of VK/AC Holdings, Inc.; Director of
Rand McNally Company; Member of the Yale Development Board;
Chairman and Director of various U.S. registered investment
companies managed by Morgan Stanley Asset Management Inc.
Michael F. Klein* Director and President Principal of Morgan Stanley Asset Management Inc.;
1221 Avenue of the Americas President and Director of various investment companies
New York, NY 10020 managed by Morgan Stanley Asset Management Inc.; Previously
12/12/58 practiced law with the New York firm of Rogers & Wells.
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
521 Fifth Avenue (investment counseling); Director of the Ashforth Company
New York, NY 10135 (real estate); Director of the Morgan Stanley Universal
8/21/35 Funds, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm); Director of the
43 Arch Street Morgan Stanley Universal Funds, Inc.
Greenwich, CT 06830
1/23/37
Andrew McNally IV Director Chairman and Chief Executive Officer of Rand McNally
8255 North Central Park Avenue (publication); Director of Allendale Insurance Co., Mercury
Skokie, IL 60076 Finance (consumer finance); Zenith Electronics, Hubbell, Inc.
11/11/39 (industrial electronics); Director of the Morgan Stanley
Universal Funds, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle L.L.C. (investment
8211 North Fresno Street firm); Director, Pacific Gas and Electric and PG&E
Fresno, CA 93720 Enterprises (utilities); Director of the Morgan Stanley
7/28/34 (utilities); Director of the Morgan Stanley Universal Funds,
Inc.
</TABLE>
- 27 -
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------- ------------------ -------------------------------------------
<S> <C> <C>
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd. Corporation (injection molding firm); Trustee and Director of
Pawling, NY 12564 Vista Mutual Fund Group; Director of the Morgan Stanley
8/12/32 Universal Funds, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin Boehm, P.C.; Formerly of
2800 North Central Avenue Counsel, Bryan, Cave LLP; (law firms); Director of the
Phoenix, AZ 85004 Morgan Stanley Universal Funds, Inc.
1/24/34
James W. Grisham* Vice President Principal of Morgan Stanley & Co. Incorporated and of
1221 Avenue of the Americas Morgan Stanley Asset Management Inc.; Vice President of
New York, NY 10020 various U.S. registered investment companies managed by
10/24/41 Morgan Stanley Asset Management Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co. Incorporated and of
1221 Avenue of the Americas Morgan Stanley Asset Management Inc.; General Counsel and
New York, NY 10020 Secretary of Morgan Stanley Asset Management Inc.;
6/10/60 Vice President of various U.S. registered investment companies
managed by Morgan Stanley Asset Management Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas and Morgan Stanley Asset Management Inc.; Previously with
New York, NY 10020 Price Waterhouse LLP (accounting); Vice President of
6/7/54 various U.S. registered investment companies managed by Morgan
Stanley Asset Management Inc.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas Morgan Stanley Asset Management Inc.; Previously with
New York, NY 10020 Citicorp (banking); Secretary of various U.S. registered
3/26/56 investment companies managed by Morgan Stanley Asset
Management Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General Counsel of
73 Tremont Street Chase Global Funds Services Company; Previously, Leland,
Boston, MA 02108-3913 O'Brien, Rubinstein Associates, Inc. (investments).
3/7/55
Joanna Haigney Treasurer Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration and Compliance Services, Chase Global
Boston, MA 02108-3913 Funds Services Company; Officer of various investment
10/10/66 companies managed by Morgan Stanley Asset Management Inc.
Previously with Coopers & Lybrand LLP.
</TABLE>
- 28 -
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------- ------------------ -------------------------------------------
<S> <C> <C>
Rene J. Feuerman Assistant Treasurer Manager of Fund Administration and Compliance Services,
73 Tremont Street Chase Global Funds Services Company. Previously Fund
Boston, MA 02108-3913 Administrator and Senior Fund Accountant, Chase Global
1/25/67 Funds Services Company.
</TABLE>
- ----------
* "Interested Person" within the meaning of the 1940 Act.
REMUNERATION OF DIRECTORS AND OFFICERS
Effective June 28, 1995, the Fund and other funds managed by MSAM (the
"Fund Complex") will pay each of the Directors who is not an "interested person"
an annual aggregate fee of $55,000, plus out-of-pocket expenses. The Fund
Complex will pay each of the members of the Fund's Audit Committee, which
consists of the Fund's Directors who are not "interested persons," an additional
annual aggregate fee of $10,000 for serving on such committee. The allocation of
such fees will be among the funds in the Fund Complex in proportion to their
respective average net assets. For the fiscal year ended December 31, 1996, the
Fund paid approximately $389,000 in Directors' fees and expenses. Directors who
are also officers or affiliated persons receive no remuneration for their
services as Directors. The Fund's officers and employees are paid by the Adviser
or its agents. As of September 8, 1997, to Fund management's knowledge, the
Directors and officers of the Fund, as a group, owned more than 1% of the
outstanding common stock of the following Portfolio of the Fund: 2.35% Latin
American Portfolio- Class A shares. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, in the fiscal year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(5)
(3) (4) TOTAL
(2) PENSION OR ESTIMATED COMPENSATION
AGGREGATE RETIREMENT ANNUAL FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED BENEFITS AND FUND
(1) FROM AS PART OF FUND UPON COMPLEX
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT PAID TO DIRECTORS
- ------------------------ ---------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C>
Barton M. Biggs,
Director and Chairman of the Board . None N/A N/A None
Warren J. Olsen,*
Director and President . . . . . . . None N/A N/A None
Michael F. Klein,**
Director and President . . . . . . . None N/A N/A None
John D. Barrett, II
Director . . . . . . . . . . . . . . 59,485 N/A N/A 68,777
Gerard E. Jones,
Director . . . . . . . . . . . . . . 59,485 N/A N/A 75,877
Andrew McNally, IV
Director . . . . . . . . . . . . . . 55,023 N/A N/A 63,195
Samuel T. Reeves,
Director . . . . . . . . . . . . . . 53,287 N/A N/A 61,331
Fergus Reid,
Director . . . . . . . . . . . . . . 67,434 N/A N/A 77,220
Frederick O. Robertshaw,
Director . . . . . . . . . . . . . . 50,834 N/A N/A 58,777
</TABLE>
- 29 -
<PAGE>
<TABLE>
<CAPTION>
(5)
(3) (4) TOTAL
(2) PENSION OR ESTIMATED COMPENSATION
AGGREGATE RETIREMENT ANNUAL FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED BENEFITS AND FUND
(1) FROM AS PART OF FUND UPON COMPLEX
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT PAID TO DIRECTORS
- ------------------------ ---------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C>
Frederick B. Whittemore,***
Director . . . . . . . . . . . . . . None N/A N/A None
</TABLE>
- ----------
* As of May 31, 1997, Mr. Olsen resigned from the Board of Directors.
** Mr. Klein was appointed to the Board of Directors effective May 31, 1997.
*** As of March 14, 1997, Mr. Whittemore resigned from the Board of Directors.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
MSAM is a wholly- owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co. The principal offices of Morgan Stanley, Dean Witter, Discover &
Co. are located at 1585 Broadway, New York, NY 10036, and the principal offices
of MSAM are located at 1221 Avenue of the Americas, New York, NY 10020. As
compensation for advisory services for the fiscal years ended December 31, 1994,
December 31, 1995 and December 31, 1996, the Adviser earned fees of
approximately $34,338,000, $40,534,000 and $55,465,000, respectively, and from
such fees voluntarily waived fees of $2,640,000, $3,526,000 and $4,340,000,
respectively. For the fiscal years ended December 31, 1994, December 31, 1995
and December 31, 1996, the Fund paid brokerage commissions of approximately
$7,287,293, $10,317,515 and $17,014,335, respectively. For the fiscal years
ended December 31, 1994, December 31, 1995 and December 31, 1996, the Fund paid
in the aggregate $796,000, $377,000 and $826,686, respectively, as brokerage
commissions to Morgan Stanley & Co. Incorporated ("Morgan Stanley" or the
"Distributor"), an affiliated broker-dealer, which represented 11%, 4%, and 5%
of the total amount of brokerage commissions paid in each respective period. For
the fiscal years ended December 31, 1994, December 31, 1995 and December 31,
1996, the Fund paid administrative fees to MSAM of approximately $4,458,000,
$5,238,000 and $7,298,531, respectively.
Sun Valley Gold Company (the "Sub-Adviser"), with principal offices at 620
Sun Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser of the
Gold Portfolio, pursuant to a sub-advisory agreement among the Fund, the Adviser
and the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser and the
Sub-Adviser have entered into an indemnification agreement under which,
generally, the Sub-Adviser has agreed to indemnify the Adviser and the Fund for
claims or losses in connection with any failure by the Sub-Adviser to comply
with its obligations under the Sub-Advisory Agreement or related agreements or
any act or omission that amounts to negligence, misfeasance or bad faith, and
the Adviser has agreed to indemnify the Sub-Adviser for claims or losses in
connection with any failure by the Adviser to comply with its obligations under
the Sub-Advisory Agreement or related agreements. As compensation for
sub-advisory services for the fiscal years ended December 31, 1994, December 31,
1995 and December 31, 1996, the Sub-Adviser earned fees of approximately
$76,000, $73,000 and $110,000, respectively, and from such fees voluntarily
waived fees of $36,000, $37,000 and $52,000, respectively. For the fiscal years
ended December 31, 1994, December 31, 1995 and December 31, 1996, the Fund paid
$8,000, $450 and $0, respectively, as brokerage commissions to Sun Valley Gold
Trading, Inc., a broker-dealer affiliated with the Sub-Adviser.
Pursuant to the MSAM Administration Agreement between the Adviser and the
Fund, the Adviser provides Administrative Services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15 of 1% of the average daily net assets of each
Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC," a corporate affiliate
of Chase) provides certain administrative services to the Fund. CGFSC provides
operational and administrative services to investment companies with
approximately $69 billion in assets and having approximately 215,930 shareholder
accounts as of December 31, 1996. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
The Distributor is a wholly- owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., serves as the Distributor of the Fund's shares pursuant
to a Distribution Agreement for the Fund and a Plan of Distribution for the
Class B shares of the Portfolios (except the Money Market, Municipal Money
Market and International Small Cap Portfolios which do not have Class B shares)
pursuant to Rule12b-1 under the 1940 Act (each, a "Plan" and collectively, the
"Plans"). Under each Plan the Distributor is entitled to receive from these
Portfolios a distribution and shareholder servicing fee, which is accrued daily
and paid quarterly, at an annual rate of up to 0.25% of the average daily net
assets of the Class B shares of these Portfolios. The Distributor expects to
allocate most of its fee to its investment representatives and investment
dealers, banks or financial service firms that provide distribution and
shareholder services (each a "Participating Dealer"). The actual amount of such
compensation is agreed upon by the Fund's Board of Directors and by the
Distributor. The Distributor may, in its discretion, voluntarily waive from time
to time all or any portion of its distribution and shareholder servicing fee and
the Distributor is free to make additional payments out of its own assets to
promote the sale of Fund shares.
- 30 -
<PAGE>
The Plans obligate the Portfolios to accrue and pay to the Distributor the
fee agreed to under its Distribution Agreement. The Plans do not obligate the
Portfolios to reimburse the Distributor for the actual expenses the Distributor
may incur in fulfilling its obligations under the Plans. Thus, under each Plan,
even if the Distributor's actual expenses exceed the fee payable to it
thereunder at any given time, the Portfolios will not be obligated to pay more
than that fee. If the Distributor's actual expenses are less than the fee it
receives, the Distributor will retain the full amount of the fee. The Plans for
the Class B shares were most recently approved by the Fund's Board of Directors,
including those directors who are not "interested persons" of the Fund as that
term is defined in the 1940 Act and who have no direct or indirect financial
interest in the operation of a Plan or in any agreements related thereto, on
February 13, 1997.
The Class B shares commenced operations on January 2, 1996. Therefore, no
Rule 12b-1 fees were paid to the Distributor for the fiscal year ended
December 31, 1995. For the fiscal year ended December 31, 1996, the Fund paid to
the Distributor fees of approximately $178,205 pursuant to the Distribution Plan
in accordance with Rule 12b-1 under the 1940 Act. The U.S. Equity Plus,
Mortgage-Backed Securities, China Growth, MicroCap, European Real Estate and
Asian Real Estate Portfolios were not in operation in the fiscal year ended
December 31, 1996.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Adviser and, as described below, impose
additional, more onerous, restrictions on the Fund's investment personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Adviser.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of September 11, 1997 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University
in the City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115,
owned 22% of such Portfolio's total outstanding Class A shares.
Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598,
owned 16% of such Portfolio's total outstanding Class A shares.
Boatmen's Trust Co. Pension Plan, P.O. Box 14737, St. Louis, MO 63178-4737,
owned 10% of such Portfolio's total outstanding Class A shares.
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL
60602-4260, owned 10% of such Portfolio's total outstanding Class A shares.
The Flinn Foundation, Northern Trust Co., Master Trust Dept., 7th Floor,
P.O. Box 92984, Chicago, IL 60675, owned 8% of such Portfolio's total
outstanding Class A shares.
Wallace Global Fund, 1990 M Street, Suite 250, Washington, D.C. 20036,
owned 5% of such Portfolio's total outstanding Class A shares.
David M. & Sharon M. Platter, 9 Palmer Lane, Riverside, CT 06878, owned 97%
of such Portfolio's total outstanding Class B shares.
- 31 -
<PAGE>
AGGRESSIVE EQUITY PORTFOLIO: Ministers and Missionaries Benefit Board of
the American Baptist Churches, Attn: Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas, New York, NY 10020, owned 11% of such Portfolio's total
outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan,
P.O. Box 92956, Chicago, IL 60675-2956, owned 10% of such Portfolio's total
outstanding Class A shares.
Bank Morgan Stanley AG, Bahnogstrasse 92, Zurich CH-8023, Switzerland,
owned 6% of such Portfolio's total outstanding Class A shares.
Kinghugh S.A., c/o Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 6% of such Portfolio's total outstanding
Class A shares.
ASIAN EQUITY PORTFOLIO: Association De Biefsaissance Et De Retraite Des
Pollciers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal,
Quebec H2J1N3, owned 13% of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan,
P.O. Box 92956, Chicago, IL 60675-2956, owned 8% of such Portfolio's total
outstanding Class A shares.
Thomas J. Holce, 109 N. Lotus Beach Drive, Portland, OR 97217-8021, owned
6% of such Portfolio's total outstanding Class B shares.
Steve & Julie Gerhardt, 6030 Quail Hill Drive, Cincinnati, OH 45233, owned
6% of such Portfolio's total outstanding Class B shares.
BALANCED PORTFOLIO: Kinney Printing Co., P.O. Box 64010, St. Paul, MN
55154-0010, owned 23% of such Portfolio's total outstanding Class A shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned
17% of such Portfolio's total outstanding Class A shares.
Guarantee & Trust Company, FBO H. Conrad Meyer III, IRA Rollover, One
Woodland Avenue, Bronxville, NY 10708, owned 11% of such Portfolio's total
outstanding Class A shares.
Jeffery R. Holzschuh, 21 Kenilworth Terrace, Greenwich, CT 06830, owned 7%
of such Portfolio's total outstanding Class A shares.
William Guthrie, IRA Rollover, MSTC Custodian, 435 Sheridan Road, Winnetka,
IL 60093-2626, owned 57% of such Portfolio's total outstanding Class B shares.
Ramakrishna Kothalanka M.D., Profit Sharing Plan, MSTC Custodian, 126
Bentley Avenue, Jersey City, NJ 07304-1702, owned 31% of such Portfolio's total
outstanding Class B shares.
Maree R. Malway, Trustee, Patricia P. Franics Living Trust, Plante & Moran
LLP, 505 N. Woodward Avenue, Suite 2000, Bloomfield Hills, MI 48304-2979, owned
6% of such Portfolio's total outstanding Class B shares.
Eric J. Hall, 604 Hardscrabble Road, Chappaqua, NY 10514, owned 6% of such
Portfolio's total outstanding Class B shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan
Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 48%
of such Portfolio's total outstanding Class A shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750,
owned 19% of such Portfolio's total outstanding Class A shares.
NOAM/A/EC, c/o Philip Winters, Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas, New York, NY 10020, owned 9% of such Portfolio's total
outstanding Class A shares.
- 32 -
<PAGE>
South Trust Estate & Trust Company of Georgia, Trustee U/A Southern
Engineering Company Retirement Plans, P.O. Box 1001, Atlanta, GA 30301, owned 8%
of such Portfolio's total outstanding Class A shares.
HVA Limited Partnership, c/o H L Van Arnem, 1301 W. Newport Center Drive,
Deerfield Beach, FL 33442-7734, owned 12% of such Portfolio's total outstanding
Class B shares.
Anne W. Rohrbach, c/o Gleacher Avenue, 660 Madison Avenue, 19th Floor, New
York, NY 10021, owned 12% of such Portfolio's total outstanding Class B shares.
Lawrence M. Howell, Howell Capital, One Maritime Plaza, Suite 1700, San
Francisco, CA 94101, owned 8% of such Portfolio's total outstanding Class B
shares.
Julian Eisner, 871 Oak Lane, North Woodmere, NY 11581, owned 7% of such
Portfolio's total outstanding Class B shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned
7% of such Portfolio's total outstanding Class B shares.
Bruce S. Ives, 163 Gallows Hill Road, West Redding, CT 06896, owned 6% of
such Portfolio's total outstanding Class B shares.
William B. O'Connor, 18 Montfort Road, Port Washington, NY 11050, owned 6%
of such Portfolio's total outstanding Class B shares.
James F. & Marlene Connors, 7701 Woodmont Avenue, Apt. 801, Bethesda, MD
20814, owned 5% of such Portfolio's total outstanding Class B shares.
EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 6% of
such Portfolio's total outstanding Class A shares.
Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112,
owned 6% of such Portfolio's total outstanding Class A shares.
EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark
Street, Evanston, IL 60208-1122, owned 21% of such Portfolio's total outstanding
Class A shares.
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7%
of such Portfolio's total outstanding Class A shares.
Morgan Stanley & Co. Pension Fund, c/o Northern Trust Co., 770 Broadway,
New York, NY 10003, owned 7% of such Portfolio's total outstanding Class A
shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan,
P.O. Box 92956, Chicago, IL 60675-2956, owned 7% of such Portfolio's total
outstanding Class A shares.
Alice H. & Paul D. Bartlett, 4800 Main Street, Kansas City, MO 64112, owned
9% of such Portfolio's total outstanding Class B shares.
Daniel E. Winters, 1319 Mirror Terrace, NW, Winter Haven, FL 33881, owned
7% of such Portfolio's total outstanding Class B shares.
Dr. Russell Warren, IRA MSTC Custodian, 215 John Street, Greenwich, CT
06831-2516, owned 6% of such Portfolio's total outstanding Class B shares.
Rodriguez Living Trust, Javier & Gloria Rodriguez Trustees, 210 Saint
Katherine Drive, La Canada, CA 91011, owned 6% of such Portfolio's total
outstanding Class B shares.
Bruce A. Drummond, 1847 Onaway SE, Grand Rapids, MI 49506, owned 5% of such
Portfolio's total outstanding Class B shares.
- 33 -
<PAGE>
EQUITY GROWTH PORTFOLIO: Fidelity Management Trust Company as Trustee for
GTE Master Savings Trust, 82 Devonshire Street, Boston, MA 02109, owned 22% of
such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan,
P.O. Box 92956, Chicago, IL 60675, owned 17% of such Portfolio's total
outstanding Class A shares.
Fidelity Investments Institutional Operations Company as Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 9% of such
Portfolio's total outstanding Class A shares.
St. Raymonds Cemetery Reserve Fund, P.O. Box 92800, Rochester, NY 14692,
owned 5% of such Portfolio's total outstanding Class A shares.
EUROPEAN EQUITY PORTFOLIO: HVA Limited Partnership, 1301 W. Newport Center
Drive, Deerfield Beach, FL 33442-7734, owned 5% of such Portfolio's total
outstanding Class B shares.
FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 30% of such
Portfolio's total outstanding Class A shares.
Brooks School, c/o Mr. Frank Marino, North Andover, MA 01845, owned 6% of
such Portfolio's total outstanding Class A shares.
Burton P. Cohen, 3912 Zenith Avenue South, Minneapolis, MN 55410-1169,
owned 9% of such Portfolio's total outstanding Class B shares.
Michael S. Virgil, Trustee, Mary Ann Young Brownsey Trust, 333 N. Wabash
Avenue, 22nd Floor, Chicago, IL 60611, owned 9% of such Portfolio's total
outstanding Class B shares.
Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 8% of such
Portfolio's total outstanding Class B shares.
Catholic Medical Center of Brooklyn & Queens, Inc., Deferred Compensation
Plan, 8825 153rd Street, Apt. 1H, Jamaica, NY 11432-3748, owned 6% of such
Portfolio's total outstanding Class B shares.
Tom M. & Connie P. Dicarrado, 123 Angola Road, Cornwall, NV 12518-1109,
owned 6% of such Portfolio's total outstanding Class B shares.
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey c/o Morgan
Stanley Asset Management Inc., 25 Cabot Square, London E144QA, England, U.K.
owned 46% of such Portfolio's total outstanding Class A shares.
JM Kaplan Fund, Inc., 880 Third Avenue, 3rd Floor, New York, NY 10022,
owned 13% of such Portfolio's total outstanding Class A shares.
Kaplan, Choate Value Partners, L.P., 880 Third Avenue, New York, NY
10022-4730, owned 8% of such Portfolio's total outstanding Class A shares.
Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank,
P.O. Box 2558, Houston, TX 77252, owned 7% of such Portfolio's total outstanding
Class A shares.
Gooss & Company, c/o Chase Manhattan Bank, 1211 6th Avenue, New York, NY
10036, owned 6% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations as Agent for Certain Employee
Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 25% of such
Portfolio's total outstanding Class B shares.
Edward J. Prostic, 2225 Stratford Road, Mission Hills, KS 66208, owned 8%
of such Portfolio's total outstanding Class B shares.
Eduardo Abad Trustee, Abad Charitable Remainder Trust 1, 277 North
Deepspring, Orange, CA 92669-6505, owned 8% of such Portfolio's total
outstanding Class B shares.
- 34 -
<PAGE>
V. Marc Droppert IRA, MSTC Custodian, 13106 184th NE, Redmond, WA 98052,
owned 7% of such Portfolio's total outstanding Class B shares.
GLOBAL FIXED INCOME PORTFOLIO: American Industries Trust Company Trustee
for First Farm Credit Bank Retirement Plan, 5700 NW Central Drive, 4th Floor,
Houston, TX 77092, owned 20% of such Portfolio's total outstanding Class A
shares.
Northern Trust Company as Custodian, FBO The Lund Foundation, P.O. Box
92956, Chicago, IL 60675, owned 16% of such Portfolio's total outstanding
Class A shares.
Northern Trust Company as Custodian, FBO The LBD Foundation, P.O. Box
92956, Chicago, IL 60675, owned 6% of such Portfolio's total outstanding Class A
shares.
The Northern Trust Co. FBO Christel Dehaan Trust, P.O. Box 92956, Chicago,
IL 60675-2956, owned 6% of such Portfolio's total outstanding Class A shares.
Lakeview Holdings Ltd., Coutts & Co. (Bahamas) Ltd., P.O. Box N7788, West
Bay St., Nassau, Bahamas, owned 6% of such Portfolio's total outstanding Class A
shares.
National Bank of Commerce Trustee, FBO National Bank of Commerce Pension
Plan, c/o NBC Trust Dept., One Commerce Square, Memphis, TN 38150, owned 5% of
such Portfolio's total outstanding Class A shares.
Radiology Associates PA Employee Benefit Plan, 500 South University,
Suite 604, Little Rock, AR 72205, owned 5% of such Portfolio's total outstanding
Class A shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ, England, UK,
owned 52% of such Portfolio's total outstanding Class B shares.
George N. & Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831,
owned 15% of such Portfolio's total outstanding Class B shares.
George & Claudine Boutros, 11007 Branbrook, Houston, TX 77042, owned 11% of
such Portfolio's total outstanding Class B shares.
Paul E. & H. Anthony Hellmers, 4 Colonial Lane, Larchmont, NY 10538, owned
10% of such Portfolio's total outstanding Class B shares.
Anthony F. & Colette H. Rowland, c/o Cambrian Management, 1114 Avenue of
the Americas, New York, NY 10036, owned 9% of such Portfolio's total outstanding
Class B shares.
GOLD PORTFOLIO: Merrill Lynch Trust Co., Trustee FBO Qualified Retirement
Plans, 285 Davidson Avenue, 4th floor, Somerset, NJ 08873, owned 28% of such
Portfolio's total outstanding Class B shares.
Marshall & Ilsley Trust Company, C/F John Morey, 1000 N. Water Street,
Milwaukee, WI 53202, owned 15% of such Portfolio's total outstanding Class B
shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street,
Kansas City, MO 64112, owned 12% of such Portfolio's total outstanding Class B
shares.
Chicago Methodist Episcopal Church Aid Society, c/o Gordon Worley, 1407
Clinton Place, River Forest, IL 60305-1205, owned 10% of such Portfolio's total
outstanding Class B shares.
Steven C. Olson, 505 Knollwood Road, Ridgewood, NJ 07450, owned 9% of such
Portfolio's total outstanding Class B shares.
Priscilla & John Privat, Community Property, 8852 N.E. 24th Street,
Bellevue, WA 98004, owned 8% of such Portfolio's total outstanding Class B
shares.
Donald E. Axinn, 131 Jericho Turnpike, Jericho, NY 11753-1017, owned 7% of
such Portfolio's total outstanding Class B shares.
- 35 -
<PAGE>
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 20% of such
Portfolio's total outstanding Class A shares.
Adeliade L. Hinckley, c/o Jim Bell, Morgan Stanley/IIS Department, 1251
Avenue of the Americas, New York, NY 10020, owned 6% of such Portfolio's total
outstanding Class B shares.
INTERNATIONAL EQUITY PORTFOLIO: Vanguard Fiduciary Trust Company FBO Ball
Corp. Plan 91324, The Vanguard Group, P.O. Box 2600 VM421, Valley Forge, PA
19462, owned 16% of such Portfolio's total outstanding Class B shares.
Fleet Bank, Trustee for Third Presbyterian Church, P.O. Box 92800,
Rochester, NY 14692, owned 14% of such Portfolio's total outstanding Class B
shares.
INTERNATIONAL MAGNUM PORTFOLIO: Bankers Trust Trustee, Harris Corporation
Retirement Plan & Harris Corporation Union Retirement Plan, 1025 W. Nasa
Boulevard, Melbourne, FL 32919, owned 40% of such Portfolio's total outstanding
Class A shares.
Southwest Guaranty Trust Co., 2121 Sage Road, Suite 150, Houston, TX 77056,
owned 7% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations Company, Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 81% of such
Portfolio's total outstanding Class B shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund,
P.O. Box 241, Airport Road, Belfast, N. Ireland, owned 9% of such Portfolio's
total outstanding Class A shares.
The Skillman Foundation, Attn: Jean E. Gregory, 600 Renaissance Center,
Suite 1700, Detroit, MI 48243, owned 8% of such Portfolio's total outstanding
Class A shares.
Trustees of Boston College Attn: Paul Haran Associate Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 6% of such Portfolio's total
outstanding Class A shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General
Mills Blvd., Minneapolis, MN 55426, owned 6% of such Portfolio's total
outstanding Class A shares.
JAPANESE EQUITY PORTFOLIO: Barlett and Company, Profit Sharing Plan and
Trust, 4800 Main Street, Kansas City, MO 64112, owned 12% of such Portfolio's
total outstanding Class B shares.
Adase Partners, 106 Laurel Way, Beverly Hills, CA 90210, owned 8% of such
Portfolio's total outstanding Class B shares.
Paul M. & Shirley F. Mathews, 25 W. 706 Jerome Avenue, Wheaton, IL 60187,
owned 6% of such Portfolio's total outstanding Class B shares.
William & Brenda Castonguay, 9101 Hometown Drive, Raleigh, NC 27615, owned
6% of such Portfolio's total outstanding Class B shares.
Wayne Gretzky Trustee of the Gretzky Trust of 1989, 9100 Wilshire
Boulevard, Beverly Hills, CA 90210, owned 5% of such Portfolio's total
outstanding Class B shares.
LATIN AMERICAN PORTFOLIO: Marc Andreessen, Trustee FBO Marc Andreessen
1996 Living Trust, 16615 Lark Avenue, Apt. 101, Los Gatos, CA 95030, owned 10%
of such Portfolio's total outstanding Class B shares.
Pinnacle Trading, LLC, P.O. Box 28918, Fresno, CA 93729-8918, owned 8% of
such Portfolio's total outstanding Class B shares.
Robert M. & Anne D. Buxton, 888 Park Avenue, Apt. 8C, New York, NY 10021,
owned 8% of such Portfolio's total outstanding Class B shares.
Joseph M. Haggar, Jr., 16800 Dallas Parkway, Suite 120, Dallas, TX 75248,
owned 5% of such Portfolio's total outstanding Class B shares.
- 36 -
<PAGE>
Horizon Cons Ltd. Profit Sharing Plan, Horizon Cons Ltd. Money Purchase
Plan, 615 Colonial Park Drive, #201, Roswell, GA 30075, owned 5% of such
Portfolio's total outstanding Class B shares.
Chicago Methodist Episcopal Church Aid Society, c/o Gordon Worley, 1407
Clinton Place, River Forest, IL 60305-1205, owned 5% of such Portfolio's total
outstanding Class B shares.
MUNICIPAL BOND PORTFOLIO: Daniel F. and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 10% of such Portfolio's total
outstanding Class A shares.
Frank R. Mori, 935 Park Avenue, New York, NY 10028, owned 8% of such
Portfolio's total outstanding Class A shares.
Arnold E. and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA
93108-1421, owned 7% of such Portfolio's total outstanding Class A shares.
Cushman Trust, c/o Cambrian Services, 1114 Avenue of the Americas,
Suite 2702, New York, NY 10036, owned 7% of such Portfolio's total outstanding
Class A shares.
Sevenson Environmental Services, P.O. Box 396, 2749 Lockport Road, Niagara
Falls, NY 14305, owned 7% of such Portfolio's total outstanding Class A shares.
Donna Karan, c/o Stephan Weiss, The Donna Karan Company, 550 Seventh
Avenue, New York, NY 10018, owned 6% of such Portfolio's total outstanding
Class A shares.
SMALL CAP VALUE EQUITY PORTFOLIO: Barlett and Company, Profit Sharing Plan
and Trust, 4800 Main Street, Kansas City, MO 64112, owned 7% of such Portfolio's
total outstanding Class B shares.
James E. Himoff, IRA Rollover, 7201 State Route 8, Grant Lake, NY
12815-2236, owned 5% of such Portfolio's total outstanding Class B shares.
TECHNOLOGY PORTFOLIO: Valassis Enterprises-Equity, c/o Franklin
Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 19% of
such Portfolio's total outstanding Class A shares.
Goolock Associates, c/o Oppenheimer & Co. Inc., 200 Liberty Street, New
York, NY 10281, owned 14% of such Portfolio's total outstanding Class A shares.
Bruce W. Bastian and McKay S. Matthews, Trustees FBO Bruce W. Bastian
Charitable Trust, 51 West Center #755, Orem, UT 84057-4605 owned 14% of such
Portfolio's total outstanding Class A shares.
Martha Tredgett, 312 Bleeker Street, New York, NY 10014-3425, owned 12% of
such Portfolio's total outstanding Class B shares.
Donald L. Gustafson, IRA Rollover, MSTC Custodian, 3420 Norman Drive, Reno,
NV 85909-5089 owned 7% of such Portfolio's total outstanding Class B shares.
Dr. Murray J. Klauber, 1620 Gulf of Mexico Drive, Longboat Key, FL
34228-3403, owned 7% of such Portfolio's total outstanding Class B shares.
Paul Krieger, 23 Fairview Avenue, Great Neck, NY 11023, owned 5% of such
Portfolio's total outstanding Class B shares.
U.S. EQUITY PLUS PORTFOLIO: Morgan Stanley, Dean Witter, Discover & Co.,
1221 Avenue of the Americas, New York, NY 10020, owned 56% of such Portfolio's
total outstanding Class A shares.
The Flinn Foundation, Northern Trust Co., Master Trust Department, 7th
Floor, P.O. Box 92984, Chicago, IL 60675, owned 44% of such Portfolio's total
outstanding Class A shares.
Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, New
York, NY 10020, owned 100% of such Porfolio's total outstanding Class B shares.
- 37 -
<PAGE>
U.S. REAL ESTATE PORTFOLIO: Northern Trust Company Trustee, FBO Anderson
Worldwide Profit Sharing 401(k) Retirement Trust, P.O. Box 92956DV, Chicago, IL
60675, owned 13% of such Portfolio's total outstanding Class A Shares.
Northwestern University, Attn: Investment Department, 633 Clark Street,
Suite 1-209, Evanston, IL 60208, owned 8% of such Portfolio's total outstanding
Class A shares.
Morgan Stanley & Co. Pension Fund, c/o Northern Trust Company Cust, 770
Broadway, New York, NY 10003, owned 7% of such Portfolio's total outstanding
Class A shares.
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 6% of such Portfolio's total outstanding Class A Shares.
European Patent Organization Pension Reserve Fund, Erhardt Strasse 27,
Munich, 80331 Germany, owned 5% of such Portfolio's total outstanding Class A
shares.
Merrill Lynch Trust Co., Trustee of FBO Qualified Retirement Plans, 265
Davidson Avenue, 4th Floor, Somerset, NJ 08873, owned 45% of such Portfolio's
total outstanding Class B shares.
VALUE EQUITY PORTFOLIO: Alice H. Bartlett Trust, Paul D. Bartlett, Jr.,
Trustee, 4800 Main Street, Kansas City, MO 64112, owned 19% of such Portfolio's
total outstanding Class B shares.
Paul D. Bartlett, Jr., 4800 Main Street, Suite 600, Kansas City, MO 64112,
owned 13% of such Portfolio's total outstanding Class B shares.
R. Douglas Spedding, c/oTrustee of R. Douglas Spedding 1996 Trust, 4380 E.
Alameda, Glendale, CO 80222, owned 11% of such Portfolio's total outstanding
Class B shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ, England, UK,
owned 8% of such Portfolio's total outstanding Class B shares.
First United Methodist Church of Chicago - Endowment Fund, 77 West
Washington, Chicago, IL 60602, owned 6% of such Portfolio's total outstanding
Class B shares.
George N. & Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831,
owned 6% of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust, 333 N. Wabash Avenue, 22nd Floor, Chicago, IL
60611, owned 6% of such Portfolio's total outstanding Class B shares.
Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648-2321, owned 5% of
such Portfolio's total outstanding Class B shares.
NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS
The Money Market Portfolio and the Municipal Money Market Portfolio seek to
maintain a stable net asset value per share of $1.00. These Portfolios use the
amortized cost method of valuing their securities, which does not take into
account unrealized gains or losses. The use of amortized cost and the
maintenance of each Portfolio's per share net asset value at $1.00 is based on
the Portfolio's election to operate under the provisions of Rule 2a-7 under the
1940 Act. As a condition of operating under that Rule, each of the Money Market
Portfolios must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less, and invest only in securities which are of "eligible quality" as
determined in accordance with regulations of the Commission.
The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and each
Portfolio's investment objectives, to stabilize the net asset value per share as
computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Directors deem appropriate and at such intervals
as are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such
- 38 -
<PAGE>
review, investments for which market quotations are readily available are valued
at the most recent bid price or quoted yield available for such securities or
for securities of comparable maturity, quality and type as obtained from one or
more of the major market makers for the securities to be valued. Other
investments and assets are valued at fair value, as determined in good faith by
the Directors.
In the event of a deviation of over 1/2 of 1% between a Portfolio's net
asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Directors will promptly consider
what action, if any, should be taken. The Directors will also take such action
as they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise from
differences between the two. Such action may include redemption in kind, selling
instruments prior to maturity to realize capital gains or losses or to shorten
the average maturity, withholding dividends, paying distributions from capital
or capital gains or utilizing a net asset value per share as determined by using
available market quotations.
There are various methods of valuing the assets and of paying dividends and
distributions from a money market fund. Each of the Money Market and Municipal
Money Market Portfolios values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since dividends
from net investment income will be declared daily and paid monthly, the net
asset value per share of each Portfolio will ordinarily remain at $1.00, but
each Portfolio's daily dividends will vary in amount. Net realized gains, if
any, will normally be declared and paid monthly.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolios' past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations used by the Fund are based
on the standardized methods of computing performance mandated by the Commission.
An explanation of those and other methods used by the Fund to compute or express
performance follows.
TOTAL RETURN
From time to time each Portfolio, except the Money Market and Municipal
Money Market Portfolios, may advertise total return for each class of shares of
the Portfolio. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10- year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10- year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.
The average annual compounded rates of return (unless otherwise noted) for
the Fund's Portfolios for the one year and five year periods ended December 31,
1996 and for the period from inception through December 31, 1996 are as follows:
<TABLE>
<CAPTION>
INCEPTION AVERAGE ANNUAL AVERAGE ANNUAL
NAME OF PORTFOLIO+ DATE ONE YEAR FIVE YEAR SINCE INCEPTION
- ------------------ --------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Active Country Allocation
Class A. . . . . . . . . . . . . . . 1/17/92 9.71% N/A 8.71%
Class B . . . . . . . . . . . . . . 1/02/96 9.22% N/A N/A
Aggressive Equity
Class A. . . . . . . . . . . . . . . 3/08/95 40.90% N/A 45.98%
Class B. . . . . . . . . . . . . . . 1/02/96 39.72% N/A N/A
Asian Equity
Class A. . . . . . . . . . . . . . . 7/01/91 3.49% 19.35% 18.28%
Class B. . . . . . . . . . . . . . . 1/02/96 2.92% N/A N/A
Balanced
Class A. . . . . . . . . . . . . . . 2/20/90 10.93% 10.15% 10.39%
Class B. . . . . . . . . . . . . . . 1/02/96 10.24% N/A N/A
Emerging Growth
Class A. . . . . . . . . . . . . . . 11/01/89 3.72% 4.10% 11.96%
Class B. . . . . . . . . . . . . . . 1/02/96 3.58% N/A N/A
</TABLE>
- 39 -
<PAGE>
<TABLE>
<CAPTION>
INCEPTION AVERAGE ANNUAL AVERAGE ANNUAL
NAME OF PORTFOLIO+ DATE ONE YEAR FIVE YEAR SINCE INCEPTION
- ------------------ --------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Emerging Markets
Class A. . . . . . . . . . . . . . . 9/25/92 12.19% N/A 12.93%
Class B. . . . . . . . . . . . . . . 1/02/96 11.04% N/A N/A
Emerging Markets Debt
Class A. . . . . . . . . . . . . . . 2/01/94 50.52% N/A 18.94%
Class B. . . . . . . . . . . . . . . 1/02/96 48.52% N/A N/A
Equity Growth
Class A. . . . . . . . . . . . . . . 4/02/91 30.97% 16.99% 17.06%
Class B. . . . . . . . . . . . . . . 1/02/96 29.92% N/A N/A
European Equity
Class A. . . . . . . . . . . . . . . 4/02/93 22.29% N/A 19.62%
Class B. . . . . . . . . . . . . . . 1/02/96 20.76% N/A N/A
Fixed Income
Class A. . . . . . . . . . . . . . . 5/15/91 4.61% 7.00% 8.35%
Class B. . . . . . . . . . . . . . . 1/02/96 4.35% N/A N/A
Global Equity
Class A. . . . . . . . . . . . . . . 7/15/92 22.83% N/A 19.22%
Class B. . . . . . . . . . . . . . . 1/02/96 22.04% N/A N/A
Global Fixed Income
Class A. . . . . . . . . . . . . . . 5/01/91 6.44% 7.17% 8.50%
Class B. . . . . . . . . . . . . . . 1/02/96 6.12% N/A N/A
Gold
Class A. . . . . . . . . . . . . . . 2/01/94 16.94% N/A 6.80%
Class B. . . . . . . . . . . . . . . 1/02/96 13.21% N/A N/A
High Yield
Class A. . . . . . . . . . . . . . . 9/28/92 15.01% N/A 12.91%
Class B. . . . . . . . . . . . . . . 1/02/96 14.37% N/A N/A
International Equity
Class A. . . . . . . . . . . . . . . 8/04/89 19.64% 16.41% 11.96%
Class B. . . . . . . . . . . . . . . 1/02/96 18.58% N/A N/A
International Magnum
Class A. . . . . . . . . . . . . . . 3/15/96 8.25%* N/A N/A
Class B. . . . . . . . . . . . . . . 3/15/96 7.90%* N/A N/A
International Small Cap
Class A. . . . . . . . . . . . . . . 12/15/92 16.82% N/A 16.42%
Japanese Equity
Class A. . . . . . . . . . . . . . . 4/25/94 -1.40% N/A -2.51%
Class B. . . . . . . . . . . . . . . 1/02/96 -1.67% N/A N/A
Latin American
Class A. . . . . . . . . . . . . . . 1/18/95 48.77% N/A 16.98%
Class B. . . . . . . . . . . . . . . 1/02/96 42.44% N/A N/A
Municipal Bond
Class A. . . . . . . . . . . . . . . 1/18/95 3.67% N/A 6.36%
Class B. . . . . . . . . . . . . . . 1/02/96 3.55% N/A N/A
Small Cap Value Equity
Class A. . . . . . . . . . . . . . . 12/17/92 22.99% N/A 14.32%
Class B. . . . . . . . . . . . . . . 1/02/96 22.33% N/A N/A
U.S. Real Estate
Class A. . . . . . . . . . . . . . . 2/24/95 39.56% N/A 32.73%
Class B. . . . . . . . . . . . . . . 1/02/96 38.23% N/A N/A
Value Equity
Class A. . . . . . . . . . . . . . . 1/31/90 19.73% 14.92% 12.95%
Class B. . . . . . . . . . . . . . . 1/02/96 18.57% N/A N/A
</TABLE>
- 40 -
<PAGE>
- ----------
+ The China Growth, Mortgage Backed Securities, MicroCap, U.S. Equity Plus,
Asian Real Estate and European Real Estate Portfolios had not commenced
operations as of December 31, 1996.
* Cumulative (unannualized) total return since inception of the Portfolio.
These figures were calculated according to the following formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000
payment made at the beginning of the 1-, 5-, or
10- year periods at the end of the 1-, 5- or 10-
year periods (or fractional portion thereof).
CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS
From time to time certain of the Fund's Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
The respective current yields for certain of the Fund's Portfolios for the
30-day period ended December 31, 1996 were as follows:
PORTFOLIO NAME CLASS A SHARES CLASS B SHARES
- -------------- -------------- --------------
Emerging Markets Debt . . . . 10.46% 10.16%
Fixed Income. . . . . . . . . 6.39% 6.27%
Global Fixed Income . . . . . 4.91% 4.76%
High Yield. . . . . . . . . . 9.31% 9.05%
Municipal Bond. . . . . . . . 4.35% 4.11%
These figures were obtained using the following formula:
6
Yield = 2[a - b + 1) - 1
-----------------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares outstanding
during theperiod that were entitled to receive
income distributions
- 41 -
<PAGE>
d = the maximum offering price per share on the last
day of theperiod.
CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS
The current yield of the Money Market and Municipal Money Market Portfolios
is calculated daily on a base period return for a hypothetical account having a
beginning balance of one share for a particular period of time (generally 7
days). The return is determined by dividing the net change (exclusive of any
capital changes in such account) by its average net asset value for the period,
and then multiplying it by 365/7 to determine the annualized current yield. The
calculation of net change reflects the value of additional shares purchased with
the dividends by the Portfolio, including dividends on both the original share
and on such additional shares. The yields of the Money Market and Municipal
Money Market Portfolios for the 7-day period ended December 31, 1996 were 4.99%
and 3.38%, respectively. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for each Portfolio by dividing the
base period return by 7, adding 1 to the quotient, raising the sum to the 365th
power, and subtracting 1 from the result. The effective yields of the Money
Market and Municipal Money Market Portfolios for the 7-day period ended
December 31, 1996 were 5.11% and 3.43%, respectively.
The yield of a Portfolio will fluctuate. The annualization of a week's
dividend is not a representation by the Portfolio as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as investment quality, average maturity, the type of instruments
the Portfolio invests in, changes in interest rates on instruments, changes in
the expenses of the Fund and other factors. Yields are one basis investors may
use to analyze the Portfolios of the Fund, and other investment vehicles;
however, yields of other investment vehicles may not be comparable because of
the factors set forth in the preceding sentence, differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.
TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND
AND MUNICIPAL MONEY MARKET PORTFOLIO
It is easy to calculate your own taxable equivalent yield if you know your
tax bracket. The formula is:
Tax Free Yield = Your Taxable Equivalent Yield
--------------
1 - Your Tax Bracket
For example, if you are in the 28% tax bracket and can earn a tax-free
yield of 7.5%, the taxable equivalent yield would be 10.42%.
The table below indicates the advantages of investments in Municipal Bonds
for certain investors. Tax-exempt rates of interest payable on a Municipal Bond
(shown at the top of each column) are equivalent to the taxable yields set forth
opposite the respective income tax levels, based on income tax rates effective
for the tax year 1996 under the Internal Revenue Code. There can, of course, be
no guarantee that the Municipal Bond Portfolio or Municipal Money Market
Portfolio will achieve a specific yield. Also, it is possible that some portion
of the Portfolio's dividends may be subject to Federal income taxes. A
substantial portion, if not all, of such dividends may be subject to state and
local taxes.
- 42 -
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT RATES BASED ON TAX-EXEMPT YIELD OF:
----------------------------------------------------------------------------
SAMPLE LEVEL OF FEDERAL
TAXABLE INCOME INCOME
--------------- TAX
JOINT RETURN SINGLE RETURN BRACKETS 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ------------ ------------- -------- -- -- -- -- -- -- -- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9%
39,000-94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2
over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
</TABLE>
- ----------
* Net amount subject to 1996 Federal Income Tax after deductions and
exemptions, not indexed for 1996 income tax rates.
The taxable equivalent yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1996 assuming a Federal
income tax rate of 39.6% (maximum rate), were 5.60% and 6.44%, respectively. The
taxable equivalent effective yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1996, assuming the same
tax rate, were 5.68% and 6.57%, respectively.
COMPARISONS
To help investors better evaluate how an investment in a Portfolio of
Morgan Stanley Institutional Fund, Inc. might satisfy their investment
objective, advertisements regarding the Fund may discuss various measures of
Fund performance as reported by various financial publications. Advertisements
may also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may be used:
(a) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- -- analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(b) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper Analytical Services, Inc.,
Morningstar, Inc., New York Times, Personal Investor, Wall Street Journal and
Weisenberger Investment Companies Service -- publications that rate fund
performance over specified time periods.
(c) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers and Bloomberg L.P.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed Income
Fund Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Ranks individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
(e) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes
price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the U.S.
Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson Associates --
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, U.S. Treasury bills and inflation.
- 43 -
<PAGE>
The following indices and averages may also be used:
(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and 30%
NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock Index and 65% Salomon
Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and
35% Salomon Brothers High Grade Bond Index.
(b) Consumer Price Index (or cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
(c) Donoghue's Money Fund Average -- an average of all major money market
fund yields, published weekly for 7- and 30-day yields.
(d) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(e) CS First Boston High Yield Index -- generally includes over 180 issues
with an average maturity range of seven to ten years with a minimum
capitalization of $100 million. All issues are individually trader-priced
monthly.
(f) CS First Boston Upper/Middle Tier High Yield Index -- an unmanaged
index of bonds rated B to BBB.
(g) Goldman Sachs 100 Convertible Bond Index -- currently includes 67
bonds and 33 preferred. The original list of names was generated by screening
for convertible issues of 100 million or greater in market capitalization. The
index is priced monthly.
(h) IFC Global Total Return Composite Index -- an unmanaged index of
common stocks and includes 18 developing countries in Latin America, East and
South Asia, Europe, the Middle East and Africa (net of dividends reinvested).
(i) Indata Balanced-Median Index -- an unmanaged index and includes an
asset allocation of 2.5% cash, 38.2% bonds and 59.3% equity based on $52.6
billion in assets among 579 portfolios for the year ended December 31, 1996
(assumes dividends reinvested).
(j) Indata Equity-Median Stock Index -- an unmanaged index which includes
an average asset allocation of 7.4% cash and 92.6% equity based on $464.9
billion in assets among 1,277 portfolios for the year ended December 31, 1996.
(k) J.P. Morgan Emerging Markets Bond Index -- a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
(l) J.P. Morgan Emerging Markets Bond Index Plus -- expanding on the J.P.
Morgan Emerging Markets Bond Index, which only trades Brady Bonds, this index
reflects total returns for external debt instruments which have been traded in
emerging markets. Brady Bonds are included amoung such instruments, as well as
Eurobonds, loans and U.S. dollar denominated local market instruments. Countries
included in the index are Argentina, Brazil, Bulgaria, Ecuador, Mexico, Morocco,
Nigeria, Panama, Peru, the Phillipines, Poland, Russia, South Africa and
Venezuela. A more comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from these countries. At $96 billion, its market cap is nearly 50%
higher than the EMBI's. The EMBI+ is not, however, intended to replace the EMBI
but rather to complement it. The EMBI continues to represent the most liquid,
most easily traded segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these indices are
published daily.
(m) J.P. Morgan Traded Global Bond Index -- an unmanaged index of
securities and includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, The Netherlands, Spain, Sweden, United Kingdom and the United
States.
(n) Lehman Brothers Aggregate Bond Index -- an unmanaged index made up of
the Government/Corporate Index, the Mortgage- Backed Securities Index and the
Asset-Backed Securities Index.
(o) Lehman Brothers LONG-TERM Treasury Bond -- composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of 10 years
or greater.
(p) The Lehman 7 Year Municipal Bond Index -- an unmanaged index which
consists of investment grade bonds with maturities between 6-8 years rated BAA
or better. All bonds have been taken from deals done within the last 5 years,
with assets of $50 million or larger.
- 44 -
<PAGE>
(q) Lipper Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(r) Morgan Stanley Capital International Combined Far East Free ex-Japan
Index -- a market-capitalization weighted index comprising stocks in China Free
Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and
Thailand. Korea is included in the MSCI Combined Far East Free ex-Japan Index at
20% of its market capitalization.
(s) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900 securities on the
stock exchanges of countries in Europe, Australia and the Far East.
(t) Morgan Stanley Capital International Emerging Markets Global Latin
America Index -- an unmanaged, arithmetic market value weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela (Assumes reinvestment of dividends).
(u) Morgan Stanley Capital International Europe Index -- an unmanaged
index of common stocks and includes 14 countries throughout Europe.
(v) Morgan Stanley Capital International Japan Index -- an unmanaged index
of common stocks.
(w) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index covering at least 60%
of markets in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela
(assumes dividends reinvested).
(x) Morgan Stanley Capital International World Index -- an arithmetic,
market value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.
(y) NASDAQ Composite Index -- an unmanaged index of common stocks.
(z) NASDAQ Industrial Index -- a capitalization-weighted index composed of
more than 3,000 domestic stocks taken from the following industry sectors:
agriculture, mining, construction, manufacturing, electronic components,
services and public administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
(aa) National Association of Real Estate Investment Trusts ("NAREIT") Index
- -- an unmanaged market weighted index of tax qualified REITs (excluding
healthcare REITs) listed on the New York Stock Exchange, American Stock Exchange
and the NASDAQ National Market System including dividends.
(bb) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation and finance
company stocks listed on the New York Stock Exchange.
(cc) Philadelphia Gold and Silver Index -- an unmanaged index comprised of
seven leading companies involved in the mining of gold and silver.
(dd) Russell 2000 Growth Index -- comprised of those Russell 2000
Securities with an above-average growth orientation. Here, securities tend to
exhibit higher price-to-book and price-earnings ratios, lower divided yields and
higher forecasted growth than the Value universe.
(ee) Russell 2500 Index -- comprised of the bottom 500 stocks in the
Russell 1000 Index which represents the universe of stocks from which most
active money managers typically select; and all the stocks in the Russell 2000
Index. The largest security in the index has a market capitalization of
approximately 1.3 billion.
(ff) Salomon Brothers GNMA Index -- includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the Government
National Association.
(gg) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
(hh) Salomon Brothers Broad Investment Grade Bond -- a market-weighted
index that contains approximately 4700 individually priced investment grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and mortgage
pass-through securities.
- 45 -
<PAGE>
(ii) Standard & Poor's 500 Stock Index or its component indices --
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities company stocks and 20 transportation stocks. Comparisons of
performance assume reinvestment of dividends.
(jj) Standard & Poor's Small Cap 600 Index -- a capitalization-weighted
index of 600 domestic stocks having market capitalizations which reside within
the 50th and the 83rd percentiles of the market capitalization of the entire
stock market, chosen for certain liquidity characteristics and for industry
representation.
(kk) Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
(ll) Lipper Science and Technology Fund Index -- a composite index of the
mutual funds which invest at least 65% of their assets in science and technology
stocks.
(mm) Hambrecht and Quist Technology Index -- an index of computer and chip
makers, biotechnology concerns and other high- tech companies.
(nn) Sound View Technology Index -- an unweighted index consisting of more
than 100 technology companies.
(oo) Morgan Stanley High Tech 35 Index -- an index comprised of
thirty-five technology stocks chosen by Morgan Stanley.
(pp) Pacific Stock Exchange Index -- an index consisting of approximately
100 technololgy and healthcare technology concerns.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Fund's
Portfolios, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by the Fund to calculate its futures. In addition, there can be no
assurance that the Fund will continue this performance as compared to such other
averages.
GENERAL PERFORMANCE INFORMATION
Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, a Portfolio's performance may be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. The Portfolios may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the
Portfolios. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Portfolios may include in advertisements, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, foreign securities, stocks,
bonds, treasury bills and shares of a Portfolio. In addition, advertisements may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio
- 46 -
<PAGE>
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives. Advertisements may include lists
of representative Morgan Stanley clients. The Portfolios may also from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Portfolio investment are reinvested by being paid in
additional Portfolio shares, any future income or capital appreciation of a
Portfolio would increase the value, not only of the original investment in the
Portfolio, but also of the additional Portfolio shares received through
reinvestment.
The Portfolios may include in their advertisements, discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, goal setting, questionnaires
designed to help create a personal financial profile, worksheets used to project
savings needs based on assumed rates of inflation and hypothetical rates of
return and action plans offering investment alternatives), investment management
techniques, policies or investment suitability of a Portfolio (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic account rebalancing, the advantages and disadvantages
of investing in tax-deferred and taxable investments). Advertisements and sales
materials relating to a Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by Morgan Stanley; and the
portfolio manager's goals, strategies and investment techniques.
The Portfolios' advertisements may discuss economic and political
conditions of the United States and foreign countries, the relationship between
sectors of the U.S., a foreign, or the global economy and the U.S., a foreign,
or the global economy as a whole and the effects of inflation. The Portfolios
may include discussions and illustrations of the growth potential of various
global markets including, but not limited to, Africa, Asia, Europe, Latin
America, North America, South America, Emerging Markets and individual
countries. These discussions may include the past performance of the various
markets or market sectors; forecasts of population, gross national product and
market performance; and the underlying data which supports such forecasts. From
time to time, advertisements, sales literature, communications to shareholders
or other materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio.
The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures to those
of other funds. Measures of volatility seek to compare the historical share
price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit the
Directors to issue 38 billion shares of common stock, par value $.001 per share,
from an unlimited number of classes ("Portfolios") of shares. Currently the Fund
consists of shares of thirty-two Portfolios (the China Growth, Mortgage-Backed
Securities and MicroCap Portfolios are not currently offering shares).
The shares of each Portfolio of the Fund are fully paid and nonassessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each Portfolio of the Fund have no pre-emptive
rights. The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so. A shareholder
is entitled to one vote for each full share held (and a fractional vote for each
fractional share held), then standing in his name on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- 47 -
<PAGE>
The Fund's policy is to distribute substantially all of each Portfolio's
net investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes for shareholders subject to tax as set
forth herein and in the applicable Prospectus.
As set forth in the Prospectuses, unless the shareholder elects otherwise
in writing, all dividends and capital gains distributions for a class of shares
are automatically received in additional shares of such class of that Portfolio
of the Fund at net asset value (as of the business day following the record
date). This automatic reinvestment of dividends and distributions will remain in
effect until the Fund is notified by the shareholder in writing at least three
days prior to the record date that either the Income Option (income dividends in
cash and capital gains distributions in additional shares at net asset value) or
the Cash Option (both income dividends and capital gains distributions in cash)
has been elected.
CUSTODY ARRANGEMENTS
Chase is the Fund's custodian for domestic and certain foreign assets.
Chase is not affiliated with Morgan Stanley & Co. Incorporated. Morgan Stanley
Trust Company, Brooklyn, NY, acts as the Fund's custodian for foreign assets
held outside the United States and employs subcustodians who were approved by
the Directors of the Fund in accordance with Rule 17f -5 adopted by the
Commission under the 1940 Act. Morgan Stanley Trust Company is an affiliate of
Morgan Stanley & Co. Incorporated. In the selection of foreign subcustodians,
the Directors consider a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to provide efficiently the custodial services required for the Fund,
and the reputation of the institution in the particular country or region.
ADVISER'S USE OF COMPANIES COMPRISING THE S&P 500 INDEX
The Adviser uses the 500 companies included in the S&P 500 Index as the
universe of potential investments for the U.S. Equity Plus Portfolio. The U.S.
Equity Plus Portfolio is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to investors in the U.S. Equity
Plus Portfolio or any member of the public regarding the advisability of
investing in the U.S. Equity Plus Portfolio or the ability of the S&P 500 Index
to track general stock market performance. S&P's only relationship to the
Adviser is the licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined, composed and calculated by S&P without regard
to the Adviser or the U.S. Equity Plus Portfolio. S&P has no obligation to take
the needs of the Adviser or the investors in the U.S. Equity Plus Portfolio into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for, does not participate in and has no obligation or liability
in connection with the management, administration or marketing of the U.S.
Equity Plus Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO THE PERFORMANCE OF THE ADVISER OR THE U.S. EQUITY PLUS PORTFOLIO,
AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) ARISING OUT OF ANY USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
- 48 -
<PAGE>
DESCRIPTION OF RATINGS
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
Excerpts from Moody's Investors Service, Inc. ("Moody's") Description of
Bond Ratings: Aaa -- Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa --
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category. A -- Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa -- Bonds
which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba -- Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B -- Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Caa -- Bonds which are rated Caa are
of poor standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest. Ca -- Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C -- Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
EXCERPTS FROM S&P'S DESCRIPTION OF BOND RATINGS: AAA -- Bonds rated AAA
have the highest rating assigned by Standard & Poor's to a debt obligation and
indicate an extremely strong capacity to pay principal and interest. AA -- Bonds
rated AA have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only to a small degree. A -- Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories. BBB -- Debt rated BBB
is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than for
debt in higher rated categories. BB, B, CCC, CC -- Debt rated BB, B, CCC and CC
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C -- The rating C is reserved for income
bonds on which no interest is being paid. D -- Debt rated D is in default, and
payment of interest and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1
- -- best quality, enjoying strong protection from established cash flows of funds
for their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: SP-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
- 49 -
<PAGE>
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended December 31,
1996, including notes thereto and the report of Price Waterhouse LLP are herein
incorporated by reference from the Fund's Annual Report. A copy of the Fund's
Annual Report to Shareholders must accompany the delivery of this Statement of
Additional Information. The China Growth, Mortgage-Backed Securities, MicroCap,
U.S. Equity Plus, European Real Estate and Asian Real Estate Portfolios had not
commenced operations at December 31, 1996.
- 50 -
<PAGE> 1
[1997 ANNUAL REPORT/FINANCIAL STATEMENT LOGO]
[MAS FUNDS LOGO]
[MAS FUNDS LOGO]
<PAGE> 2
We are pleased to present the Annual Report for the Portfolios of MAS Funds
listed below. Please call your Miller Anderson & Sherrerd service contact at
800-354-8185 with any questions regarding these Financial Statements.
TABLE OF CONTENTS
Statement of Net Assets
<TABLE>
<S> <C>
Value Portfolio.......................... 1
Equity Portfolio......................... 4
Small Cap Value Portfolio................ 8
International Equity Portfolio........... 12
Mid Cap Growth Portfolio................. 15
Mid Cap Value Portfolio.................. 18
Emerging Markets Portfolio............... 21
Fixed Income Portfolio................... 23
Domestic Fixed Income Portfolio.......... 32
High Yield Portfolio..................... 38
Cash Reserves Portfolio.................. 43
Fixed Income Portfolio II................ 45
Mortgage-Backed Securities Portfolio..... 51
Limited Duration Portfolio............... 55
Special Purpose Fixed Income Portfolio... 60
Municipal Portfolio...................... 67
PA Municipal Portfolio................... 72
Global Fixed Income Portfolio............ 76
International Fixed Income Portfolio..... 79
Intermediate Duration Portfolio.......... 81
Balanced Portfolio....................... 88
Multi-Asset-Class Portfolio.............. 98
Statement of Operations..................... 110
Statement of Changes in Net Assets.......... 115
Financial Highlights........................ 122
Notes to Financial Statements............... 140
Report of Independent Accountants........... 152
</TABLE>
THIS ANNUAL REPORT CONTAINS CERTAIN INVESTMENT RETURN INFORMATION. PAST
PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH EITHER MORE OR LESS THAN THEIR ORIGINAL COST.
THIS REPORT HAS BEEN PREPARED FOR SHAREHOLDERS AND MAY BE DISTRIBUTED TO OTHERS
ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 3
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
VALUE
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (81.2%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
BANKS (7.6%)
Bank of New York Co. 684,085 $ 32,836
Chase Manhattan Corp. 581,817 68,654
Citicorp 290,480 38,906
Crestar Financial Corp. 329,268 15,434
First Union Corp. 625,682 31,323
Mellon Bank Corp. 606,696 33,217
Republic New York Corp. 271,601 30,861
Signet Banking Corp. 634,309 34,411
- ------------------------------------------------------
GROUP TOTAL 285,642
- ------------------------------------------------------
BASIC RESOURCES (5.7%)
Cabot Oil & Gas Corp., Class A 690,842 18,610
Dow Chemical Co. 370,275 33,579
E.I. DuPont de Nemours & Co. 466,068 28,692
IMC Global, Inc. 591,694 20,857
Great Lakes Chemical Corp. 947,218 46,710
Inland Steel Industries, Inc. 671,500 14,689
Rohm & Haas Co. 365,456 35,061
Westvaco Corp. 483,420 17,433
- ------------------------------------------------------
GROUP TOTAL 215,631
- ------------------------------------------------------
CONSUMER DURABLES (8.7%)
Dana Corp. 706,351 34,876
Ford Motor Co. 2,330,530 105,456
General Motors Corp. 872,309 58,390
Goodyear Tire & Rubber Co. 1,117,013 76,795
Owens Corning 937,341 34,213
Tupperware Corp. 686,576 19,310
- ------------------------------------------------------
GROUP TOTAL 329,040
- ------------------------------------------------------
CONSUMER SERVICES (0.3%)
Standard Register Co. 350,311 11,670
- ------------------------------------------------------
CREDIT & FINANCE/ INVESTMENT COMPANIES (1.4%)
Capital One Financial Corp. 764,680 34,984
Federal National Mortgage
Association 410,356 19,287
- ------------------------------------------------------
GROUP TOTAL 54,271
- ------------------------------------------------------
ENERGY (8.1%)
Amoco Corp. 398,136 38,370
Atlantic Richfield Co. 478,956 40,921
British Petroleum plc ADR 447,442 40,633
El Paso Natural Gas Co. 423,506 25,649
MAPCO, Inc. 841,108 27,704
Phillips Petroleum Co. 795,595 41,073
Repsol SA ADR 743,210 32,237
<CAPTION>
VALUE
SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
Ultramar Diamond Shamrock
Corp. 601,090 $ 19,423
YPF SA ADR 1,105,038 40,748
- ------------------------------------------------------
GROUP TOTAL 306,758
- ------------------------------------------------------
FOOD, TOBACCO & OTHER (4.5%)
IBP, Inc. 896,903 21,189
Philip Morris Co., Inc. 1,706,405 70,923
RJR Nabisco Holdings Corp. 1,427,490 49,070
Universal Foods Corp. 722,247 29,070
- ------------------------------------------------------
GROUP TOTAL 170,252
- ------------------------------------------------------
HEALTH CARE (4.6%)
Beckman Instruments, Inc. 952,399 40,536
Bergen Brunswig Corp., Class A 533,908 21,557
Columbia/HCA Healthcare Corp. 1,172,161 33,700
* Foundation Health Corp. 1,092,185 34,950
Mallinckrodt, Inc. 748,851 26,959
* Maxicare Health Plans, Inc. 812,360 15,130
- ------------------------------------------------------
GROUP TOTAL 172,832
- ------------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (19.8%)
Aeroquip-Vickers, Inc. 1,416,976 69,432
* AMR Corp. 312,490 34,589
Burlington Northern Santa Fe,
Inc. 221,165 21,370
Case Corp. 1,146,226 76,367
Caterpillar, Inc. 436,094 23,522
CSX Corp. 390,196 22,826
(dd) Cummins Engine Co., Inc. 1,383,486 107,998
Deere & Co. 367,802 19,769
Delta Air Lines, Inc. 402,300 37,892
Eaton Corp. 461,902 42,668
* FMC Corp. 392,265 34,814
Harnischfeger Industries, Inc. 1,200,101 51,304
Kennametal, Inc. 786,512 38,146
Olsten Corp. 1,505,360 27,943
Parker Hannifin Corp. 831,937 37,437
Raytheon Corp. 278,994 16,496
Tecumseh Products Co., Class A 585,476 32,604
TRW, Inc. 566,318 31,077
* UAL Corp. 236,352 20,001
- ------------------------------------------------------
GROUP TOTAL 746,255
- ------------------------------------------------------
INSURANCE (7.5%)
Allstate Corp. 528,920 42,512
American General Corp. 529,055 27,445
Chubb Corp. 322,215 22,897
Everest Reinsurance Holdings,
Inc. 900,091 36,904
Hartford Financial Services
Group, Inc. 440,353 37,898
Old Republic International
Corp. 816,200 31,832
ReliaStar Financial Corp. 821,574 32,709
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
1
<PAGE> 4
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
PORTFOLIO VALUE
(CONT'D) SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
TIG Holdings, Inc. 615,982 $ 21,444
Transatlantic Holdings, Inc. 378,558 27,114
- ------------------------------------------------------
GROUP TOTAL 280,755
- ------------------------------------------------------
RETAIL (5.4%)
Dillard's, Inc., Class A 704,809 30,879
* Federated Department Stores,
Inc. 862,200 37,182
Russell Corp. 716,215 21,084
Springs Industries, Inc.,
Class A 661,418 34,725
* Toys 'R' Us, Inc. 965,551 34,277
V.F. Corp. 485,953 45,011
- ------------------------------------------------------
GROUP TOTAL 203,158
- ------------------------------------------------------
TECHNOLOGY (5.4%)
* Arrow Electronics, Inc. 257,500 14,935
International Business
Machines Corp. 858,744 90,973
* Seagate Technology, Inc. 900,552 32,533
Tektronix, Inc. 495,678 33,427
* Western Digital Corp. 826,752 33,122
- ------------------------------------------------------
GROUP TOTAL 204,990
- ------------------------------------------------------
UTILITIES (2.2%)
Cinergy Corp. 379,607 12,693
DTE Energy Co. 614,840 18,714
Duke Energy Corp. 314,623 15,554
Entergy Corp. 630,745 16,439
GPU, Inc. 538,004 19,301
OGE Energy Corp. 2,000 94
- ------------------------------------------------------
GROUP TOTAL 82,795
- ------------------------------------------------------
TOTAL COMMON STOCKS (Cost $2,252,115) 3,064,049
- ------------------------------------------------------
CASH EQUIVALENTS (26.7%)
- ------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
---------
<S> <C> <C>
Short-term Investments Held as
Collateral for Loaned
Securities (7.8%) $ 295,614 295,614
- ------------------------------------------------------
COMMERCIAL PAPER (12.2%)
American Express Credit Corp.
5.50%, 10/17/97 35,000 34,914
Asset Securitization Corp.
5.55%, 11/6/97 40,000 39,778
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- ------------------------------------------------------
<S> <C> <C>
Associates Corp.
5.52%, 10/6/97 $ 50,000 $ 49,962
Atlantic Asset Securitization
Corp.
5.57%, 10/16/97 20,000 19,954
Barclays U.S. Funding Corp.
5.53%, 10/8/97 25,000 24,973
Canadian Imperial Holdings
5.54%, 10/30/97 40,000 39,822
Commercial Credit Corp.
5.50%, 10/2/97 25,000 24,996
5.50%, 10/27/97 25,000 24,901
Delaware Funding Corp.
5.53%, 10/14/97 50,000 49,900
Eiger Capital Corp.
5.55%, 11/5/97 43,375 43,141
sec. First Chicago Financial
Corp.
5.51%, 10/16/97 (acquired
9/16/97, cost $22,149) 22,200 22,149
Societe Generale
5.51%, 10/23/97 25,000 24,916
5.52%, 10/17/97 20,000 19,951
Sony Capital Corp.
5.55%, 10/29/97 40,000 39,827
- ------------------------------------------------------
GROUP TOTAL 459,184
- ------------------------------------------------------
DISCOUNT NOTE (3.0%)
Federal Home Loan Mortgage
Corporation
10/30/97 75,000 74,977
Federal National Mortgage Association
0.00%, 10/30/97 40,000 39,824
- ------------------------------------------------------
GROUP TOTAL 114,801
- ------------------------------------------------------
REPURCHASE AGREEMENT (3.7%)
Chase Securities, Inc.
5.90%, dated 9/30/97, due
10/1/97, to be repurchased
at $138,187, collateralized
by various U.S. Government
Obligations, due 10/1/97-
1/29/99, valued at $139,466 138,164 138,164
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $1,007,763) 1,007,763
- ------------------------------------------------------
TOTAL INVESTMENTS (107.9%) (Cost $3,259,878) 4,071,812
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
2
<PAGE> 5
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C> <C>
OTHER ASSETS AND LIABILITIES (-7.9%)
Cash $ 1
Dividends Receivable 4,171
Interest Receivable 23
Receivable for Fund Shares Sold 9,907
Other Assets 72
Payable for Investments Purchased (8,452)
Payable for Fund Shares Redeemed (1,270)
Payable for Investment Advisory Fees (4,491)
Payable for Administrative Fees (245)
Payable for Shareholder Servicing Fee-
Investment Class (4)
Payable for Distribution Fee-Adviser Class (39)
Payable for Trustees' Deferred
Compensation Plan-Note F (57)
Payable for Daily Variation on Futures
Contracts (1,450)
Collateral on Securities Loaned, at Value (295,614)
Other Liabilities (492)
----------
(297,940)
- ------------------------------------------------------
NET ASSETS (100%) $3,773,872
- ------------------------------------------------------
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 173,895,195 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $3,542,772
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 20.37
- ------------------------------------------------------
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C>
INVESTMENT CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 1,465,899 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $ 29,847
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 20.36
- ------------------------------------------------------
ADVISER CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 9,890,611 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $ 201,253
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 20.35
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $2,632,809
Undistributed Net Investment Income (Loss) 18,442
Undistributed Realized Net Gain (Loss) 306,739
Unrealized Appreciation (Depreciation) on:
Investment Securities 811,934
Futures 3,948
- ------------------------------------------------------
NET ASSETS $3,773,872
- ------------------------------------------------------
sec. Restricted Security-Total market value of
restricted securities owned at September 30, 1997
was $22,149 or 0.6% of net assets.
! See Note A1 to Financial Statements.
* Non-income producing security.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
ADR American Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
EQUITY
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (94.0%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
BANKS (3.6%)
BankBoston Corp. 203,200 $ 17,970
Citicorp 92,100 12,336
First Union Corp. 249,854 12,508
Wells Fargo & Co. 17,900 4,923
- ------------------------------------------------------
GROUP TOTAL 47,737
- ------------------------------------------------------
BASIC RESOURCES (5.0%)
Boise Cascade Corp. 98,400 4,139
Bowater, Inc. 147,200 7,507
Champion International Corp. 330,100 20,115
E.I. DuPont de Nemours & Co. 307,000 18,900
Weyerhaeuser Co. 89,400 5,308
W.R. Grace & Co. 135,900 10,006
- ------------------------------------------------------
GROUP TOTAL 65,975
- ------------------------------------------------------
BEVERAGE & PERSONAL PRODUCTS (0.6%)
Coca-Cola Enterprises, Inc. 275,600 7,424
- ------------------------------------------------------
CONSUMER DURABLES (6.2%)
Ford Motor Co. 690,000 31,222
General Motors Corp. 350,917 23,490
Goodyear Tire & Rubber Co. 155,100 10,663
Lucas Varity plc ADR 411,700 15,619
- ------------------------------------------------------
GROUP TOTAL 80,994
- ------------------------------------------------------
CONSUMER SERVICES (5.9%)
* Clear Channel Communications,
Inc. 234,700 15,226
* GTECH Holdings Corp. 154,100 5,269
* HFS, Inc. 298,600 22,227
News Corp. Ltd. ADR 354,900 6,366
Service Corp. International 321,500 10,348
Tele-Communications, Inc.,
Class A 524,400 10,750
* Tele-Communications Liberty
Media Group, Class A 257,142 7,698
- ------------------------------------------------------
GROUP TOTAL 77,884
- ------------------------------------------------------
CREDIT & FINANCE/ INVESTMENT COMPANIES (3.4%)
American Express Co. 77,200 6,321
Bear Stearns Co., Inc. 194,000 8,536
CMAC Investment Corp. 90,700 4,864
Lehman Brothers Holdings, Inc. 85,000 4,558
SLM Holding Corp. 131,700 20,347
- ------------------------------------------------------
GROUP TOTAL 44,626
- ------------------------------------------------------
ENERGY (6.2%)
Atlantic Richfield Co. 111,700 9,543
British Petroleum plc ADR 241,934 21,971
Coastal Corp. 150,200 9,200
<CAPTION>
VALUE
SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
Columbia Gas System, Inc. 116,100 $ 8,127
Phillips Petroleum Co. 370,800 19,143
Repsol SA ADR 162,500 7,048
Texaco, Inc. 108,800 6,684
- ------------------------------------------------------
GROUP TOTAL 81,716
- ------------------------------------------------------
FOOD, TOBACCO & OTHER (4.8%)
Philip Morris Cos., Inc. 1,111,270 46,187
RJR Nabisco Holdings Corp. 501,980 17,256
- ------------------------------------------------------
GROUP TOTAL 63,443
- ------------------------------------------------------
HEALTH CARE (6.1%)
Aetna, Inc. 287,900 23,446
Baxter International, Inc. 140,800 7,357
Bristol-Myers Squibb Co. 166,072 13,743
Columbia/HCA Healthcare Corp. 214,205 6,158
* Health Management Associates,
Class A 241,100 7,625
* Lincare Holdings, Inc. 156,000 7,868
Merck & Co., Inc. 78,600 7,855
SmithKline Beecham plc ADR 128,600 6,285
- ------------------------------------------------------
GROUP TOTAL 80,337
- ------------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (17.2%)
Aeroquip-Vickers, Inc. 120,800 5,919
Allied Signal, Inc. 166,800 7,089
* AMR Corp. 70,400 7,792
* Berkshire Hathaway, Inc. 149 6,675
Boeing Co. 132,870 7,233
Case Corp. 311,500 20,754
Cummins Engine Co., Inc. 388,800 30,351
Delta Air Lines, Inc. 14,700 1,384
Eaton Corp. 84,500 7,806
* FMC Corp. 164,229 14,575
Harnischfeger Industries, Inc. 118,300 5,057
Lockheed Martin Corp. 214,200 22,839
*@ PML, Inc. 125 --
Textron, Inc. 177,100 11,511
Union Pacific Corp. 162,650 10,186
United Technologies Corp. 372,600 30,181
Waste Management, Inc. 766,500 26,780
York International Corp. 223,100 9,984
- ------------------------------------------------------
GROUP TOTAL 226,116
- ------------------------------------------------------
INSURANCE (5.4%)
Allstate Corp. 116,600 9,372
CIGNA Corp. 45,100 8,400
Exel Ltd. 197,900 11,787
Hartford Financial Services
Group (The), Inc. 200,350 17,243
Loews Corp. 207,300 23,412
- ------------------------------------------------------
GROUP TOTAL 70,214
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
4
<PAGE> 7
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
MID CAP GROWTH (4.3%)
* Advanced Fibre
Communications, Inc. 15,800 $ 648
* Allied Waste Industries, Inc. 11,800 226
* ASE Test Ltd. 4,200 356
At Home Corp., Series A 21,000 486
Bell Canada International, Inc. 13,900 262
* BioChem Pharmaceutical, Inc. 19,700 621
* BMC Software, Inc. 13,400 868
* Borders Group, Inc. 31,700 872
* Brightpoint, Inc. 10,100 468
Brylane, Inc. 7,100 326
* Cellular Communications
International, Inc. 4,000 166
CIENA Corp. 12,500 619
* Cinar Films, Inc., Class B 19,400 740
Cintas Corp. 12,800 944
Coinstar, Inc. 22,100 287
Comcast Corp., Class A Special 34,800 896
Complete Business Solutions,
Inc. 14,500 413
* CompUSA, Inc. 16,000 560
* Computer Horizons Corp. 14,000 507
Cott Corp. 39,400 399
CVS Corp. 13,800 785
* Cyberonics, Inc. 20,900 337
Danaher Corp. 15,600 905
Diamond Offshore Drilling, Inc. 9,700 535
* Digital Microwave Corp. 11,700 524
* Electronics for Imaging, Inc. 11,100 566
Estee Lauder Cos., Class A 14,900 689
* Fiserv, Inc. 17,550 770
* Florida Panthers Holdings,
Inc. 3,900 92
Franklin Resources, Inc. 6,200 577
* Global Marine, Inc. 19,700 655
* Globalstar Telecommunications
Ltd. 37,800 1,984
HBO & Co. 21,800 823
* Health Management Associates,
Class A 49,195 1,556
Healthcare Recoveries, Inc. 20,900 470
* Heftel Broadcasting Corp.,
Class A 8,600 651
* Imax Corp. 25,500 666
* Inter-Tel, Inc. 12,000 636
Ionica Group plc ADR 15,000 280
* Jacor Communications, Inc. 12,000 530
J.D. Edwards & Co. 11,200 375
Jones Apparel Group, Inc. 11,400 616
J. Ray McDermott, S.A. 7,200 353
* Kemet Corp. 16,000 486
* Lincare Holdings, Inc. 31,600 1,594
* Loral Space & Communications 47,500 980
* MAPICS, Inc. 34,300 446
* McAfee Associates, Inc. 16,825 892
McDermott International, Inc. 8,600 314
* Metro Networks, Inc. 17,800 536
MicroFocus Group ADR 17,000 597
Money Store (The), Inc. 500 14
* Newbridge Networks Corp. 10,500 629
<CAPTION>
VALUE
SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
NEXTLINK Communications, Inc.,
Class A 9,200 $ 221
* Office Depot, Inc. 14,800 299
* Orbotech Ltd. 9,600 554
* Orthodontic Centers
of America, Inc. 29,000 580
* Outdoor Systems, Inc. 21,900 575
* PanAmSat Corp. 14,200 612
* Pediatrix Medical Group, Inc. 9,800 432
* Peoplesoft, Inc. 13,400 801
Positron Fiber Systems Corp. 17,900 185
* Premier Parks, Inc. 14,800 559
ProBusiness Services, Inc. 2,700 52
Qwest Communications
International, Inc. 14,600 673
* Republic Industries, Inc. 18,600 613
* Rexall Sundown, Inc. 16,000 730
* Robert Mondavi Corp., Class A 12,600 690
Santa Fe International Corp. 11,000 511
* Sapient Corp. 8,000 407
* Saville Systems Ireland plc
ADR 5,800 407
* Sealed Air Corp. 9,300 511
* Security Capital Group Inc.,
Class B 7,200 248
Security Capital Industrial
Trust 24,990 583
* Security Capital U.S. Realty 25,300 377
* Silicon Valley Group, Inc. 9,300 331
Sirrom Capital Corp. 23,600 1,224
* Stage Stores, Inc. 10,900 470
State Street Corp. 10,700 652
SunAmerica, Inc. 12,300 482
* Tele-Communications Liberty
Media Group, Class A 30,058 900
* Tele-Communications, Inc.,
Class A 44,000 902
* Tellabs, Inc. 11,000 566
* Tel-Save Holdings, Inc. 23,400 563
* 3Com Corp. 22,475 1,152
Tidewater, Inc. 11,500 681
* Tommy Hilfiger Corp. 8,900 444
* Total Renal Care Holdings,
Inc. 12,300 615
TV Azteca, SA de C.V. ADR 17,800 400
* U.S. Office Products Co. 12,100 427
* Uniphase Corp. 4,900 390
* Univision Communications,
Inc., Class A 10,400 564
* Valassis Communications, Inc. 19,400 618
* Visio Corp. 10,900 455
Wesley Jessen VisionCare, Inc. 18,800 531
* Wind River Systems 9,300 384
* WorldCom, Inc. 27,050 957
- ------------------------------------------------------
GROUP TOTAL 56,855
- ------------------------------------------------------
RETAIL (3.6%)
CVS Corp. 180,800 10,283
* Federated Department Stores,
Inc. 265,800 11,463
Home Depot, Inc. 181,988 9,486
McDonald's Corp. 58,100 2,767
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
5
<PAGE> 8
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY
PORTFOLIO VALUE
(CONT'D) SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
* Office Depot, Inc. 367,400 $ 7,417
Sears, Roebuck & Co. 111,800 6,366
- ------------------------------------------------------
GROUP TOTAL 47,782
- ------------------------------------------------------
TECHNOLOGY (8.7%)
* BMC Software, Inc. 220,100 14,252
* Cisco Systems, Inc. 197,500 14,430
Flextronics International Ltd. 5,500 258
Hewlett Packard Co. 300 21
Intel Corp. 99,400 9,176
* Microsoft Corp. 198,500 26,264
* Oracle Corp. 305,107 11,117
RSL Communications Ltd., Class
A 10,800 238
* Sabre Group Holdings, Inc. 113,800 4,075
* Seagate Technology, Inc. 326,000 11,777
* 3Com Corp. 300,475 15,399
Xerox Corp. 83,600 7,038
- ------------------------------------------------------
GROUP TOTAL 114,045
- ------------------------------------------------------
UTILITIES (3.7%)
* Airtouch Communications, Inc. 140,600 4,982
Duke Energy Corp. 13,368 661
GTE Corp. 192,100 8,717
SBC Communications, Inc. 177,600 10,900
Sprint Corp. 211,000 10,550
* WorldCom, Inc. 374,189 13,237
- ------------------------------------------------------
GROUP TOTAL 49,047
- ------------------------------------------------------
VALUE (9.3%)
Aeroquip-Vickers, Inc. 62,700 3,072
Allstate Corp. 19,981 1,606
American General Corp. 24,600 1,276
Amoco Corp. 13,600 1,311
* AMR Corp. 11,100 1,229
* Arrow Electronics Inc. 3,800 220
Atlantic Richfield Co. 19,600 1,675
Bank of New York Co. 32,000 1,536
Beckman Instruments, Inc. 34,800 1,481
Bergen Brunswig Corp., Class A 59,500 2,402
British Petroleum plc ADR 14,266 1,296
Burlington Northern Santa Fe,
Inc. 8,800 850
Cabot Oil & Gas Corp., Class A 32,700 881
Capital One Financial Corp. 44,853 2,052
Case Corp. 38,200 2,545
Caterpillar, Inc. 25,800 1,392
Chase Manhattan Corp. 21,000 2,478
Chubb Corp. 17,600 1,251
Citicorp 16,900 2,264
Columbia/HCA Healthcare Corp. 21,400 615
Crestar Financial Corp. 66,526 3,118
CSX Corp. 32,100 1,878
Cummins Engine Co., Inc. 51,800 4,044
<CAPTION>
VALUE
SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
Deere & Co. 21,200 $ 1,139
Dillard's, Inc., Class A 25,400 1,113
Dow Chemical Co. 11,600 1,052
E.I. DuPont de Nemours & Co. 24,000 1,477
Eaton Corp. 25,300 2,337
Entergy Corp. 36,367 948
Federal National Mortgage
Association 14,000 658
First Union Corp. 16,600 831
* FMC Corp. 19,671 1,746
Ford Motor Co. 90,900 4,113
* Foundation Health Corp. 52,110 1,667
General Motors Corp. 39,132 2,619
Goodyear Tire & Rubber Co. 45,200 3,107
GPU, Inc. 39,800 1,428
Great Lakes Chemical Corp. 19,900 981
Harnischfeger Industries, Inc. 40,400 1,727
Hartford Financial Group,
(The), Inc. 16,100 1,386
IBP, Inc. 48,000 1,134
International Business Machines
Corp. 39,200 4,153
Kennametal, Inc. 18,376 891
Mallinckrodt, Inc. 33,100 1,192
MAPCO, Inc. 41,100 1,354
* Maxicare Health Plans, Inc. 42,400 790
Mellon Bank Corp. 27,600 1,511
Old Republic International
Corp. 34,200 1,334
Olsten Corp. 43,200 802
Parker Hannifin Corp. 35,250 1,586
Philip Morris Cos., Inc. 61,800 2,569
Phillips Petroleum Co. 25,600 1,322
Raytheon Corp. 19,100 1,129
ReliaStar Financial Corp. 29,800 1,186
Repsol SA ADR 30,400 1,319
Republic New York Corp. 12,900 1,466
RJR Nabisco Holdings Corp. 52,300 1,798
Rohm & Haas Co. 23,500 2,255
Russell Corp. 30,300 892
* Seagate Technology, Inc. 34,200 1,235
Signet Banking Corp. 48,727 2,643
Springs Industries, Inc., Class
A 30,100 1,580
Standard Register Co. 22,200 740
Talbots, Inc. 33,200 948
Tecumseh Products Co., Class A 50,100 2,790
Tektronix, Inc. 30,900 2,084
TIG Holdings, Inc. 24,100 839
* Toys R Us, Inc. 41,700 1,480
Transatlantic Holdings, Inc. 16,800 1,203
TRW, Inc. 24,800 1,361
Tupperware Corp. 27,200 765
* UAL Corp. 14,600 1,235
Ultramar Diamond Shamrock Corp. 35,000 1,131
V.F. Corp. 26,300 2,436
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
6
<PAGE> 9
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- ------------------------------------------------------
<S> <C> <C>
* Western Digital Corp. 26,900 $ 1,078
YPF SA ADR 46,200 1,704
- ------------------------------------------------------
GROUP TOTAL 122,736
- ------------------------------------------------------
TOTAL COMMON STOCKS (Cost $935,035) 1,236,931
- ------------------------------------------------------
CASH EQUIVALENTS (13.7%)
- ------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
---------
Short-Term Investments Held as
Collateral for Loaned
Securities (8.0%) $104,927 104,927
- ------------------------------------------------------
<S> <C> <C>
DISCOUNT NOTE (1.9%)
Federal Home Loan Mortgage
Corporation
10/3/97 25,000 24,992
- ------------------------------------------------------
REPURCHASE AGREEMENT (3.8%)
Chase Securities, Inc., 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at $49,571,
collateralized by various
U.S. Government Obligations,
due 10/1/97-1/29/99 valued at
$50,030 49,563 49,563
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $179,482) 179,482
- ------------------------------------------------------
TOTAL INVESTMENTS (107.7%) (Cost $1,114,517) 1,416,413
- ------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-7.7%)
Cash 1
Dividends Receivable 1,988
Interest Receivable 8
Receivable for Investments Sold 12,698
Receivable for Fund Shares Sold 323
Other Assets 45
Payable for Investments Purchased (5,450)
Payable for Fund Shares Redeemed (4,266)
Payable for Investment Advisory Fees (1,690)
Payable for Administrative Fees (86)
Payable for Trustees' Deferred
Compensation Plan-Note F (41)
Collateral on Securities Loaned, at Value (104,927)
Other Liabilities (115)
----------
(101,512)
- ------------------------------------------------------
NET ASSETS (100%) $1,314,901
- ------------------------------------------------------
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C>
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 44,576,212 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $1,312,547
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 29.45
- ------------------------------------------------------
INVESTMENT CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 80,011 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $ 2,354
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 29.42
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid In Capital $ 670,052
Undistributed Net Investment Income (Loss) 4,070
Undistributed Realized Net Gain (Loss) 338,883
Unrealized Appreciation (Depreciation) on
Investment Securities 301,896
- ------------------------------------------------------
NET ASSETS $1,314,901
- ------------------------------------------------------
! See Note A1 to Financial Statements.
* Non-income producing security.
@ Value is less than $500.
ADR American Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
7
<PAGE> 10
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
SMALL CAP VALUE
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (95.9%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
BANKS (4.8%)
Bank United Corp., Class A 77,400 $ 3,425
Banknorth Group, Inc. 20,400 1,114
* Coast Savings Financial, Inc. 61,000 3,199
Colonial BancGroup, Inc. 33,800 972
Cullen/Frost Bankers, Inc. 62,100 2,942
Eagle Financial Corp. 113,900 4,556
First Financial Corp. of
Wisconsin 64,600 2,200
Long Island Bancorp, Inc. 68,100 3,201
Magna Group, Inc. 44,700 1,763
* Mechanics Savings Bank 76,600 2,011
ML Bancorp, Inc. 77,200 2,113
North Fork Bancorp., Inc. 80,700 2,340
* PFF Bancorp, Inc. 85,000 1,647
* Prime Bancshares, Inc. 17,600 334
* Redfed Bancorp, Inc. 110,000 1,932
Reliance Bancorp, Inc. 103,300 3,409
Trustco Bank Corp. 42,895 1,169
Union Planters Corp. 41,237 2,304
Whitney Holding Corp. 49,800 2,353
- -----------------------------------------------------
GROUP TOTAL 42,984
- -----------------------------------------------------
BASIC RESOURCES (5.7%)
* ACX Technologies, Inc. 154,300 4,108
Agnico-Eagle Mines Ltd. 219,000 2,204
* Alumax, Inc. 98,200 4,014
Caraustar Industries, Inc. 24,300 832
Chesapeake Corp. 62,100 2,251
Commonwealth Industries, Inc. 100,000 1,925
Crompton & Knowles Corp. 75,000 1,992
Gibraltar Steel Corp. 126,100 3,074
Harsco Corp. 57,400 2,605
Ivex Packaging Corp. 44,000 704
* Lone Star Technologies, Inc. 58,500 3,053
Longview Fibre Co. 134,500 2,673
Oregon Steel Mills, Inc. 134,600 3,651
P.H. Glatfelter Co. 72,200 1,602
Pope & Talbot, Inc. 33,400 708
* RMI Titanium Co. 107,800 2,695
Rouge Industries, Inc., Class A 5,000 78
Special Metals Corp. 54,000 1,013
Steel Dynamics, Inc. 170,000 3,995
* Tetra Technologies, Inc. 207,400 4,796
* Titanium Metals Corp. 88,600 3,300
- -----------------------------------------------------
GROUP TOTAL 51,273
- -----------------------------------------------------
BEVERAGE & PERSONAL PRODUCTS (0.5%)
* Blyth Industries, Inc. 160,050 4,481
- -----------------------------------------------------
CONSUMER DURABLES (4.5%)
Arvin Industries, Inc. 226,700 8,898
* Brewer (C) Homes, Inc., Class
A 121,300 258
Centex Corp. 38,300 2,236
Excel Industries, Inc. 207,700 4,141
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
* Furniture Brands
International, Inc. 121,300 $ 2,290
General Cable Corp. 94,200 3,344
* Giant Cement Holdings, Inc. 237,300 5,784
Interface, Inc. 16,400 478
* Lear Corp. 84,900 4,181
Lone Star Industries, Inc. 28,300 1,528
Simpson Industries, Inc. 206,100 2,383
Southdown, Inc. 44,700 2,442
* Tower Automotive, Inc. 56,800 2,556
- -----------------------------------------------------
GROUP TOTAL 40,519
- -----------------------------------------------------
CONSUMER SERVICES (3.0%)
Central Newspapers, Inc., Class
A 30,100 2,235
* John Q. Hammons Hotels, Inc. 129,600 1,134
Journal Register Co. 253,700 4,979
* Prime Hospitality Corp. 432,600 9,761
* Regal Cinemas, Inc. 52,700 1,416
Sotheby's Holdings, Inc., Class
A 105,600 2,145
TMP Worldwide, Inc. 200,000 4,825
Travel Services International,
Inc. 16,200 336
- -----------------------------------------------------
GROUP TOTAL 26,831
- -----------------------------------------------------
CREDIT & FINANCE/
INVESTMENT COMPANIES (5.3%)
Eaton Vance Corp. 76,200 2,724
EVEREN Capital Corp. 195,000 7,922
* First Alliance Corp. 87,900 2,769
* FIRSTPLUS Financial Group,
Inc. 72,200 4,052
* Hambrecht & Quist Group 182,100 6,419
Healthcare Financial Partners,
Inc. 30,100 929
* Imperial Credit Industries,
Inc. 181,500 4,810
Legg Mason, Inc. 89,733 4,733
Money Store (The), Inc. 203,600 5,803
North American Mortgage Co. 78,300 2,251
Raymond James Financial, Inc. 92,250 3,321
* Renters Choice, Inc. 60,000 1,363
* Southern Pacific Funding Corp. 67,800 953
- -----------------------------------------------------
GROUP TOTAL 48,049
- -----------------------------------------------------
ENERGY (9.6%)
Aquila Gas Pipeline Corp. 111,000 1,429
* Benton Oil & Gas Co. 101,900 1,904
* BJ Services Co. 59,600 4,425
Camco International, Inc. 45,500 3,174
* Carrizo Oil & Gas, Inc. 57,900 868
* Dawson Production Services,
Inc. 142,000 3,000
Eastern Enterprises 67,000 2,500
Energen Corp. 129,100 4,591
* Global Industries Ltd. 136,600 5,447
* HS Resources, Inc. 277,301 4,783
Input/Output, Inc. 35,000 1,037
KN Energy, Inc. 140,000 6,405
* Marine Drilling Co., Inc. 118,000 3,687
* Maverick Tube Corp. 109,600 4,521
* Nabors Industries, Inc. 46,900 1,826
National Fuel Gas Co. 66,000 2,904
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
8
<PAGE> 11
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
* Noble Drilling Corp. 153,200 $ 4,941
* NS Group, Inc. 101,600 3,289
* Ocean Energy, Inc. 23,500 1,621
Pioneer Natural Resources Co. 153,600 6,432
* Pride International, Inc. 58,700 1,996
Power-One, Inc. 30,500 427
Reading & Bates Corp. 40,000 1,662
Santa Fe International Corp. 119,400 5,552
Southwestern Energy Co. 83,500 1,070
Stewart & Stevenson Services,
Inc. 60,000 1,444
* Tejas Gas Corp. 36,500 2,192
* Veritas DGC, Inc. 33,600 1,430
Vintage Petroleum, Inc. 17,900 882
Wicor, Inc. 7,100 307
- -----------------------------------------------------
GROUP TOTAL 85,746
- -----------------------------------------------------
FOOD, TOBACCO & OTHER (4.4%)
* Consolidated Cigar Holdings,
Inc. 125,000 5,109
* CTB International Corp. 134,000 2,111
Dean Foods Co. 40,400 1,869
Dimon, Inc. 798,600 19,965
* Standard Commercial Corp. 227,250 3,835
* Stokely USA, Inc. 561,300 526
Swisher International Group,
Inc., Class A 104,400 1,886
Universal Corp. 114,600 4,154
- -----------------------------------------------------
GROUP TOTAL 39,455
- -----------------------------------------------------
HEALTH CARE (10.6%)
Alpharma, Inc. 139,600 3,124
Angelica Corp. 246,300 4,895
* ARV Assisted Living, Inc. 350,700 4,406
Beckman Instruments, Inc. 93,600 3,984
* Beverly Enterprises 143,700 2,497
* Coherent, Inc. 134,700 7,459
* Datascope Corp. 137,000 3,014
* FPA Medical Management, Inc. 310,500 10,673
* Genesis Health Ventures, Inc. 79,600 3,099
* HealthCare Compare Corp. 62,000 3,960
* Lincare Holdings, Inc. 83,600 4,217
* Marquette Medical Systems,
Inc., Class A 92,100 2,855
* Maxicare Health Plans, Inc. 147,200 2,742
* Medpartners, Inc. 35,400 759
* Mid Atlantic Medical Services,
Inc. 267,700 4,233
* Multicare Cos., Inc. 34,950 972
* NBTY, Inc. 105,400 2,227
* Personnel Group of America,
Inc. 91,200 3,124
Physicians' Specialty Corp. 153,100 1,531
* RightCHOICE Managed Care,
Inc., Class A 48,100 493
* Rotech Medical Corp. 161,300 3,105
* Sterile Recoveries, Inc. 67,000 963
* Total Renal Care Holdings,
Inc. 57,900 2,895
* Universal Health Services,
Inc., Class B 115,300 4,987
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
* Vivus, Inc. 194,400 $ 7,290
* Watson Pharmaceuticals, Inc. 100,500 6,005
- -----------------------------------------------------
GROUP TOTAL 95,509
- -----------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (14.8%)
AAR Corp. 98,200 3,277
* AccuStaff, Inc. 220,000 6,930
Air Express International Corp. 67,500 2,464
Airborne Freight Corp. 80,700 4,887
* Allied Waste Industries, Inc. 238,600 4,563
Arnold Industries, Inc. 229,700 5,369
* Atlas Air, Inc. 59,900 1,681
Aviall, Inc. 199,200 3,050
* Aviation Sales Co. 105,000 3,176
* BE Aerospace, Inc. 214,900 7,736
* Catalina Lighting, Inc. 44,500 259
* CDI Corp. 198,200 7,482
Cincinnati Milacron, Inc. 74,600 2,005
Columbus McKinnon Corp. 61,200 1,607
Crane Co. 233,050 9,584
Danka Business Systems plc ADR 43,500 1,936
* Data Processing Resources
Corp. 71,100 1,778
* Fiserv, Inc. 41,400 1,816
Flowserve Corp. 157,600 4,708
Greenbrier Cos., Inc. 140,800 2,358
* Hagler Bailly, Inc. 22,400 568
* Halter Marine Group, Inc. 50,000 2,419
Hanover Compressor Co. 27,000 662
* Hirsch International Corp.,
Class A 75,200 1,330
* Insurance Auto Auctions, Inc. 201,500 2,519
JLG Industries, Inc. 21,000 269
Kaydon Corp. 65,300 3,918
Knightsbridge Tankers Ltd. 112,200 3,177
* Lason Holdings, Inc. 10,000 276
* Midwest Express Holdings, Inc. 45,000 1,443
* OMI Corp. 629,500 7,869
Precision Castparts Corp. 98,700 6,416
* PST Vans, Inc. 80,800 313
* Seacor Holdings, Inc. 50,300 3,119
ServiceMaster, L.P. 25,000 714
* Staffmark, Inc. 66,200 2,524
* Swift Transportation Co., Inc. 47,000 1,486
Teekay Shipping Corp. 71,000 2,387
Tranz Rail Holdings Ltd. ADR 161,500 2,665
* Triumph Group, Inc. 225,600 7,544
Werner Enterprises, Inc. 184,400 4,472
- -----------------------------------------------------
GROUP TOTAL 132,756
- -----------------------------------------------------
INSURANCE (4.1%)
Allied Life Financial Corp. 120,100 2,882
AmerUs Life Holdings, Inc.,
Class A 100,000 3,281
American Bankers Insurance
Group, Inc. 43,600 1,591
Everest Reinsurance Holdings,
Inc. 120,000 4,920
FBL Financial Group, Inc., Class
A 52,100 1,928
Fremont General Corp. 144,100 6,881
Hartford Life, Inc., Class A 106,600 4,097
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 12
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP VALUE
PORTFOLIO VALUE
(CONT'D) SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
Nationwide Financial Services,
Inc., Class A 231,300 $ 6,447
Presidential Life Corp. 100,700 2,001
PXRE Corp. 83,619 2,639
- -----------------------------------------------------
GROUP TOTAL 36,667
- -----------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (7.6%)
Associated Estates Realty Corp. 94,300 2,263
Avalon Properties, Inc. 51,000 1,517
Cali Realty Corp. 60,000 2,498
+ Canadian Hotel Income
Properties 300,000 2,139
CarrAmerica Realty Corp. 55,000 1,760
Chateau Communities, Inc. 153,908 4,540
Crescent Real Estate Equities
Co. 86,500 3,471
Duke Realty Investments, Inc. 134,912 3,078
Equity Office Properties Trust 38,700 1,313
Excel Realty Trust, Inc. 187,400 5,880
Health Care REIT, Inc. 95,500 2,626
Health and Retirement Property
Trust 95,000 1,793
Healthcare Realty Trust, Inc. 102,200 2,906
Home Properties of N.Y., Inc. 306,667 7,973
Kilroy Realty Corp. 142,700 3,853
Post Properties, Inc. 61,900 2,461
* Security Capital Group Inc.,
Class B 109,600 3,768
Smith (Charles E.) Residential
Realty, Inc. 231,500 7,871
Spieker Properties, Inc. 81,400 3,302
United Dominion Realty Trust,
Inc. 206,900 3,104
- -----------------------------------------------------
GROUP TOTAL 68,116
- -----------------------------------------------------
RETAIL (6.6%)
Applebee's International, Inc. 217,200 5,430
* Borders Group, Inc. 99,400 2,734
Brylane, Inc. 119,000 5,459
Cato Corp., Class A 271,200 2,475
Culp, Inc. 250,300 5,194
800-JR CIGAR, Inc. 23,800 833
Family Dollar Stores, Inc. 85,500 1,950
* Galey & Lord, Inc. 84,100 1,587
Hughes Supply, Inc. 71,400 2,155
* Landry's Seafood Restaurants,
Inc. 83,000 2,438
* Max & Erma's Restaurants, Inc. 30,900 218
* Nautica Enterprises, Inc. 60,100 1,690
Novel Denim Holdings Ltd. 10,000 270
* Office Depot, Inc. 135,000 2,725
Pier 1 Imports, Inc. 217,250 3,897
* Proffitt's, Inc. 39,400 2,334
Rare Hospitality International,
Inc. 91,600 882
Russ Berrie & Co., Inc. 64,800 1,895
* Stage Stores, Inc. 81,800 3,528
* U.S. Office Products Co. 136,200 4,801
* Zale Corp. 254,200 6,593
- -----------------------------------------------------
GROUP TOTAL 59,088
- -----------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
TECHNOLOGY (13.5%)
* Ade Corp. 46,200 $ 1,854
* Align-Rite International, Inc. 131,700 3,144
* Altera Corp. 65,500 3,357
* Boston Technology, Inc. 90,800 3,076
Box Hill Systems Corp. 44,400 777
* Cadence Design Systems, Inc. 45,700 2,445
* Checkfree Corp. 102,400 2,163
* Cherry Corp., Class A 20,000 380
* CHS Electronics, Inc. 104,100 2,850
* Computer Products, Inc. 105,000 3,124
* Compuware Corp. 65,900 3,987
* Comverse Technology, Inc. 91,600 4,832
* Creative Technology Ltd. 100,000 2,556
* Credence Systems Corp. 74,000 3,608
* Davox Corp. 96,600 3,236
* Dionex Corp. 41,000 2,211
* Exar Corp. 34,800 922
* FactSet Research Systems, Inc. 25,300 753
* Globecomm Systems, Inc. 32,100 562
* HMT Technology Corp. 326,700 5,125
* ITI Technologies, Inc. 19,200 547
Ingram Micro, Inc., Class A 106,300 2,877
Innovex, Inc. 72,200 2,328
* Integrated Device Technology,
Inc. 87,800 1,059
* Intevac, Inc. 312,900 4,420
Investors Financial Services
Corp. 15,000 619
* KLA-Tencor Corp. 60,700 4,101
* Micro Linear Corp. 273,000 2,457
* MicroTouch Systems, Inc. 110,300 3,075
* Microage, Inc. 201,800 5,852
* PairGain Technologies, Inc. 39,600 1,129
* P-COM, Inc. 200,000 4,788
Penn Engineering & Manufacturing
Corp. 163,900 4,569
* Quantum Corp. 120,100 4,601
Salient 3 Communications, Inc.,
Class A 43,900 549
* Sanmina Corp. 14,000 1,212
* SCI Systems, Inc. 237,000 11,746
* Spectran Corp. 81,400 1,160
*@ Sterling Software, Inc.
(Escrow) 6,951 --
* Summit Design, Inc. 193,800 3,440
* Technology Modeling
Association, Inc. 155,500 2,381
Tower Semiconductor Ltd. 105,200 2,091
* USCS International, Inc. 72,500 1,622
* Unit Instruments, Inc. 166,500 2,019
* Wonderware Corp. 70,100 1,288
- -----------------------------------------------------
GROUP TOTAL 120,892
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
10
<PAGE> 13
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
UTILITIES (0.9%)
Commonwealth Energy System 216,200 $ 5,837
Rochester Gas & Electric Corp. 43,700 1,082
* U.S. Long Distance Corp. 54,600 1,095
- -----------------------------------------------------
GROUP TOTAL 8,014
- -----------------------------------------------------
TOTAL COMMON STOCKS (Cost $643,540) 860,380
- -----------------------------------------------------
RIGHT (0.0%)
- -----------------------------------------------------
* Alpharma, Inc., expiring
11/25/97 (Cost $0) 23,267 131
- -----------------------------------------------------
WARRANT (0.2%)
- -----------------------------------------------------
sec.* Canadian Hotel Income
Properties REIT, expiring
6/25/98 (acquired 9/16/97,
Cost $1,929) 300,000 1,929
- -----------------------------------------------------
CASH EQUIVALENT (4.4%)
- -----------------------------------------------------
FACE
AMOUNT
(000)
--------
REPURCHASE AGREEMENT (4.4%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97, to
be repurchased at $39,113,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$39,476 (Cost $39,107) $ 39,107 39,107
- -----------------------------------------------------
TOTAL INVESTMENTS (100.5%) (Cost $684,576) 901,547
- -----------------------------------------------------
<CAPTION>
VALUE
(000)!
- -----------------------------------------------------
<S> <C> <C>
OTHER ASSETS AND LIABILITIES (-0.5%)
Cash $ 7
Dividends Receivable 836
Interest Receivable 6
Receivable for Investments Sold 1,325
Receivable for Fund Shares Sold 287
Other Assets 19
Payable for Investments Purchased (4,432)
Payable for Fund Shares Redeemed (513)
Payable for Investment Advisory Fees (1,530)
Payable for Administrative Fees (56)
Payable for Trustees' Deferred Compensation
Plan-Note F (16)
Other Liabilities (84)
--------
(4,151)
- -----------------------------------------------------
NET ASSETS (100%) $897,396
- -----------------------------------------------------
INSTITUTIONAL CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 35,932,079 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $897,396
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 24.97
- -----------------------------------------------------
NET ASSETS CONSISTS OF:
Paid in Capital $582,644
Undistributed Net Investment Income (Loss) 2,064
Undistributed Realized Net Gain (Loss) 95,717
Unrealized Appreciation (Depreciation) on
Investment Securities 216,971
- -----------------------------------------------------
NET ASSETS $897,396
- -----------------------------------------------------
sec. Restricted Security-Total market value of restricted
security owned at September 30, 1997 was $1,929 or
0.2% of net assets.
! See Note A1 to Financial Statements.
* Non-income producing security.
(+) 144A security. Certain conditions for public sale may
exist.
@ Value is less than $500.
ADR American Depositary Receipt
REIT Real Estate Investment Trust
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE> 14
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (96.1%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
ARGENTINA (0.8%)
YPF SA ADR 146,700 $ 5,409
- -----------------------------------------------------
AUSTRALIA (0.9%)
Reinsurance Australia Corp.,
Ltd. 2,057,071 5,609
- -----------------------------------------------------
AUSTRIA (2.0%)
OMV AG 89,159 13,306
- -----------------------------------------------------
BRAZIL (0.4%)
Votorantim Celulose e Papel
SA 99,600,000 2,773
- -----------------------------------------------------
CANADA (4.2%)
Canadian National Railway Co. 92,000 4,784
National Bank of Canada 585,000 8,192
Quebecor, Inc., Class B 397,100 7,098
TransCanada Pipelines Ltd. 379,100 7,339
- -----------------------------------------------------
GROUP TOTAL 27,413
- -----------------------------------------------------
CHINA (0.7%)
New World Development Co.,
Ltd. ADR 695,000 4,204
- -----------------------------------------------------
FRANCE (6.1%)
Cie Generale des Eaux 67,136 7,898
* Dexia France 76,999 7,294
Elf Aquitaine 109,630 14,634
Scor 229,200 9,901
- -----------------------------------------------------
GROUP TOTAL 39,727
- -----------------------------------------------------
GERMANY (3.5%)
Deutsche Bank AG 91,260 6,404
Henkel KGaA 143,900 8,103
Springer (Axel) Verlag AG 9,526 8,140
- -----------------------------------------------------
GROUP TOTAL 22,647
- -----------------------------------------------------
HONG KONG (3.9%)
China Southern Airlines Co.,
Ltd. 106,800 3,191
Great Eagle Holdings Ltd. 1,866,600 5,150
HSBC Holdings plc 94,000 3,146
Jardine Matheson Holdings
Ltd. 431,000 3,491
Jardine Strategic Holdings
Ltd. 1,418,500 5,561
Wheelock & Co., Ltd. 2,447,000 4,981
- -----------------------------------------------------
GROUP TOTAL 25,520
- -----------------------------------------------------
INDIA (0.7%)
Housing Development Finance
Corp., Ltd. 279 25
ITC Ltd. 9,374 153
* Jardine Fleming India Fund,
Inc. 374,600 3,371
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
Tata Power Supply Co., Ltd. 11,940 $ 42
Videsh Sanchar Nigam Ltd. 45,000 1,046
- -----------------------------------------------------
GROUP TOTAL 4,637
- -----------------------------------------------------
INDONESIA (1.0%)
* Gulf Indonesia Resources
Ltd. 94,100 2,094
Lippo Securities 24,939,000 3,707
Pabrik Kertas Tjiwi Kimia 1,357,500 755
- -----------------------------------------------------
GROUP TOTAL 6,556
- -----------------------------------------------------
IRELAND (1.3%)
Irish Life plc 1,592,000 8,294
- -----------------------------------------------------
ITALY (5.0%)
ENI S.p.A. 1,460,500 9,202
Pirelli S.p.A. 3,468,000 10,172
Telecom Italia S.p.A. 3,361,221 13,083
- -----------------------------------------------------
GROUP TOTAL 32,457
- -----------------------------------------------------
JAPAN (19.9%)
Bridgestone Corp. 573,000 13,767
Canon, Inc. 394,000 11,523
Chiyoda Fire & Marine
Insurance Co., Ltd. 1,011,000 3,870
Fuji Photo Film Ltd. 243,000 10,026
Hirose Electric Co., Ltd. 50,600 3,727
Mitsubishi Heavy Industries
Ltd. 805,000 4,408
Mitsui Fudosan Co., Ltd. 639,000 7,782
Nichido Fire & Marine
Insurance Co. 794,000 5,197
Nintendo Corp., Ltd. 99,000 9,268
Promise Co., Ltd. 66,000 3,445
Sankyo Co., Ltd. 178,000 6,164
Sony Corp. 80,000 7,556
Sumitomo Electric Industries 402,000 5,762
Sumitomo Marine & Fire
Insurance Co. 891,000 6,164
Takeda Chemical Industries 353,000 10,587
Takefuji Corp. 69,000 2,613
Tokio Marine & Fire Insurance 543,000 6,523
UNY Co., Ltd. 332,000 5,006
Yasuda Fire & Marine
Insurance 1,042,000 6,138
- -----------------------------------------------------
GROUP TOTAL 129,526
- -----------------------------------------------------
KOREA (0.3%)
Samsung Electronics GDR 16,440 1,573
- -----------------------------------------------------
MEXICO (2.3%)
ALFA, SA de C.V., Class A 789,000 7,418
Cemex SA de C.V., Series B 734,300 4,403
*@ Grupo Financiero Capital
SA 761,325 --
Grupo Mexico SA, Series B 806,000 3,260
- -----------------------------------------------------
GROUP TOTAL 15,081
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
12
<PAGE> 15
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
NETHERLANDS (6.5%)
ING Groep N.V. 274,055 $ 12,586
Philips Electronics N.V. 205,800 17,414
Vendex International N.V. 202,365 11,998
- -----------------------------------------------------
GROUP TOTAL 41,998
- -----------------------------------------------------
NORWAY (1.4%)
Christiania Bank OG
Kreditkasse 2,733,700 9,427
- -----------------------------------------------------
RUSSIA (0.6%)
Lukoil Holding ADR 37,800 3,713
- -----------------------------------------------------
SINGAPORE (1.2%)
* Creative Technology Ltd. 299,100 7,646
- -----------------------------------------------------
SPAIN (2.2%)
Telefonica de Espana ADR 148,800 14,006
- -----------------------------------------------------
SWEDEN (4.5%)
Nordbanken AB 273,800 9,349
SKF AB, Class B 290,900 8,476
Sparbanken Sverige AB, Class
A 484,100 11,680
- -----------------------------------------------------
GROUP TOTAL 29,505
- -----------------------------------------------------
SWITZERLAND (2.4%)
* Swissair AG (Registered) 11,835 15,831
- -----------------------------------------------------
THAILAND (0.0%)
Hana Microelectronics Public
Co., Ltd. (Foreign) 71,400 245
- -----------------------------------------------------
UNITED KINGDOM (24.3%)
Abbey National plc 766,500 11,805
Bank of Scotland 1,354,400 11,207
Bass plc 721,200 9,725
B.A.T. Industries plc 1,546,904 13,549
BG plc 2,384,400 10,346
BOC Group plc 691,782 12,376
Burmah Castrol plc 662,000 11,810
Cable & Wireless plc 1,232,780 10,499
Imperial Tobacco Group plc 1,726,200 10,330
LucasVarity plc 2,457,000 9,274
Railtrack Group plc PP 522,454 7,576
Sun Alliance Insurance Group
plc 1,327,842 12,521
Sainsbury (J.) plc 1,481,500 11,088
Tomkins plc 2,831,255 15,756
- -----------------------------------------------------
GROUP TOTAL 157,862
- -----------------------------------------------------
TOTAL COMMON STOCKS (Cost $506,388) 624,965
- -----------------------------------------------------
PREFERRED STOCK (0.6%)
- -----------------------------------------------------
BRAZIL (0.6%)
Multicanal Participacoes SA
ADR (Cost $4,642) 351,800 3,738
- -----------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
WARRANTS (0.5%)
- -----------------------------------------------------
FRANCE (0.0%)
* Cie Generale des Eaux,
expiring 5/2/01 75,170 $ 41
- -----------------------------------------------------
GERMANY (0.5%)
* Veba AG, expiring 4/6/98 9,229 3,421
- -----------------------------------------------------
TOTAL WARRANTS (Cost $1,798) 3,462
- -----------------------------------------------------
PURCHASED OPTIONS (1.2%)
- -----------------------------------------------------
<CAPTION>
NO. OF
CONTRACTS
---------
<S> <C> <C>
KOREA (1.2%)
Kookmin Bank Call Option
expiring 9/4/99, strike
price $0.01 22,577 252
Kookmin Bank Call Option
expiring 9/30/99, strike
price $0.01 143,173 1,546
Pohang Iron & Steel Co. Call
Option expiring 9/30/99,
strike price $0.01 43,000 2,562
Shinhan Bank Call Option
expiring 9/30/99, strike
price $0.01 80,140 652
SK Telecom Co., Ltd. Call
Option expiring 9/4/99,
strike price $0.01 1,761 829
SK Telecom Co., Ltd. Call
Option expiring 9/30/99,
strike price $0.01 3,965 1,808
- -----------------------------------------------------
TOTAL PURCHASED OPTIONS (Cost $11,120) 7,649
- -----------------------------------------------------
FIXED INCOME SECURITY (0.3%)
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT
& POOR'S) (000)
---------- -------
<S> <C> <C> <C>
GERMANY (0.3%)
+ Bundesobligationen
7.00%, 12/22/97 (Cost
$1,764) Aaa DEM 3,100 1,767
- -----------------------------------------------------
FOREIGN CURRENCY (0.3%)
- -----------------------------------------------------
Canadian Dollar CAD 15 11
French Franc FRF 116 20
Hong Kong Dollar HKD 787 102
Indian Rupee INR 61,910 1,713
Japanese Yen JPY 2,947 24
Philippines Peso PHP 6,599 194
- -----------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $2,062) 2,064
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
13
<PAGE> 16
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY
PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(CONT'D) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
CASH EQUIVALENTS (5.8%)
- -----------------------------------------------------
Short-Term Investments held
as Collateral for Loaned
Securities (5.2%) $33,926 $ 33,926
- -----------------------------------------------------
REPURCHASE AGREEMENT (0.6%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at
$4,326, collateralized by
various U.S. Government
Obligations, due
10/1/97-1/29/99, valued at
$4,366 (Cost $4,325) 4,325 4,325
- -----------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $38,251) 38,251
- -----------------------------------------------------
TOTAL INVESTMENTS (104.8%) (Cost $566,025) 681,896
- -----------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.8%)
Dividends Receivable 1,715
Interest Receivable 96
Receivable for Withholding Tax Reclaim 346
Receivable for Investments Sold 2,441
Receivable for Fund Shares Sold 153
Unrealized Gain on Forward Foreign Currency
Contracts 901
Other Assets 38
Payable for Investments Purchased (1,835)
Payable for Fund Shares Redeemed (481)
Payable for Investment Advisory Fees (819)
Payable for Administrative Fees (43)
Payable for Trustees' Deferred Compensation
Plan-Note F (18)
Payable to Custodian (1)
Collateral on Securities Loaned, at Value (33,926)
Other Liabilities (77)
--------
(31,510)
- -----------------------------------------------------
NET ASSETS (100%) $650,386
- -----------------------------------------------------
<CAPTION>
VALUE
(000)!
- -----------------------------------------------------
<S> <C> <C> <C>
INSTITUTIONAL CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 41,463,323 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $649,755
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.67
- -----------------------------------------------------
INVESTMENT CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 40,359 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 631
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.63
- -----------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $479,226
Undistributed Net Investment Income (Loss) 9,914
Undistributed Realized Net Gain (Loss) 44,500
Unrealized Appreciation (Depreciation) on:
Investment Securities 115,869
Foreign Currency Transactions 877
- -----------------------------------------------------
NET ASSETS $650,386
- -----------------------------------------------------
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
* Non-income producing security.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
@ Value is less than $500.
ADR American Depositary Receipt
GDR Global Depositary Receipt
PP Partially Paid
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
14
<PAGE> 17
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MID CAP GROWTH
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (95.6%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
BANKS (1.1%)
State Street Corp. 78,800 $ 4,802
- -----------------------------------------------------
BASIC RESOURCES (0.9%)
* Sealed Air Corp. 69,600 3,824
- -----------------------------------------------------
BEVERAGE & PERSONAL PRODUCTS (2.9%)
Cott Corp. 286,900 2,905
Estee Lauder Cos., Class A 110,000 5,087
* Robert Mondavi Corp., Class A 92,900 5,086
- -----------------------------------------------------
GROUP TOTAL 13,078
- -----------------------------------------------------
CONSUMER DURABLES (1.5%)
Danaher Corp. 115,150 6,679
- -----------------------------------------------------
CONSUMER SERVICES (16.5%)
At Home Corp., Series A 144,650 3,345
* Cinar Films, Inc., Class B 147,600 5,627
Coinstar, Inc. 113,500 1,476
Comcast Corp., Class A Special 257,297 6,625
Florida Panthers Holdings, Inc. 34,500 813
* Heftel Broadcasting Corp.,
Class A 63,200 4,787
* Imax Corp. 194,400 5,079
* Jacor Communications, Inc. 89,000 3,933
Metro Networks, Inc. 133,900 4,034
* Outdoor Systems, Inc. 162,050 4,254
PanAmSat Corp. 107,500 4,636
* Premier Parks, Inc. 112,100 4,232
* Tele-Communications, Inc.,
Class A 325,200 6,667
* Tele-Communications Liberty
Media Group, Class A 230,144 6,890
TV Azteca, SA de C.V. ADR 130,600 2,938
* Univision Communications,
Inc., Class A 78,300 4,248
* Valassis Communications, Inc. 143,600 4,577
- -----------------------------------------------------
GROUP TOTAL 74,161
- -----------------------------------------------------
CREDIT & FINANCE/ INVESTMENT COMPANIES (3.4%)
Franklin Resources, Inc. 47,600 4,433
Money Store (The), Inc. 12,400 353
* Security Capital Group, Inc.,
Class B 54,800 1,884
Sirrom Capital Corp. 165,800 8,601
- -----------------------------------------------------
GROUP TOTAL 15,271
- -----------------------------------------------------
ENERGY (4.0%)
Diamond Offshore Drilling, Inc. 73,500 4,056
* Global Marine, Inc. 148,200 4,927
* J. Ray McDermott, S.A. 55,100 2,700
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
McDermott International, Inc. 62,900 $ 2,296
Santa Fe International Corp. 81,500 3,790
- -----------------------------------------------------
GROUP TOTAL 17,769
- -----------------------------------------------------
FOOD, TOBACCO & OTHER (1.2%)
* Rexall Sundown, Inc. 119,200 5,438
- -----------------------------------------------------
HEALTH CARE (11.7%)
* BioChem Pharmaceutical, Inc. 145,800 4,593
* Cyberonics, Inc. 159,400 2,570
HBO & Co. 161,200 6,085
* Health Management Associates,
Inc., Class A 368,500 11,654
* Lincare Holdings, Inc. 227,000 11,449
* Orthodontic Centers of
America, Inc. 219,600 4,392
* Pediatrix Medical Group, Inc. 72,700 3,208
* Total Renal Care Holdings,
Inc. 91,600 4,580
Wesley Jessen VisionCare, Inc. 142,200 4,017
- -----------------------------------------------------
GROUP TOTAL 52,548
- -----------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (7.0%)
* Allied Waste Industries, Inc. 90,000 1,721
Cintas Corp. 94,750 6,988
* Fiserv, Inc. 129,550 5,684
* Loral Space & Communications 351,200 7,243
ProBusiness Services, Inc. 20,600 394
sec.* Republic Industries, Inc.
(acquired 1/20/97-5/5/97, cost
$4,250) 133,700 4,404
Tidewater, Inc. 86,800 5,143
- -----------------------------------------------------
GROUP TOTAL 31,577
- -----------------------------------------------------
INSURANCE (1.6%)
Healthcare Recoveries, Inc. 158,400 3,564
SunAmerica, Inc. 90,900 3,562
- -----------------------------------------------------
GROUP TOTAL 7,126
- -----------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (1.7%)
Security Capital Industrial
Trust 189,064 4,408
(+) Security Capital U.S. Realty 196,500 2,928
- -----------------------------------------------------
GROUP TOTAL 7,336
- -----------------------------------------------------
RETAIL (8.2%)
* Borders Group, Inc. 234,200 6,440
Brylane, Inc. 52,300 2,399
* CompUSA, Inc. 130,700 4,575
CVS Corp. 113,200 6,438
* Jones Apparel Group, Inc. 86,000 4,644
* Office Depot, Inc. 96,900 1,956
Stage Stores, Inc. 83,800 3,614
* Tommy Hilfiger Corp. 65,600 3,276
* U.S. Office Products Co. 92,000 3,243
- -----------------------------------------------------
GROUP TOTAL 36,585
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
15
<PAGE> 18
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID CAP GROWTH
PORTFOLIO
VALUE
(CONT'D) SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
TECHNOLOGY (26.7%)
* Advanced Fibre Communications,
Inc. 129,200 $ 5,297
* ASE Test Ltd. 32,300 2,738
Bell Canada International, Inc. 107,300 2,025
* BMC Software, Inc. 102,400 6,630
* Brightpoint, Inc. 75,600 3,506
* Cellular Communications
International, Inc. 27,800 1,154
CIENA Corp. 95,700 4,740
Complete Business Solutions,
Inc. 108,000 3,078
* Computer Horizons Corp. 92,700 3,360
* Digital Microwave Corp. 84,400 3,777
* Electronics for Imaging, Inc. 82,100 4,187
Flextronics International Ltd. 42,500 1,997
* Inter Tel, Inc. 89,300 4,733
J. D. Edwards & Co. 85,200 2,854
* Kemet Corp. 121,500 3,691
* MAPICS, Inc. 281,000 3,653
* McAfee Associates, Inc. 128,962 6,835
* MicroFocus Group ADR 123,200 4,327
* Newbridge Networks Corp. 79,600 4,766
NEXTLINK Communications, Inc.,
Class A 70,900 1,702
* Orbotech, Ltd. 69,100 3,991
* Peoplesoft, Inc. 109,500 6,543
Positron Fiber Systems Corp. 143,500 1,480
RSL Communications Ltd., Class A 83,200 1,830
* Sapient Corp. 61,200 3,114
* Saville Systems Ireland plc
ADR 44,100 3,098
* Silicon Valley Group, Inc. 71,200 2,532
* Tellabs, Inc. 83,800 4,316
* 3Com Corp. 171,975 8,814
* Uniphase Corp. 36,100 2,870
* Visio Corp. 80,800 3,373
* Wind River Systems 68,900 2,842
- -----------------------------------------------------
GROUP TOTAL 119,853
- -----------------------------------------------------
UTILITIES (7.2%)
* Globalstar Telecommunications
Ltd. 294,102 15,440
Ionica Group plc ADR 115,800 2,164
Qwest Communications
International, Inc. 76,000 3,506
* Tel-Save Holdings, Inc. 167,800 4,038
* WorldCom, Inc. 206,874 7,318
- -----------------------------------------------------
GROUP TOTAL 32,466
- -----------------------------------------------------
TOTAL COMMON STOCKS (Cost $299,282) 428,513
- -----------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- -----------------------------------------------------
<S> <C> <C>
CASH EQUIVALENTS (24.8%)
- -----------------------------------------------------
Short-term Investments Held as
Collateral for Loaned
Securities (24.0%) $ 107,435 $107,435
- -----------------------------------------------------
REPURCHASE AGREEMENT (0.8%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97, to
be repurchased at $3,427,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$3,458 3,426 3,426
- -----------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $110,861) 110,861
- -----------------------------------------------------
TOTAL INVESTMENTS (120.4%) (Cost $410,143) 539,374
- -----------------------------------------------------
OTHER ASSETS AND LIABILITIES (-20.4%)
Dividends Receivable 29
Interest Receivable 1
Receivable for Investments Sold 23,619
Receivable for Fund Shares Sold 485
Other Assets 12
Payable for Investments Purchased (7,142)
Payable for Fund Shares Redeemed (159)
Payable for Investment Advisory Fees (517)
Payable for Administrative Fees (28)
Payable for Trustees' Deferred Compensation
Plan-Note F (11)
Collateral on Securities Loaned, at Value (107,435)
Other Liabilities (65)
--------
(91,211)
- -----------------------------------------------------
NET ASSETS (100%) $448,163
- -----------------------------------------------------
INSTITUTIONAL CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 20,465,497 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $446,963
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 21.84
- -----------------------------------------------------
ADVISER CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 55,013 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 1,200
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 21.81
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
16
<PAGE> 19
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- -----------------------------------------------------
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid In Capital $265,123
Undistributed Realized Net Gain (Loss) 53,809
Unrealized Appreciation (Depreciation) on
Investment Securities 129,231
- -----------------------------------------------------
NET ASSETS $448,163
- -----------------------------------------------------
sec. Restricted Security-Total market value of
restricted securities owned at September 30, 1997
was $4,404 or 1.0% of net assets.
! See Note A1 to Financial Statements.
* Non-income producing security.
(+) 144A security. Certain conditions for public sale
may exist.
ADR American Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
17
<PAGE> 20
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MID CAP VALUE
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (96.7%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
BANKS (10.6%)
City National Corp. 32,200 $ 1,030
Colonial BancGroup, Inc. 20,100 578
Comerica, Inc. 28,400 2,242
Community First Bankshares, Inc. 29,000 1,407
Crestar Financial Corp. 41,500 1,945
Cullen/Frost Bankers, Inc. 25,000 1,184
First Financial Corp. of
Wisconsin 24,800 845
First of America Bank Corp. 30,713 1,649
Greenpoint Financial Corp. 8,500 539
Hubco, Inc. 11,700 371
Long Island Bancorp, Inc. 22,100 1,039
Mercantile Bankshares Corp. 122 4
National Commerce Bancorp. 25,400 692
North Fork Bancorp, Inc. 79,700 2,311
Northern Trust Corp. 19,800 1,171
Prime Bancshares, Inc. 4,300 82
Southtrust Corp. 30,200 1,487
Summit Bancorp. 35,838 1,593
Trans Financial, Inc. 34,800 1,109
UnionBanCal Corp. 12,700 1,099
Webster Financial Corp. 2,000 118
Wilmington Trust Corp. 16,300 890
- -----------------------------------------------------
GROUP TOTAL 23,385
- -----------------------------------------------------
BASIC RESOURCES (2.3%)
Bowater, Inc. 9,100 464
H. B. Fuller Co. 12,042 653
Lubrizol Corp. 14,900 626
* Owens-Illinois, Inc. 16,500 560
P.H. Glatfelter Co. 37,100 823
Rohm & Haas Co. 7,000 672
* Tetra Technologies, Inc. 60,300 1,394
- -----------------------------------------------------
GROUP TOTAL 5,192
- -----------------------------------------------------
CONSUMER DURABLES (5.8%)
Arvin Industries, Inc. 16,000 628
Callaway Golf Co. 19,000 663
* Champion Enterprises, Inc. 22,900 438
* Furniture Brands
International, Inc. 20,400 385
General Cable Corp. 47,400 1,683
Harley-Davidson, Inc. 35,400 1,033
Ivex Packaging Corp. 10,800 173
* Lear Corp. 25,200 1,241
Lone Star Industries, Inc. 25,500 1,377
Mascotech, Inc. 16,500 338
Premark International, Inc. 22,900 733
Southdown, Inc. 40,000 2,185
* Tower Automotive, Inc. 16,300 734
* USG Corp. 27,400 1,313
- -----------------------------------------------------
GROUP TOTAL 12,924
- -----------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES (3.1%)
* Doubletree Corp. 11,000 $ 531
* Gibson Greetings, Inc. 31,800 823
Hertz Corp., Class A 11,000 414
Journal Register Co. 67,600 1,327
McClatchy Newspapers, Inc.,
Class A 26,175 900
* MGM Grand, Inc. 17,300 751
New York Times Co., Class A 7,000 368
Omnicom Group, Inc. 300 22
* Valassis Communications, Inc. 20,000 638
Washington Post Co., Class B 2,300 1,031
- -----------------------------------------------------
GROUP TOTAL 6,805
- -----------------------------------------------------
CREDIT & FINANCE/
INVESTMENT COMPANIES (4.6%)
AMBAC, Inc. 14,800 602
Bear Stearns Co., Inc. 28,620 1,259
Capital One Financial Corp. 21,500 984
CMAC Investment Corp. 23,300 1,249
Franklin Resources, Inc. 43,750 4,074
Healthcare Financial Partners,
Inc. 5,900 182
Lehman Brothers Holdings, Inc. 17,000 912
Money Store (The), Inc. 32,600 929
- -----------------------------------------------------
GROUP TOTAL 10,191
- -----------------------------------------------------
ENERGY (11.9%)
Apache Corp. 22,000 943
* BJ Services Co. 38,100 2,829
Columbia Gas System, Inc. 17,500 1,225
* Cooper Cameron Corp. 14,200 1,020
Diamond Offshore Drilling, Inc. 32,600 1,799
El Paso Natural Gas Co. 6,200 375
* EVI, Inc. 19,100 1,222
* Falcon Drilling Co., Inc. 80,600 2,846
* Forcenergy, Inc. 15,200 590
* Global Industries Ltd. 6,000 239
* Nabors Industries, Inc. 28,100 1,094
National Fuel Gas Co. 14,400 634
NICOR, Inc. 13,500 506
Noble Affiliates, Inc. 13,400 600
* Noble Drilling Corp. 24,100 777
* NS Group, Inc. 24,800 803
ONEOK, Inc. 14,647 478
Pacific Enterprises 8,900 301
Sun Co., Inc. 12,100 530
Transocean Offshore, Inc. 15,400 738
* Tuboscope Vetco International
Corp. 26,700 838
Union Texas Petro Holdings, Inc. 24,800 583
* United Meridian Corp. 20,300 746
* Varco International, Inc. 10,300 500
* Veritas DGC, Inc. 13,800 587
Vintage Petroleum, Inc. 12,800 630
* Weatherford Enterra, Inc. 38,800 2,069
* Western Atlas, Inc. 11,100 977
- -----------------------------------------------------
GROUP TOTAL 26,479
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
18
<PAGE> 21
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
FOOD, TOBACCO & OTHER (5.4%)
* Consolidated Cigar Holdings,
Inc. 14,100 $ 576
* CTB International Corp. 32,100 506
Dean Foods Co. 18,600 860
Dimon, Inc. 68,400 1,710
Interstate Bakeries Corp. 16,800 1,152
Lancaster Colony Corp. 9,300 494
Schweitzer-Mauduit
International, Inc. 37,200 1,581
Tyson Foods, Inc., Class A 25,200 591
Universal Corp. 124,400 4,509
- -----------------------------------------------------
GROUP TOTAL 11,979
- -----------------------------------------------------
HEALTH CARE (7.6%)
* Biogen, Inc. 17,000 551
* Coherent, Inc. 8,600 476
* Datascope Corp. 40,000 880
* Dura Pharmaceuticals, Inc. 16,400 715
* FPA Medical Management, Inc. 53,300 1,832
* Health Care and Retirement
Corp. 11,800 439
* Healthdyne Technologies, Inc. 127,000 2,365
ICN Pharmaceuticals, Inc. 14,000 689
* Marquette Medical Systems,
Inc., Class A 30,100 933
* Personnel Group of America,
Inc. 19,300 661
* Rotech Medical Corp. 19,500 375
Sullivan Dental Products, Inc. 92,300 2,365
* Universal Health Services,
Inc., Class B 25,600 1,107
* Watson Pharmaceuticals, Inc. 10,400 621
* Wellpoint Health Networks,
Inc. 40,100 2,323
Xomed Surgical Products, Inc. 20,000 398
- -----------------------------------------------------
GROUP TOTAL 16,730
- -----------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (16.4%)
* AccuStaff, Inc. 87,600 2,759
Aeroquip-Vickers, Inc. 30,400 1,490
Agco Corp. 12,400 393
Air Express International Corp. 123,300 4,500
Airborne Freight Corp. 9,800 594
Arnold Industries, Inc. 54,600 1,276
* Aviation Sales Co. 24,100 729
* Banner Associates, Inc. 66,700 684
Case Corp. 16,900 1,126
* CDI Corp. 53,600 2,023
* Ceridian Corp. 18,000 666
CNF Transportation, Inc. 42,100 1,834
* Coltec Industries, Inc. 16,800 363
Crane Co. 12,950 533
Danka Business Systems plc ADR 43,200 1,922
DONCASTERS plc ADR 11,200 336
Expeditors International of
Washington, Inc. 24,700 1,034
* Fiserv, Inc. 28,600 1,255
* Halter Marine Group, Inc. 13,400 648
* Hirsch International Corp.,
Class A 14,800 262
Ingersoll Rand Co. 4,650 200
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
* Interim Services, Inc. 35,800 $ 1,007
Kaydon Corp. 13,700 822
@ Lockheed Martin Corp. 1 --
Miller (Herman), Inc. 50,600 2,707
PACCAR, Inc. 17,400 974
Parker Hannifin Corp. 3,600 162
Power-One, Inc. 7,500 105
Precision Castparts Corp. 25,600 1,664
* SPS Technologies, Inc. 20,800 978
Technitrol, Inc. 12,000 478
Trinity Industries, Inc. 14,300 690
Triumph Group, Inc. 19,000 635
* USA Waste Services, Inc. 30,700 1,224
York International Corp. 4,600 206
- -----------------------------------------------------
GROUP TOTAL 36,279
- -----------------------------------------------------
INSURANCE (3.7%)
Everest Reinsurance Holdings,
Inc. 24,600 1,009
Hartford Life, Inc., Class A 13,600 523
Mercury General Corp. 15,500 1,356
Nationwide Financial Services,
Inc., Class A 92,600 2,581
Old Republic International Corp. 8,500 332
Reliance Group Holdings, Inc. 33,800 458
Torchmark Corp. 20,800 816
Western National Corp. 37,400 1,073
- -----------------------------------------------------
GROUP TOTAL 8,148
- -----------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.9%)
Kilroy Realty Corp. 16,900 456
Security Capital Group, Inc.,
Class B 26,600 914
SL Green Realty Corp. 20,500 530
- -----------------------------------------------------
GROUP TOTAL 1,900
- -----------------------------------------------------
RETAIL (9.4%)
Arbor Drugs, Inc. 34,700 807
Applebee's International, Inc. 43,500 1,088
Brylane, Inc. 12,600 578
Culp, Inc. 23,200 481
CVS Corp. 37,700 2,144
* Fred Meyer, Inc. 8,700 463
Hughes Supply, Inc. 52,500 1,585
* Neiman Marcus Group (The),
Inc. 12,400 397
* Office Depot, Inc. 65,600 1,324
Pier 1 Imports, Inc. 53,250 955
ProSource, Inc. 54,800 356
Richfood Holdings, Inc. 28,800 747
Ross Stores, Inc. 51,800 1,768
Russ Berrie & Co., Inc. 37,600 1,100
* Shopko Stores, Inc. 53,600 1,394
* Stage Stores, Inc. 16,200 699
TJX Companies, Inc. 108,000 3,301
* Tommy Hilfiger Corp. 19,300 964
V.F. Corp. 6,200 574
- -----------------------------------------------------
GROUP TOTAL 20,725
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
19
<PAGE> 22
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID CAP VALUE
PORTFOLIO
VALUE
(CONT'D) SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
TECHNOLOGY (12.5%)
* ADC Telecommunications, Inc. 17,000 $ 553
* Altera Corp. 23,200 1,189
* BMC Software, Inc. 7,000 453
Box Hill Systems Corp. 10,700 187
* Cadence Design Systems, Inc. 21,300 1,140
* Computer Products, Inc. 42,000 1,250
* Comverse Technology, Inc. 33,100 1,746
* Credence Systems Corp. 10,100 492
Elbit Systems Ltd. 35,200 484
* Electro Scientific Industries,
Inc. 6,000 366
* ESS Technology, Inc. 8,500 129
* Gateway 2000, Inc. 15,000 472
* HMT Technology Corp. 78,700 1,235
* Inacom Corp. 32,100 1,194
Innovex, Inc. 3,800 123
* Intevac, Inc. 27,300 386
* KLA Tencor Corp. 14,900 1,007
* Microage, Inc. 44,300 1,285
* Quantum Corp. 18,900 724
* SCI Systems, Inc. 63,000 3,122
* Semitool, Inc. 18,700 470
* Solectron Corp. 27,400 1,219
Storage Technology Corp. 20,100 961
* Symantec Corp. 90,800 2,066
* Tech Data Corp. 27,700 1,274
* Technology Modeling
Association, Inc. 31,200 478
Tektronix, Inc. 11,100 749
* Teradyne, Inc. 32,500 1,749
* USCS International, Inc. 13,800 309
Vishay Intertechnology, Inc. 21,300 563
* Xilinx, Inc. 8,200 415
- -----------------------------------------------------
GROUP TOTAL 27,790
- -----------------------------------------------------
UTILITIES (2.5%)
Black Hills Corp. 25,200 739
IPALCO Enterprises, Inc. 27,800 952
LG&E Energy Corp. 30,800 683
New Century Energies, Inc. 21,400 889
* Nextel Communications, Inc.,
Class A 52,500 1,516
Pinnacle West Capital Corp. 23,700 797
- -----------------------------------------------------
GROUP TOTAL 5,576
- -----------------------------------------------------
TOTAL COMMON STOCKS (Cost $172,425) 214,103
- -----------------------------------------------------
UNIT TRUST (0.9%)
- -----------------------------------------------------
S&P 400 Mid-Cap Depository
Receipts (Cost $2,051) 32,100 2,070
- -----------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- -----------------------------------------------------
<S> <C> <C>
CASH EQUIVALENT (2.6%)
- -----------------------------------------------------
REPURCHASE AGREEMENT (2.6%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97, to
be repurchased at $5,793,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$5,847 (Cost $5,792) $ 5,792 $ 5,792
- -----------------------------------------------------
TOTAL INVESTMENTS (100.2%) (Cost $180,268) 221,965
- -----------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.2%)
Dividends Receivable 109
Interest Receivable 1
Receivable for Investments Sold 785
Receivable for Fund Shares Sold 1,556
Other Assets 3
Payable for Investments Purchased (2,510)
Payable for Fund Shares Redeemed (1)
Payable for Administrative Fees (14)
Payable for Investment Advisory Fees (337)
Payable for Trustees' Deferred Compensation
Plan-Note F (2)
Other liabilities (57)
--------
(467)
- -----------------------------------------------------
NET ASSETS (100%) $221,498
- -----------------------------------------------------
INSTITUTIONAL CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 10,103,104 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $220,260
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 21.80
- -----------------------------------------------------
INVESTMENT CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 56,951 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 1,238
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 21.75
- -----------------------------------------------------
NET ASSETS CONSIST OF:
Paid In Capital $157,584
Undistributed Net Investment Income (Loss) 310
Undistributed Realized Net Gain (Loss) 21,907
Unrealized Appreciation (Depreciation) on
Investment Securities 41,697
- -----------------------------------------------------
NET ASSETS $221,498
- -----------------------------------------------------
! See Note A1 to Financial Statements.
* Non-income producing security.
@ Value is less than $500.
ADR American Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
20
<PAGE> 23
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS
PORTFOLIO
STATEMENT OF NET ASSETS
COMMON STOCKS (76.2%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
ARGENTINA (3.2%)
YPF SA ADR 19,500 $ 719
- -----------------------------------------------------
BRAZIL (7.4%)
Light Participacoes SA 2,500,000 890
* Multicanal Participacoes SA
ADR 48,900 520
Telebras SA 2,361,000 273
- -----------------------------------------------------
GROUP TOTAL 1,683
- -----------------------------------------------------
HONG KONG (1.8%)
* China Southern Airlines Co.,
Ltd. ADR 13,600 406
- -----------------------------------------------------
INDIA (13.0%)
Bajaj Auto Ltd. 27,000 412
East India Hotels Ltd. 24,000 251
Hindustan Lever Ltd. 2,704 100
Indian Petrochemicals Corp.,
Ltd. 131,000 413
ITC Ltd. 5,633 92
Mahanagar Telephone Nigam Ltd. 134,000 953
Reliance Industries Ltd. 74,820 746
- -----------------------------------------------------
GROUP TOTAL 2,967
- -----------------------------------------------------
INDONESIA (6.7%)
Enseval PuTera Mega 866,000 142
Gulf Indonesia Resources Ltd. 12,900 287
Hanjaya Mandala Sampoerna
(Foreign) 153,000 316
Lippo Securities 1,650,000 245
Pabrik Kertas Tjiwi Kimia 343,500 191
Sinar Mas Multiartha (Foreign) 166,600 44
Unilever Indonesia (Foreign) 29,000 306
- -----------------------------------------------------
GROUP TOTAL 1,531
- -----------------------------------------------------
ISRAEL (7.3%)
Bank Hapoalim Ltd. 240,000 557
Elron Electronic Industries
Ltd. 10,000 184
First International Bank of
Israel Ltd., Class 1 3,300 439
Supersol Ltd. 150,000 488
- -----------------------------------------------------
GROUP TOTAL 1,668
- -----------------------------------------------------
KOREA (1.8%)
LG International Corp. 60,938 419
- -----------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
MEXICO (21.1%)
ALFA SA de C.V., Class A 121,000 $ 1,138
Cemex SA de C.V., Series B 125,000 749
Coca-Cola Femsa SA ADR 12,000 697
Grupo Mexico SA, Series B 137,000 554
* Grupo Posadas SA, Series A 969,000 749
Organizacion Soriana SA de
C.V., Series B 232,000 920
- -----------------------------------------------------
GROUP TOTAL 4,807
- -----------------------------------------------------
RUSSIA (2.3%)
* Lukoil Holding ADR 5,300 521
- -----------------------------------------------------
SINGAPORE (2.3%)
* Creative Technology Ltd. 20,900 534
- -----------------------------------------------------
THAILAND (4.1%)
Hana Microelectronics Public
Co., Ltd. (Foreign) 105,000 360
Ruam Pattana Fund II (Foreign) 830,600 167
* Sub-Thawee Fund 785,400 407
- -----------------------------------------------------
GROUP TOTAL 934
- -----------------------------------------------------
TURKEY (3.5%)
Yapi ve Kredi Bankasi AS 32,397,000 809
- -----------------------------------------------------
UNITED KINGDOM (1.7%)
Lonrho PLC 210,000 392
- -----------------------------------------------------
TOTAL COMMON STOCKS (Cost $15,931) 17,390
- -----------------------------------------------------
PREFERRED STOCKS (11.8%)
- -----------------------------------------------------
BRAZIL (11.8%)
Banco Itau SA 1,391,000 899
* CESP 14,950,000 1,267
Telebras SA 2,119,700 274
Votorantim Celulose e Papel SA 9,400,000 262
- -----------------------------------------------------
TOTAL PREFERRED STOCKS (Cost $1,498) 2,702
- -----------------------------------------------------
WARRANT (0.0%)
- -----------------------------------------------------
INDONESIA (0.0%)
* Sinar Mas Multiartha
(Foreign), expiring 11/28/01
(Cost $0) 12,495 1
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
21
<PAGE> 24
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO
NO. OF VALUE
(CONT'D) CONTRACTS (000)!
- ---------------------------------------------------------
<S> <C> <C>
PURCHASED OPTIONS (4.7%)
- ---------------------------------------------------------
KOREA (4.7%)
Pohang Iron & Steel Co. Call
Option, expiring 9/4/99,
strike price $0.01 6,720 $ 413
Shinhan Bank Call Option,
expiring 9/4/99, strike
price $0.01 21,450 180
SK Telecom Co., Ltd. Call
Option, expiring 9/4/99,
strike price $0.01 1,019 479
- ---------------------------------------------------------
TOTAL PURCHASED OPTIONS (Cost $1,603) 1,072
- ---------------------------------------------------------
FOREIGN CURRENCY (0.1%)
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
--------
<S> <C> <C> <C>
@ Hong Kong Dollar HKD 2 --
Indian Rupee INR 489 13
Indonesian Rupiah IDR 2,163 1
Israeli Shekel ILS 7 2
Singapore Dollar SGD 2 1
- --------------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $18) 17
- --------------------------------------------------------
CASH EQUIVALENTS (8.4%)
- --------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
U.S. TREASURY SECURITY (0.8%)
(dd) U.S. Treasury Bill
11/20/97 $ 170 169
- --------------------------------------------------------
REPURCHASE AGREEMENT (7.6%)
Chase Securities, Inc. 5.90%, dated
9/30/97, due 10/1/97, to be
repurchased at $1,738,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at $1,754 1,738 1,738
- --------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $1,907) 1,907
- --------------------------------------------------------
TOTAL INVESTMENTS (101.2%) (Cost $20,957) 23,089
- --------------------------------------------------------
<CAPTION>
VALUE
(000)!
- --------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (-1.2%)
Foreign Currency Held as Collateral on Futures
Contracts (Cost $60) $ 60
Dividends Receivable 30
Receivable for Withholding Tax Reclaim 1
Unrealized Gain on Futures Contracts 18
Other Assets 2
Payable for Investments Purchased (252)
Payable for Investment Advisory Fees (47)
Payable for Administrative Fees (1)
Accrued Foreign Capital Gains Taxes (38)
Payable for Trustees' Deferred Compensation
Plan-Note F (1)
Other Liabilities (53)
-------
(281)
- --------------------------------------------------------
NET ASSETS (100%) $22,808
- --------------------------------------------------------
INSTITUTIONAL CLASS
- --------------------------------------------------------
NET ASSETS
Applicable to 1,838,162 outstanding shares of
beneficial interest (unlimited authorization,
no par value) $22,808
- --------------------------------------------------------
NET ASSET VALUE PER SHARE $ 12.41
- --------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $17,829
Undistributed Net Investment Income (Loss) 91
Undistributed Realized Net Gain (Loss) 2,776
Unrealized Appreciation (Depreciation) on:
Investment Securities (Net of Foreign Capital
Gain Tax of $38) 2,095
Foreign Currency Transactions (1)
Futures 18
- --------------------------------------------------------
NET ASSETS $22,808
- --------------------------------------------------------
! See Note A1 to Financial Statements.
* Non-income producing security.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
@ Value is less than $500.
ADR American Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
22
<PAGE> 25
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
FIXED INCOME
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (97.9%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (9.5%)
## Government National
Mortgage Association
Various Pools:
6.00%, 7/20/27 Agy $ 118,000 $ 118,885
November TBA
6.00%, 11/20/27 Agy 195,000 196,158
- -------------------------------------------------------
GROUP TOTAL 315,043
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (11.4%)
Federal Home Loan
Mortgage Corporation
Conventional Pools:
9.50%, 10/1/16 Agy 1,825 1,976
10.00%, 11/1/20 Agy 10,800 11,786
10.50%, 4/1/11-10/1/20 Agy 3,958 4,415
11.00%, 9/1/15-9/1/20 Agy 6,620 7,431
11.25%,
10/1/11-12/1/15 Agy 1,674 1,885
11.50%, 1/1/11-12/1/15 Agy 169 193
11.75%, 4/1/19 Agy 175 199
12.50%, 8/1/13 Agy 19 22
13.00%, 6/1/19 Agy 57 65
14.75%, 3/1/10 Agy 35 41
Gold Pools:
7.00%, 9/1/23-6/1/25 Agy 53,789 53,881
7.50%, 2/1/27-6/1/27 Agy 1,697 1,730
9.50%, 10/1/17-1/1/21 Agy 8,719 9,507
10.00%, 10/1/20 Agy 4,282 4,732
10.50%, 8/1/19-4/1/21 Agy 1,875 2,085
Federal National Mortgage
Association
Conventional Pools:
9.50%, 7/1/16 Agy 2,861 3,109
10.00%, 10/1/07-4/1/27 Agy 11,117 12,186
10.50%, 6/1/10-11/1/20 Agy 7,128 7,984
10.75%, 2/1/11 Agy 45 50
11.00%, 1/1/16-11/1/20 Agy 5,689 6,411
11.50%, 11/1/15-2/1/20 Agy 6,165 7,035
12.00%, 4/1/15 Agy 55 64
12.50%, 5/1/12 Agy 1,126 1,313
Government National
Mortgage Association
Various Pools:
7.00%,
12/15/22-12/15/23 Agy 95,712 96,047
10.00%,
11/15/09-3/15/27 Agy 57,669 63,908
10.50%,
2/15/13-8/15/26 Agy 21,996 24,748
11.00%,
12/15/09-5/15/26 Agy 44,689 51,052
11.50%,
7/20/15-9/20/19 Agy 520 580
12.00%,
4/15/12-3/15/16 Agy 1,530 1,775
- -------------------------------------------------------
GROUP TOTAL 376,210
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ASSET BACKED CORPORATES (5.3%)
Advanta Mortgage Loan
Trust, Series 97-3 A2
6.61%, 4/25/12 AAA $ 13,000 $ 13,022
Arcadia Auto, Series 97-C
A4
6.375%, 1/15/03 AAA 15,280 15,341
(+) Aegis Auto
Receivables Trust,
Series 95-1 A
8.60%, 3/20/02 N/R 43 43
## Airplanes Pass Through
Trust, Series 1 B
6.756%, 3/15/19 A 5,816 5,830
ALPS,
Series:
94-1 A4 CMO
7.80%, 9/15/04 AA 5,900 6,039
94-1 C2 CMO
9.35%, 9/15/04 BBB 4,975 5,116
CIT Group Home Equity
Loan Trust, Series 97-1
A3
6.25%, 9/15/01 AAA 9,625 9,629
Commercial Financial
Services, Inc., Series
97-5 A1
7.72%, 6/15/05 A 8,225 8,221
(+) Federal Mortgage
Acceptance Corp., Loan
Receivables Trust,
Series 96-B A1
7.629%, 11/1/18 A 5,422 5,530
First Plus Home Loan
Trust, Series:
97-3 A2
6.48%, 9/10/08 AAA 9,590 9,612
97-3 A3
6.57%, 10/10/10 AAA 8,860 8,895
Honda Auto Receivables
Grantor Trust, Series
97-A A
5.85%, 2/15/03 AAA 28,307 28,283
(+) Long Beach Auto,
Series 97-2 A
6.69%, 9/25/04 AAA 12,076 12,078
(+) NAL Auto Trust,
Series:
96-4 A
6.90%, 12/15/00 N/R 3,968 3,943
97-2 A
7.75%, 9/15/02 N/R 9,086 9,095
(+) National Car Rental
Financing Ltd., Series
96-1 A4
7.35%, 10/20/03 N/R 8,025 8,223
Old Stone Credit Corp,
Series 92-3 B1
6.35%, 9/25/07 AAA 10 10
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
23
<PAGE> 26
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Security Pacific Home
Equity Trust, Series
91-AB
10.50%, 3/10/06 A+ $ 3,073 $ 3,075
(+) Team Fleet Financing
Corp., Series 96-1A
6.65%, 12/15/02 A- 4,800 4,805
WFS Financial Owner
Trust, Series 97-C A3
6.01%, 3/20/02 AAA 17,350 17,331
- -------------------------------------------------------
GROUP TOTAL 174,121
- -------------------------------------------------------
ASSET BACKED MORTGAGES (1.1%)
Advanta Mortgage Loan
Trust, Series 96-2 A5
8.08%, 6/25/27 AAA 8,940 9,297
Champion Home Equity Loan
Trust, Series 96-2 A4
8.00%, 9/25/28 AAA 6,800 7,091
Cityscape Home Equity
Loan Trust,
Series:
96-3 YMA
10/25/26 N/R 165,603 223
96-3 A IO
1.00%, 10/25/26 N/R 140,679 3,487
Contimortgage Home Equity
Loan Trust,
Series:
96-4 A11 IO
1.10%, 1/15/28 AAA 139,666 3,670
96-4 A12 IO
1.05%, 1/15/28 AAA 45,114 1,186
sec. 96-4 A12 YMA
1/15/28 (acquired
12/16/96, cost $83) AAA 56,415 83
(+) 96-4 A12 YMA
1/15/28 AAA 169,152 252
97-1 A10 YMA
3/15/28 N/R 168,379 235
97-1 A10 I IO
1.10%, 3/15/28 AAA 164,485 4,503
IMC Home Equity Loan
Trust, Series 96-3 A7
8.05%, 8/25/26 AAA 6,717 6,998
- -------------------------------------------------------
GROUP TOTAL 37,025
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS-
AGENCY COLLATERAL SERIES (2.6%)
Federal Home Loan
Mortgage Corporation,
Series:
1415 S Inv Fl IO CMO
18.813%, 11/15/07 Agy $ 3,111 $ 1,434
1476 S Inv Fl IO
REMIC PAC
4.363%, 2/15/08 Agy 29,318 3,419
1485 S Inv Fl IO
REMIC
3.913%, 3/15/08 Agy 28,037 2,487
1600 SA Inv Fl IO
REMIC
2.313%, 10/15/08 Agy 59,012 3,263
1709 H PO REMIC
1/15/24 Agy 801 409
1750 C PD PO REMIC
3/15/24 Agy 1,206 856
1813 K PO
2/15/24 Agy 795 547
1844 PC PO
3/15/24 Agy 1,460 922
1887 I PO
10/15/22 Agy 860 577
1950 Inv Fl IO
2.313%, 10/15/22 Agy 1,550 142
90-129 H PAC
8.85%, 3/15/21 Agy 80 87
90-1007 F Inv Fl
21.795%, 1/15/20 Agy 1 1
92-1398 I Inv Fl REMIC
10.304%, 10/15/07 Agy 2,471 2,786
93-149 O PO REMIC
8/25/23 Agy 1,733 1,100
Federal National Mortgage
Association,
Series:
90-118 S Inv Fl CMO
28.975%, 9/25/20 Agy 1,348 2,099
92-186 S Inv Fl IO CMO
3.363%, 10/25/07 Agy 55,194 4,741
93-205 G PO REMIC
9/25/23 Agy 4,363 2,812
93-235 H PO REMIC
9/25/23 Agy 1,744 1,364
96-11 V PO REMIC
9/25/23 Agy 12,280 8,278
96-14 PC PO REMIC
12/25/23 Agy 1,385 797
96-37 H PO REMIC
8/25/23 Agy 8,563 6,365
96-46 PB PO REMIC
9/25/23 Agy 1,425 954
96-54 N PO REMIC
7/25/23 Agy 1,025 766
96-54 O PO REMIC
11/25/23 Agy 1,145 713
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
24
<PAGE> 27
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-68 SC Inv Fl IO
REMIC
2.475%, 1/25/24 Agy $ 11,695 $ 1,419
97-7 AE PO REMIC
2/15/23 Agy 4,943 3,566
97-30 Inv Fl IO REMIC
2.281%, 7/25/22 Agy 465 43
282 1 PO
5/15/24 Agy 27,242 18,669
287 1 PO
12/17/07 Agy 19,282 12,618
G92-53 S Inv Fl IO
REMIC
32.625%, 9/25/22 Agy 2,561 2,123
Government National
Mortgage Association,
Series:
96-12 S Inv Fl IO
2.813%, 6/16/26 Agy 2,091 145
96-13 S Inv Fl IO
3.65%, 7/16/11 Agy 819 71
96-17 S Inv Fl IO REMIC
2.863%, 8/16/26 Agy 1,019 73
Kidder Peabody Mortgage
Assets Trust,
Series:
87-B IO
9.50%, 4/22/18 AAA 86 26
87-B PO
4/22/18 AAA 86 64
Morgan Stanley
Mortgage Trust, Series
88-28 8 PAC
9.40%, 10/1/18 AAA 75 78
- -------------------------------------------------------
GROUP TOTAL 85,814
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (6.1%)
American Housing Trust,
Series V 1G
9.125%, 4/25/21 AAA 6,566 6,974
Capstead Mortgage Corp.
7.25%, 9/15/27 AAA 12,275 12,270
Citicorp Mortgage
Securities, Inc.,
Series 93-9 A1
7.00%, 3/25/20 AAA 55 56
CMC Securities Corp. IV,
Series 94-G A4
7.00%, 9/25/24 AAA 5,937 5,673
Countrywide Funding
Corp., Series 94-12 A10
7.00%, 5/25/24 AAA 510 492
DLJ Mortgage
Acceptance Corp.,
Series:
( 7/8) 97-CF1 A1B
7.60%, 5/15/30 AAA 11,650 12,349
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
(+) 97-CF1 S IO
1.097%, 5/15/30 AAA $ 74,739 $ 4,971
97-CF2 A1B
6.82%, 10/15/30 AAA 19,725 19,860
sec. First Boston
Mortgage Corp., Series
92-4 B1
8.125%, 10/25/22
(acquired 1/25/93-
12/9/93, cost $3,945) A 4,157 4,242
GE Capital Mortgage
Services, Inc., Series
94-24 A4
7.00%, 7/25/24 AAA 8,138 7,798
J. P. Morgan Commercial
Mortgage Finance Corp.,
Series 97-C5 A2
7.069%, 9/15/29 AAA 14,750 15,071
sec.## Kidder Peabody
Funding Corp.,
Series 92-4 B2
8.467%, 5/28/22
(acquired
8/5/92-8/29/97, cost
$3,770) N/R 3,758 3,755
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA 2,715 2,949
PNC Mortgage Securities
Corp.,
Series 96-1 B1
7.50%, 6/25/26 AA 138 140
Prudential Home Mortgage
Securities Co., Inc.,
Series:
sec. 90-5 A3
9.50%, 5/25/05
(acquired
4/19/90-11/30/94, cost
$806) AAA 847 847
+ 92-33 B1
7.50%, 11/15/22 Aa3 120 116
(+)+ 92-A 2B4
7.90%, 4/28/22 A1 11,188 10,950
sec.+ 93-17 B1
6.50%, 3/1/23
(acquired
4/14/93-10/13/94, cost
$6,316) A2 6,604 6,507
(+)# 94-A 3B5
6.802%, 4/28/24 N/R 11,307 10,915
(+) 94-A 3B3
6.803%, 4/28/24 N/R 410 397
Residential Accredit
Loans, Inc.,
Series:
97-Q52 A8
7.75%, 3/25/27 AAA 5,540 5,708
+ 97-QS1 A11
7.50%, 2/25/27 Aaa 10,466 10,594
97-QS3
7.75%, 4/25/27 AAA 11,980 12,327
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
25
<PAGE> 28
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
97-QS4 A7
7.75%, 5/25/27 AAA $ 13,000 $ 13,399
Residential Funding
Mortgage Securities
Co., Inc.,
Series:
92-S15 A5
8.00%, 5/25/07 AAA 14 13
93-MZ3 A2
6.97%, 8/28/23 N/R 7,821 7,616
94-S1 A19
6.75%, 1/25/24 AAA 11,625 11,313
Rural Housing Trust,
Series 87-1M
3.33%, 4/1/26 A- 5,439 5,184
Ryland Mortgage
Securities Corp.,
Series:
+ 93-4 A9
7.50%, 8/25/24 Aaa 400 401
94-7B 4A2
7.50%, 8/25/25 AAA 7,500 7,520
Saxon Mortgage Securities
Corp.,
Series 93-8A A6
7.375%, 9/25/23 AAA 235 233
- -------------------------------------------------------
GROUP TOTAL 200,640
- -------------------------------------------------------
COMMERCIAL MORTGAGES (8.2%)
+ American Southwest
Financial Securities
Corp.,
Series 95-C1 A1B
7.40%, 11/17/04 Aaa 8,075 8,349
Asset Securitization
Corp.,
Series:
95-MD4 A1
7.10%, 8/13/29 AAA 39,417 40,560
(+)+ 96-D3 A1C
7.40%, 10/13/26 Aaa 8,060 8,470
96-MD6 A1C
7.04%, 11/13/26 AAA 8,210 8,438
Beverly Finance Corp.
8.36%, 7/15/04 AA- 125 135
(+) Carousel Center
Finance, Inc.,
Series 1 A1
6.828%, 11/15/07 AA 6,200 6,244
CBM Funding Corp., Series
96-1 A3PI
7.08%, 2/1/13 AA 7,520 7,752
(+) Creekwood Capital
Corp., Series 95-1A
8.47%, 3/16/15 AA 5,612 6,249
(+) Crystal Run
Properties, Series A
7.393%, 8/15/11 AA 8,500 8,878
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
CS First Boston Mortgage
Securities Corp.,
Series 97-C1 A1C
7.24%, 6/20/29 AAA $ 15,010 $ 15,568
DLJ Mortgage Acceptance
Corp.,
Series:
(+) 95-CF2 A3
7.05%, 12/17/27 A 3,300 3,329
95-CF2 S2 IO
1.645%, 12/17/27 BBB 48,300 4,389
(+) 96-CF1 A1B
7.58%, 3/13/28 AAA 5,350 5,639
(+) 96-CF2 A1B
7.29%, 11/12/21 AAA 2,320 2,404
(+)## 96-CF2 S IO
1.643%, 11/12/21 N/R 38,197 3,387
+## GMAC Commercial
Mortgage Securities,
Inc., Series 96-C1 X2
IO
1.96%, 3/15/21 Aaa 35,229 3,289
+ GS Mortgage Securities
Corp.,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa 15,545 15,876
97-GL X2 IO
1.07%, 7/13/30 Aaa 37,474 2,013
(+) Lakeside Finance
Corp.
6.47%, 12/15/00 AA 145 145
(+) Lakewood Mall Finance
Co., Series 95-C1 A
7.00%, 8/13/10 AA 7,000 7,133
+ LB Commercial Conduit
Mortgage Trust, Series
96-C2 A
7.416%, 10/25/26 Aaa 9,936 10,328
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C1 A3
7.42%, 4/25/28 AAA 11,500 12,001
96-C2 A2
6.82%, 11/21/28 AAA 3,855 3,903
96-C2 IO
1.529%, 11/21/28 N/R 40,132 3,603
97-C1 A3
7.12%, 6/18/29 AAA 13,000 13,382
+ Midland Realty
Acceptance Corp.,
Series 96-C2 A2
7.233%, 1/25/27 Aaa 6,855 7,093
Mortgage Capital Funding,
Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 10,750 11,094
+ 97-MC1 A3
7.288%, 7/20/27 Aaa 14,250 14,818
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
26
<PAGE> 29
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Nomura Asset Securities
Corp.,
Series:
94-MD1 A1B
7.526%, 3/15/18 N/R $ 280 $ 288
94-MD1 A2
7.664%, 3/15/18 N/R 65 68
94-MD1 A3
8.026%, 3/15/18 N/R 4,349 4,680
(+) Park Avenue Finance
Corp., Series 97-C1 A1
7.58%, 5/12/07 N/R 11,907 12,516
Prime Property Funding,
Series 1 A
6.633%, 7/23/03 AA 4,834 4,835
+ Salomon Brothers
Mortgage Securities,
Series 97-TZH A2
7.174%, 3/24/22 Aa2 8,000 8,227
Sawgrass Financial,
Series 93-A1
6.45%, 1/20/06 AAA 155 155
## Structured Asset
Securities Corp.,
Series:
96-CFL X1A IO
1.483%, 2/25/28 N/R 63,256 1,680
96-CFL X1 IO
1.335%, 2/25/28 N/R 64,538 3,345
96-CFL X2 IO
1.249%, 2/25/28 N/R 15,835 475
- -------------------------------------------------------
GROUP TOTAL 270,738
- -------------------------------------------------------
ENERGY (0.4%)
(+) Excel Paralubes
Funding
7.43%, 11/1/15 A- 7,125 7,218
Mobile Energy Services
8.665%, 1/1/17 BBB- 7,021 7,475
- -------------------------------------------------------
GROUP TOTAL 14,693
- -------------------------------------------------------
FINANCE (12.1%)
(+) Anthem Insurance
Cos., Inc., Series A
9.00%, 4/1/27 BBB+ 17,085 18,415
(+) BankAmerica
Institutional, Series A
8.07%, 12/31/26 A- 18,525 19,051
(+) BT Institutional
Capital Trust, Series A
8.09%, 12/1/26 BBB+ 16,725 16,929
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 14,950 15,272
(+) Equitable Life
Assurance Society of
the U.S., Series 1 A
6.95%, 12/1/05 A 15,162 15,273
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
(+) Farmers Insurance
Exchange
8.625%, 5/1/24 BBB+ $ 15,620 $ 16,633
(+) First Chicago NBD
Corp., Series A
7.95%, 12/1/26 A- 20,100 20,302
First Union Institutional
Capital, Series I
8.04%, 12/1/26 BBB+ 23,710 24,302
(+) Florida Property &
Casualty
7.375%, 7/1/03 A- 8,700 8,981
(+) Florida Windstorm
6.70%, 8/25/04 A- 19,575 19,513
(+)+ Home Ownership
Funding Corp.,
13.331% (Preferred
Stock) Aaa (1)63,625 61,744
(+) John Hancock Surplus
Note
7.375%, 2/15/24 AA- 18,260 18,247
(+) Metropolitan Life
Insurance Co.
7.45%, 11/1/23 AA 12,200 11,871
(+) Nationwide Mutual
Life Insurance Co.
7.50%, 2/15/24 A+ 13,160 12,950
NB Capital Trust
8.25%, 4/15/27 A- 13,975 14,730
(+) New York Life
Insurance Co.
7.50%, 12/15/23 AA 6,105 6,042
PNC Institutional
Capital, Series A
7.95%, 12/15/26 BBB+ 17,675 17,752
(+) Prime Property
Funding
6.80%, 8/15/02 A 6,485 6,520
7.00%, 8/15/04 A 6,720 6,790
(+) State Street
Institutional Capital,
Series:
A
7.94%, 12/30/26 A 9,800 9,989
B
8.035%, 3/15/27 A 6,575 6,759
Washington Mutual Capital
8.375%, 6/1/27 BBB- 4,775 5,010
Wells Fargo Capital,
Series:
(+) A
8.125%, 12/1/26 BBB 16,875 17,361
B
7.95%, 12/1/26 BBB+ 1,900 1,915
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 10,369 10,480
96 WFP-D
6.95%, 9/1/13 AA- 16,625 16,833
- -------------------------------------------------------
GROUP TOTAL 399,664
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
27
<PAGE> 30
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
FOREIGN GOVERNMENTS (0.9%)
Government of Germany
7.375%, 1/3/05 AAA DEM 45,775 $ 29,100
- -------------------------------------------------------
INDUSTRIALS (3.5%)
## Blue Bell Funding
11.85%, 5/1/99 BB- $ 4,542 4,655
DR Securitized Lease
Trust,
Series:
93-K1 A1
6.66%, 8/15/10 BB- 9,247 8,426
93-K1 A2
7.43%, 8/15/18 BB- 260 226
94-K1 A1
7.60%, 8/15/07 BB- 7,075 6,882
DR Structured Finance,
Series 94-K2
9.35%, 8/15/19 BB- 3,795 3,845
(+) Entertainment
Properties,
14.253% (Preferred
Stock) BBB- (1)10,200 9,811
(+) HMH Properties, Inc.
8.875%, 7/15/07 BB- 3,450 3,540
Kmart Corp.
7.75%, 10/1/12 B+ 160 150
Kmart Funding Corp.,
Series F
8.80%, 7/1/10 BB- 3,500 3,572
News America Holdings
8.875%, 4/26/23 BBB 12,030 13,309
7.75%, 1/20/24 BBB 2,425 2,392
(+) Oxymar
7.50%, 2/15/16 BBB 5,520 5,516
Paramount Communications,
Inc.
8.25%, 8/1/22 BB+ 23,577 23,278
Philip Morris Cos., Inc.
6.375%, 2/1/06 A 170 164
Rhone-Poulenc Rorer,
Inc., Series 92-A 3
8.62%, 1/5/21 BBB+ 7,950 8,698
Scotia Pacific Holding
Co.
7.95%, 7/20/15 BBB 6,940 7,258
Southland Corp.
5.00%, 12/15/03 BB+ 11,148 9,615
Tier One Properties,
11.095% (Preferred
Stock) A (1)4,650 4,556
- -------------------------------------------------------
GROUP TOTAL 115,893
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
NON-AGENCY FIXED RATE MORTGAGES (0.0%)
sec. Household Bank,
Series 85-1
7.94%, 5/1/02
(acquired 6/22/94,
cost $259) N/R $ 274 $ 275
sec.## Magnolia Federal
Bank, Series 84-2
9.111%, 10/1/07
(acquired 5/1/87, cost
$793) N/R 843 865
- -------------------------------------------------------
GROUP TOTAL 1,140
- -------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.3%)
Bank of America, Series A
8.375%, 5/1/07 AAA 17 17
(+) DLJ Mortgage
Acceptance Corp.,
Series 93-MF7 A1
7.40%, 6/18/03 AAA 112 115
## Resolution Trust
Corp., Series 92-5 C
8.618%, 1/25/26 AA 4,479 4,518
Ryland Acceptance Corp.
IV, Series 79-A
6.65%, 7/1/11 AA 4,712 4,539
+ Town & Country Funding
Corp., Series A
5.85%, 8/15/98 Aa2 550 549
- -------------------------------------------------------
GROUP TOTAL 9,738
- -------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES-
AGENCY COLLATERAL SERIES (1.2%)
Federal National Mortgage
Association,
Series:
249 1 PO
10/25/23 Agy 39,071 25,818
254 1 PO
1/1/24 Agy 4,735 3,392
260 1 PO
4/1/24 Agy 6,307 4,481
93-146 G PO REMIC
5/25/23 Agy 5,411 3,546
93-243 C PO REMIC
11/25/23 Agy 1,192 920
93-M2 B IO REMIC
2.575%, 11/25/23 Agy 250 14
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
28
<PAGE> 31
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-27 A PO REMIC
10/25/23 Agy $ 155 $ 68
First Boston Mortgage
Securities Corp.,
Series 87-B2 IO
8.985%, 4/25/17 AAA 67 19
- -------------------------------------------------------
GROUP TOTAL 38,258
- -------------------------------------------------------
TELEPHONES (1.2%)
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ 7,615 8,348
Tele-Communications, Inc.
9.25%, 1/15/23 BBB- 16,515 17,773
8.75%, 2/15/23 BBB- 3,160 3,268
# Teleport Communications
Group, Inc.
0.00%, 7/1/07 B 12,270 9,601
- -------------------------------------------------------
GROUP TOTAL 38,990
- -------------------------------------------------------
TRANSPORTATION (0.3%)
(+) Jet Equipment Trust,
Series:
95-A A11
10.00%, 6/15/12 A+ 275 341
95-5A C
10.69%, 11/1/13 BBB 8,320 10,530
- -------------------------------------------------------
GROUP TOTAL 10,871
- -------------------------------------------------------
U.S. TREASURY SECURITIES (28.4%)
U.S. Treasury Bond
8.75%, 8/15/20 Tsy 139,435 176,777
U.S. Treasury Notes
6.25%, 5/31/99 Tsy 239,800 241,524
6.75%, 6/30/99 Tsy 136,800 138,937
6.875%, 7/31/99 Tsy 15,000 15,267
(dd) 7.125%, 9/30/99 Tsy 223,000 228,434
3.375%, 1/15/07
(Inflation Indexed) Tsy 108,694 106,621
U.S. Treasury Strips, PO
11/15/18 Tsy 125,000 31,584
2/15/19 Tsy 5,000 1,243
- -------------------------------------------------------
GROUP TOTAL 940,387
- -------------------------------------------------------
UTILITIES (0.2%)
(+) Edison Mission Energy
Funding Corp., Series B
7.33%, 9/15/08 BBB 7,125 7,328
- -------------------------------------------------------
YANKEE (5.2%)
(+) Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB 18,400 18,776
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
AST Research, Inc.
7.45%, 10/1/02 A- $ 12,500 $ 12,449
(+) Hyundai Semiconductor
America
8.625%, 5/15/07 BBB- 10,100 10,307
(+) Israel Electric
Corp., Ltd.
7.25%, 12/15/06 A- 7,925 8,030
Korea Development Bank
7.375%, 9/17/04 AA- 11,360 11,451
National Power Corp.
7.875%, 12/15/06 BB+ 11,080 10,807
8.40%, 12/15/16 BB+ 7,525 7,220
(+) Paiton Energy Funding
9.34%, 2/15/14 BBB- 9,395 10,304
(+) Petroliam Nasional
Bhd.
7.125%, 10/18/06 A+ 11,850 11,745
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 16,420 17,341
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ 18,340 19,917
## Republic of Argentina
5.00%, 3/31/23 BB 16,320 12,322
Republic of Argentina
Par, Series L, 'Euro'
5.50%, 3/31/23 BB 4,160 3,141
Republic of Colombia
8.70%, 2/15/16 BBB- 8,855 9,025
United Mexican States,
Series A
6.25%, 12/31/19 BB 10,975 9,096
- -------------------------------------------------------
GROUP TOTAL 171,931
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$3,179,704) 3,237,584
- -------------------------------------------------------
RIGHTS (0.0%)
- -------------------------------------------------------
SHARES
------
@ United Mexican States Recovery
Rights, expiring 6/30/03
(Cost $0) (1) 25,575,000 --
- -------------------------------------------------------
STRUCTURED INVESTMENT (0.1%)-SEE NOTE A7
- -------------------------------------------------------
FACE
AMOUNT
(000)
--------
Morgan Guaranty Trust
Company, 11/20/05;
monthly payments equal
to 1% per annum of the
outstanding notional
balance, indexed to
GNMA ARM pools
(Cost $6,212) N/R $ 156,321 4,513
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
29
<PAGE> 32
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
INTEREST RATE CAPS (0.1%)-SEE NOTE A6
- -------------------------------------------------------
Bankers Trust Co., Inc.,
terminating 10/15/99,
to receive on 10/15/99
the excess, as measured
on 10/15/98, of 12
month LIBOR over 6.34%
multiplied by the
notional amount. N/R $ 2,800 $ 8
J.P. Morgan and Co.,
Inc., terminating
10/15/99, to receive on
10/15/99 the excess, as
measured on 10/15/98,
of 12 month LIBOR over
6.34% multiplied by the
notional amount. N/R 778,400 2,355
- -------------------------------------------------------
GROUP TOTAL (Premium Paid $3,301) 2,363
- -------------------------------------------------------
CASH EQUIVALENTS (23.2%)
- -------------------------------------------------------
Short-term Investments
Held as Collateral for
Loaned Securities
(16.5%) 544,483 544,483
- -------------------------------------------------------
COMMERCIAL PAPER (3.8%)
American Express Credit
Corp.
5.50%, 10/17/97 30,000 29,927
Atlantic Asset
Securitization Corp.
5.57%, 10/16/97 20,000 19,954
Delaware Funding Corp.
5.50%, 10/14/97 50,000 49,900
John Deere Capital Corp.
5.53%, 10/7/97 25,000 24,977
- -------------------------------------------------------
GROUP TOTAL 124,758
- -------------------------------------------------------
AGENCY FLOATING RATE MORTGAGE (0.0%)
## Federal Home Loan
Mortgage Corporation
2/15/24 135 135
- -------------------------------------------------------
DISCOUNT NOTE (0.7%)
Federal National Mortgage
Association
10/30/97 25,000 24,890
- -------------------------------------------------------
U.S. TREASURY SECURITY (0.0%)
U.S. Treasury Bill
11/13/97 235 234
- -------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT (2.2%)
Chase Securities, Inc. 5.90%
dated 9/30/97, due 10/1/97, to
be repurchased at $71,792,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$72,456 $ 71,780 $ 71,780
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $766,280) 766,280
- -------------------------------------------------------
TOTAL INVESTMENTS (121.3%) (Cost
$3,955,497) 4,010,740
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-21.3%)
Cash 1
Dividends Receivable 2,973
Interest Receivable 35,743
Receivable for Investments Sold 41,860
Receivable for Fund Shares Sold 16,011
Unrealized Gain on Swap Agreements 54
Receivable for Daily Variation on Futures
Contracts 170
Other Assets 67
Payable for Investments Purchased (251,715)
Payable for Fund Shares Redeemed (797)
Payable for Investment Advisory Fees (2,920)
Payable for Administrative Fees (212)
Payable for Shareholder Servicing
Fees-Investment Class (1)
Payable for Distribution Fees-Adviser Class (14)
Payable for Trustees' Deferred Compensation
Plan-Note F (57)
Unrealized Loss on Forward Foreign Currency
Contracts (454)
Collateral on Securities Loaned, at Value (544,483)
Other Liabilities (769)
----------
(704,543)
- -------------------------------------------------------
NET ASSETS (100%) $3,306,197
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 263,471,478 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $3,219,987
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 12.22
- -------------------------------------------------------
INVESTMENT CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 779,333 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 9,527
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 12.22
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
30
<PAGE> 33
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADVISER CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 6,275,192 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $ 76,683
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 12.22
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $3,155,536
Undistributed Net Investment Income (Loss) 57,872
Undistributed Realized Net Gain (Loss) 40,102
Unrealized Appreciation (Depreciation) on:
Investment Securities 55,243
Foreign Currency Transactions (534)
Futures and Swaps (2,022)
- -------------------------------------------------------
NET ASSETS $3,306,197
- -------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C>
sec. Restricted Security-Total market value of
restricted securities owned at September 30, 1997
was $16,574 or 0.5% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public sale
may exist.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
# Step Bond-Coupon rate increases in increments to
maturity. Rate disclosed is as of September 30,
1997. Maturity date disclosed is the ultimate
maturity.
## Variable or floating rate security-rate disclosed
is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
@ Value is less than $500.
Inv Fl Inverse Floating Rate-Interest rate fluctuates with
an inverse relationship to an associated interest
rate. Indicated rate is the effective rate at
September 30, 1997.
CMO Collateralized Mortgage Obligation
DEM German Mark
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See Note
A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
31
<PAGE> 34
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (96.9%)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (10.5%)
## Government National
Mortgage Association
Various Pools:
6.00%, 8/20/27-9/20/27 Agy $ 7,900 $ 7,959
November TBA
6.00%, 11/20/27 Agy 2,225 2,238
- -------------------------------------------------------
GROUP TOTAL 10,197
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (12.7%)
Federal Home Loan Mortgage
Corporation
Conventional Pools:
10.00%, 9/1/17-11/1/20 Agy 760 830
10.50%, 4/1/26 Agy 473 527
11.00%, 5/1/20 Agy 220 247
Gold Pools:
7.00%, 4/1/24-12/1/24 Agy 1,895 1,897
12.00%, 11/1/19 Agy 91 105
Federal National Mortgage
Association
Conventional Pools:
9.50%, 2/1/20-8/1/21 Agy 933 1,012
10.00%, 5/1/22 Agy 139 152
10.50%, 12/1/17 Agy 379 424
11.50%, 9/1/25 Agy 179 204
Government National Mortgage
Association
Various Pools:
7.00%, 12/15/22-12/15/23 Agy 3,256 3,267
10.00%, 9/15/18-12/25/26 Agy 1,029 1,139
10.50%, 5/15/19-2/15/25 Agy 1,295 1,456
11.00%, 12/15/09-7/15/20 Agy 775 887
12.00%, 12/15/12-3/15/15 Agy 141 163
- -------------------------------------------------------
GROUP TOTAL 12,310
- -------------------------------------------------------
ASSET BACKED CORPORATES (8.1%)
(+) Aegis Auto Receivables
Trust, Series 95-1 A
8.60%, 3/20/02 N/R 221 222
## Airplanes Pass Through
Trust, Series 1 B
6.756%, 3/15/19 A 339 340
ALPS, Series 94-1 A4 CMO
7.80%, 9/15/04 AA 375 384
Americredit Automobile
Receivables Trust, Series
96-B A
6.50%, 1/12/02 AAA 402 404
Arcadia Auto Receivables
Trust, Series 97-C A4
6.375%, 1/15/03 AAA 480 482
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
CPS Auto Grantor Trust,
Series 97-2 A
6.65%, 10/15/02 AAA $ 330 $ 332
(+) First Merchants Auto
Receivables Corp., Series
97-2 A1
6.85%, 11/15/02 AAA 376 378
First Plus Home Loan Trust,
Series:
97-3 A2
6.48%, 9/10/08 AAA 285 286
97-3 A3
6.57%, 10/10/10 AAA 280 281
Honda Auto Receivables
Grantor Trust,
Series 97-A A
5.85%, 2/15/03 AAA 815 814
(+) Long Beach Auto, Series
97-2 A
6.69%, 9/25/04 AAA 370 371
NAL Auto Trust, Series 97-2A
7.75%, 9/15/02 A 467 467
(+) National Car Rental
Financing Ltd., Series
96-1 A4
7.35%, 10/20/03 A 375 384
(+)++ NPR Health Care,
Series 97-1 A
6.815%, 7/1/01 AAA 200 202
(+) Railcar Leasing Series 1
A2
7.125%, 1/15/13 AAA 650 672
(+) Team Fleet Financing
Corp.,
Series:
96-1 A
6.65%, 12/15/02 A- 250 250
97-1 A
7.35%, 5/15/03 A- 600 617
Union Acceptance Corp.,
Series 96-B A
6.45%, 7/9/03 AAA 451 452
WFS Financial Owner Trust,
Series 97-C A3
6.10%, 3/20/02 AAA 490 489
- -------------------------------------------------------
GROUP TOTAL 7,827
- -------------------------------------------------------
ASSET BACKED MORTGAGES (3.0%)
AFC Home Equity Loan Trust,
Series 96-4 1A6
7.22%, 3/25/27 AAA 500 505
Cityscape Home Equity Loan
Trust,
Series:
96-3 YMA
10/25/26 N/R 7,094 10
96-3 A8
7.65%, 9/25/25 AAA 450 460
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
32
<PAGE> 35
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
sec. 96-3 A IO
1.00%, 10/25/26 (acquired
12/24/96, cost $214) AAA $ 7,094 $ 176
Contimortgage Home Equity
Loan Trust,
Series:
96-3 A7
8.04%, 9/15/27 AAA 400 420
(+) 96-4 A11 IO
1.10%, 1/15/28 AAA 6,027 158
96-4 A12 IO
1.05%, 1/15/28 AAA 1,947 51
96-4 A12 YMA
1/15/28 AAA 2,435 4
(+) 96-4 A12 YMA
1/15/28 AAA 7,300 11
(+) 97-1 A10 YMA
3/15/28 N/R 7,242 10
97-1 A10 IO
1.10%, 3/15/28 AAA 7,075 194
Delta Funding Home Equity
Loan Trust,
Series 96-2 A5
8.01%, 10/25/27 AAA 434 459
IMC Home Equity Loan Trust,
Series 96-3 A7
8.05%, 8/25/26 AAA 450 469
- -------------------------------------------------------
GROUP TOTAL 2,927
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL
SERIES (1.7%)
## Collateralized Mortgage
Obligation Trust, Series
16-Q Inv Fl
12.375%, 3/20/18 AAA 128 139
Federal Home Loan Mortgage
Corporation,
Series:
## 1632-SA Inv Fl REMIC
5.336%, 11/15/23 Agy 300 250
## 1699-SD Inv Fl IO REMIC
2.313%, 3/15/24 Agy 1,836 147
Federal National Mortgage
Association,
Series:
96-37 H PO REMIC
8/25/23 Agy 423 314
97-3 E PO REMIC
12/25/23 Agy 275 185
282 1 PO
5/15/24 Agy 964 660
- -------------------------------------------------------
GROUP TOTAL 1,695
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS- NON-AGENCY
COLLATERAL SERIES (7.7%)
Bear Stearns Mortgage
Securities, Inc., Series
96-9 AI11
8.00%, 12/25/27 AAA $ 250 $ 260
Citicorp Mortgage
Securities, Inc.,
Series:
94-7 A5
6.25%, 4/25/24 AAA 550 494
sec.++ 95-2 B1 REMIC
7.50%, 4/25/25 (acquired
8/14/95-9/27/96, cost
$400) AA 415 422
Countrywide Mortgage Backed
Securities, Inc.,
Series 93-C A11
6.50%, 1/25/24 AAA 238 228
(+) DLJ Mortgage Acceptance
Corp.,
Series:
97-CFI A1B
7.60%, 5/15/30 AAA 450 477
97-CFI S IO
1.097%, 5/15/30 AAA 2,890 192
97-CF2 A1B
6.82%, 10/15/30 AAA 550 554
++ First Boston Mortgage
Securities Corp., Series
93-5 B1
7.30%, 7/25/23 A 239 239
GE Capital Mortgage
Services, Inc.,
Series:
94-24 A4
7.00%, 7/25/24 AAA 218 209
94-27 A6
6.50%, 7/25/24 AAA 250 232
+ Independent National
Mortgage Corp., Series
94-O B1
7.875%, 9/25/24 A2 243 250
J. P. Morgan Commercial
Mortgage Finance Corp.,
Series 97-2 C5 A2
7.069%, 9/15/29 AAA 450 460
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA 100 109
PNC Mortgage Securities
Corp.,
Series:
94-3 A8
7.50%, 7/25/24 AAA 150 149
96-1 B1
7.50%, 6/25/26 AA 444 449
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
33
<PAGE> 36
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC FIXED
INCOME PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Prudential Home Mortgage
Securities Co., Inc.,
Series:
90-5 A3
9.50%, 5/25/05 AAA $ 29 $ 29
95-2 M
8.50%, 6/25/25 AA 271 286
Residential Accredit Loans,
Inc.,
Series:
+ 97-QS1 A11
7.50%, 2/25/27 Aaa 500 506
97-QS12 A8 TBA
7.25%, 12/25/27 AAA 550 551
Residential Asset
Securitization Trust,
Series 96-A11 A9
7.75%, 2/25/27 AAA 350 358
Residential Funding Mortgage
Securities Co., Inc.,
Series:
++ 93-MZ3 A2
6.97%, 8/28/23 AA 550 536
93-S27 M2
7.50%, 6/25/23 A 237 239
Rural Housing Trust,
Series 87-1 M
3.33%, 10/1/28 A- 261 249
- -------------------------------------------------------
GROUP TOTAL 7,478
- -------------------------------------------------------
COMMERCIAL MORTGAGES (10.3%)
American Southwest Financial
Securities Corp.,
Series:
++## 93-2 S1 IO
1.056%, 1/18/09 AA 6,561 332
+ 95-C1 A1B
7.40%, 11/17/04 Aaa 225 233
Asset Securitization Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 211 222
95-MD4 A1
7.10%, 8/13/29 AAA 268 276
## 95-MD4 ACS2 IO
2.381%, 8/13/29 AAA 1,766 314
(+) 96-D3 A1C
7.40%, 10/13/26 Aaa 375 394
96-MD6 A1C
7.04%, 11/13/26 AAA 400 411
(+) Carousel Center Finance,
Inc., Series 1 B
7.188%, 10/15/07 A 325 331
CBM Funding Corp.,
Series 96-1 A3PI
7.08%, 2/1/13 AA 250 258
Chase Commercial Mortgage
Securities Corp., Series
96-2 B
6.90%, 10/19/06 AA 500 504
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Creekwood Capital Corp.,
Series 95-1A
8.47%, 3/16/15 AA $ 242 $ 269
(+) CVM Finance Corp.
7.19%, 3/1/04 AA 434 445
(+) DLJ Mortgage Acceptance
Corp.,
Series:
95-CF2 A3
7.05%, 12/17/27 A 400 403
95-CF2 A1B
7.29%, 7/15/06 AAA 385 399
96-CF1 A1B
7.58%, 3/13/28 AAA 375 395
## 96-CF2 S IO
1.643%, 11/12/21 AAA 3,836 340
(+) Forum Finance
7.125%, 5/15/04 AA 375 383
+## GMAC Commercial Mortgage
Securities, Inc., Series
96-C1 X2 IO
1.96%, 3/15/21 Aaa 2,318 216
+ LB Commercial Conduit
Mortgage Trust, Series
96-C2 A
7.416%, 10/25/26 Aaa 468 487
(+) Lakewood Mall Finance
Co., Series 95-C1 A
7.00%, 8/13/10 AA 275 280
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C1 A3
7.42%, 4/25/28 AAA 275 287
96-C2 A2
6.82%, 11/21/28 AAA 200 202
++ 96-C2 IO
1.529%, 11/21/28 AAA 2,007 180
+ Midland Realty Acceptance
Corp., Series 96-C2 A2
7.233%, 1/25/27 Aaa 325 336
Mortgage Capital Funding,
Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 225 232
+ 97-MC1 A3
7.288%, 7/20/27 Aaa 650 676
++ Nomura Asset Securities
Corp.,
Series:
94-MD1 A1B
7.526%, 3/15/18 AAA 100 103
## 94-MD1 A2
7.664%, 3/15/18 AAA 125 131
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
34
<PAGE> 37
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Park Avenue Finance
Corp.,
Series 97-C1 A1
7.58%, 5/12/07 N/R $ 496 $ 522
(+) Prime Property Funding,
Series 1 A
6.633%, 7/23/03 AA 173 173
++## Structured Asset
Securities Corp.,
Series:
96-CFL X1 IO
1.335%, 2/25/28 AAA 3,344 173
96-CFL X1A IO
1.483%, 2/25/28 AAA 3,293 87
96-CFL X2 IO
1.249%, 2/25/28 AAA 880 26
- -------------------------------------------------------
GROUP TOTAL 10,020
- -------------------------------------------------------
ENERGY (0.7%)
(+) Excel Paralubes Funding
7.43%, 11/1/15 A- 450 456
Paiton Energy Funding
9.34%, 2/15/14 BBB- 175 192
- -------------------------------------------------------
GROUP TOTAL 648
- -------------------------------------------------------
FINANCE (14.4%)
(+) Anthem Insurance Cos.,
Inc., Series A
9.00%, 4/1/27 BBB+ 450 485
(+) BankAmerica
Institutional,
Class A
8.07%, 12/31/26 A- 525 540
(+) BT Institutional Capital
Trust, Series A
8.09%, 12/1/26 BBB+ 450 455
(+) Corestates Capital Corp.
8.00%, 12/15/26 A- 425 434
(+) Equitable Life Assurance
Society of the U.S.,
Series 1A
6.95%, 12/1/05 A 600 604
(+) Farmers Insurance
Exchange
8.625%, 5/1/24 BBB+ 475 506
(+) Fifty-Seventh Street
Associates
7.125%, 6/1/17 A 571 574
(+) First Chicago NBD Corp.,
Series A
7.95%, 12/1/26 A- 550 556
(+) First Hawaiian Bank,
Series A
6.93%, 12/1/03 A 575 580
First Union Institutional
Capital, Series I
8.04%, 12/1/26 BBB+ 525 538
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Florida Property &
Casualty
7.375%, 7/1/03 A- $ 250 $ 258
7.45%, 7/1/04 A 150 156
(+) Florida Windstorm
6.70%, 8/25/04 A- 300 299
(+)+ Home Ownership Funding
Corp.,
13.331% (Preferred Stock) Aaa (1)2,375 2,305
(+) John Hancock Surplus
Note
7.375%, 2/15/24 AA- 790 789
(+) Metropolitan Life
Insurance Co.
7.45%, 11/1/23 AA 400 389
(+) Nationwide Mutual Life
Insurance Co.
7.50%, 2/15/24 A+ 350 344
NB Capital Trust
8.25%, 4/15/27 A- 325 343
PNC Institutional Capital,
Series A
7.95%, 12/15/26 BBB+ 625 628
(+) Prime Property Funding
7.00%, 8/15/04 A 400 404
Republic of Colombia
8.70%, 2/15/16 BBB- 300 306
(+) State Street
Institutional Capital,
Series:
A
7.94%, 12/30/26 A 400 408
B
8.035%, 3/15/27 A 100 103
Washington Mutual Capital
8.375%, 6/1/27 BBB- 180 189
(+) Wells Fargo Capital,
Series A
8.125%, 12/1/26 BBB 600 617
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 893 903
96 WFP-D
6.95%, 9/1/13 AA- 250 253
- -------------------------------------------------------
GROUP TOTAL 13,966
- -------------------------------------------------------
INDUSTRIALS (0.6%)
News America Holdings
7.75%, 1/20/24 BBB 75 74
7.75%, 2/1/24 BBB 305 301
Tier One Properties,
11.095% (Preferred Stock) A (1)200 196
- -------------------------------------------------------
GROUP TOTAL 571
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
35
<PAGE> 38
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC FIXED
INCOME PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
RATED NON-AGENCY FIXED RATE MORTGAGES (0.3%)
sec.## Gemsco Mortgage Pass
thru Certficate,
Series 87-A
8.701%, 11/25/10
(acquired 9/9/88, cost
$258) AA $ 281 $ 286
## Resolution Trust Corp.,
Series 92-5 C
8.618%, 1/25/26 AA 43 43
- -------------------------------------------------------
GROUP TOTAL 329
- -------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES - AGENCY COLLATERAL
SERIES (2.2%)
Federal Home Loan Mortgage
Corporation,
Series 1911-C PO
11/15/23 Agy 700 361
Federal National Mortgage
Association,
Series:
96-34 C PO
3/25/23 Agy 525 279
249 1 PO
10/25/23 Agy 1,631 1,078
254 1 PO
1/1/24 Agy 218 156
260 1 PO
4/1/24 Agy 292 207
- -------------------------------------------------------
GROUP TOTAL 2,081
- -------------------------------------------------------
TELEPHONES (0.5%)
Tele-Communications, Inc.
9.25%, 1/15/23 BBB- 450 484
- -------------------------------------------------------
TRANSPORTATION (0.5%)
(+) Jet Equipment Trust,
Series 95-A A11
10.00%, 6/15/12 A+ 395 490
- -------------------------------------------------------
U.S. TREASURY SECURITIES (23.7%)
U.S. Treasury Bond
8.75%, 8/15/20 Tsy 900 1,141
U.S. Treasury Notes
7.00%, 4/15/99 Tsy 2,625 2,672
6.25%, 5/31/99 Tsy 9,725 9,795
6.75%, 6/30/99 Tsy 2,280 2,316
(dd) 7.125%, 9/30/99 Tsy 1,875 1,921
3.375%, 1/15/07
(Inflation Indexed) Tsy 3,647 3,577
U.S. Treasury Strip, PO
11/15/18 Tsy 6,000 1,516
- -------------------------------------------------------
GROUP TOTAL 22,938
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $92,468) 93,961
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
INTEREST RATE CAP (0.1%)-SEE NOTE A6
- -------------------------------------------------------
J.P. Morgan and Co., Inc.,
terminating 10/15/99, to
receive on 10/15/99 the
excess, as measured on
10/15/98, of 12 month
LIBOR over 6.34%
multiplied by the notional
amount (Premium Paid $111) N/R $ 26,200 $ 79
- -------------------------------------------------------
CASH EQUIVALENTS (8.3%)
- -------------------------------------------------------
Short-term Investments Held as
Collateral for Loaned Securities
(3.1%) 2,970 2,970
- -------------------------------------------------------
REPURCHASE AGREEMENT (5.2%)
Chase Securities, Inc. 5.90%, dated
9/30/97, due 10/1/97, to be
repurchased at $5,068,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at $5,115 5,068 5,068
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $8,038) 8,038
- -------------------------------------------------------
TOTAL INVESTMENTS (105.3%) (Cost $100,617) 102,078
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.3%)
Cash 1
Dividends Receivable 100
Interest Receivable 1,171
Receivable for Investments Sold 612
Receivable for Fund Shares Sold 4
Unrealized Gain on Swap Agreements 2
Other Assets 3
Payable for Investments Purchased (3,856)
Payable for Fund Shares Redeemed (66)
Payable for Investment Advisory Fees (83)
Payable for Administrative Fees (7)
Payable for Trustees' Deferred Compensation
Plan-Note F (2)
Payable for Daily Variation on Futures
Contracts (1)
Collateral on Securities Loaned, at Value (2,970)
Other Liabilities (32)
-------
(5,124)
- -------------------------------------------------------
NET ASSETS (100%) $96,954
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
36
<PAGE> 39
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C> <C> <C>
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 8,599,726 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $96,954
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.27
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $92,986
Undistributed Net Investment Income (Loss) 1,805
Undistributed Realized Net Gain (Loss) 702
Unrealized Appreciation (Depreciation) on
Investment Securities 1,461
- -------------------------------------------------------
NET ASSETS $96,954
- -------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C> <C>
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1997 was $884 or 0.9% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
++ Fitch Rating. Security is not rated by Standard
& Poor's Corporation or Moody's Investor
Service, Inc.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
CMO Collateralized Mortgage Obligation
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1997.
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
37
<PAGE> 40
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (90.9%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- ------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
ASSET BACKED CORPORATES (3.5%)
ALPS, Series 96-1 D
12.75%, 6/15/06 BB- $ 6,507 $ 7,022
EES Coke Battery Co.,
Inc.
9.382%, 4/15/07 BB- 2,500 2,615
Federal Mortgage
Acceptance Corp., Loan
Receivables Trust,
Series 96-B C A1
7.929%, 11/1/18 N/R 3,335 2,990
(+)+ Long Beach Auto,
Series 97-1 B
14.22%, 10/26/03 Ba3 6,305 6,351
- ------------------------------------------------------
GROUP TOTAL 18,978
- ------------------------------------------------------
CABLE (8.1%)
Cablevision Systems
Corp.
9.875%, 5/15/06 B 6,340 6,847
(+)# Intermedia
Communications, Inc.
0.00%, 7/15/07 B 9,750 6,776
ITT Promedia
9.125%, 9/15/07 B- DEM 8,500 4,997
Paramount
Communications, Inc.
8.25%, 8/1/22 BB+ $ 5,325 5,258
TCI Pacific
Communications,
5.00% (Convertible
Preferred Stock) BB- (1)20,000 2,512
Time Warner, Inc.,
Series M,
10.25% (Preferred
Stock) BB+ (1)15,114 17,306
- ------------------------------------------------------
GROUP TOTAL 43,696
- ------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS - NON-AGENCY
COLLATERAL SERIES (3.1%)
sec.## CBA Mortgage
Corp., Series 93-C1 A2
7.76%, 12/25/03
(acquired 8/18/95,
cost $1,334) BB 1,657 1,644
+ Citicorp Mortgage
Securities, Inc.,
Series 90-8 A7
9.50%, 6/25/05 B3 1,375 723
(+)++ Countrywide
Funding Corp., Series
95-4 B3 7.50%, 9/25/25 BB 1,451 1,137
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
DLJ Mortgage Acceptance
Corp., Series:
sec. 94-3 B3
6.50%, 4/25/24
(acquired 5/8/95,
cost $914) N/R $ 1,369 $ 786
97-CF2
0.357%, 10/15/30 AAA 103,893 2,755
+ First Boston Mortgage
Securities Corp.,
Series 92-4R 2
8.025%, 10/25/22 Ba3 5 5
(+) GE Capital Mortgage
Services, Inc.,
Series 94-28 B3
8.00%, 8/25/24 N/R 1,379 1,137
(+) Prudential Home
Mortgage Securities
Co., Inc.,
Series:
+ 92-A 3B2
7.90%, 4/28/22 Caa 3,900 2,340
++ 96-5 B3
7.25%, 4/25/26 BB 1,458 1,321
Residential Funding Mortgage Securities Co.,
Inc.,
Series:
sec. 95-S10 B1
7.50%, 7/25/25
(acquired 8/25/95,
cost $464) BB 611 547
sec. 95-S11 B1
7.50%, 9/25/25
(acquired 8/25/95,
cost $966) BB 1,274 1,138
95-S16 B3
7.50%, 11/25/25 N/R 1,231 1,120
## Ryland Mortgage
Securities Corp.,
Series 92-A C1
8.27%, 3/29/30 BB 700 560
Saxon Mortgage Securities Corp.,
Series:
(+) 93-8A
6.75%, 2/25/24 BB 1,581 844
sec. 94-2 B3
6.75%, 1/25/24
(acquired 2/9/94,
cost $724) BB 847 495
- ------------------------------------------------------
GROUP TOTAL 16,552
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
38
<PAGE> 41
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGES (0.7%)
(+)## DLJ Mortgage
Acceptance Corp.,
Series 96-CF2 S IO
1.643%, 11/12/21 AAA $ 8,226 $ 730
+ GMAC Commercial
Mortgage Securities,
Inc., Series 96-C1 X2
IO
1.96%, 3/15/21 Aaa 14,833 1,385
## Structured Asset
Securities Corp.,
Series:
96-CFL X1 IO
1.335%, 2/25/28 AAA 20,994 1,088
96-CFL X1A IO
1.483%, 2/25/28 AAA 20,540 545
96-CFL X2 IO
1.249%, 2/25/28 AAA 5,146 154
- ------------------------------------------------------
GROUP TOTAL 3,902
- ------------------------------------------------------
ENERGY (2.5%)
Midland Funding II,
Series A
11.75%, 7/23/05 B- 2,300 2,708
Nuevo Energy Co.
9.50%, 4/15/06 B+ 3,836 4,095
Snyder Oil Corp.
8.75%, 6/15/07 B+ 4,480 4,474
(+)# Transamerica Energy
Corp.
0.00%, 6/15/02 B+ 2,525 2,001
- ------------------------------------------------------
GROUP TOTAL 13,278
- ------------------------------------------------------
FINANCE (7.2%)
(+) Anthem Insurance
Cos., Inc., Series A
9.00%, 4/1/27 BBB+ 6,525 7,033
(+) Cliffs Drilling Co.
10.25%, 5/15/03 B 975 1,051
(+) Commercial Financial
Services, Inc., Series
97-5 A1
7.72%, 6/15/05 A 5,200 5,197
(+) Geberit
International S.A.
10.125%, 4/15/07 B+ 4,240 2,631
Navistar Financial
Corp., Series B
9.00%, 6/1/02 B+ 1,545 1,595
Pindo Deli Finance
Mauritius
10.75%, 10/1/07 B 6,555 6,686
(+)# PTC International
Finance
0.00%, 7/1/07 B+ 8,560 5,607
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
(+) Riggs Capital Trust
II
8.875%, 3/15/27 BB- $ 4,370 $ 4,616
Western Financial Bank
8.875%, 8/1/07 BB+ 4,225 4,235
- ------------------------------------------------------
GROUP TOTAL 38,651
- ------------------------------------------------------
FOOD, TOBACCO & OTHER (0.4%)
(+) Ameriserv Food Co.
10.125%, 7/15/07 B- 2,150 2,228
- ------------------------------------------------------
HEALTH CARE (2.1%)
(+) Integrated Health
Services
9.50%, 9/15/07 B 4,155 4,280
Tenet Healthcare Corp.
8.625%, 1/15/07 B+ 3,880 4,021
(+) Vencor, Inc.
8.625%, 7/15/07 B+ 2,900 2,940
- ------------------------------------------------------
GROUP TOTAL 11,241
- ------------------------------------------------------
INDUSTRIALS (34.7%)
Advanced Micro Devices
11.00%, 8/1/03 BB- 5,295 5,937
(+) Azteca Holdings S.A.
11.00%, 6/15/02 B- 1,555 1,623
(+) Big Flower Press
8.875%, 7/1/07 B 4,600 4,583
(+) CA FM Lease Trust
8.50%, 7/15/17 BBB- 3,697 3,914
Comcast Cellular
9.50%, 5/1/07 BB+ 5,000 5,225
*(+)@ Consolidated
Hydro, Inc. (Warrants,
expiring 12/31/03) N/R (1)2,700 --
Consolidated Hydro,
Inc.,
13.50% (Preferred
Stock) N/R (1)1,500 11
DR Securitized Lease
Trust,
Series:
93-K1 A1
6.66%, 8/15/10 BB- 3,432 3,127
93-K1 A2
7.43%, 8/15/18 BB- 2,565 2,230
94-K1 A1
7.60%, 8/15/07 BB- 3,938 3,831
94-K1 A2
8.375%, 8/15/15 BB- 1,525 1,455
DR Structured Finance,
Series 94-K2
9.35%, 8/15/19 BB- 1,425 1,444
(+) Fleming Cos., Inc.
10.50%, 12/1/04 B+ 2,925 3,060
10.625%, 7/31/07 B+ 1,980 2,091
(+) Fox/Liberty Networks
# 0.00%, 8/15/07 B 3,740 2,384
8.875%, 8/15/07 B 2,310 2,324
Globalstar LP/Capital
11.375%, 2/15/04 B 6,510 6,803
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
39
<PAGE> 42
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
*(+) Globalstar
Telecommunications
Ltd. (Warrants,
expiring 2/15/04) N/R $ (1)6,510 $ 781
Grand Casinos, Inc.
10.125%, 12/1/03 BB 6,370 6,776
+ HMC Acquisition
Properties
9.00%, 12/15/07 Ba3 3,585 3,684
(+) HMH Properties, Inc.
8.875%, 7/15/07 BB- 1,005 1,031
(+) Hermes Europe
Railtel
11.50%, 8/15/07 B 1,320 1,419
Horseshoe Gaming
9.375%, 6/15/07 B 3,820 3,944
Host Marriott Travel
Plaza
9.50%, 5/15/05 BB- 5,175 5,447
(+)## Huntsman Corp.
9.094%, 7/1/07 B+ 4,675 4,862
(+) Hylsa SA de CV
9.25%, 9/15/07 BB 5,200 5,285
(+) Hyundai
Semiconductor America
8.625%, 5/15/07 BBB- 4,750 4,847
ISP Holdings, Inc.,
Series B
9.00%, 10/15/03 B+ 8,805 9,212
(+) Impress Metal
Packaging
9.875%, 5/29/07 B DEM 7,650 4,595
Kmart Funding Corp.,
Series F
8.80%, 7/1/10 BB- $ 4,850 4,949
# Norcal Waste Systems,
Inc.
13.00%, 11/15/05 BB- 7,910 9,097
Outdoor Systems, Inc.
8.875%, 6/15/07 B 7,360 7,507
(+) RBS Participacos SA
11.00%, 4/1/07 BB- 4,975 5,236
(+) Residential
Reinsurance
11.45%, 12/15/98 BB- 3,000 3,084
Revlon Worldwide,
Series B
Zero Coupon, 3/15/01 B- 6,850 4,975
SD Warren Co.
12.00%, 12/15/04 B+ 4,300 4,864
Sinclair Broadcast
Group, Inc.
9.00%, 7/15/07 B 2,300 2,289
Sinclair Capital,
11.625% (Preferred
Stock) B (1)52,815 5,730
Station Casinos, Inc.
9.75%, 4/15/07 B+ 4,410 4,399
(+)# TCI Satellite
Entertainment, Inc.
0.00%, 2/15/07 B- 15,295 9,980
Total Access
Communications
(Convertible)
2.00%, 5/31/06 BBB- 1,640 1,644
Tele-Communications,
Inc.
9.25%, 1/15/23 BBB- 5,170 5,564
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
+ TV Azteca S.A.,
Series:
B
10.50%, 2/15/07 Ba3 $ 5,540 $ 5,872
Viacom, Inc.
8.00%, 7/7/06 BB- 10,020 9,995
- ------------------------------------------------------
GROUP TOTAL 187,110
- ------------------------------------------------------
LODGING (1.9%)
Courtyard by Marriott,
Series B
10.75%, 2/1/08 B- 2,185 2,368
(+) Murrin Murrin
Holdings
9.375%, 8/31/07 BB- 7,480 7,686
- ------------------------------------------------------
GROUP TOTAL 10,054
- ------------------------------------------------------
MATERIALS (1.2%)
Asia Pulp & Paper,
Series A
12.00%, 2/15/04 B+ 6,335 6,446
- ------------------------------------------------------
SUPERMARKETS (1.2%)
Southland Corp.
5.00%, 12/15/03 BB+ 7,599 6,554
- ------------------------------------------------------
TECHNOLOGY (0.4%)
++## Blue Bell Funding
11.85%, 5/1/99 BB- 2,215 2,270
- ------------------------------------------------------
TELEPHONES (12.7%)
# Brooks Fiber
Properties, Inc.
0.00%, 3/1/06 N/R 10,870 8,723
0.00%, 11/1/06 N/R 3,765 2,908
*@ Dial Call
Communications, Inc.
(Warrants, expiring
4/25/99) N/R (1)4,800 --
# Dial Call
Communications, Inc.
0.00%, 4/15/04 CCC 4,875 4,552
+ 0.00%, 12/15/05 B3 7,015 6,270
(+) Iridium Capital
Corp.
13.00%, 7/15/05 B 2,275 2,372
*(+) Iridium World
Communications Ltd.
(Warrants, expiring
7/15/05) N/R (1)2,275 341
(+) IXC Communications,
Inc., PIK 7.25%
(Preferred Stock) CCC (1)3,435 3,985
(+)+ IXC Communications,
Inc., Series B
12.50%, 10/1/05 B2 4,600 5,313
# Nextel Communications,
Inc.
0.00%, 8/15/04 CCC 9,810 8,498
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
40
<PAGE> 43
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Qwest Communications
International, Inc.,
Series B
10.875%, 4/1/07 B+ $ 2,415 $ 2,729
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ 6,630 7,268
Rogers Cablesystems Ltd.
10.125%, 9/1/12 BB+ 2,750 2,984
Rogers Communications,
Inc.
9.125%, 1/15/06 BB- 2,060 2,096
Tele-Communications,
Inc.
8.75%, 2/15/23 BBB- 175 181
# Teleport
Communications Group,
Inc.
0.00%, 7/1/07 B 13,290 10,399
- ------------------------------------------------------
GROUP TOTAL 68,619
- ------------------------------------------------------
TRANSPORTATION (1.4%)
(+) Jet Equipment Trust,
Series:
95-A C
11.44%, 11/1/14 BBB- 2,350 3,045
94-A3
11.79%, 6/15/13 BBB- 3,450 4,517
- ------------------------------------------------------
GROUP TOTAL 7,562
- ------------------------------------------------------
UTILITIES (2.9%)
Cleveland Electric
Illuminating Co.
Series B
8.375%, 12/1/11 BB+ 600 614
8.375%, 8/1/12 BB+ 2,025 2,073
Midland Cogeneration
Ltd. Venture LP,
Series:
C-91
10.33%, 7/23/02 BB- 628 672
Midland Funding Corp. I,
Series C-94
10.33%, 7/23/02 BB- 3,328 3,561
National Power Corp.
7.875%, 12/15/06 BB+ 2,985 2,912
Quezon Power Ltd.
8.86%, 6/15/17 BB+ 5,800 5,844
- ------------------------------------------------------
GROUP TOTAL 15,676
- ------------------------------------------------------
YANKEE (6.9%)
## Central Bank of
Argentina Bocon PIK
Pre 4
5.00%, 9/1/02 N/R 3,185 3,846
(+) Globo Communicacoes
10.50%, 12/20/06 BB- 2,390 2,510
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
(+) Government of
Jamaica
9.625%, 7/2/02 N/R $ 2,295 $ 2,329
Multicanal SA
10.50%, 2/1/07 BB- 3,000 3,206
# Occidente y Caribe
Cellular
0.00%, 3/15/04 B 8,480 6,689
*@ Occidente y Caribe
Cellular (Warrants,
expiring 3/15/04) N/R (1)33,920 --
## Republic of Argentina
5.50%, 3/31/23 BB 7,125 5,379
Republic of Colombia
8.70%, 2/15/16 BBB- 725 739
(+) Republic of Panama
7.875%, 2/13/02 BB+ 4,315 4,342
(+) Transgas de
Occidente S.A.
9.79%, 11/1/10 BBB- 3,050 3,372
United Mexican States
Series B
6.25%, 12/31/19 BB 5,975 4,952
@ United Mexican States
(Recovery Rights,
expiring 6/30/03) N/R (1)5,975,000 --
- ------------------------------------------------------
GROUP TOTAL 37,364
- ------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$461,482) 490,181
- ------------------------------------------------------
CASH EQUIVALENTS (8.8%)
- ------------------------------------------------------
REPURCHASE AGREEMENTS (8.8%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at $23,639,
collateralized by various
U.S. Government Obligations,
due 10/1/97-1/29/99, valued
at $23,858 23,635 23,635
Goldman Sachs & Co. 6.15%,
dated 9/30/97, due 10/1/97,
to be repurchased at $23,638,
collateralized by U.S.
Treasury Bonds, 8.00%, due
11/15/21, valued at $24,122 23,634 23,634
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $47,269) 47,269
- ------------------------------------------------------
TOTAL INVESTMENTS (99.7%) (Cost $508,751) 537,450
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
41
<PAGE> 44
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD
PORTFOLIO
<TABLE>
<CAPTION>
VALUE
(CONT'D) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (0.3%)
Cash $ 1
Dividends Receivable 378
Interest Receivable 9,035
Receivable for Investments Sold 7,931
Receivable for Fund Shares Sold 924
Receivable for Daily Variation on Futures
Contracts 58
Other Assets 11
Payable for Investments Purchased (15,855)
Payable for Fund Shares Redeemed (149)
Payable for Investment Advisory Fees (451)
Payable for Administrative Fees (34)
Payable for Trustees' Deferred Compensation
Plan-Note F (9)
Payable for Shareholder Servicing Fees-
Investment Class (1)
Payable for Distribution Fees-Adviser Class (1)
Unrealized Loss on Forward Foreign Currency
Contracts (58)
Other Liabilities (88)
--------
1,692
- ------------------------------------------------------
NET ASSETS (100%) $539,142
- ------------------------------------------------------
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 51,614,460 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $523,899
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.15
- ------------------------------------------------------
INVESTMENT CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 1,074,664 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $ 10,916
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.16
- ------------------------------------------------------
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C> <C> <C>
ADVISER CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 426,411 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 4,327
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.15
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $487,027
Undistributed Net Investment Income (Loss) 11,795
Undistributed Realized Net Gain (Loss) 12,232
Unrealized Appreciation (Depreciation) on:
Investment Securities 28,699
Foreign Currency Transactions (57)
Futures (554)
- ------------------------------------------------------
NET ASSETS $539,142
- ------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
sec. Restricted Security-Total market value of
restricted securities owned at September 30, 1997
was $4,610 or 0.9% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
* Non-Income Producing Security.
(+) 144A security. Certain conditions for public sale
may exist.
++ A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
(dd) Fitch rating. Security is not rated by Standard &
Poor's Corporation or Moody's Investors Service,
Inc.
# Step Bond-Coupon rate increases in increments to
maturity. Rate disclosed is as of September 30,
1997. Maturity date disclosed is the ultimate
maturity.
## Variable or floating rate security-rate disclosed
is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
@ Value is less than $500.
DEM German Mark
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PIK Payment-In Kind Security
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
42
<PAGE> 45
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
CASH RESERVES
PORTFOLIO
STATEMENT OF NET ASSETS
COMMERCIAL PAPER (82.6%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
FACE
AMOUNT VALUE
SEPTEMBER 30, 1997 (000) (000)!
- -----------------------------------------------------
<S> <C> <C>
COMMERCIAL BANKING & CREDIT (25.3%)
Abbey National N.A.
5.51%, 12/11/97 $ 2,500 $ 2,473
American Express Credit Corp.
5.49%, 10/23/97 2,500 2,492
Associates Corp. of North America
5.51%, 12/11/97 2,500 2,473
Banc One Corp.
5.52%, 10/17/97 2,500 2,494
Canadian Imperial Holdings
5.49%, 11/3/97 2,500 2,487
CIT Group Holdings, Inc.
5.49%, 11/14/97 2,500 2,483
Eiger Capital Corp.
5.54%, 10/7/97 2,500 2,497
J.P. Morgan & Co.
5.51%, 11/10/97 2,500 2,485
SunTrust Banks, Inc.
5.49%, 11/4/97 2,500 2,487
Westdeutsche Landesbank
5.51%, 11/12/97 2,500 2,484
- -----------------------------------------------------
GROUP TOTAL 24,855
- -----------------------------------------------------
FINANCIAL LEASING & SERVICES (26.2%)
ABN-Amro Finance
5.50%, 10/20/97 2,500 2,493
A.I. Credit Corp.
5.50%, 10/27/97 2,500 2,490
Asset Securitization Corp.
5.50%, 10/15/97 2,500 2,495
Atlantic Asset Securitization
Corp.
5.55%, 10/3/97 2,444 2,443
Commercial Credit Co.
5.51%, 10/28/97 2,500 2,490
Delaware Funding Corp.
5.51%, 11/20/97 2,500 2,481
First Chicago Financial Corp.
5.52%, 11/25/97 2,500 2,479
National Rural Utilities
Cooperative Finance Corp.
5.53%, 1/27/98 2,000 1,964
Panasonic Finance, Inc.
5.49%, 11/7/97 2,500 2,486
UBS Finance, Inc.
5.52%, 10/14/97 1,500 1,497
USAA Capital Corp.
5.49%, 11/20/97 2,500 2,481
- -----------------------------------------------------
GROUP TOTAL 25,799
- -----------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- -----------------------------------------------------
<S> <C> <C>
FOOD & HOUSEHOLD PRODUCTS (4.8%)
Campbell Soup Co.
5.49%, 12/11/97 $ 2,300 $ 2,275
Clorox Co.
5.50%, 11/6/97 2,500 2,486
- -----------------------------------------------------
GROUP TOTAL 4,761
- -----------------------------------------------------
INDUSTRIALS (11.1%)
General Electric Capital Corp.
5.49%, 11/6/97 2,500 2,486
General Electric Capital Corp.
5.54%, 1/13/98 1,000 984
H.J. Heinz Co.
5.50%, 10/1/97 2,500 2,500
IBM Credit Corp.
5.50%, 10/10/97 2,500 2,496
John Deere & Co.
5.49%, 10/21/97 2,500 2,492
- -----------------------------------------------------
GROUP TOTAL 10,958
- -----------------------------------------------------
MANUFACTURING AND RETAIL TRADE (2.5%)
Xerox Corp.
5.50%, 11/17/97 2,500 2,482
- -----------------------------------------------------
PERSONAL BANKING & CREDIT (5.1%)
Prudential Funding Corp.
5.50%, 11/26/97 2,500 2,479
Transamerica Corp.
5.51%, 10/2/97 2,500 2,500
- -----------------------------------------------------
GROUP TOTAL 4,979
- -----------------------------------------------------
TELECOMMUNICATIONS (5.1%)
Bell Atlantic Financial Services
5.52%, 10/6/97 2,500 2,498
SBC Communications, Inc.
5.50%, 10/31/97 2,500 2,488
- -----------------------------------------------------
GROUP TOTAL 4,986
- -----------------------------------------------------
TRANSPORTATION (2.5%)
Daimler-Benz AG
5.50%, 10/29/97 2,500 2,489
- -----------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost $81,309) 81,309
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
43
<PAGE> 46
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
CASH RESERVES
PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(CONT'D) (000) (000)!
- -----------------------------------------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT (7.1%)
- -----------------------------------------------------
COMMERCIAL BANKING & CREDIT (7.1%)
Credit Agricole Indosuez
5.56%, 11/18/97 $ 2,500 $ 2,500
## Societe Generale Bank
5.77%, 1/15/98 2,500 2,500
Swiss Bank (NY)
5.62%, 1/21/98 2,000 2,000
- -----------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (Cost $7,000) 7,000
- -----------------------------------------------------
AGENCY FLOATING RATE MORTGAGE (7.1%)
- -----------------------------------------------------
## Federal Home Loan Mortgage
Corp.
5.44%, 6/22/98 (Cost $6,996) 7,000 6,996
- -----------------------------------------------------
BANKERS ACCEPTANCE (2.6%)
- -----------------------------------------------------
First Union National Bank
5.57%, 10/31/97 (Cost $2,500) 2,500 2,500
- -----------------------------------------------------
REPURCHASE AGREEMENT (0.7%)
- -----------------------------------------------------
Chase Securities, Inc.
5.90%, dated 9/30/97, due
10/1/97, to be repurchased at
$710, collateralized by U.S.
Treasury Notes, 6.25%, due
7/31/98, valued at $721 (Cost
$710) 710 710
- -----------------------------------------------------
TOTAL INVESTMENTS (100.1%) (Cost $98,515) 98,515
- -----------------------------------------------------
<CAPTION>
VALUE
(000)!
- -----------------------------------------------------
<S> <C> <C>
OTHER ASSETS AND LIABILITIES (-0.1%)
Interest Receivable 85
Receivable for Fund Shares Sold 2
Other Assets 3
Dividend Payable (49)
Payable for Fund Shares Redeemed (8)
Payable for Investment Advisory Fees (47)
Payable for Administrative Fees (7)
Payable for Trustees' Deferred Compensation
Plan-Note F (2)
Other Liabilities (28)
-------
(51)
- -----------------------------------------------------
NET ASSETS (100%) $98,464
- -----------------------------------------------------
INSTITUTIONAL CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 98,463,030 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $98,464
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 1.00
- -----------------------------------------------------
NET ASSETS CONSIST OF:
Paid In Capital $98,464
- -----------------------------------------------------
NET ASSETS (100%) $98,464
- -----------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
! See Note A1 to Financial Statements.
## Variable or floating rate security-rate disclosed is
as of September 30, 1997.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
44
<PAGE> 47
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
FIXED INCOME
PORTFOLIO II
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (97.0%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (9.5%)
## Government National
Mortgage Association
Various Pools:
6.00%, 8/20/27 Agy $ 17,000 $ 17,128
November TBA
6.00%, 11/20/27 Agy 4,325 4,351
- -------------------------------------------------------
GROUP TOTAL 21,479
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (12.5%)
Federal Home Loan Mortgage
Corporation
Conventional
Pools:
8.25%, 10/1/06 Agy 99 104
10.00%, 9/1/17-11/1/20 Agy 1,334 1,455
10.25%, 7/1/09 Agy 256 283
11.00%, 1/1/16 Agy 335 377
11.25%, 9/1/10-12/1/14 Agy 374 420
Gold Pools:
7.00%, 9/1/23-6/1/25 Agy 4,838 4,846
10.00%, 1/1/21 Agy 891 985
10.50%, 3/1/16 Agy 1,220 1,356
Federal National Mortgage
Association Conventional
Pools:
10.00%, 5/1/22 Agy 832 912
10.50%, 11/1/17-12/1/17 Agy 697 780
10.75%, 8/1/13 Agy 102 115
11.25%, 11/1/00-8/1/13 Agy 215 242
11.50%, 1/1/17-9/1/25 Agy 873 993
Government National
Mortgage Association
Various Pools:
7.00%, 12/15/22-12/15/23 Agy 6,050 6,071
10.00%,
11/15/09-12/15/20 Agy 6,937 7,701
10.50%, 12/15/00-5/15/19 Agy 113 127
11.00%, 2/15/10-2/15/19 Agy 1,335 1,523
11.50%, 8/20/14-1/20/18 Agy 21 24
- -------------------------------------------------------
GROUP TOTAL 28,314
- -------------------------------------------------------
ASSET BACKED CORPORATES (7.9%)
(+) Aegis Auto Receivables
Trust, Series 95-1 A
8.60%, 3/20/02 N/R 657 660
## Airplanes Pass Through
Trust, Series 1 B
6.756%, 3/15/19 A 499 500
ALPS, Series 94-1 A4 CMO
7.80%, 9/15/04 AA 800 819
Americredit Automobile
Receivables Trust, Series
96-B A
6.50%, 1/12/02 AAA 1,113 1,118
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Arcadia Auto,
Series 97-C
A4
6.375%, 1/15/03 AAA 1,110 1,114
CPS Auto Grantor Trust,
Series 97-2 A
6.65%, 10/15/02 AAA $ 637 $ 641
(+) First Merchants Auto
Receivables Corp.,
Series 97-2 A1
6.85%, 11/15/02 AAA 611 615
First Plus Home Equity Loan
Trust,
Series:
97-3 A2
6.48%, 9/10/08 AAA 655 656
97-3 A3
6.57%, 10/10/10 AAA 645 648
Honda Auto Receivables
Grantor Trust, Series
97-A A
5.85%, 2/15/03 AAA 1,770 1,768
(+) Long Beach Auto,
Series 97-2A
6.69%, 9/25/04 AAA 790 790
(+) NAL Auto Trust,
Series 97-2A
7.75%, 9/15/02 N/R 933 934
(+) National Car Rental
Financing Ltd.,
Series 96-1 A4
7.35%, 10/20/03 N/R 1,125 1,153
(+) NPR Health Care,
Series 97-1 A
6.815%, 7/1/01 N/R 400 404
(+) Railcar Leasing
7.125%, 1/15/13 AAA 1,350 1,395
Security Pacific Home
Equity Trust,
Series 91-AB
10.50%, 3/10/06 A+ 414 415
(+) Team Fleet Financing
Corp.,
Series:
96-1A
6.65%, 12/15/02 A- 475 476
97-1A
7.35%, 5/15/03 A- 1,300 1,337
Union Acceptance Corp.,
Series 96-B A
6.45%, 7/9/03 AAA 1,234 1,234
WFS Financial Owner Trust,
Series 97-C A3
6.01%, 3/20/02 AAA 1,180 1,179
- -------------------------------------------------------
GROUP TOTAL 17,856
- -------------------------------------------------------
ASSET BACKED MORTGAGES (1.0%)
AFC Home Equity Loan Trust,
Series 96-4 1A6
7.22%, 3/25/27 AAA 1,000 1,010
Cityscape Home Equity Loan
Trust,
Series:
96-3 A IO
1.00%, 10/25/26 N/R 14,706 365
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
45
<PAGE> 48
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
FIXED INCOME
PORTFOLIO II
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD MOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-3 YMA
10/25/26 N/R $ 14,706 $ 20
Contimortgage Home Equity
Loan Trust,
Series:
96-4 A11 IO
1.10%, 1/15/28 AAA 12,055 317
sec. 96-4 A12 YMA
1/15/28 (acquired
12/16/96, cost $7) AAA 4,870 7
(+) 96-4 A12 YMA
1/15/28 AAA 14,600 22
96-4 A12 IO
1.05%, 1/15/28 AAA 3,894 102
(+) 97-1 A10 YMA
3/15/28 N/R 14,484 20
97-1 A10I IO
1.10%, 3/15/28 AAA 14,149 387
- -------------------------------------------------------
GROUP TOTAL 2,250
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL
SERIES (2.7%)
Federal Home Loan Mortgage
Corporation,
Series:
89-47 F PAC CMO
10.00%, 6/15/20 Agy 400 439
## 1632 SA Inv Fl REMIC
5.336%, 11/15/23 Agy 884 737
## 1699 SD Inv Fl IO
REMIC
2.313%, 3/15/24 Agy 9,319 745
1709 H PO REMIC
1/15/24 Agy 62 31
1750 C PD PO REMIC
3/15/24 Agy 91 65
1813 K PO REMIC
2/15/24 Agy 60 41
1844 PC PO REMIC
3/15/24 Agy 110 70
1854 A PO REMIC
12/15/23 Agy 800 527
1887 I PO REMIC
10/15/22 Agy 65 44
Federal National Mortgage
Association,
Series:
93-149 O PO REMIC
8/25/23 Agy 130 82
93-205 G PO REMIC
9/25/23 Agy 474 305
93-235 H PO REMIC
9/25/23 Agy 186 145
96-14 PC PO REMIC
12/25/23 Agy 105 60
96-37 H PO REMIC
8/25/23 Agy 752 559
96-46 PB PO REMIC
9/25/23 Agy 110 74
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-54 N PO REMIC
7/25/23 Agy $ 79 $ 59
96-54 O PO REMIC
11/25/23 Agy 89 56
282 1 PO
5/15/24 Agy 1,831 1,255
287 1 PO
12/17/07 Agy 1,340 877
- -------------------------------------------------------
GROUP TOTAL 6,171
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- NON-AGENCY
COLLATERAL SERIES (10.7%)
## Bear Stearns Mortgage
Securities Inc.,
Series 96-4 AI 10
8.125%, 9/25/27 AAA 1,100 1,148
+ Chase Mortgage Finance
Corp.,
Series:
93-N A8
6.75%, 11/25/24 Aaa 1,287 1,218
94-H A7
7.25%, 6/25/25 Aaa 1,600 1,576
sec. Citicorp Mortgage
Securities, Inc.,
Series 95-2 B1 REMIC
7.50%, 4/25/25 (acquired
8/7/95-7/22/97, cost
$849) N/R 874 887
DLJ Mortgage Acceptance
Corp., Series 97-CF2 A1B
6.82%, 10/15/30 AAA 650 654
First Boston Mortgage
Corp.,
Series:
sec. 92-4 B1
8.125%, 10/25/22
(acquired 1/25/93, cost
$313) A 326 333
93-5 B1
7.30%, 7/25/23 AAA 1,419 1,418
GE Capital Mortgage
Services, Inc., Series
94-24 A4
7.00%, 7/25/24 AAA 582 558
J. P. Morgan Commercial
Mortgage Finance Corp.,
Series 97-C5 A2
7.069%, 9/15/29 AAA 1,075 1,098
sec.## Kidder Peabody
Funding Corp.,
Series 92-4 B2
8.467%, 5/28/22
(acquired 8/5/92,
cost $274) N/R 274 274
Mid-State Trust II,
Series 88-2 A4
9.625%, 4/1/03 AAA 1,050 1,140
PNC Mortgage Securities
Corp.,
Series:
94-3 A8
7.50%, 7/25/24 AAA 2,117 2,107
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
46
<PAGE> 49
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-1 B1
7.50%, 6/25/26 AA $ 1,159 $ 1,174
Prudential Home Mortgage
Securities Co., Inc.,
Series:
sec.+ 92-33 B1
7.50%, 8/15/22 (acquired
9/14/92, cost $523) Aa3 550 535
(+)+ 92-A 2B4
7.90%, 4/28/22 A1 1,000 979
+ 93-17 B1
6.50%, 3/1/23 Aa2 597 591
(+)## 94-A 3B3
6.803%, 4/28/24 N/R 1,450 1,402
Residential Accredit Loans,
Inc.,
Series:
97-Q52 A8
7.75%, 3/25/27 AAA 525 541
97-QS4 A7
7.75%, 5/25/27 AAA 875 902
97-QS12 A8
7.25%, 12/25/27 TBA AAA 1,400 1,402
Residential Funding
Mortgage Securities Co.,
Inc.,
Series:
93-MZ3 A2
6.97%, 8/28/23 N/R 700 682
93-S27 M2
7.50%, 6/25/23 A 789 797
94-S1 A19
6.75%, 1/25/24 AAA 765 745
Rural Housing Trust,
Series 87-1 M
3.33%, 10/1/28 A- 938 894
## Ryland Mortgage
Securities Corp.,
Series 92-A 1A
8.27%, 3/29/30 A- 529 535
+ Salomon Brothers Mortgage
Securities, Series 93-3
B1
7.20%, 8/25/23 Aa2 621 618
- -------------------------------------------------------
GROUP TOTAL 24,208
- -------------------------------------------------------
COMMERCIAL MORTGAGES (10.8%)
American Southwest
Financial Securities
Corp.,
Series:
93-2 A1
7.30%, 1/18/09 N/R 1,098 1,119
## 93-2 S1 IO
1.056%, 1/18/09 N/R 11,299 572
+ 95-C1 A1B
7.40%, 11/17/04 Aaa 1,050 1,086
Asset Securitization Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 1,222 1,280
95-MD4 A1
7.10%, 8/13/29 AAA 1,169 1,203
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
## 95-MD4 ACS2 IO
2.381%, 8/13/29 N/R $ 2,088 $ 371
(+)+ 96-D3 A1C
7.40%, 10/13/26 Aaa 850 893
96-MD6 A1C
7.04%, 11/13/26 AAA 825 848
Beverly Finance Corp.
8.36%, 7/15/04 AA- 675 727
(+) Carousel Center
Finance, Inc., Series 1 B
7.188%, 10/15/07 A 1,400 1,426
CBM Funding Corp. Series
96-1 A3PI
7.08%, 2/1/13 AA 950 979
(+) Creekwood Capital
Corp., Series 95-1A
8.47%, 3/16/15 AA 726 808
(+) Crystal Run Properties,
Series A
7.393%, 8/15/06 AA 1,100 1,149
(+) CVM Finance Corp.
7.19%, 3/1/04 AA 580 594
(+) DLJ Mortgage Acceptance
Corp.,
Series:
95-CF2 A3
7.05%, 12/17/27 A 1,100 1,110
96-CF1 A1B
7.58%, 3/13/28 AAA 1,100 1,159
96-CF2 A1B
7.29%, 7/15/06 AAA 260 269
## 96-CF2 S IO
1.643%, 11/12/21 N/R 2,473 219
+ GMAC Commercial Mortgage
Securities, Inc.,
Series 96-C1 X2 IO
1.96%, 3/15/21 Aaa 3,616 338
+ GS Mortgage Securities
Corp.,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa 550 562
97-GL X2 IO
1.07%, 7/13/30 Aaa 2,700 145
(+) Lakewood Mall Finance
Co., Series 95-C1 A
7.00%, 8/13/10 AA 900 917
+ LB Commercial Conduit
Mortgage Trust, Series
96-C2 A
7.416%, 10/25/26 Aaa 1,035 1,076
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C1 A3
7.42%, 4/25/28 AAA 1,100 1,148
96-C2 A2
6.82%, 11/21/28 AAA 400 405
96-C2 IO
1.529%, 11/21/28 N/R 4,158 373
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
47
<PAGE> 50
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
FIXED INCOME
PORTFOLIO II
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
+ Midland Realty Acceptance
Corp., Series 96-C2 A2
7.233%, 1/25/29 Aaa $ 700 $ 724
Mortgage Capital Funding,
Inc., Series 95-MC1 A1B
7.60%, 5/25/27 AAA 1,300 1,342
## Nomura Asset Securities
Corp., Series 94-MD1 A2
7.664%, 3/15/18 N/R 750 786
(+) Prime Property Funding,
Series 1A
6.633%, 7/23/03 AA 794 794
- -------------------------------------------------------
GROUP TOTAL 24,422
- -------------------------------------------------------
ENERGY (0.6%)
(+) Excel Paralubes Funding
7.43%, 11/1/15 A- 1,275 1,292
- -------------------------------------------------------
FINANCE (13.1%)
(+) Anthem Insurance Cos.,
Inc., Series A
9.00%, 4/1/27 BBB+ 900 970
(+) BankAmerica
Institutional, Series A
8.07%, 12/31/26 A- 1,350 1,388
(+) BT Institutional
Capital Trust, Series A
8.09%, 12/1/26 BBB+ 850 860
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 1,025 1,047
Countrywide Funding Corp.
Series A
6.55%, 4/14/00 A 1,000 1,006
(+) Equitable Life
Assurance Society of the
U.S., Series 1A
6.95%, 12/1/05 A 1,200 1,209
(+) Farmers Insurance
Exchange
8.625%, 5/1/24 BBB+ 975 1,038
(+) Fifty-Seventh Street
Associates
7.125%, 6/1/17 A 1,166 1,173
(+) First Chicago NBD
Corp., Series A
7.95%, 12/1/26 A- 1,225 1,237
(+) First Hawaiian Bank,
Series A
6.93%, 12/1/03 A 1,650 1,666
First Union Institutional
Capital, Series I
8.04%, 12/1/26 BBB+ 1,125 1,153
(+) Florida Property &
Casualty
7.375%, 7/1/03 A- 800 826
7.45%, 7/1/04 A 200 207
(+) Florida Windstorm
6.70%, 8/25/04 A- 750 748
(+)+ Home Ownership Funding
Corp.,
13.331% (Preferred
Stock) Aaa (1)4,350 4,221
(+) John Hancock Surplus
Note
7.375%, 2/15/24 AA- 950 949
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Metropolitan Life
Insurance Co.
7.45%, 11/1/23 AA $ 875 $ 851
(+) Nationwide Mutual Life
Insurance Co.
7.50%, 2/15/24 A+ 850 837
NB Capital Trust
8.25%, 4/15/27 A- 800 843
(+) New York Life Insurance
Co.
7.50%, 12/15/23 AA 500 495
PNC Institutional Capital,
Series A
7.95%, 12/15/26 BBB+ 1,050 1,055
(+) Prime Property Funding
7.00%, 8/15/04 A 875 884
(+) State Street
Institutional Capital,
Series:
A
7.94%, 12/30/26 A 825 841
B
8.035%, 3/15/27 A 250 257
Washington Mutual Capital
8.375%, 6/1/27 BBB- 445 467
(+) Wells Fargo Capital,
Series A
8.125%, 12/1/26 BBB 1,150 1,183
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 1,738 1,756
96 WFP-D
6.95%, 9/1/13 AA- 450 456
- -------------------------------------------------------
GROUP TOTAL 29,623
- -------------------------------------------------------
FOREIGN GOVERNMENTS (0.8%)
Government of Germany
7.375%, 1/3/05 AAA DEM 3,075 1,955
- -------------------------------------------------------
INDUSTRIALS (0.9%)
News America Holdings
7.75%, 1/20/24 BBB $ 375 370
7.75%, 2/1/24 BBB 565 557
(+) Oxymar
7.50%, 2/15/16 BBB 650 650
Tier One Properties,
11.095% (Preferred Stock) A (1)425 416
- -------------------------------------------------------
GROUP TOTAL 1,993
- -------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.6%)
Bank of America, Series A
8.375%, 5/1/07 AAA 120 121
California Federal Savings
& Loan, Series 86-1A
8.80%, 1/1/14 AA 77 77
First Federal Savings &
Loan Association, Series
92-C
8.75%, 6/1/06 AA 43 44
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
48
<PAGE> 51
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
## Resolution Trust Corp.,
Series 92-5 C
8.618%, 1/25/26 AA $ 455 $ 459
Ryland Acceptance Corp.
Series IV 79-A
6.65%, 7/1/11 AA 779 750
- -------------------------------------------------------
GROUP TOTAL 1,451
- -------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES-
AGENCY COLLATERAL SERIES (1.2%)
Federal National Mortgage
Association,
Series:
93-146 G PO REMIC
5/25/23 Agy 583 382
93-243 C PO REMIC
11/25/23 Agy 128 99
249 1 PO
10/25/23 Agy 1,941 1,282
254 1 PO
1/1/24 Agy 634 454
260 1 PO
4/1/24 Agy 848 603
- -------------------------------------------------------
GROUP TOTAL 2,820
- -------------------------------------------------------
TELEPHONES (0.4%)
Tele-Communications, Inc.
9.25%, 1/15/23 BBB- 825 888
- -------------------------------------------------------
TRANSPORTATION (0.5%)
(+) Jet Equipment Trust,
Series 95-A A11
10.00%, 6/15/12 A+ 950 1,178
- -------------------------------------------------------
U.S. TREASURY SECURITIES (20.3%)
U.S. Treasury Bond
8.75%, 8/15/20 Tsy 10,795 13,686
U.S. Treasury Notes
6.25%, 5/31/99 Tsy 12,075 12,162
6.75%, 6/30/99 Tsy 4,000 4,062
(dd)7.125%, 9/30/99 Tsy 5,600 5,736
3.625%, 7/15/02
(Inflation Indexed) Tsy 501 500
3.375%, 1/15/07
(Inflation Indexed) Tsy 8,129 7,974
U.S. Treasury Strip, PO
11/15/18 Tsy 7,400 1,870
- -------------------------------------------------------
GROUP TOTAL 45,990
- -------------------------------------------------------
UTILITIES (0.2%)
(+) Edison Mission Energy
Funding Corp., Series B
7.33%, 9/15/08 BBB 500 514
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
YANKEE (3.3%)
(+) Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB $ 975 $ 995
AST Research, Inc.
7.45%, 10/1/02 A- 850 847
(+) Hyundai Semiconductor
America
8.625%, 5/15/07 BBB- 925 944
Korea Development Bank
7.375%, 9/17/04 AA- 790 796
(+) Paiton Energy Funding
9.34%, 2/15/14 BBB- 800 877
(+) Petroliam Nasional Bhd.
7.125%, 10/18/06 A+ 800 793
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 1,030 1,088
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ 350 380
Republic of Colombia
8.70%, 2/15/16 BBB- 700 714
- -------------------------------------------------------
GROUP TOTAL 7,434
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $215,747) 219,838
- -------------------------------------------------------
INTEREST RATE CAP (0.1%)-SEE NOTE A6
- -------------------------------------------------------
J.P. Morgan and Co., Inc.,
terminating 10/15/99, to
receive on 10/15/99 the
excess, as measured on
10/15/98, of 12 month
LIBOR over 6.34%
multiplied by the
notional amount. (Premium
Paid $243) N/R 57,500 174
- -------------------------------------------------------
CASH EQUIVALENTS (5.2%)
- -------------------------------------------------------
Short-term Investments Held as
Collateral for Loaned Securities
(0.4%) 844 844
- -------------------------------------------------------
COMMERCIAL PAPER (0.6%)
First Chicago NBD Corp.
5.839%, 10/3/97 1,525 1,525
- -------------------------------------------------------
REPURCHASE AGREEMENT (4.2%)
Chase Securities, Inc. 5.90% dated
9/30/97, due 10/1/97, to be
repurchased at $9,497,
collateralized by various U.S.
Government Obligations due
10/1/97-1/29/99, valued at
$9,584 9,495 9,495
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $11,864) 11,864
- -------------------------------------------------------
TOTAL INVESTMENTS (102.3%) (Cost $227,854) 231,876
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
49
<PAGE> 52
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
FIXED INCOME
PORTFOLIO II
<TABLE>
<CAPTION>
VALUE
(CONT'D) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (-2.3%)
Dividends Receivable $ 187
Interest Receivable 2,635
Receivable for Investments Sold 988
Receivable for Daily Variation on Futures
Contracts 18
Unrealized Gain on Swap Agreements 4
Other Assets 7
Payable for Investments Purchased (7,863)
Payable for Fund Shares Redeemed (33)
Payable for Investment Advisory Fees (209)
Payable for Administrative Fees (15)
Payable for Trustees' Deferred Compensation
Plan-Note F (6)
Unrealized Loss on Forward Foreign Currency
Contracts (31)
Collateral on Securities Loaned, at Value (844)
Other Liabilities (52)
--------
(5,214)
- -------------------------------------------------------
NET ASSETS (100%) $226,662
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 19,770,477 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $226,662
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.46
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $216,715
Undistributed Net Investment Income (Loss) 4,574
Undistributed Realized Net Gain (Loss) 1,526
Unrealized Appreciation (Depreciation) on:
Investment Securities 4,022
Foreign Currency Transactions (32)
Futures and Swaps (143)
- -------------------------------------------------------
NET ASSETS $226,662
- -------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C> <C>
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1997 was $2,036 or 0.9% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public sale
may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
## Variable or floating rate security-rate disclosed
is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
CMO Collateralized Mortgage Obligation
DEM German Mark
INV FI Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate.
Indicated rate is the effective rate at September
30, 1997.
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See Note
A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
50
<PAGE> 53
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (98.0%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- -----------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (15.0%)
## Government National
Mortgage Association
Various Pools:
6.50%, 8/20/27 Agy $2,970 $ 3,015
October TBA
6.00%, 6/20/27 Agy 2,700 2,717
- -----------------------------------------------------
GROUP TOTAL 5,732
- -----------------------------------------------------
AGENCY FIXED RATE MORTGAGES (38.1%)
Federal Home Loan Mortgage
Corporation
Conventional Pools:
10.00%, 2/1/18 Agy 341 372
11.50%, 2/1/14-1/1/16 Agy 221 251
12.50%, 9/1/11-11/1/14 Agy 179 211
Gold Pools:
7.00%, 1/1/24-12/1/24 Agy 759 760
7.50%, 2/1/27-6/1/27 Agy 5,558 5,666
October TBA
7.50%, 7/15/26 Agy 1,750 1,781
Federal National Mortgage
Association
Conventional Pools:
10.00%, 9/1/18-2/1/25 Agy 771 845
11.50%, 2/1/15-12/1/15 Agy 155 176
12.50%, 9/1/13 Agy 20 24
13.00%, 5/1/13 Agy 59 68
Government National Mortgage
Association
Various Pools:
7.00%, 12/15/23 Agy 1,812 1,818
10.00%, 1/15/13-12/25/26 Agy 706 782
10.50%, 12/15/10-12/15/17 Agy 346 390
11.00%, 12/15/09-8/15/15 Agy 42 47
11.50%, 5/15/13 Agy 26 29
12.00%, 12/15/12-11/15/15 Agy 1,097 1,273
- -----------------------------------------------------
GROUP TOTAL 14,493
- -----------------------------------------------------
ASSET BACKED CORPORATES (0.5%)
Old Stone Credit Corp,
Series 92-3 B1
6.35%, 9/25/07 AAA 32 31
Security Pacific Home Equity
Trust, Series 91-A B
10.50%, 3/10/06 A+ 176 176
- -----------------------------------------------------
GROUP TOTAL 207
- -----------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS-AGENCY
COLLATERAL SERIES (8.6%)
Federal Home Loan Mortgage
Corporation,
Series:
90-129 H PAC
8.85%, 3/15/21 Agy $ 185 $ 202
90-1007 F Inv Fl
21.795%, 1/15/20 Agy 3 3
1415-S Inv Fl IO CMO
18.813%, 11/15/07 Agy 142 66
1476-S Inv Fl IO REMIC PAC
4.363%, 2/15/08 Agy 1,122 131
1485-S Inv Fl IO REMIC
3.913%, 3/15/08 Agy 1,954 173
1600-SA Inv Fl IO REMIC
2.313%, 10/15/08 Agy 3,103 172
1950-SC Inv Fl IO
2.313%, 10/15/22 Agy 3,450 316
Federal National Mortgage
Association,
Series:
90-118 S Inv Fl CMO
28.975%, 9/25/20 Agy 43 66
92-52 SQ Inv Fl IO REMIC
7229.546%, 9/25/22 Agy 1 241
92-186 S Inv Fl IO CMO
3.363%, 10/25/07 Agy 2,243 193
93-205 G PO REMIC
9/25/23 Agy 180 116
93-235 H PO REMIC
9/25/23 Agy 72 56
96-68 SC Inv Fl IO REMIC
2.475%, 1/25/24 Agy 432 52
97-30 Inv Fl IO REMIC
2.281%, 7/25/22 Agy 1,035 96
282 1 PO
5/15/24 Agy 564 386
Government National Mortgage
Association,
Series:
96-12 S Inv Fl IO REMIC
2.813%, 6/16/26 Agy 4,557 316
96-13 S Inv Fl IO REMIC
3.65%, 7/16/11 Agy 1,817 158
96-17 S Inv Fl IO REMIC
2.863%, 8/16/26 Agy 2,269 164
Kidder Peabody Mortgage
Assets Trust,
Series:
+ 87-B IO
9.50%, 4/22/18 Aaa 190 57
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
51
<PAGE> 54
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES PORTFOLIO
!!RATINGS
(STANDARD FACE
(CONT'D) & AMOUNT VALUE
POOR'S) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
+ 87-B PO
4/22/18 Aaa $ 190 $ 143
Morgan Stanley Mortgage
Trust, Series 28 8 PAC
9.40%, 10/1/18 AAA 165 172
- -----------------------------------------------------
GROUP TOTAL 3,279
- -----------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (19.8%)
American Housing Trust,
Series V 1G
9.125%, 4/25/21 AAA 379 402
Citicorp Mortgage Securities,
Inc., Series 93-9 A1 REMIC
7.00%, 3/25/20 AAA 123 124
CMC Securities Corp. IV,
Series 94-G A4
7.00%, 9/25/24 AAA 250 239
Countrywide Funding Corp.,
Series 94-12 A10
7.00%, 5/25/24 AAA 1,135 1,096
DLJ Mortgage Acceptance
Corp., Series 97-CF2 A1B
6.82%, 10/15/30 AAA 100 101
sec. First Boston Mortgage
Corp., Series 92-4 B1
8.125%, 10/25/22
(acquired 1/25/93-
10/27/93, cost $145) A 144 147
GE Capital Mortgage Services,
Inc., Series 94-24 A4
7.00%, 7/25/24 AAA 347 333
J. P. Morgan Commercial
Mortgage Finance Corp.,
Series 97-C5 A2
7.069%, 9/15/29 AAA 125 128
sec.## Kidder Peabody Funding
Corp., Series 92-4 B2
8.467%, 5/28/22
(acquired 8/5/92-
10/27/93, cost $118) N/R 117 117
Mid-State Trust II, Series
88-2 A4
9.625%, 4/1/03 AAA 590 641
PNC Mortgage Securities
Corp., Series 96-1 B1
7.50%, 6/25/26 AA 306 310
Prudential Home Mortgage
Securities Co., Inc.,
Series:
sec.+ 92-33 B1
7.50%, 11/15/22
(acquired 11/30/92,
cost $226) Aa3 263 255
(+)## 94-A 3B3
6.803%, 4/28/24 N/R 910 880
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
Residential Accredit Loans,
Inc.
Series:
+ 97-QS1 A11
7.50%, 2/25/27 Aaa $ 190 $ 192
97-Q52 A8
7.75%, 3/25/27 AAA 85 88
97-QS3 A8
7.75%, 4/25/27 AAA 170 175
97-QS12 A8 TBA
7.25%, 12/25/27 N/R 225 225
Residential Funding Mortgage
Securities Co., Inc.,
Series 94-S1 A19
6.75%, 1/25/24 AAA 301 293
Rural Housing Trust, Series
87-1 M
3.33%, 10/1/28 A- 410 391
+ Ryland Mortgage Securities
Corp., Series 93-4 A9
7.50%, 8/25/24 Aaa 885 887
Saxon Mortgage Securities
Corp., Series 93-8A A6
7.375%, 9/25/23 AAA 517 513
- -----------------------------------------------------
GROUP TOTAL 7,537
- -----------------------------------------------------
COMMERCIAL MORTGAGES (10.0%)
Asset Securitization Corp.,
Series:
95-MD4 A1
7.10%, 8/13/29 AAA 219 225
(+)+ 96-D3 A1C
7.40%, 10/13/26 Aaa 140 147
96-MD6 A1C
7.04%, 11/13/26 AAA 140 144
Beverly Finance Corp.
8.36%, 7/15/04 AA- 285 307
CBM Funding Corp., Series
96-1 A3PI
7.08%, 2/1/13 AA 155 160
CS First Boston Mortgage
Securities Corp., Series
97-C1 A1C
7.24%, 6/20/29 AAA 190 197
(+) DLJ Mortgage Acceptance
Corp.,
Series:
96-CF2 A1B
7.29%, 11/12/21 AAA 45 47
## 96-CF2 S IO
1.643%, 11/12/21 N/R 472 42
+ GS Mortgage Securities
Corp., Series 97-GL A2D
6.94%, 7/13/30 Aaa 105 107
(+) Lakeside Finance Corp.
6.47%, 12/15/00 AA 315 315
+ LB Commercial Conduit
Mortgage Trust, Series
96-C2 A
7.416%, 10/25/26 Aaa 168 174
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
52
<PAGE> 55
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C2 A2
6.82%, 11/21/28 AAA $ 70 $ 71
96-C2 IO
1.529%, 11/21/28 N/R 740 66
+ Midland Realty Acceptance
Corp., Series 96-C2 A2
7.233%, 1/25/29 Aaa 120 124
+ Mortgage Capital Funding,
Inc., Series 97-MC1 A3
7.288%, 7/20/27 Aaa 225 234
Nomura Asset Securities
Corp.,
Series:
94-MD1 A1B
7.526%, 3/15/18 N/R 185 190
## 94-MD1 A2
7.664%, 3/15/18 N/R 150 157
(+) Prime Property Funding,
Series 1 A
6.633%, 7/23/03 AA 259 259
Sawgrass Financial, Series
93-A1
6.45%, 1/20/06 AAA 340 341
(+) Stratford Finance Corp.
6.776%, 2/1/04 AA 495 493
- -----------------------------------------------------
GROUP TOTAL 3,800
- -----------------------------------------------------
FINANCE (2.7%)
(+)+ Home Ownership Funding
Corp.,
13.331% (Preferred Stock) Aaa (1)1,050 1,019
- -----------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (1.6%)
DLJ Mortgage Acceptance
Corp., Series 93-MF7 A1
7.40%, 6/18/03 AAA 242 248
## Resolution Trust Corp.,
Series 92-5 C
8.618%, 1/25/26 AA 304 307
Ryland Acceptance Corp. IV,
Series 79-A
6.65%, 7/1/11 AA 69 66
- -----------------------------------------------------
GROUP TOTAL 621
- -----------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -----------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES- AGENCY
COLLATERAL SERIES (1.7%)
Federal National Mortgage
Association
Series:
249 1 PO,
10/25/23 Agy $ 111 $ 74
254 1 PO,
1/1/24 Agy 98 70
260 1 PO,
4/1/24 Agy 131 93
## 93-M2 B IO REMIC
2.575%, 7/25/03 Agy 554 32
93-146 G PO REMIC
5/25/23 Agy 234 153
93-243 C PO REMIC
11/25/23 Agy 44 34
96-27 A PO REMIC
10/25/23 Agy 345 151
First Boston Mortgage
Securities Corp., Series
87-B2 IO
8.985%, 4/25/17 AAA 145 40
- -----------------------------------------------------
GROUP TOTAL 647
- -----------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$36,503) 37,335
- -----------------------------------------------------
STRUCTURED INVESTMENTS (0.4%)-SEE NOTE A7
- -----------------------------------------------------
Morgan Guaranty Trust
Company, 11/20/05; monthly
payments equal to 1% per
annum of the outstanding
notional balance, indexed
to GNMA ARM pools. (Cost
$189) N/R 4,745 137
- -----------------------------------------------------
INTEREST RATE CAPS (0.1%)-SEE NOTE A6
- -----------------------------------------------------
Bankers Trust Co., Inc.,
terminating 10/15/99, to receive
on 10/15/99 the excess, as
measured on 10/15/98, of 12 month
LIBOR over 6.34% multiplied by
the notional amount. N/R 6,600 20
J.P. Morgan and Co., Inc.,
terminating 10/15/99, to receive
on 10/15/99 the excess, as
measured on 10/15/98, of 12 month
LIBOR over 6.34% multiplied by
the notional amount. N/R 10,000 30
- -----------------------------------------------------
GROUP TOTAL (Premium Paid $68) 50
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
53
<PAGE> 56
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES PORTFOLIO
FACE
AMOUNT VALUE
(CONT'D) (000) (000)!
- -----------------------------------------------------
<S> <C> <C> <C>
CASH EQUIVALENTS (13.5%)
- -----------------------------------------------------
AGENCY FLOATING RATE MORTGAGE (0.8%)
## Federal Home Loan Mortgage
Corporation,
2/15/24 $ 299 $ 299
- -----------------------------------------------------
DISCOUNT NOTE (7.6%)
Federal Home Loan Mortgage
Corporation,
10/16/97 1,500 1,496
Federal National Mortgage
Association
10/17/97 1,400 1,397
- -----------------------------------------------------
GROUP TOTAL 2,893
- -----------------------------------------------------
U.S. TREASURY SECURITY (1.3%)
(dd) U.S. Treasury Bill
11/13/97 515 512
- -----------------------------------------------------
REPURCHASE AGREEMENT (3.8%)
Chase Securities, Inc. 5.90% dated
9/30/97, due 10/1/97, to be
repurchased at $1,434,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99 valued at $1,447 1,434 1,434
- -----------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $5,134) 5,138
- -----------------------------------------------------
TOTAL INVESTMENTS (112.0%) (Cost $41,894) 42,660
- -----------------------------------------------------
OTHER ASSETS AND LIABILITIES (-12.0%)
Dividends Receivable 35
Interest Receivable 357
Receivable for Investments Sold 1,966
Receivable for Fund Shares Sold 10
Receivable for Daily Variation on Futures
Contracts 8
Other Assets 2
Payable for Investments Purchased (6,819)
Payable for Fund Shares Redeemed (14)
Payable for Investment Advisory Fees (40)
Payable for Administrative Fees (3)
Payable for Trustees' Deferred Compensation
Plan-Note F (1)
Unrealized Loss on Swap Agreements (51)
Other Liabilities (25)
-------
(4,575)
- -----------------------------------------------------
NET ASSETS (100%) $38,085
- -----------------------------------------------------
<CAPTION>
VALUE
(000)!
- -----------------------------------------------------
<S> <C> <C> <C>
INSTITUTIONAL CLASS
- -----------------------------------------------------
NET ASSETS
Applicable to 3,540,390 outstanding
shares of beneficial interest (unlimited
authorization, no par value) $38,085
- -----------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.76
- -----------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $39,281
Undistributed Net Investment Income (Loss) 1,007
Undistributed Realized Net Gain (Loss) (2,861)
Unrealized Appreciation (Depreciation) on:
Investment Securities 766
Futures and Swaps (108)
- -----------------------------------------------------
NET ASSETS $38,085
- -----------------------------------------------------
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1997 was $519 or 1.4% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
CMO Collateralized Mortgage Obligation
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1997.
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
note A8 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
54
<PAGE> 57
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
LIMITED DURATION
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (94.9%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (18.9%)
## Government National
Mortgage Association
Various Pools:
6.00%, 9/20/27 Agy $ 9,750 $ 9,823
6.50%, 8/20/27 Agy 16,830 17,088
November TBA
6.00%, 11/20/27 Agy 2,500 2,515
- -------------------------------------------------------
GROUP TOTAL 29,426
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (8.4%)
Federal Home Loan Mortgage
Corporation
Conventional Pools:
10.00%, 4/1/10-8/1/16 Agy 371 405
10.50%, 12/1/14-11/1/19 Agy 669 744
11.00%, 8/1/15-5/1/20 Agy 257 288
11.50%, 12/1/08-1/1/18 Agy 1,160 1,315
Gold Pools:
10.00%, 2/1/21-10/1/21 Agy 299 330
10.50%, 1/1/19-10/1/20 Agy 583 648
11.50%, 8/1/10 Agy 195 224
12.00%, 6/1/15-9/1/15 Agy 535 614
Federal National Mortgage
Association
Conventional Pools:
10.00%, 12/1/15-9/1/16 Agy 668 732
10.50%, 4/1/15 Agy 112 126
11.00%, 7/1/20 Agy 467 526
12.00%, 5/1/14-8/1/20 Agy 344 396
12.50%, 2/1/15 Agy 99 115
Government National
Mortgage Association
Various Pools:
10.00%,
11/15/09-12/25/26 Agy 3,132 3,476
10.50%, 5/15/16-5/15/26 Agy 724 816
11.00%, 1/15/10-6/15/20 Agy 1,720 1,966
11.50%, 2/15/13-9/15/14 Agy 280 325
- -------------------------------------------------------
GROUP TOTAL 13,046
- -------------------------------------------------------
ASSET BACKED CORPORATES (25.3%)
(+) Aegis Auto Receivables
Trust, Series 95-1 A
8.60%, 3/20/02 N/R 400 402
(+) ACC Automobile
Receivables Trust, Series
97-C A
6.40%, 3/17/04 AAA 746 748
AFG Receivables Trust,
Series:
95-A A
6.15%, 9/15/00 A 197 197
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-B A
6.60%, 4/15/01 A $ 336 $ 337
97-A A
6.35%, 10/15/02 AAA 649 650
ALPS, Series 94-1 A2 CMO
7.15%, 11/15/97 AA 788 795
Americredit Automobile
Receivables Trust, Series
96-B A
6.50%, 1/12/02 AAA 657 660
Arcadia Auto, Series 97-C
A4
6.375%, 1/15/03 AAA 770 773
Associates Manufactured
Housing Pass Through
Certificates, Series 97-1
A3
6.60%, 6/15/28 AAA 845 851
Case Equipment Loan Trust,
Series:
95-A A
7.30%, 3/15/02 AAA 140 142
95-A B
7.65%, 3/15/02 A 209 212
Champion Home Equity Loan
Trust,
Series:
96-3 A2
7.03%, 8/25/11 AAA 650 656
96-4 A2
6.66%, 11/25/11 AAA 875 876
Cityscape Home Equity Loan
Trust,
Series:
96-1 A1
6.45%, 1/25/11 AAA 252 251
96-3 A2
6.65%, 6/25/11 AAA 600 600
97-1 A3
6.63%, 3/25/18 AAA 1,300 1,301
CPS Auto Grantor Trust,
Series:
96-3 A
6.30%, 8/15/02 AAA 528 529
97-2 A
6.65%, 10/15/02 AAA 455 458
Contimortgage Home Equity
Loan Trust, Series 96-3
A2
6.97%, 7/15/11 AAA 600 602
Crown Home Equity Loan
Trust, Series 96-1 A2
6.51%, 6/25/11 AAA 950 950
CS First Boston Mortgage
Securities Corp., Series
96-2 A2
6.32%, 3/25/05 AAA 875 873
Delta Funding Home Equity
Loan Trust, Series 96-3
A2
6.525%, 10/25/11 AAA 950 948
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
55
<PAGE> 58
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED DURATION
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
First Merchants Auto
Receivables Corp.,
Series:
96-C A2
6.15%, 7/15/01 AAA $ 1,175 $ 1,167
(+) 97-2 A1
6.85%, 11/15/02 AAA 564 568
First Plus Home Loan Trust,
Series:
96-3 A2
6.85%, 6/20/07 AAA 900 904
96-4 A3
6.28%, 3/10/09 AAA 900 898
97-1 A3
6.45%, 6/10/09 AAA 1,300 1,300
First Union Residential
Securitization Trust
Series 96-2 A2
6.46%, 9/25/11 AAA 925 924
Fleet Finance, Inc., Series
93-1 A
5.45%, 3/20/23 AAA 14 14
Fleetwood Credit Corp.,
Series 92-A A
7.10%, 2/15/07 AAA 510 511
Ford Credit Auto Owner
Trust,
Series:
96-A A3
6.50%, 11/15/99 AAA 1,700 1,711
96-B
6.55%, 2/15/02 A 400 402
Ford Credit Grantor Trust,
Series 94-B A
7.30%, 10/15/99 AAA 493 497
General Electric Home
Equity Loan Asset-Backed
Certificates, Series 91-1
B
8.70%, 9/15/11 AAA 850 873
General Motors Acceptance
Corp., Grantor Trust,
Series 93-A A
4.15%, 3/15/98 AAA 2 2
General Motors Acceptance
Corp., Series 97-A A
6.50%, 4/15/02 AAA 885 889
Greenwich Capital
Acceptance, Inc., Series
95-BA1 A1
6.00%, 8/10/20 AAA 302 301
Honda Auto Receivables
Grantor Trust, Series
97-A A
5.85%, 2/15/03 AAA 1,281 1,280
IBM Credit Receivables
Lease Asset Master Trust,
Series 93-1 A
4.55%, 11/15/00 AAA 116 115
IMC Home Equity Loan Trust,
Series 96-4 A3
6.81%, 7/25/11 AAA 500 502
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Long Beach Auto,
Series 97-2 A
6.69%, 9/25/04 AAA $ 568 $ 568
Money Store (The) Home
Equity Trust,
Series 95-CA1
6.20%, 1/15/09 AAA 127 126
(+) NAL Auto Trust, Series:
96-3A
7.30%, 12/15/00 N/R 250 249
97-2A
7.75%, 9/15/02 N/R 420 420
(+) National Car Rental
Financing Ltd.,
Series 96-1 A4
7.35%, 10/20/03 N/R 600 615
Navistar Financial Corp.,
Series 94-B A
6.40%, 1/15/00 AAA 361 361
(+) NPR Health Care,
Series 97-1 A
6.815%, 7/1/01 N/R 300 303
Oakwood Mortgage Investors
Inc., Series 95-B A1
6.25%, 1/15/21 AAA 267 267
Old Stone Credit Corp,
Series 92-3 B1
6.35%, 9/25/07 AAA 94 93
Olympic Automobile
Receivables Trust,
Series:
94-A1
5.65%, 1/15/01 AAA 180 180
94-B B
6.95%, 6/15/01 AAA 240 242
Onyx Acceptance Grantor
Trust,
Series:
97-2 A
6.35%, 10/15/03 AAA 955 957
1997-3A
6.35%, 1/15/04 AAA 800 803
Onyx Acceptance Trust,
Series:
94-1 A
6.90%, 1/17/00 AAA 122 123
Preferred Credit Corp.,
Series 97-1 A3
6.91%, 5/1/07 AAA 850 856
Premier Auto Trust,
Series:
94-3 B
6.80%, 12/2/99 AA 113 114
95-A A4
6.00%, 5/6/00 AAA 775 775
Security Pacific Home Loan
Equity Trust, Series 91-1
B
8.85%, 5/15/98 AAA 678 688
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
56
<PAGE> 59
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Southern Pacific Secured
Assets Corp.,
Series 96-1 A2
6.09%, 3/25/27 AAA $ 309 $ 308
(+) Team Fleet Financing
Corp.,
Series:
96-1 A
6.65%, 12/15/02 A- 350 350
97-1 A
7.35%, 5/15/03 A- 875 900
Union Acceptance Corp.,
Series:
96-B A
6.45%, 7/9/03 AAA 722 722
97-B A2
6.70%, 6/8/03 AAA 700 706
+ Vanderbilt Mortgage
Finance, Series 97-B 1A2
6.775%, 12/7/28 Aaa 1,000 1,012
WFS Financial Owner Trust,
Series 97-C A3
6.10%, 3/20/02 AAA 810 809
Western Financial Auto
Grantor Trust,
Series:
93-A1
4.45%, 7/1/98 AAA 29 29
93-2 A2
4.70%, 10/1/98 AAA 24 23
93-3 A1
4.25%, 12/1/98 AAA 37 37
94-1 A1
5.10%, 6/1/99 AAA 86 86
- -------------------------------------------------------
GROUP TOTAL 39,391
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL
SERIES (12.4%)
Federal Home Loan Mortgage
Corporation,
Series:
181 D REMIC
8.50%, 6/15/16 Agy 1,340 1,342
1386 D REMIC
6.188%, 10/15/07 Agy 1,488 1,491
1462 PAC-1 (11) REMIC
6.75%, 9/15/16 Agy 1,075 1,082
1542 H PAC-1
6.50%, 10/15/20 Agy 1,160 1,165
1548 G SEQ
6.00%, 4/15/17 Agy 926 921
1560 PE PAC-1 (11) REMIC
6.00%, 11/15/16 Agy 1,250 1,245
1576 PD PAC (11) REMIC
5.50%, 9/15/02 Agy 1,075 1,071
1680 PB PAC-1 (11)
5.70%, 6/15/12 Agy 537 535
1839 A
6.50%, 7/15/17 Agy 1,035 1,040
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
1931 Class A SEQ
7.25%, 6/15/21 Agy $ 959 $ 970
92-127 FA REMIC
6.188%, 3/25/06 Agy 308 308
93-16 B
7.50%, 10/25/19 Agy 850 863
93-83 A SEQ
5.55%, 11/25/16 Agy 825 814
94-93 PD PAC
7.25%, 4/25/15 Agy 800 809
96-40 K
5.75%, 11/25/16 Agy 1,625 1,610
97-67 HB
6.50%, 12/17/21 Agy 1,450 1,441
97-67 HD
6.00%, 12/17/21 Agy 1,700 1,668
Federal National Mortgage
Association, Series 93-70
B
5.75%, 4/25/16 Agy 986 976
- -------------------------------------------------------
GROUP TOTAL 19,351
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- NON-AGENCY
COLLATERAL SERIES (0.3%)
Citicorp Mortgage
Securities, Inc., Series
93-9 B
7.00%, 3/25/20 AAA 101 101
G E Capital Mortgage
Services, Inc., Series
93-14 A2 REMIC
5.75%, 4/25/11 AAA 355 353
- -------------------------------------------------------
GROUP TOTAL 454
- -------------------------------------------------------
COMMERCIAL MORTGAGES (0.8%)
+ Carolina First Bank,
Series 96
6.50%, 12/18/99 Aa2 262 262
CBM Funding Corp., Series
96-1B A1
7.55%, 2/1/13 AA 335 340
+ Midland Realty Acceptance
Corp., Series 96-C2 A1
7.02%, 1/25/27 Aaa 581 592
- -------------------------------------------------------
GROUP TOTAL 1,194
- -------------------------------------------------------
FINANCE (11.6%)
Allstate Corp.
5.875%, 6/15/98 A 1,125 1,126
Associates Corp. of
North America
8.25%, 12/1/99 AA- 800 835
Bankers Trust New York
Corp.
6.625%, 7/30/99 A 635 640
Barclays American Corp.
7.875%, 8/15/98 AA 450 458
Beneficial Corp.
6.45%, 6/19/00 A 670 673
Chase Manhattan Bank N.A.
5.875%, 8/4/99 A+ 1,375 1,370
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
57
<PAGE> 60
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED DURATION
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Chrysler Financial Corp.
6.375%, 1/28/00 A- $ 775 $ 778
CIT Group Holdings
6.375%, 10/1/02 N/R 825 822
Countrywide Funding Corp.
7.32%, 8/15/00 A 650 667
(+) Farmers Insurance
Exchange
8.50%, 8/1/04 BBB- 700 750
(+) First Hawaiian Bank,
Series A
6.93%, 12/1/03 A 700 707
(+) Florida Property &
Casualty
7.45%, 7/1/04 A 150 155
7.375%, 7/1/03 A- 375 387
(+) Florida Windstorm
6.70%, 8/25/04 A- 425 424
Ford Motor Credit Corp.
7.47%, 7/29/99 A+ 675 691
8.375%, 1/15/00 A+ 400 419
General Motors Acceptance
Corp.
6.00%, 12/30/98 A- 600 601
+ 7.25%, 6/22/99 A3 285 290
Heller Financial, Inc.
9.375%, 3/15/98 BBB+ 375 381
7.875%, 11/1/99 BBB+ 525 542
Home Ownership Funding
Corp.,
13.331% (Preferred
Stock) AAA (1)1,800 1,747
Household International
6.00%, 3/15/99 A 575 575
(+) Hyatt Equities
7.00%, 5/15/02 BBB+ 925 941
International Lease Finance
8.28%, 2/3/00 A+ 550 575
Lehman Brothers Holding,
Inc.
6.625%, 11/15/00 A 725 730
(+) Prime Property Funding
6.80%, 8/15/02 A 785 789
- -------------------------------------------------------
GROUP TOTAL 18,073
- -------------------------------------------------------
FLOATING RATE NOTES (0.8%)
## Airlines Pass Through
Trust, Series 1 A5
6.006%, 3/15/19 AA 402 402
## Student Loan Marketing
Association,
Series:
95-1 A1
5.759%, 4/26/04 AAA 463 463
96-1 A1
5.744%, 7/26/04 AAA 388 389
- -------------------------------------------------------
GROUP TOTAL 1,254
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
INDUSTRIALS (1.5%)
(+) EES Coke Battery Co.,
Inc.
7.125%, 4/15/02 BBB $ 575 $ 582
(+) Kern River Funding
Corp.
6.42%, 3/31/01 A- 649 651
Philip Morris Cos., Inc.
8.75%, 6/1/01 A 520 557
RJR Nabisco, Inc.
8.625%, 12/1/02 BBB- 575 604
- -------------------------------------------------------
GROUP TOTAL 2,394
- -------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.7%)
+ Town & Country Funding
Corp., Series A
5.85%, 8/15/98 Aa2 1,000 998
- -------------------------------------------------------
TELEPHONES (0.4%)
Tele-Communications, Inc.,
Series 95-C A1
8.25%, 1/15/03 BBB- 550 579
- -------------------------------------------------------
U.S. TREASURY SECURITIES (12.7%)
U.S. Treasury Notes
5.00%, 2/15/99 Tsy 1,200 1,188
(dd) 7.00%, 4/15/99 Tsy 2,375 2,418
3.625%, 7/15/02
(Inflation Indexed) Tsy 16,210 16,147
- -------------------------------------------------------
GROUP TOTAL 19,753
- -------------------------------------------------------
UTILITIES (0.4%)
(+) Edison Mission Energy
Funding
6.77%, 9/15/03 BBB 671 677
- -------------------------------------------------------
YANKEE (0.7%)
AST Research, Inc.
7.45%, 10/1/02 A- 600 598
Korea Development Bank
7.375%, 9/17/04 AA- 470 474
- -------------------------------------------------------
GROUP TOTAL 1,072
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $147,181) 147,662
- -------------------------------------------------------
INTEREST RATE CAP (0.2%)-SEE NOTE A6
- -------------------------------------------------------
Bankers Trust Co., Inc.,
terminating 10/15/99, to
receive on 10/15/99 the
excess, as measured on
10/15/98, of 12 month
LIBOR over 6.34%
multiplied by the
notional amount. (Premium
Paid $370) N/R 96,748 292
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
58
<PAGE> 61
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
CASH EQUIVALENT (3.8%)
- -------------------------------------------------------
REPURCHASE AGREEMENT (3.8%)
Chase Securities, Inc.
5.90% dated 9/30/97, due
10/1/97, to be
repurchased at $5,961,
collateralized by various
U.S. Government
Obligations, due
10/1/97-1/29/99, valued
at $6,016 (Cost $5,960) $ 5,960 $ 5,960
- -------------------------------------------------------
TOTAL INVESTMENTS (98.9%) (Cost $153,511) 153,914
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
Dividends Receivable 60
Interest Receivable 1,119
Receivable for Investments Sold 14,638
Other Assets 4
Payable for Investments Purchased (8,395)
Payable for Fund Shares Redeemed (5,613)
Payable for Investment Advisory Fees (114)
Payable for Administrative Fees (11)
Payable for Trustees' Deferred Compensation
Plan-Note F (3)
Other Liabilities (29)
--------
1,656
- -------------------------------------------------------
NET ASSETS (100%) $155,570
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 14,831,121 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $155,570
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.49
- -------------------------------------------------------
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital $156,817
Undistributed Net Investment Income (Loss) 2,361
Undistributed Realized Net Gain (Loss) (4,002)
Unrealized Appreciation (Depreciation) on:
Investment Securities 403
Futures (9)
- -------------------------------------------------------
NET ASSETS $155,570
- -------------------------------------------------------
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
CMO Collateralized Mortgage Obligation
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
59
<PAGE> 62
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED
INCOME PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (97.1%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (10.2%)
## Government National
Mortgage Association
Various Pools:
6.00%, 8/20/27-9/20/27 Agy $ 39,800 $ 40,098
November TBA
6.00%, 11/20/27 Agy 10,150 10,210
- -------------------------------------------------------
GROUP TOTAL 50,308
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (13.0%)
Federal Home Loan Mortgage
Corporation Conventional
Pools:
10.50%, 2/1/19-3/1/27 Agy 4,666 5,204
11.00%, 12/1/10-9/1/20 Agy 2,410 2,700
11.75%, 12/1/17 Agy 128 146
Gold Pools:
7.00%, 9/1/23-12/1/24 Agy 9,397 9,410
10.50%, 11/1/15-4/1/21 Agy 759 844
Federal National Mortgage
Association Conventional
Pools:
10.50%, 8/1/15-4/1/22 Agy 4,541 5,086
12.00%, 11/1/15 Agy 3,196 3,683
Government National
Mortgage Association
Various Pools:
7.00%, 12/15/22-12/15/23 Agy 16,132 16,188
10.00%,
12/15/17-12/25/26 Agy 9,521 10,554
10.50%, 10/15/15-4/15/25 Agy 3,641 4,095
11.00%, 1/15/10-5/15/26 Agy 5,680 6,403
12.00%, 4/15/14 Agy 41 47
- -------------------------------------------------------
GROUP TOTAL 64,360
- -------------------------------------------------------
ASSET BACKED CORPORATES (5.2%)
## Airplanes Pass Through
Trust, Series 1 B
6.756%, 3/15/19 A 1,223 1,227
ALPS,
Series:
94-1 A4 CMO
7.80%, 9/15/04 AA 1,450 1,484
94-1 C2 CMO
9.35%, 9/15/04 BBB 1,816 1,867
Arcadia Auto, Series 97-C
A4
6.375%, 1/15/03 AAA 2,280 2,289
CIT Group Home Equity Loan
Trust, Series 97-1 A3
6.25%, 9/15/01 AAA 1,325 1,326
(+) Federal Mortgage
Acceptance Corp., Loan
Receivables Trust, Series
96-B A1
7.629%, 11/1/18 A 1,290 1,316
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
First Plus Home Loan Trust,
Series:
97-3 A2
6.48%, 9/10/08 AAA $ 1,345 $ 1,348
97-3 A3
6.57%, 10/10/10 AAA 1,330 1,335
Honda Auto Receivables
Grantor Trust, Series
97-A A
5.85%, 2/15/03 AAA 3,959 3,955
(+) Long Beach Auto,
Series 97-2 A
6.69%, 9/25/04 AAA 1,753 1,754
(+) NAL Auto Trust,
Series: 96-4 A
6.90%, 12/15/00 N/R 975 969
97-2 A
7.75%, 9/15/02 N/R 1,019 1,020
(+) National Car Rental
Financing Ltd.,
Series 96-1 A4
7.35%, 10/20/03 N/R 1,650 1,691
Security Pacific Home
Equity Trust, Series
91-AB
10.50%, 3/10/06 A+ 512 513
(+) Team Fleet Financing
Corp., Series 96-1A
6.65%, 12/15/02 A- 1,125 1,126
WFS Financial Owner Trust,
Series 97-C A3
6.01%, 3/20/02 AAA 2,470 2,467
- -------------------------------------------------------
GROUP TOTAL 25,687
- -------------------------------------------------------
ASSET BACKED MORTGAGES (1.9%)
Champion Home Equity Loan
Trust, Series 96-2 A4
8.00%, 9/25/28 AAA 2,105 2,195
Cityscape Home Equity Loan
Trust,
Series:
sec. 96-3 YMA
10/25/26 (acquired
12/24/96, cost $53) N/R 38,981 52
96-3 A IO
1.00%, 10/25/26 N/R 34,246 849
96-3 A8
7.65%, 8/25/26 AAA 2,200 2,250
Contimortgage Home Equity
Loan Trust,
Series:
96-3 A7
8.04%, 9/15/27 AAA 2,150 2,256
96-4 A11 IO
1.10%, 1/15/28 AAA 29,147 766
96-4 A12 IO
1.05%, 1/15/28 AAA 9,408 247
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
60
<PAGE> 63
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
96-4 A12 YMA
1/15/28 AAA $ 11,765 $ 17
(+) 96-4 A12 YMA
1/15/28 AAA 35,300 53
(+) 97-1 A10 YMA
3/15/28 N/R 36,896 52
97-1 A10I IO
1.10%, 3/15/28 AAA 34,489 944
- -------------------------------------------------------
GROUP TOTAL 9,681
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL
SERIES (2.5%)
Federal Home Loan Mortgage
Corporation,
Series:
1415-S Inv Fl IO
18.813%, 11/15/07 Agy 1,003 462
1476-S Inv Fl IO
REMIC PAC
4.363%, 2/15/08 Agy 9,282 1,082
1485-S Inv Fl IO REMIC
3.913%, 3/15/08 Agy 8,804 781
1600-SA Inv Fl IO REMIC
2.313%, 10/15/08 Agy 18,995 1,050
1709 H PO
1/15/24 Agy 237 121
1750 C PD PO
3/15/24 Agy 361 257
1813 K PO
2/15/24 Agy 240 165
1844 PC PO
3/15/24 Agy 435 275
1887 I PO
10/15/22 Agy 255 171
88-22 C PAC (11)
9.50%, 4/15/20 Agy 41 46
Federal National Mortgage
Association,
Series:
92-186 S Inv Fl IO CMO
3.363%, 10/25/07 Agy 17,501 1,503
93-149 O PO
8/25/23 Agy 347 220
93-205 G PO
9/25/23 Agy 853 550
93-235 H PO REMIC
9/25/23 Agy 338 264
96-14 PC PO
12/25/23 Agy 415 239
96-46 PB PO
9/25/23 Agy 425 285
96-54 N PO
7/25/23 Agy 305 228
96-54 O PO
11/25/23 Agy 342 213
96-68 SC Inv Fl IO REMIC
2.475%, 1/25/24 Agy 4,050 491
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
97-7 AE PO REMIC
2/15/23 Agy $ 1,092 $ 788
282 1 PO
5/15/24 Agy 4,433 3,038
- -------------------------------------------------------
GROUP TOTAL 12,229
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- NON-AGENCY
COLLATERAL SERIES (8.7%)
American Housing Trust,
Series:
IV 2
9.553%, 9/25/20 A 303 316
V 1G
9.125%, 4/25/21 AAA 1,631 1,733
+ Chase Mortgage Finance
Corp., Series 93-N A8
6.75%, 11/25/24 Aaa 2,800 2,651
Chemical Mortgage
Securities, Inc., Series
93-1 M
7.45%, 2/25/23 AA 225 227
CMC Securities Corp. IV,
Series 94-G A4
7.00%, 9/25/24 AAA 1,800 1,720
DLJ Mortgage Acceptance
Corp., Series 97-CF2 A1B
6.82%, 10/15/30 AAA 2,975 2,995
sec. First Boston Mortgage
Corp., Series 92-4 B1
8.125%, 10/25/22
(acquired 1/26/93, cost
$1,056) A 1,106 1,128
GE Capital Mortgage
Services, Inc.,
Series:
(+) 94-13 B1
6.50%, 4/25/24 N/R 5,297 5,003
94-24 A4
7.00%, 7/25/24 AAA 1,681 1,611
+ Independent National
Mortgage Corp., Series
94-O B1
7.875%, 9/25/24 A2 2,522 2,604
J. P. Morgan Commercial
Mortgage Finance Corp.,
Series 97-C5 A2
7.069%, 9/15/29 AAA 2,200 2,248
sec.## Kidder Peabody
Funding Corp., Series
92-4 B2
8.467%, 5/28/22
(acquired 8/5/92, cost
$739) N/R 738 737
Mid-State Trust II, Series
88-A4
9.625%, 4/1/03 AAA 725 787
Prudential Home Mortgage
Securities Co., Inc.,
Series:
90-5 A3
9.50%, 5/25/05 AAA 194 194
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
61
<PAGE> 64
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL PURPOSE FIXED
INCOME PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+)+ 92-A 2B4
7.90%, 4/28/22 A1 $ 2,598 $ 2,543
(+)# 94-A 3B3
6.802%, 4/28/24 N/R 3,154 3,045
Residential Accredit Loans,
Inc.,
Series:
97-Q52 A8
7.75%, 3/25/27 AAA 1,200 1,236
+ 97-QS1 A11
7.50%, 2/25/27 Aaa 2,600 2,632
97-QS4 A7
7.75%, 5/25/27 AAA 2,300 2,370
97-QS12 A8 TBA
7.25%, 12/25/27 AAA 2,350 2,354
Rural Housing Trust, Series
87-1M
3.33%, 10/1/28 A- 472 450
Ryland Mortgage Securities
Corp.,
Series:
## 92-A 1A
8.27%, 3/29/30 A- 1,762 1,784
94-7B 4A2
7.50%, 8/25/25 AAA 2,700 2,707
- -------------------------------------------------------
GROUP TOTAL 43,075
- -------------------------------------------------------
COMMERCIAL MORTGAGES (9.8%)
+ American Southwest
Financial Securities
Corp., Series 95-C1 A1B
7.40%, 11/17/04 Aaa 2,150 2,223
Asset Securitization Corp.,
Series:
95-MD4 A1
7.10%, 8/13/29 AAA 4,796 4,935
(+)+ 96-D3 A1C
7.40%, 10/13/26 Aaa 1,850 1,944
96-MD6 A1C
7.04%, 11/13/26 AAA 1,950 2,004
Beverly Finance Corp.
8.36%, 7/15/04 AA- 2,300 2,476
(+) Carousel Center
Finance, Inc., Series 1
A1
6.828%, 10/15/07 AA 1,650 1,662
CBM Funding Corp., Series
96-1 A3PI
7.08%, 2/1/13 AA 1,800 1,856
(+) Creekwood Capital
Corp., Series 95-1A
8.47%, 3/16/15 AA 1,693 1,886
(+) Crystal Run Properties,
Series A
7.393%, 8/15/11 AA 2,250 2,350
CS First Boston Mortgage
Securities Corp., Series
97-C1 A1C
7.24%, 6/20/29 AAA 2,600 2,697
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) DLJ Mortgage Acceptance
Corp.,
Series:
96-CF2 A1B
7.29%, 11/12/21 AAA $ 575 $ 596
## 96-CF2 S IO
1.643%, 11/12/21 N/R 5,992 531
+ GMAC Commercial Mortgage
Securities, Inc., Series
96-C1 X2 IO
1.96%, 3/15/21 Aaa 8,807 822
+ GS Mortgage Securities
Corp.,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa 2,475 2,528
97-GL X2 IO
1.07%, 7/13/30 Aaa 5,996 322
(+) Lakewood Mall Finance
Co., Series 95-C1 A
7.00%, 8/13/10 AA 1,900 1,936
+ LB Commercial Conduit
Mortgage Trust, Series
96-C2 A
7.416%, 10/25/26 Aaa 2,292 2,382
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C2 A2
6.82%, 11/21/28 AAA 950 962
96-C2 IO
1.529%, 11/21/28 N/R 9,962 894
+ Midland Realty Acceptance
Corp., Series 96-C2 A2
7.233%, 1/25/29 Aaa 1,625 1,681
+ Mortgage Capital Funding,
Inc., Series 97-MC1 A3
7.288%, 7/20/27 Aaa 2,900 3,016
Nomura Asset Securities
Corp., Series 94-MD1 A3
8.026%, 3/15/18 N/R 1,200 1,291
(+) Park Avenue Finance
Corp., Series 97-C1 A1
7.58%, 5/12/07 N/R 1,042 1,095
Prime Property Funding,
Series 1 A
6.633%, 7/23/03 AA 1,519 1,520
+ Salomon Brothers Mortgage
Securities, Series 97-TZH
A2
7.174%, 3/24/22 Aa2 1,250 1,286
(+) Stratford Finance Corp.
6.776%, 2/1/04 AA 2,300 2,289
Structured Asset Securities
Corp.,
Series:
## 96-CFL X1A IO
1.483%, 2/25/28 N/R 16,440 437
## 96-CFL X1 IO
1.335%, 2/25/28 N/R 16,715 866
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
62
<PAGE> 65
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
## 96-CFL X2 IO
1.249%, 2/25/28 N/R $ 3,970 $ 119
- -------------------------------------------------------
GROUP TOTAL 48,606
- -------------------------------------------------------
ENERGY (0.8%)
(+) Excel Paralubes Funding
7.43%, 11/1/15 A- 1,825 1,849
Mobile Energy Services
8.665%, 1/1/17 BBB- 1,812 1,929
- -------------------------------------------------------
GROUP TOTAL 3,778
- -------------------------------------------------------
FINANCE (11.9%)
(+) Anthem Insurance Cos.,
Inc., Series A
9.00%, 4/1/27 BBB+ 2,375 2,560
(+) BankAmerica
Institutional, Series A
8.07%, 12/31/26 A- 2,825 2,905
(+) BT Institutional
Capital Trust, Series A
8.09%, 12/1/26 BBB+ 1,950 1,974
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 2,075 2,120
(+) Equitable Life
Assurance Society of the
U. S., Series 1 A
6.95%, 12/1/05 A 2,490 2,508
(+) Farmers Insurance
Exchange
8.625%, 5/1/24 BBB+ 2,200 2,343
(+) First Chicago NBD
Corp., Series A
7.95%, 12/1/26 A- 2,625 2,651
First Union Institutional
Capital, Series I
8.04%, 12/1/26 BBB+ 2,850 2,921
(+) Florida Property &
Casualty
7.375%, 7/1/03 A- 750 774
(+) Florida Windstorm
6.70%, 8/25/04 A- 2,900 2,891
(+)+ Home Ownership Funding
Corp.,
13.331% (Preferred
Stock) Aaa (1)11,000 10,675
(+) John Hancock Surplus
Note
7.375%, 2/15/24 AA- 2,620 2,618
(+) Metropolitan Life
Insurance Co.
7.45%, 11/1/23 AA 2,000 1,946
NB Capital Trust
8.25%, 4/15/27 A- 950 1,001
(+) Nationwide Mutual Life
Insurance Co.
7.50%, 2/15/24 A+ 1,950 1,919
(+) New York Life Insurance
Co.
7.50%, 12/15/23 AA 1,075 1,064
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) PNC Institutional
Capital, Series A
7.95%, 12/15/26 BBB+ $ 2,550 $ 2,561
(+) Prime Property Funding
7.00%, 8/15/04 A 1,965 1,986
(+) State Street
Institutional Capital,
Series:
A
7.94%, 12/30/26 A 1,250 1,274
B
8.035%, 3/15/27 A 1,000 1,028
Washington Mutual Capital
8.375%, 6/1/27 BBB- 1,300 1,364
(+) Wells Fargo Capital,
Series A
8.125%, 12/1/26 BBB 2,750 2,829
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 3,076 3,109
96 WFP-D
6.95%, 9/1/13 AA- 1,800 1,823
- -------------------------------------------------------
GROUP TOTAL 58,844
- -------------------------------------------------------
FOREIGN GOVERNMENTS (0.9%)
Government of Germany
7.375%, 1/3/05 AAA DEM 7,250 4,609
- -------------------------------------------------------
INDUSTRIALS (3.9%)
## Blue Bell Funding
11.85%, 5/1/99 BB- $ 378 387
DR Securitized Lease Trust,
Series:
93-K1 A1
6.66%, 8/15/10 BB- 481 439
93-K1 A2
7.43%, 8/15/18 BB- 200 174
94-K1 A2
8.375%, 8/15/15 BB- 1,075 1,026
DR Structured Finance,
Series 94-K2
9.35%, 8/15/19 BB- 1,280 1,297
(+) Entertainment
Properties,
14.253% (Preferred
Stock) BBB- (1)2,100 2,020
(+) HMH Properties, Inc.
8.875%, 7/15/07 BB- 575 590
News America Holdings
8.875%, 4/26/23 BBB 1,215 1,344
7.75%, 1/20/24 BBB 575 567
(+) Oxymar
7.50%, 2/15/16 BBB 1,590 1,589
Paramount Communications,
Inc.
8.25%, 8/1/22 BB+ 3,135 3,095
Rhone-Poulenc Rorer, Inc.,
Series 92-A3
8.62%, 1/5/21 BBB+ 2,175 2,380
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
63
<PAGE> 66
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL PURPOSE FIXED
INCOME PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Scotia Pacific Holding Co.
7.95%, 7/20/15 BBB $ 1,616 $ 1,691
Southland Corp.
5.00%, 12/15/03 BB+ 1,722 1,485
Tier One Properties,
11.095% (Preferred
Stock) A (1)975 955
Time Warner, Inc., Series
M,
10.25% (Preferred Stock) BB+ (1)218 250
- -------------------------------------------------------
GROUP TOTAL 19,289
- -------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.6%)
First Federal Savings &
Loan Association, Series
92-C
8.75%, 6/1/06 AA 50 51
## Resolution Trust Corp.,
Series 92-5 C
8.618%, 1/25/26 AA 1,279 1,290
Ryland Acceptance Corp. IV,
Series 79-A
6.65%, 7/1/11 AA 1,542 1,485
sec. Shearson American
Express, Series A CMO
9.625%, 12/1/12
(acquired
8/24/92-5/25/93, cost
$280) AA 279 289
- -------------------------------------------------------
GROUP TOTAL 3,115
- -------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES- AGENCY COLLATERAL
SERIES (1.7%)
Federal National Mortgage
Association,
Series:
93-146 G PO REMIC 5/25/23 Agy 1,079 707
93-243 C PO REMIC
11/25/23 Agy 238 184
249 1 PO
10/25/23 Agy 7,775 5,138
254 1 PO
1/1/24 Agy 1,207 865
260 1 PO
4/1/24 Agy 1,624 1,153
- -------------------------------------------------------
GROUP TOTAL 8,047
- -------------------------------------------------------
TELEPHONES (1.3%)
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ 1,375 1,507
Tele-Communications, Inc.
9.25%, 1/15/23 BBB- 3,085 3,320
# Teleport Communications
Group, Inc.
0.00%, 7/1/07 B 1,965 1,538
- -------------------------------------------------------
GROUP TOTAL 6,365
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION (0.6%)
(+) Jet Equipment Trust,
Series 95-5A C
10.69%, 5/1/15 BBB $ 2,200 $ 2,784
- -------------------------------------------------------
U.S. TREASURY SECURITIES (18.3%)
U.S. Treasury Bond
8.75%, 8/15/20 Tsy 28,825 36,545
U.S. Treasury Notes
6.25%, 5/31/99 Tsy 1,800 1,813
dd 7.125%, 9/30/99 Tsy 35,350 36,211
3.375%, 1/15/07
(Inflation Indexed) Tsy 16,385 16,073
- -------------------------------------------------------
GROUP TOTAL 90,642
- -------------------------------------------------------
UTILITIES (0.3%)
(+) Edison Mission Energy
Funding Corp., Series B
7.33%, 9/15/08 BBB 1,225 1,260
- -------------------------------------------------------
YANKEE (5.5%)
(+) Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB 2,542 2,594
AST Research, Inc.
7.45%, 10/1/02 A- 1,850 1,843
(+) Hyundai Semiconductor
America
8.625%, 5/15/07 BBB- 1,400 1,429
(+) Israel Electric Corp.,
Ltd
7.25%, 12/15/06 A- 1,650 1,672
Korea Development Bank
7.375%, 9/17/04 AA- 1,390 1,401
National Power Corp.
7.875%, 12/15/06 BB+ 1,525 1,487
8.40%, 12/15/16 BB+ 1,415 1,358
(+) Paiton Energy Funding
9.34%, 2/15/14 BBB- 1,900 2,084
(+) Petroliam Nasional Bhd.
7.125%, 10/18/06 A+ 1,800 1,784
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 2,345 2,477
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ 3,450 3,747
## Republic of Argentina
Par, Series L, 'Euro'
5.50%, 3/31/23 BB 3,220 2,431
Republic of Colombia
8.70%, 2/15/16 BBB- 1,325 1,350
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
64
<PAGE> 67
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
United Mexican States,
Series B
6.25%, 12/31/19 BB $ 1,750 $ 1,450
@ United Mexican States
(Recovery Rights,
expiring 6/30/03) N/R (1)2,913,250 --
- -------------------------------------------------------
GROUP TOTAL 27,107
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $467,705) 479,786
- -------------------------------------------------------
STRUCTURED INVESTMENT (0.2%)-SEE NOTE A7
- -------------------------------------------------------
Morgan Guaranty Trust
Company, 11/20/05;
monthly payments equal to
1% per annum of the
outstanding notional
balance, indexed to GNMA
ARM pools (Cost $1,608) N/R 40,456 1,168
- -------------------------------------------------------
INTEREST RATE CAP (0.1%)-SEE NOTE A6
- -------------------------------------------------------
J.P. Morgan and Co., Inc.,
terminating 10/15/99, to
receive on 10/15/99 the
excess, as measured on
10/15/98, of 12 month
LIBOR over 6.34%
multiplied by the
notional amount (Premium
Paid $492) N/R 116,600 353
- -------------------------------------------------------
CASH EQUIVALENTS (9.4%)
- -------------------------------------------------------
Short-term Investments Held as
Collateral for Loaned Securities
(4.9%) 24,378 24,378
- -------------------------------------------------------
SHORT-TERM CORPORATE (0.8%)
## Ford Motor Credit Co.,
Medium Term Note
5.513%, 11/3/97 4,050 4,050
- -------------------------------------------------------
REPURCHASE AGREEMENT (3.7%)
Chase Securities, Inc. 5.90% dated
9/30/97, due 10/1/97, to be
repurchased at $18,051,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$18,218 18,048 18,048
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $46,476) 46,476
- -------------------------------------------------------
TOTAL INVESTMENTS (106.8%)(Cost $516,281) 527,783
- -------------------------------------------------------
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (-6.8%)
Cash $ 22
Dividends Receivable 539
Interest Receivable 4,882
Receivable for Investments Sold 6,199
Receivable for Fund Shares Sold 29
Receivable for Daily Variation on Futures
Contracts 67
Unrealized Gain on Swap Agreements 9
Other Assets 14
Payable for Investments Purchased (18,433)
Payable for Fund Shares Redeemed (2,055)
Payable for Administrative Fees (32)
Payable for Investment Advisory Fees (454)
Payable for Trustees' Deferred Compensation
Plan-Note F (12)
Unrealized Loss on Forward Foreign Currency
Contracts (72)
Collateral on Securities Loaned, at Value (24,378)
Other Liabilities (63)
--------
(33,738)
- -------------------------------------------------------
NET ASSETS (100%) $494,045
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 39,184,400 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $492,784
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 12.58
- -------------------------------------------------------
INVESTMENT CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 100,429 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 1,261
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 12.56
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $464,940
Undistributed Net Investment Income (Loss) 9,955
Undistributed Realized Net Gain (Loss) 8,474
Unrealized Appreciation (Depreciation) on:
Investment Securities 11,502
Foreign Currency Transactions (88)
Futures and Swaps (738)
- -------------------------------------------------------
NET ASSETS $494,045
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
65
<PAGE> 68
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL PURPOSE FIXED
INCOME PORTFOLIO
(CONT'D)
- ---------------------------------------------------------
<S> <C> <C>
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1997 was $2,206 or 0.4% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
dd A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
# Step Bond-Coupon rate increases in increments to
maturity. Rate disclosed is as of September 30,
1997. Maturity date disclosed is the ultimate
maturity.
## Variable or floating rate securities-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
@ Value is less than $500.
CMO Collateralized Mortgage Obligation
DEM German Mark
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1997.
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
66
<PAGE> 69
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MUNICIPAL
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (96.1%)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (92.2%)
Adelanto, CA School District
(FGIC)
Zero Coupon, 9/1/18 AAA $ 4,350 $ 1,418
Aldine, TX Independent
School District (PSFG)
Zero Coupon, 2/15/07 AAA 750 476
Allegheny County, PA
Sanitation Authority,
Series B (MBIA)
Zero Coupon, 6/1/10 AAA 1,500 787
Arkansas State Development
Finance Authority Home
Mortgage Revenue Bonds,
Series B-1
4.90%, 7/1/29 AAA 725 725
Bakersfield, CA Hospital
Revenue Bonds (AMBAC)
3.70%, 1/1/19 AAA 40 40
Benicia, CA School District
(MBIA)
Zero Coupon, 8/1/11 AAA 3,480 1,715
Brazos River Authority Texas
Pollution Control Revenue
Bonds, Series A
8.25%, 1/1/19 BBB+ 250 265
California Housing & Finance
Agency Revenue Bonds
(MBIA)
5.30%, 8/1/14 AAA 195 198
California Pollution Control
Financing Authority
Pollution Control Revenue
Bonds, Series B
8.875%, 1/1/10 A 2,800 2,879
California School Finance
Authority Lease Revenue
Bonds, Series A (MBIA)
6.70%, 7/1/02 AAA 1,305 1,385
California State
Zero Coupon, 3/1/04 A+ 375 282
Casino Reinvestment
Development Authority,
Series A (FSA)
5.00%, 10/1/03 AAA 1,300 1,339
Center Township, PA Sewer
Authority Revenue Bonds,
Series A (MBIA)
Zero Coupon, 4/15/19 AAA 855 266
Central Valley, CA Finance
Authority
5.70%, 7/1/03 BBB- 125 132
Chicago, IL Wastewater
Transmission Revenue Bonds
(FGIC)
5.125%, 1/1/03 AAA 1,300 1,344
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Cleveland, OH City School
District (AMBAC)
4.80%, 6/1/03 AAA $ 1,300 $ 1,326
Colorado Health Facilities
Revenue Bonds, Series A
Zero Coupon, 7/15/20 AAA 1,000 280
Delaware County, PA
Industrial Development
Authority Revenue Bonds,
Series A
6.50%, 1/1/08 A 450 497
Elizabeth Forward, PA School
District Series B
Zero Coupon,
9/1/08 (AMBAC) AAA 425 249
9/1/11 (MBIA) AAA 850 414
Fort Bend, TX Independent
School District (PSFG)
Zero Coupon, 2/15/07 AAA 1,250 794
Fort Worth, TX Independent
School District (PSFG)
Zero coupon, 2/15/08 AAA 940 563
Georgia State Housing &
Financing Authority,
Series A A2
5.875%, 12/1/19 AA+ 195 200
Grand Prairie, TX
Independent School
District (PSFG)
Zero Coupon, 8/15/07 AAA 750 465
Hamilton Southeastern, IN
(AMBAC)
Zero Coupon, 1/1/15 AAA 1,000 392
Harris County, TX Toll Road,
Series A (MBIA)
Zero Coupon, 8/15/07 AA+ 475 295
Hawaii State Housing Finance
& Development Corp.,
Single Family Mortgage
Revenue Bonds, Series A
4.90%, 7/1/28 AA 350 348
+ Hillsborough County, FL
Housing & Finance
Authority, Single Family
Mortgage Revenue Bonds
4.50%, 4/1/30 Aaa 725 728
Houston, TX Housing Finance
& Development Corp.,
Single Family Mortgage
Revenue Bonds, Series B-1
8.00%, 6/1/14 A 325 354
Houston, TX Independent
School District (PSFG)
Zero Coupon, 8/15/12 AAA 550 252
Hurst Euless Bedford, TX
Independent School
District (PSFG)
Zero Coupon,
8/15/17 AAA 965 328
8/15/18 AAA 1,100 352
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
67
<PAGE> 70
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
+ Idaho Housing & Finance
Association, Single Family
Mortgage Revenue Bonds,
Series F
5.70%, 7/1/27 Aaa $ 275 $ 280
Series H-2 (FHA)
5.40%, 7/1/27 Aaa 500 505
Illinois Development Finance
Authority Revenue Bonds
(FGIC)
Zero Coupon, 12/1/09 AAA 2,000 1,076
+ Indiana State Housing
Finance Authority Revenue
Bonds Series A2 (AMBAC)
5.55%, 1/1/21 Aaa 500 511
Indiana Transportation
Finance Authority Highway
Revenue Bonds (AMBAC)
Zero Coupon, 12/1/16 AAA 1,695 594
Indianapolis Airport
Authority Revenue Bonds
7.10%, 1/15/17 BBB 375 419
Intermountain Power Agency,
UT Series A
Zero Coupon, 7/1/17 A+ 1,750 599
Series B (MBIA)
6.50%, 7/1/09 AAA 875 1,007
Series C (FSA)
4.80%, 7/1/03 AAA 1,300 1,325
Iowa Finance Authority
Single Family Revenue
Bonds, Series G
4.95%, 1/1/21 AAA 500 500
+ Jacksonville, FL Electric
Authority Revenue Bonds
Zero Coupon, 10/1/11 AA 325 159
Kane & De Kalb Counties, IL
Unit School District
(AMBAC)
Zero Coupon, 12/1/09 AAA 525 282
Kansas City, KA Utility
Systems Revenue Bonds
(AMBAC)
Zero Coupon,
3/1/06 AAA 130 87
3/1/06 AAA 95 64
+ Keller, TX Independent
School District (PSFG)
Zero Coupon, 8/15/12 Aaa 800 366
Kentucky State Turnpike
Authority (FGIC)
Zero Coupon, 1/1/10 AAA 450 243
La Joya, TX Independent
School District (PSFG)
Zero Coupon, 8/1/12 AAA 645 296
Little Rock, AK Airport
Passenger Facility Revenue
Bonds (AMBAC)
5.65%, 5/1/16 AAA 220 231
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Maricopa County, AZ Unified
School District-Chandler
(FGIC)
Zero Coupon, 7/1/07 AAA $ 250 $ 157
Maryland Transportation
Authority (FGIC)
Zero Coupon, 7/1/08 AAA 250 149
Mercer County, NJ Revenue
Bonds
Zero Coupon, 4/1/06 AA- 350 237
Metropolitan Pier &
Exposition Authority, IL
Series A (AMBAC)
4.90%, 12/15/03 AAA 1,275 1,306
Metropolitan Government
Nashville & Davidson
County, TN Health &
Education Facilities Board
Revenue Bonds, Series A
TBA
5.25%, 5/1/03 AA 900 935
Michigan State Housing
Development Authority
Series B
5.50%, 12/1/26 AA+ 500 511
Michigan State Trunk Line,
Series A (AMBAC)
Zero Coupon
10/1/05 AAA 750 518
10/1/12 AAA 1,500 686
Midland, TX Independent
School District (PSFG)
Zero Coupon, 8/15/06 AAA 750 492
Millcreek Township, PA
(FGIC)
Zero Coupon, 8/15/05 AAA 325 226
Minnesota State Housing &
Finance Agency, Single
Family Mortgage Revenue
Bonds, Series E
5.05%, 7/1/24 AA+ 1,300 1,310
Mississippi Housing Finance
Corp.
Zero Coupon, 9/15/16 AA- 5,250 1,894
Mobile, AL Industrial
Development Board Solid
Waste Disposal Revenue
Bonds
6.95%, 1/1/20 BBB- 180 197
Nebraska Investment Finance
Authority Revenue Bonds,
Series B
5.60%, 3/1/20 AAA 490 502
Series D
5.80%, 3/1/20 AAA 490 502
Nebraska Public Power
District Revenue Bonds
5.40%, 1/1/03 A+ 200 209
+ Nevada Housing Division,
Series C (FHA)
5.65%, 4/1/27 Aaa 500 512
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
68
<PAGE> 71
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
+ Nevada Housing Division
Senior, Series A-2
5.50%, 10/1/27 Aaa $ 350 $ 357
New Jersey Building
Authority State Building
Revenue Bonds
7.20%, 6/15/13 AA- 1,150 1,192
New Jersey Economic
Development Authority
Zero Coupon, 3/15/09 A+ 275 153
New Jersey State
Zero Coupon, 2/15/06 AA+ 500 337
New Mexico Mortgage Finance
Authority, Series H
5.35%, 7/1/15 AAA 500 511
New York City, NY Industrial
Development Agency Revenue
Bonds (FSA)
6.00%, 11/1/15 AAA 1,575 1,654
## New York City, NY General
Obligation Inverse Bonds
19.31%, 10/1/03 BBB+ 250 413
New York State Dormitory
Authority
5.10%, 5/15/01 BBB+ 250 255
+ New York State Mortgage
Agency Revenue Bonds,
Series 65
5.00%, 4/1/20 Aa2 1,300 1,307
Noblesville, IN High School
Building Corp. (AMBAC)
Zero Coupon,
2/15/17 AAA 900 312
2/15/19 AAA 1,850 568
Norris, CA School District
(MBIA)
Zero Coupon,
5/1/15 AAA 785 309
5/1/16 AAA 400 149
North Carolina Eastern
Municipal Power Agency
Revenue Bonds,
Series B
6.125%, 1/1/09 BBB 350 374
Series C
5.125%, 1/1/03 BBB 450 457
North Carolina Housing &
Finance Agency Revenue
Bonds,
Series FF
5.50%, 9/1/22 AA 485 494
Series JJ
5.75%, 3/1/23 AA 555 569
Series RR
5.00%, 9/1/22 AA 1,300 1,289
North Slope Borough, AK
General Obligation, Series
B (CGIC)
Zero Coupon, 6/30/04 AAA 575 419
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
Northern Illinois University
Revenue Bond (FGIC)
Zero Coupon, 4/1/15 AAA $ 675 $ 262
Okemos, MI Public School
District (MBIA)
Zero Coupon, 5/1/15 AAA 900 353
Oley Valley, PA School
District (AMBAC)
Zero Coupon, 5/15/09 AAA 760 425
Orange County, FL Housing &
Finance Authority, Single
Family Mortgage Revenue
Bonds, Series B
5.10%, 9/1/27 AAA 1,300 1,310
Penn Hills Township, PA
Zero Coupon, 6/1/12 N/R 1,025 443
## Pennsylvania Housing &
Finance Agency
3.85%, 10/3/23 AA+ 1,000 1,000
# Pennsylvania State General
Obligation (AMBAC)
0.00%, 4/15/03 AAA 775 898
Philadelphia, PA Airport
Revenue Bonds TBA (FGIC)
5.50%, 6/15/01 AAA 1,340 1,393
Philadelphia, PA Authority
For Industrial Development
Revenue Bonds, Series A
6.50%, 10/1/27 N/R 220 228
Philadelphia, PA Gas Works
5.80%, 7/1/01 BBB 350 364
Philadelphia, PA General
Obligation Series A (FGIC)
5.40%, 11/15/03 AAA 600 631
Philadelphia, PA Hospitals &
Higher Education
Facilities Authority
Revenue Bonds
6.15%, 7/1/05 BBB+ 125 132
Philadelphia, PA Municipal
Authority (FGIC)
4.90%, 4/1/03 AAA 500 511
Philadelphia, PA Water &
Wastewater Revenue Bonds
(FGIC)
5.15%, 6/15/04 AAA 1,300 1,341
Port Authority, NY & NJ
Special Obligation Revenue
Bonds
7.00%, 10/1/07 N/R 450 504
+ Saline County, KS
Zero Coupon, 12/1/15 Aaa 750 285
San Antonio, TX Electric &
Gas Revenue Bonds (AMBAC)
Zero Coupon, 2/1/05 AAA 200 142
San Antonio, TX General
Obligation TBA
6.00%, 8/1/06 AA 250 272
San Bernardino County, CA,
Series A (MBIA)
7.40%, 7/1/16 AAA 1,150 1,176
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
69
<PAGE> 72
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Savannah, GA Economic
Development Authority
Revenue Bonds
7.40%, 4/1/26 N/R $ 100 $ 110
Schuylkill County, PA
Redevelopment Authority
(FGIC)
7.125%, 6/1/13 AAA 750 830
Skokie, IL Park District,
Series B (AMBAC)
Zero Coupon, 12/1/12 AAA 1,750 782
Steel Valley, PA Allegheny
County
Zero Coupon, 11/1/17 A 650 217
Steel Valley, PA School
District
Zero Coupon, 11/1/11 A 740 353
Utah State Housing Finance
Agency, Series A-2
5.50%, 7/1/27 AAA 460 469
Washington State Public
Power Supply (MBIA)
Zero Coupon, 7/1/10 AAA 475 245
7.00%, 7/1/07 AA- 375 435
## Wichita, KS Hospital
Revenue Bonds, Series
III-A (MBIA)
3.79%, 10/20/17 AAA 900 900
Wisconsin Housing & Economic
Development Authority Home
Ownership Revenue Bonds,
Series E
5.125%, 9/1/26 AA 1,300 1,303
## York County, PA Hospital
Authority Revenue Bonds
(AMBAC)
3.82%, 7/1/21 AAA 900 900
- -------------------------------------------------------
GROUP TOTAL 69,308
- -------------------------------------------------------
ASSET BACKED CORPORATES (0.5%)
ALPS, Series 96-1 D
12.75%, 6/15/06 BB- 349 377
- -------------------------------------------------------
INDUSTRIALS (1.6%)
Comcast Corp.
9.375%, 5/15/05 BB+ 225 241
Grand Casinos, Inc.
10.125%, 12/1/03 BB 250 266
Host Marriott Travel Plaza
9.50%, 5/15/05 BB- 175 184
+ Revlon Worldwide Corp.
Zero Coupon, 3/15/98 B3 235 229
Viacom, Inc.
8.00%, 7/7/06 BB- 250 249
- -------------------------------------------------------
GROUP TOTAL 1,169
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
TELEPHONES (0.2%)
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ $ 125 $ 137
- -------------------------------------------------------
TRANSPORTATION (0.2%)
(+) Jet Equipment Trust,
Series 95-5A C
10.69%, 5/1/15 BBB 100 126
- -------------------------------------------------------
U.S. TREASURY SECURITY (1.0%)
(dd) U.S. Treasury Bond
8.75%, 8/15/20 Tsy 575 729
- -------------------------------------------------------
YANKEE (0.4%)
(+) Republic of Panama
7.875%, 2/13/02 BB+ 310 312
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $67,339) 72,158
- -------------------------------------------------------
CASH EQUIVALENTS (6.2%)
- -------------------------------------------------------
<CAPTION>
SHARES
------
<S> <C> <C>
MONEY MARKET INSTRUMENTS (4.8%)
Dreyfus Basic Municipal Money
Market Fund 1,789,204 1,789
Vanguard Municipal Fund Money
Market Portfolio 1,792,234 1,792
- -------------------------------------------------------
GROUP TOTAL 3,581
- -------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
--------
<S> <C> <C>
U.S. TREASURY SECURITY (0.3%)
U.S. Treasury Bill
11/13/97 $ 250 248
- -------------------------------------------------------
REPURCHASE AGREEMENT (1.1%)
Chase Securities, Inc. 5.90%, dated
9/30/97, due 10/1/97, to be
repurchased at $862,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at $870 862 862
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $4,691) 4,691
- -------------------------------------------------------
TOTAL INVESTMENTS (102.3%) (Cost $72,030) 76,849
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
70
<PAGE> 73
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (-2.3%)
Interest Receivable $ 711
Receivable for Fund Shares Sold 2
Receivable for Daily Variation on Futures
Contracts 3
Unrealized Gain on Swap Agreements 283
Other Assets 2
Dividends Payable (54)
Payable for Investments Purchased (2,529)
Payable to Custodian (40)
Payable for Fund Shares Redeemed (1)
Payable for Investment Advisory Fees (59)
Payable for Administrative Fees (5)
Payable for Trustees' Deferred Compensation
Plan-Note F (2)
Other Liabilities (40)
-------
(1,729)
- -------------------------------------------------------
NET ASSETS (100%) $75,120
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 6,450,855 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $75,120
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.64
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $70,309
Undistributed Net Investment Income (Loss) 71
Undistributed Realized Net Gain (Loss) (469)
Unrealized Appreciation (Depreciation) on:
Investment Securities 4,819
Futures and Swaps 390
- -------------------------------------------------------
NET ASSETS $75,120
- -------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C>
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
(+) 144A security. Certain conditions for public sale
may exist.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
# Step Bond-Coupon increases in increments to
maturity. Rate disclosed is as of September 30,
1997. Maturity date disclosed is the ultimate
maturity.
## Variable or floating rate security-rate disclosed
is as of September 30, 1997.
AMBAC American Municipal Bond Assurance Corporation
CGIC Capital Guaranty Insurance Corporation
FGIC Financial Guaranty Insurance Corporation
FHA Federal Housing Administration
FSA Financial Security Assurance
MBIA Municipal Bond Insurance Association
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch
PSFG Permanent School Fund Guarantee
TBA Security is subject to delayed delivery. See Note
A8 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
71
<PAGE> 74
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
PA MUNICIPAL
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (97.3%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (94.9%)
Aliquippa School District, PA
Zero Coupon, 6/1/12 A $ 685 $ 310
Allegheny County, PA (AMBAC)
Zero Coupon, 5/1/03 AAA 325 253
Arkansas State Development
Finance Authority Home
Mortgage Revenue Bonds,
Series B-1
4.90%, 7/1/29 AAA 275 275
Berks County, PA (FGIC)
Zero Coupon,
5/15/19 AAA 1,250 387
11/15/20 AAA 1,000 284
Bucks County, PA Water &
Sewer Authority Revenue
Bonds (FGIC)
Zero Coupon, 12/1/05 AAA 375 257
+ Series B
5.50%, 2/1/08 Aaa 205 214
Center Township, PA Sewer
Authority Revenue Bonds
Series A (MBIA)
Zero Coupon, 4/15/17 AAA 615 215
Series A
6.00%, 4/15/03 AAA 500 538
Central Valley, CA Finance
Authority
5.70%, 7/1/03 BBB- 100 105
Chartiers Valley, PA (FGIC)
Zero Coupon, 2/1/06 AAA 425 287
Clinton County, PA Industrial
Development Authority
6.25%, 11/15/06 BB- 150 152
Dauphin County, PA General
Authority Health Systems
Revenue Bonds (MBIA)
4.90%, 5/15/03 AAA 550 560
Delaware County, PA
Industrial Development
Authority Revenue Bonds,
Series A
6.50%, 1/1/08 A 200 221
Elizabeth Forward, PA School
District
Series B (MBIA)
Zero Coupon, 9/1/11 AAA 400 195
Georgia State Housing &
Financing Authority, Series
A A2
5.875%, 12/1/19 AA+ 120 123
Girard Area, PA School
District (FGIC)
Zero Coupon,
10/1/18 AAA 700 225
10/1/19 AAA 250 76
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Hawaii State Housing Finance
& Development Corp., Single
Family Mortgage Revenue
Bonds, Series A
4.90%, 7/1/28 AA $ 125 $ 124
+ Hillsborough County, FL
Housing & Finance Authority
Single Family Mortgage
Revenue Bonds
4.50%, 4/1/30 Aaa 275 276
Houston, TX Housing Finance &
Development Corp., Single
Family Mortgage Revenue
Bonds, Series B-1
8.00%, 6/1/14 A 175 191
Huron, MI School District
(AMBAC)
Zero Coupon, 5/1/18 AAA 1,500 493
+ Idaho Housing & Finance
Association, Single Family
Mortgage Revenue Bonds,
Series H-2
5.40%, 7/1/27 Aaa 250 253
Intermountain Power Agency,
UT
Series B (MBIA)
6.50%, 7/1/09 AAA 300 345
Iowa Finance Authority,
Single Family Revenue
Bonds, Series G
4.95%, 1/1/21 AAA 200 200
Kane & De Kalb Counties, IL
Unit School District
(AMBAC)
Zero Coupon, 12/1/09 AAA 200 108
Lehigh County, PA General
Purpose Authority Revenue
Bonds, Horizons Health
Systems, Inc.,
Series B
8.25%, 7/1/13 N/R 250 267
Metropolitan Government
Nashville & Davidson
County, TN Health &
Education Facilities Board
Revenue Bonds Series A TBA
5.25%, 5/1/03 AA 335 348
Millcreek Township, PA (FGIC)
Zero Coupon, 8/15/05 AAA 375 261
Minnesota State Housing &
Finance Agency, Single
Family Mortgage Revenue
Bonds, Series E
5.05%, 7/1/24 AA+ 550 554
Mobile, AL Industrial
Development Board Solid
Waste Disposal Revenue
Bonds
6.95%, 1/1/20 BBB- 80 87
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
72
<PAGE> 75
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Montour, PA School District
(MBIA)
Zero Coupon, 1/1/13 AAA $ 300 $ 134
Nebraska Investment Finance
Authority Revenue Bonds,
Series D
5.80%, 3/1/20 AAA 270 276
+ Nevada Housing Division,
Series C
5.65%, 4/1/27 Aaa 250 256
New York City, NY Industrial
Development Agency Revenue
Bonds (FSA)
6.00%, 11/1/15 AAA 775 814
## New York City, NY General
Obligation Inverse Bonds
19.31%, 10/1/03 BBB+ 100 165
+ New York State Mortgage
Agency Revenue Bonds,
Series 65
5.00%, 4/1/20 Aa2 550 553
North Carolina Eastern
Municipal Power Agency
Revenue Bonds, Series C
5.125%, 1/1/03 BBB 150 152
North Carolina Housing &
Finance Agency Revenue
Bonds, Series JJ
5.75%, 3/1/23 AA 300 307
Series RR
5.00%, 9/1/22 AA 550 545
North Slope Borough, AK
General Obligation, Series
B (CGIC)
Zero Coupon, 6/30/04 AAA 285 208
Northwestern, PA School
District (AMBAC)
Zero Coupon, 1/15/09 AAA 450 256
Oley Valley, PA School
District (AMBAC)
Zero Coupon, 5/15/09 AAA 760 425
Orange County, FL Housing &
Finance Authority, Single
Family Mortgage Revenue
Bonds, Series B
5.10%, 9/1/27 AAA 550 554
Penn Hills Township, PA,
Zero Coupon, 6/1/12 N/R 450 195
Series B
Zero Coupon, 12/1/13 N/R 500 197
Pennsylvania Convention
Center Authority
6.25%, 9/1/04 BBB 250 267
6.70%, 9/1/16 (FGIC) AAA 500 579
Pennsylvania Housing &
Finance Authority
Series 47
5.20%, 4/1/27 AA+ 375 379
Series 48
5.375%, 10/1/16 AA+ 300 305
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
Series 50A
5.35%, 10/1/08 AA+ $ 250 $ 256
Series 51
5.65%, 4/1/20 AA+ 250 256
Series 52B
5.55%, 10/1/12 AA+ 500 509
Series 59A
4.95%, 4/1/25 AA+ 550 549
# Pennsylvania State General
Obligation (AMBAC)
0.00%, 4/15/03 AAA 300 347
Zero Coupon, 7/1/05 AAA 375 261
## Pennsylvania State Higher
Education Assistance
Agency, Student Loan
Revenue Bonds (AMBAC)
3.85%, 3/1/22 AAA 500 500
Pennsylvania State
Certificates of
Participation Series A
(AMBAC)
5.00%, 7/1/03 AAA 500 513
Philadelphia, PA Airport
Revenue Bonds (FGIC) TBA
5.50%, 6/15/01 AAA 550 572
Philadelphia, PA Authority
For Industrial Development
Revenue Bonds, Series A
6.50%, 10/1/27 N/R 100 104
Philadelphia, PA Gas Works
5.80%, 7/1/01 BBB 200 208
Philadelphia, PA General
Obligation, Series A (FGIC)
5.125%, 5/15/03 AAA 100 103
+ Philadelphia, PA Hospitals
10.875%, 7/1/08 Aaa 140 183
Philadelphia, PA Hospitals &
Higher Education Facilities
Authority Revenue Bonds
6.15%, 7/1/05 BBB+ 50 53
Philadelphia, PA School
District, Series A (MBIA)
5.20%, 7/1/03 AAA 200 208
Series B (AMBAC)
5.00%, 4/1/03 AAA 550 565
Philadelphia, PA Water &
Wastewater Revenue Bonds
(FGIC)
5.15%, 6/15/04 AAA 550 567
5.20%, 6/15/05 AAA 500 521
Pittsburgh, PA General
Obligation (AMBAC)
Zero Coupon, 9/1/04 AAA 350 255
6.50%, 4/1/11 AAA 275 301
Pittsburgh, PA Water & Sewer
(FGIC)
Zero Coupon, 9/1/05 AAA 375 259
Port Authority, NY & NJ
Special Obligation Revenue
Bonds
7.00%, 10/1/07 N/R 250 280
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
73
<PAGE> 76
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PA MUNICIPAL
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Robinson Township, PA
6.90%, 5/15/18 AAA $ 115 $ 135
San Antonio, TX General
Obligation TBA
6.00%, 8/1/06 AA 125 136
San Bernardino County, CA
Series A (MBIA)
7.40%, 7/1/16 AAA 450 460
Savannah, GA Economic
Development Authority
Revenue Bonds
7.40%, 4/1/26 N/R 40 44
Scranton, PA Health & Welfare
Authority
6.625%, 7/1/09 AAA 125 137
Southeastern Area Schools,
PA, Revenue Bonds
Series A
Zero Coupon, 10/1/06 A 200 130
Series B
Zero Coupon, 10/1/06 A 390 253
Steel Valley, PA School
District
Zero Coupon, 11/1/11 A 430 205
Stroud Township, PA Sewer
Authority (CGIC)
Zero Coupon, 11/15/05 AAA 375 258
Upper Darby Township, PA
(AMBAC)
Zero Coupon, 7/15/11 AAA 525 258
Washington County, West PA
Power Co.
4.95%, 3/1/03 A 150 153
(dd) Westmoreland County, PA
(AMBAC)
Zero Coupon, 8/1/14 AAA 1,475 605
Wisconsin Housing & Economic
Development Authority Home
Ownership Revenue Bonds,
Series E
5.125%, 9/1/26 AA 550 551
Yough, PA School District
(MBIA)
Zero Coupon, 10/1/13 AAA 1,445 623
- ------------------------------------------------------
GROUP TOTAL 26,069
- ------------------------------------------------------
ASSET BACKED CORPORATES (0.6%)
ALPS, Series 96-1 D
12.75%, 6/15/06 BB- 150 161
- ------------------------------------------------------
INDUSTRIALS (0.6%)
Comcast Corp.
9.375%, 5/15/05 BB+ 75 80
Host Marriott Travel Plaza
9.50%, 5/15/05 BB- 75 79
- ------------------------------------------------------
GROUP TOTAL 159
- ------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
TELEPHONES (0.2%)
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ $ 50 $ 55
- ------------------------------------------------------
TRANSPORTATION (0.5%)
(+) Jet Equipment Trust,
Series 95-5A C
10.69%, 5/1/15 BBB 100 127
- ------------------------------------------------------
YANKEE (0.5%)
(+) Republic of Panama
7.875%, 2/13/02 BB+ 145 146
- ------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $24,731) 26,717
- ------------------------------------------------------
CASH EQUIVALENTS (5.3%)
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS (3.0%)
Dreyfus PA Municipal Money
Market Fund 401,727 402
Vanguard PA Tax-Free Money
Market Fund 408,622 408
- -------------------------------------------------------
GROUP TOTAL 810
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
-------
<S> <C> <C> <C>
U.S. TREASURY SECURITY (0.4%)
U.S. Treasury Bill
11/13/97 $ 125 124
- ------------------------------------------------------
REPURCHASE AGREEMENT (1.9%)
Chase Securities, Inc. 5.90%, dated
9/30/97, due 10/1/97, to be repur-
chased at $522, collateralized by
various U.S. Government Obliga-
tions, due 10/1/97-1/29/99, valued
at $527 522 522
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $1,456) 1,456
- ------------------------------------------------------
TOTAL INVESTMENTS (102.6%) (Cost $26,187) 28,173
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
74
<PAGE> 77
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (-2.6%)
Cash $ 1
Interest Receivable 283
Receivable for Fund Shares Sold 2
Receivable for Daily Variation Margin on
Futures Contracts 1
Unrealized Gain on Swap Agreements 128
Other Assets 1
Dividends Payable (45)
Payable for Investments Purchased (1,027)
Payable for Investment Advisory Fees (20)
Payable for Administrative Fees (2)
Payable for Trustees' Deferred Compensation
Plan-Note F (1)
Other Liabilities (33)
-------
(712)
- ------------------------------------------------------
NET ASSETS (100%) $27,461
- ------------------------------------------------------
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 2,344,197 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $27,461
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.71
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $25,489
Undistributed Net Investment
Income (Loss) 20
Undistributed Realized Net Gain (Loss) (229)
Unrealized Appreciation (Depreciation) on:
Investment Securities 1,986
Futures and Swaps 195
- ------------------------------------------------------
NET ASSETS $27,461
- ------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C> <C>
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
# Step Bond-Coupon increases in increments to
maturity. Rate disclosed is as of September 30,
1997. Maturity date disclosed is the ultimate
maturity.
## Variable or Floating rate security-rate
disclosed is as of September 30, 1997.
AMBAC American Municipal Bond Assurance Corporation
CGIC Capital Guaranty Insurance Corporation
FGIC Financial Guaranty Insurance Corporation
FSA Financial Security Assurance
MBIA Municipal Bond Insurance Association
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
75
<PAGE> 78
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (82.1%)
(UNLESS OTHERWISE NOTED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIAN DOLLAR (4.9%)
Commonwealth of
Australia
9.00%, 9/15/04 AAA AUD 3,575 $ 3,030
Federal National
Mortgage Association
6.50%, 7/10/02 Agy 1,050 785
- -------------------------------------------------------
GROUP TOTAL 3,815
- -------------------------------------------------------
BRITISH POUND (5.8%)
United Kingdom Treasury
Bills
8.00%, 6/7/21 AAA GBP 1,025 1,941
8.50%, 7/16/07 AAA 1,395 2,570
- -------------------------------------------------------
GROUP TOTAL 4,511
- -------------------------------------------------------
CANADIAN DOLLAR (3.0%)
(+) Global Econ2 EI
Zero Coupon, 11/1/98 AAA (1)600 2
(+) Global Econ2 PIP
Zero Coupon, 11/1/98 AAA (1)600 3
Government of Canada
7.50%, 3/1/01 AAA CAD 2,165 1,686
9.75%, 6/1/21 AA+ 640 659
- -------------------------------------------------------
GROUP TOTAL 2,350
- -------------------------------------------------------
DANISH KRONE (2.4%)
Kingdom of Denmark
8.00%, 5/15/03 AA+ DKK 6,765 1,133
8.00%, 3/15/06 AA+ 4,500 765
- -------------------------------------------------------
GROUP TOTAL 1,898
- -------------------------------------------------------
GERMAN MARK (13.3%)
GMAC Global Bond
3.42%, 9/25/02 A- DEM 1,400 792
Government of Germany
6.25%, 1/4/24 AAA 1,000 573
7.125%, 1/29/03 AAA 2,775 1,725
7.375%, 1/3/05 AAA 2,680 1,704
7.50%, 9/9/04 AAA 2,210 1,412
8.375%, 5/21/01 AAA 6,430 4,089
- -------------------------------------------------------
GROUP TOTAL 10,295
- -------------------------------------------------------
IRISH PUNT (1.9%)
Irish Government
8.00%, 8/18/06 AAA IEP 900 1,484
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ITALIAN LIRA (5.9%)
Republic of Italy BTPS
9.50%, 2/1/06 AAA ITL 3,180,000 $ 2,249
10.00%, 8/1/03 AAA 3,300,000 2,296
- -------------------------------------------------------
GROUP TOTAL 4,545
- -------------------------------------------------------
JAPANESE YEN (5.5%)
Credit Locale de France
6.00%, 10/31/01 AAA JPY 75,000 737
European Investment Bank
3.00%, 9/20/06 AAA 88,000 786
6.625%, 3/15/00 AAA 60,000 567
Export-Import Bank of
Japan
2.875%, 7/28/05 AAA 80,000 711
International Bank for
Reconstruction &
Development
4.75%, 12/20/04 AAA 78,600 785
++ 6.75%, 6/18/01 AAA 64,000 639
- -------------------------------------------------------
GROUP TOTAL 4,225
- -------------------------------------------------------
SWEDISH KRONA (7.3%)
Swedish Government
6.00%, 2/9/05 AAA SEK 19,900 2,632
13.00%, 6/15/01 AA+ 18,175 2,994
- -------------------------------------------------------
GROUP TOTAL 5,626
- -------------------------------------------------------
UNITED STATES DOLLAR (32.1%)
AGENCY FIXED RATE MORTGAGE (3.1%)
Government National
Mortgage Association
10.50%, 5/15/18 Agy $ 2,144 2,411
- -------------------------------------------------------
CORPORATE (7.6%)
Anthem Insurance Cos.,
Inc. Series A
9.00%, 4/1/27 BBB+ 275 296
(+) BankAmerica
Institutional, Series
A
8.07%, 12/31/26 A- 350 360
(+) BT Institutional
Capital Trust, Series
A
8.09%, 12/1/26 BBB+ 325 329
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 250 255
(+) Edison Mission
Energy Funding
7.33%, 9/15/08 BBB 225 231
(+) Entertainment
Properties
14.253%, (Preferred
Stock) BBB- (1)300 289
First Chicago NBD Corp.,
Series A
7.95%, 12/1/26 A- 400 404
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
76
<PAGE> 79
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) HMH Properties, Inc.
8.875%, 7/15/07 BB- $ 95 $ 97
(+)+ Home Ownership
Funding Corp.
13.331%, (Preferred
Stock) Aaa (1)1,575 1,528
Nationwide Mutual Life
Insurance
7.50%, 2/15/24 A+ 300 295
(+) PNC Institutional
Capital, Series A
7.95%, 12/15/26 BBB+ 425 427
(+) Tier One Properties
11.095%,
(Preferred Stock) A (1)150 147
(+) Wells Fargo Capital,
Series A
8.125%, 12/1/26 BBB 350 360
Series B
7.95%, 12/1/26 BBB+ 100 101
World Financial
Properties, Series 96
WFP-D
6.95%,9/1/13 AA- 775 785
- -------------------------------------------------------
GROUP TOTAL 5,904
- -------------------------------------------------------
U.S. TREASURY SECURITIES (17.9%)
U.S. Treasury Bond
8.75%, 8/15/20 Tsy 2,060 2,612
U.S. Treasury Notes
6.125%, 5/15/98 Tsy 3,875 3,888
6.75%, 5/31/99 Tsy 2,150 2,182
6.25%, 2/15/03 Tsy 455 459
7.875%, 11/15/04 Tsy 300 330
7.50%, 2/15/05 Tsy 2,615 2,824
3.375%, 1/15/07
(Inflation Indexed) Tsy 1,621 1,590
- -------------------------------------------------------
GROUP TOTAL 13,885
- -------------------------------------------------------
YANKEE (3.5%)
Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB 399 407
(+) AST Research, Inc.
7.45%, 10/1/02 A- 300 299
(+) Israel Electric
Corp., Ltd.
7.25%, 12/15/06 A- 300 304
Korea Development Bank
7.375%, 9/17/04 AA- 225 227
(+) Petroliam Nasional
Bhd.
7.125%, 10/18/06 A+ 225 223
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 375 396
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ $ 550 $ 597
Republic of Colombia
8.70%, 2/15/16 BBB- 220 224
- -------------------------------------------------------
GROUP TOTAL 2,677
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $64,379) 63,626
- -------------------------------------------------------
CASH EQUIVALENTS (16.4%)
- -------------------------------------------------------
COMMERCIAL PAPER (5.8%)
Atlantic Asset Securitization
Corp.
5.57%, 10/16/97 1,500 1,496
Barclays U.S. Funding Corp.
5.55%, 10/14/97 1,505 1,502
Daimler-Benz AG
5.57%, 10/7/97 1,500 1,499
- -------------------------------------------------------
GROUP TOTAL 4,497
- -------------------------------------------------------
DISCOUNT NOTE (3.9%)
Federal Home Loan Mortgage
Corporation
10/3/97 3,000 2,999
- -------------------------------------------------------
REPURCHASE AGREEMENTS (6.7%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at $2,759,
collateralized by various
U.S. Government Obligations,
due 10/1/97-1/29/99, valued
at $2,785 2,759 2,759
Goldman Sachs & Co. 6.15%,
dated 9/30/97, due 10/1/97,
to be repurchased at $2,470,
collateralized by U.S.
Treasury Bonds, 8.00%, due
11/15/21, valued at $2,521 2,470 2,470
- -------------------------------------------------------
GROUP TOTAL 5,229
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $12,725) 12,725
- -------------------------------------------------------
FOREIGN CURRENCY (0.1%)
- -------------------------------------------------------
Canadian Dollar CAD 6 5
Irish Punt IEP 36 52
@ Italian Lira ITL 256 --
Swedish Krona SEK 4 1
- -------------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $58) 58
- -------------------------------------------------------
TOTAL INVESTMENTS (98.6%) (Cost $77,162) 76,409
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
77
<PAGE> 80
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME
PORTFOLIO
VALUE
(CONT'D) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (1.4%)
Cash $ 239
Foreign Currency Held as Collateral on Futures
Contracts (Cost $356) 356
Dividends Receivable 67
Interest Receivable 1,209
Receivable for Investments Sold 164
Receivable for Fund Shares Sold 4
Unrealized Gain on Futures Contracts 67
Other Assets 2
Payable for Investments Purchased (528)
Payable for Investment Advisory Fees (72)
Payable for Administrative Fees (5)
Payable for Trustees' Deferred Compensation
Plan-Note F (2)
Unrealized Loss on Forward Foreign Currency
Contracts (377)
Other Liabilities (40)
-------
1,084
- -------------------------------------------------------
NET ASSETS (100%) $77,493
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 7,281,220 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $77,493
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.64
- -------------------------------------------------------
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital $76,229
Undistributed Net Investment Income (Loss) 1,414
Undistributed Realized Net Gain (Loss) 921
Unrealized Appreciation (Depreciation) on:
Investment Securities (753)
Foreign Currency Transactions (385)
Futures 67
- -------------------------------------------------------
NET ASSETS $77,493
- -------------------------------------------------------
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public sale may
exist.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
(1) Amount represents shares held by the Portfolio.
@ Value is less than $500.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
78
<PAGE> 81
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL FIXED
INCOME PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (70.6%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIAN DOLLAR (5.0%)
Commonwealth of Australia
9.00%, 9/15/04 AAA AUD 7,350 $ 6,230
Federal National Mortgage
Association
6.50%, 7/10/02 Agy 1,960 1,466
- ------------------------------------------------------
GROUP TOTAL 7,696
- ------------------------------------------------------
BRITISH POUND (8.9%)
United Kingdom Treasury Bills
8.00%, 6/7/21 AAA GBP 1,930 3,655
8.00%, 6/10/03 AAA 1,765 3,050
8.50%, 7/16/07 AAA 3,730 6,870
- ------------------------------------------------------
GROUP TOTAL 13,575
- ------------------------------------------------------
CANADIAN DOLLAR (2.9%)
(+) Global Econ2 EI
Zero Coupon,
11/1/98 AAA (1)1,400 4
(+) Global Econ2 PIP
Zero Coupon,
11/1/98 AAA (1)1,400 6
Government of Canada
7.50%, 3/1/01 AAA CAD 3,100 2,414
9.75%, 6/1/21 AA+ 1,950 2,009
- ------------------------------------------------------
GROUP TOTAL 4,433
- ------------------------------------------------------
DANISH KRONE (2.9%)
Kingdom of Denmark
8.00%, 5/15/03 AA+ DKK 18,360 3,074
8.00%, 3/15/06 AA+ 7,675 1,304
- ------------------------------------------------------
GROUP TOTAL 4,378
- ------------------------------------------------------
FINNISH MARKKA (0.9%)
Government of Finland
9.50%, 3/15/04 AA- FIM 6,000 1,382
- ------------------------------------------------------
FRENCH FRANC (0.8%)
Government of France O.A.T.
8.50%, 3/28/00 AAA FRF 6,400 1,183
- ------------------------------------------------------
GERMAN MARK (14.7%)
GMAC Global Bond
3.42%, 9/25/02 A- DEM 2,600 1,470
Government of Germany
6.25%, 1/4/24 AAA 2,350 1,347
+ 7.00%, 1/13/00 Aaa 9,300 5,579
(dd)7.375%, 1/3/05 AAA 3,600 2,289
7.50%, 9/9/04 AAA 7,025 4,487
8.375%, 5/21/01 AAA 6,880 4,375
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
International Bank for
Reconstruction &
Development
7.125%, 4/12/05 AAA DEM 4,550 $ 2,851
- ------------------------------------------------------
GROUP TOTAL 22,398
- ------------------------------------------------------
IRISH PUNT (2.2%)
Irish Government
8.00%, 8/18/06 AAA IEP 2,060 3,398
- ------------------------------------------------------
ITALIAN LIRA (8.3%)
Republic of Italy BTPS
9.50%, 2/1/06 AAA ITL 9,070,000 6,415
10.00%, 8/1/03 AA 8,995,000 6,259
- ------------------------------------------------------
GROUP TOTAL 12,674
- ------------------------------------------------------
JAPANESE YEN (13.8%)
(dd) Credit Locale de France
6.00%, 10/31/01 AAA JPY 516,000 5,070
European Investment Bank
6.625%, 3/15/00 AAA 205,000 1,939
3.00%, 9/20/06 AAA 151,000 1,349
Export-Import Bank of Japan
2.875%, 7/28/05 AAA 420,000 3,732
Inter-American Development
Bank
6.00%, 10/30/01 AAA 465,000 4,586
International Bank for
Reconstruction &
Development
(dd) 6.75%, 6/18/01 AAA 140,000 1,398
4.75%, 12/20/04 AAA 305,000 3,045
- ------------------------------------------------------
GROUP TOTAL 21,119
- ------------------------------------------------------
NETHERLANDS GUILDER (1.7%)
Netherlands Government
8.25%, 2/15/07 AAA NLG 4,225 2,543
- ------------------------------------------------------
SPANISH PESETA (1.2%)
Spanish Government
10.10%, 2/28/01 AAA ESP 240,000 1,858
- ------------------------------------------------------
SWEDISH KRONA (7.3%)
Swedish Government
6.00%, 2/9/05 AAA SEK 47,800 6,321
13.00%, 6/15/01 AA+ 29,525 4,863
- ------------------------------------------------------
GROUP TOTAL 11,184
- ------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost
$110,356) 107,821
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
79
<PAGE> 82
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL FIXED
INCOME PORTFOLIO
FACE
AMOUNT VALUE
(CONT'D) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
CASH EQUIVALENTS (27.2%)
- ------------------------------------------------------
COMMERCIAL PAPER (13.3%)
Atlantic Asset Securitization
Corp.
5.57%, 10/16/97 $3,000 $ 2,993
Daimler-Benz AG
5.57%, 10/7/97 3,000 2,997
Ford Motor Credit Corp.
5.54%, 10/7/97 3,000 2,997
Transamerica Financial Corp.
5.51%, 10/30/97 3,000 2,987
Toys 'R' Us, Inc.
5.50%, 10/27/97 3,000 2,988
USAA Capital Corp.
5.53%, 10/9/97 3,000 2,997
Xerox Credit Corp.
5.55%, 10/9/97 2,340 2,337
- ------------------------------------------------------
GROUP TOTAL 20,296
- ------------------------------------------------------
DISCOUNT NOTE (3.9%)
Federal Home Loan Mortgage
Corporation
10/3/97 6,000 5,998
- ------------------------------------------------------
REPURCHASE AGREEMENTS (10.0%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at
$7,662, collateralized by
various U.S. Government
Obligations, due
10/1/97-1/29/99, valued at
$7,733 7,661 7,661
Goldman Sachs & Co. 6.15%,
dated 9/30/97, due 10/1/97,
to be repurchased at
$7,660, collateralized by
U.S. Treasury Bonds, 8.00%,
due 11/15/21, valued at
$7,817 7,659 7,659
- ------------------------------------------------------
GROUP TOTAL 15,320
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $41,614) 41,614
- ------------------------------------------------------
FOREIGN CURRENCY (0.0%)
- ------------------------------------------------------
British Pound GBP 1 1
Canadian Dollar CAD 34 25
@ Japanese Yen JPY 3 --
@ Spanish Peseta ESP 12 --
- ------------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $25) 26
- ------------------------------------------------------
TOTAL INVESTMENTS (97.8%) (Cost $151,995) 149,461
- ------------------------------------------------------
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES (2.2%)
Foreign Currency Held as Collateral on
Futures Contracts (Cost $887) $ 887
Interest Receivable 2,656
Receivable for Fund Shares Sold 1,876
Unrealized Gain on Futures Contracts 308
Other Assets 5
Payable for Investments Purchased (1,718)
Payable for Fund Shares Redeemed (16)
Payable for Investment Advisory Fees (133)
Payable for Administrative Fees (10)
Payable for Trustees' Deferred Compensation
Plan-Note F (4)
Payable to Custodian (24)
Unrealized Loss on Forward Foreign Currency
Contracts (523)
Other Liabilities (13)
--------
3,291
- ------------------------------------------------------
NET ASSETS (100%) $152,752
- ------------------------------------------------------
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 14,990,797 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $152,752
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.19
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $154,579
Undistributed Net Investment Income (Loss) (372)
Undistributed Realized Net Gain (Loss) 1,312
Unrealized Appreciation (Depreciation) on:
Investment Securities (2,535)
Foreign Currency Transactions (540)
Futures 308
- ------------------------------------------------------
NET ASSETS $152,752
- ------------------------------------------------------
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public sale
may exist.
(dd) A portion of these securities was pledged to cover
margin requirements for futures contracts.
+ Moody's Investor Service, Inc. rating. Security is
not rated by Standard & Poor's Corporation.
(1) Amount represents shares held by the Portfolio.
@ Value is less than $500.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
80
<PAGE> 83
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
INTERMEDIATE DURATION
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (95.5%)
<TABLE>
<CAPTION>
- ------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (10.0%)
## Government National
Mortgage Association
November TBA
6.00%, 11/20/27 Agy $ 5,475 $ 5,508
6.50%, 11/20/28 Agy 1,650 1,677
- ------------------------------------------------------
GROUP TOTAL 7,185
- ------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (13.6%)
Federal Home Loan
Mortgage Corporation
Conventional Pools:
11.00%, 7/1/13 Agy 113 127
11.50%, 3/1/13 Agy 178 202
Gold Pools:
7.00%, 1/1/24-12/1/24 Agy 999 1,000
10.00%, 6/1/17 Agy 464 513
Federal National
Mortgage Association
Conventional Pools:
10.00%, 5/1/22-1/1/27 Agy 317 347
10.50%, 12/1/10 Agy 95 106
Government National
Mortgage Association
Conventional Pools:
7.00%, 12/15/23 Agy 2,647 2,656
10.00%, 2/15/16-
12/25/25 Agy 1,621 1,798
10.50%, 3/15/06-
2/15/18 Agy 323 363
11.00%, 3/15/10-
8/15/27 Agy 2,169 2,480
11.50%, 6/15/13 Agy 146 168
12.50%, 12/15/10 Agy 39 45
- ------------------------------------------------------
GROUP TOTAL 9,805
- ------------------------------------------------------
ASSET BACKED CORPORATES (11.1%)
(+) Aegis Auto Receivables
Trust, Series 95-1 A
8.60%, 3/20/02 N/R 71 72
(+) Series 97-C A
6.40%, 3/17/04 AAA 333 334
AFG Receivables Trust,
Series:
95-A A
6.15%, 9/15/00 A 17 17
+ 96-B A
6.60%, 4/15/01 A2 45 45
97-A A
6.35%, 10/15/02 AAA 278 279
ALPS,
Series 94-1 A4 CMO
7.80%, 9/15/04 AA 260 266
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Americredit Automobile
Receivables Trust,
Series 96-B A
6.50%, 1/12/02 AAA $ 94 $ 94
Arcadia Auto,
Series 97-C A4
6.375%, 1/15/03 AAA 360 361
Associates Manufactured
Housing,
Series:
97-1 A3
6.60%, 6/15/28 AAA 235 237
97-2 A
6.65%, 10/15/02 AAA 244 246
Case Equipment Loan Trust,
Series:
95-A A
7.30%, 3/15/02 AAA 14 14
95-A B
7.65%, 3/15/02 A 26 27
Cityscape Home Equity Loan
Trust, Series 96-1 A1
6.45%, 3/1/09 AAA 29 29
Contimortgage Home Equity
Loan Trust, Series 96-3
A2
6.97%, 7/15/11 AAA 75 75
CPS Auto Grantor Trust,
Series 96-3 A
6.30%, 8/15/02 AAA 275 275
(+) Federal Mortgage
Acceptance Corp., Loan
Receivables Trust,
Series:
96-B A1
7.629%, 11/1/18 A 96 97
97-A A
7.35%, 4/15/19 AAA 360 373
First Merchants Auto
Receivables Corp.,
Series:
96-C A2
6.15%, 7/15/01 AAA 175 174
(+) 97-2 A1
6.85%, 11/15/02 AAA 235 237
First Plus Home Loan
Trust, Series 96-4 A3
6.28%, 3/10/09 AAA 250 249
Fleetwood Credit Corp.,
Series 92-A
7.10%, 2/15/07 AAA 81 81
Ford Credit Auto Owner
Trust,
Series:
96-A A3
6.50%, 11/15/99 AAA 200 201
96-B
6.55%, 2/15/02 A 100 100
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
81
<PAGE> 84
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE DURATION
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Ford Credit Grantor Trust,
Series 94-B A
7.30%, 10/15/99 AAA $ 65 $ 66
General Electric Home
Equity Loan Asset-Backed
Certificates, Series
91-1 B
8.70%, 9/15/11 AAA 250 257
General Motors Acceptance
Corp., Grantor Trust,
Series 93-A A
4.15%, 3/15/98 AAA 1 1
Greenwich Capital
Acceptance, Inc.,
Series 95-B A1
6.00%, 8/10/20 AAA 25 25
Honda Auto Receivables
Grantor Trust,
Series 97-A A
5.85%, 2/15/03 AAA 582 582
IBM Credit Receivables
Lease Asset Master
Trust, Series 93-1 A
4.55%, 11/15/00 AAA 11 11
(+) Long Beach Auto,
Series 97-2 A
6.69%, 9/25/04 AAA 272 272
Money Store (The) Home
Equity Trust,
Series 95-CA1
6.20%, 1/15/09 AAA 11 11
(+)++ NAL Auto Trust,
Series 97-2A
7.75%, 9/15/02 A 210 210
(+) National Auto Credit,
Inc. Series 96 3A
7.30%, 12/15/00 N/R 59 59
Navistar Financial Corp.
Owner Trust, Series 94-B
A
6.40%, 1/15/00 AAA 23 23
(+) NPR Health Care,
Series 97-1 A
6.815%, 7/1/01 N/R 100 101
Old Stone Credit Corp,
Series 92-3 B1
6.35%, 9/25/07 AAA 60 59
Olympic Automobile
Receivables Trust,
Series:
94-B A2
6.85%, 6/15/01 AAA 64 65
94-B B
6.95%, 6/15/01 AAA 32 32
Onyx Acceptance Grantor
Trust,
Series:
94-1 A
6.90%, 1/17/00 AAA 25 25
97-2 A
6.35%, 10/15/02 AAA 387 388
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
97-3A
6.35%, 1/15/04 AAA $ 370 $ 371
Premier Auto Trust, Series
95-4 A4
6.00%, 5/6/00 AAA 100 100
(+) Railcar Leasing
7.125%, 1/15/13 AAA 350 362
(+) Team Fleet Financing
Corp., Series 97-1 A
7.35%, 5/15/03 A- 300 308
Union Acceptance Corp.,
Series:
96-B A
6.45%, 7/9/03 AAA 105 105
97-B A2
6.70%, 6/8/03 AAA 300 302
Western Financial Auto
Grantor Trust,
Series:
93-2 A2
4.70%, 10/1/98 AAA 9 9
94-1 A1
5.10%, 6/1/99 AAA 18 18
WFS Financial Owner Trust,
Series 97-C A3
6.01%, 3/20/02 AAA 380 380
- ------------------------------------------------------
GROUP TOTAL 8,025
- ------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
AGENCY COLLATERAL SERIES (2.6%)
Federal Home Loan Mortgage
Corporation,
Series:
93-149 O PO REMIC
8/25/23 Agy 35 22
## 1386 D REMIC
6.188%, 10/15/07 Agy 416 417
1632 SA Inv Fl REMIC
5.336%, 11/15/23 Agy 65 54
1709 H PO REMIC
1/15/24 Agy 14 7
1750 C PD PO REMIC
3/15/24 Agy 22 15
1813 K PO REMIC
2/15/24 Agy 15 10
1844 PC PO REMIC
3/15/24 Agy 30 19
1887 I PO REMIC
10/15/22 Agy 15 10
Federal National Mortgage
Association,
Series:
93-205 G PO REMIC
9/25/23 Agy 14 9
93-235 H PO REMIC
9/25/23 Agy 4 3
96-11 V PO 9/25/23 Agy 565 381
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
82
<PAGE> 85
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
96-14 PC PO 12/25/23 Agy $ 25 $ 14
96-46 PB PO 9/25/23 Agy 30 20
96-54 N PO 7/25/23 Agy 20 15
96-54 O PO 11/25/23 Agy 20 12
97-3 E PO 12/25/23 Agy 75 50
97-7 EB PO 2/25/23 Agy 233 166
282 1 PO 5/15/24 Agy 506 347
287 1 PO 12/17/07 Agy 496 325
- ------------------------------------------------------
GROUP TOTAL 1,896
- ------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (5.1%)
Asset Securitization
Corp., Series 96-MD6 A1C
6.88%, 11/13/26 AAA 250 255
Bear Stearns Mortgage
Securities, Inc.,
Series:
96-4 AI10
8.125%, 9/25/27 AAA 50 52
96-9 AI11
8.00%, 6/15/26 AAA 50 52
Citicorp Mortgage
Securities, Inc., Series
93-9 A1
7.00%, 3/25/20 AAA 60 60
DLJ Mortgage Acceptance
Corp.,
Series:
(+) 97-CF1 A1B
7.60%, 5/15/30 AAA 300 318
(+) 97-CF1 S IO
1.097%, 5/15/30 AAA 1,295 86
97-CF2 A1B
6.82%, 10/15/30 AAA 500 503
ICI Funding Corp., Series
97-2 1A8
8.00%, 7/25/28 AAA 349 365
## J. P. Morgan Commercial
Mortgage Finance Corp.,
Series 97- C5 A2
7.069%, 9/15/29 AAA 325 332
+ Independent National
Mortgage Corp.,
Series 94-O B1
7.875%, 9/25/24 A2 97 100
Merrill Lynch Mortgage
Investors, Inc.,
Series 95-C1 IO
2.188%, 5/25/15 N/R 2,553 176
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Residential Accredit
Loans Inc.,
Series:
97 Q52 A8 NAS
7.75%, 3/25/27 AAA $ 75 $ 77
97 QS3 NAS
7.75%, 4/25/27 AAA 150 154
97 QS10 A7 TBA
7.25%, 9/15/27 AAA 550 550
Residential Asset
Securitization Trust,
Series:
96-A11 A9
7.75%, 2/25/27 AAA 50 51
97-A9 A5
7.25%, 9/15/27 AAA 525 526
- ------------------------------------------------------
GROUP TOTAL 3,657
- ------------------------------------------------------
COMMERCIAL MORTGAGES (7.0%)
+ American Southwest
Financial Securities
Corp.,
Series 95-C1 A1B
7.40%, 11/17/04 Aaa 50 52
Asset Securitization
Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 141 148
95-MD4 A1
7.10%, 8/13/29 AAA 706 727
96-MD6 A1C
7.04%, 11/13/26 AAA 100 103
(+) Carousel Center
Finance, Inc., Series 1
B
7.527%, 10/15/07 BBB+ 83 84
CBM Funding Corp., Series
96-1 A3PI
7.08%, 2/1/13 AA 100 103
Chase Commercial Mortgage
Securities Corp., Series
96-2 B
6.90%, 10/19/06 AA 100 101
CS First Boston Mortgage
Securities Corp.,
Series 97-C1 A1C
7.24%, 6/20/29 AAA 325 337
(+) DLJ Mortgage
Acceptance Corp.,
Series:
96-CF2 A1B
7.29%, 7/15/06 AAA 85 88
## 96-CF2 S IO
1.643%, 11/12/21 N/R 623 55
(+) Forum Finance
7.125%, 5/15/04 AA 250 256
+ GMAC Commercial Mortgage
Securities, Inc.,
Series 97-C1, Class A2
6.853, 9/15/06 Aaa 500 508
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
83
<PAGE> 86
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE DURATION
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
+ GS Mortgage Securities
Corp.,
Series:
97-GL A2D
6.94%, 7/13/30 Aaa $ 350 $ 357
97-GL X2 IO
1.07%, 7/13/30 Aaa 999 55
(+) Hospitality Properties
Mortgage Acceptance
Corp., Series 96-C1 A
6.275%, 12/6/04 A 200 200
(+) Lakewood Mall Finance
Co., Series 95-C1 A
7.00%, 8/13/10 AA 100 102
+ LB Commercial Conduit
Mortgage Trust,
Series 96-C2 A
7.416%, 10/25/26 Aaa 99 102
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C1 A3
7.42%, 4/25/28 AAA 100 104
96-C2 A2
6.82%, 11/21/28 AAA 345 349
96-C2 IO
1.529%, 10/25/26 N/R 444 40
97-C1 A3
7.12%, 6/18/29 AAA 150 154
+ Midland Realty
Acceptance Corp., Series
96-C2 A2
7.233%, 1/25/27 Aaa 100 103
Mortgage Capital Funding,
Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 150 155
97-MC1 A3
7.288%, 7/20/27 Aaa 375 390
(+) Park Avenue Finance
Corp., Series 97-C1 A1
7.58%, 5/12/07 N/R 198 209
+ Salomon Brothers
Mortgage Securities,
Series 97-TZH A2
7.174%, 3/24/22 Aa2 150 154
- ------------------------------------------------------
GROUP TOTAL 5,036
- ------------------------------------------------------
ENERGY (0.1%)
(+) Excel Paralubes
Funding
7.43%, 11/1/15 A- 100 101
- ------------------------------------------------------
FINANCE (13.8%)
Allstate Corp.
5.875%, 6/15/98 A 125 125
(+) Anthem Insurance Cos.,
Inc., Series A
9.00%, 4/1/27 BBB+ 225 243
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Associates Corp. of North
America, Series H
6.73%, 3/27/03 AA- $ 175 $ 177
(+) BankAmerica
Institutional, Series A
8.07%, 12/31/26 A- 350 360
Bankers Trust New York
Corp.
6.625%, 7/30/99 A 150 151
Barclays American Corp.
7.875%, 8/15/98 AA 125 127
Beneficial Corp., Series H
6.575%, 12/16/02 A 175 176
(+) BT Institutional
Capital Trust, Series A
8.09%, 12/1/26 BBB+ 250 253
Chase Manhattan Bank N.A.
5.875%, 8/4/99 A+ 575 573
Chrysler Financial Corp.
6.375%, 1/28/00 A- 200 201
6.62%, 6/16/00 A 325 328
CIT Group Holdings
6.375%, 10/1/02 AA- 400 399
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 300 307
Countrywide Funding Corp.
6.05%, 3/1/01 A 75 74
6.55%, 4/14/00 A 100 101
(+) Equitable Life
Assurance Society of the
U.S.,
Series 1 A
6.95%, 12/1/05 A 250 252
(+) Farmers Insurance
Exchange
8.625%, 5/1/24 BBB+ 300 319
(+) First Chicago NBD
Corp., Series A
7.95%, 12/1/26 A- 675 682
(+) First Hawaiian Bank,
Series A
6.93%, 12/1/03 A 350 353
First Union Institutional
Capital, Series I
8.04%, 12/1/26 BBB+ 300 307
(+) Florida Property &
Casualty
7.375%, 7/1/03 A- 125 129
7.45%, 7/1/04 A 100 104
(+) Florida Windstorm
6.70%, 8/25/04 A- 200 199
Ford Motor Credit Corp.
7.47%, 7/29/99 A+ 75 77
8.375%, 1/15/00 A+ 25 26
General Motors Acceptance
Corp. Medium Term Note
6.75%, 6/10/02 A- 100 101
+ 6.65%, 5/24/00 A3 100 101
(+)+ Home Ownership
Funding Corp.,
13.331%
(Preferred Stock) Aaa (1)650 631
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
84
<PAGE> 87
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
Household Finance Corp.
6.08%, 3/8/06 A $ 68 $ 67
(+) Hyatt Equities LLC
7.00%, 5/15/02 BBB+ 340 346
Lehman Brothers Holding
Corp.
6.50%, 7/18/00 A 375 376
6.625%, 11/15/00 A 100 101
(+) Metropolitan Life
Insurance Co.
7.45%, 11/1/23 AA 325 316
PNC Institutional Capital,
Series A
7.95%, 12/15/26 BBB+ 300 301
(+) Prime Property Funding
6.80%, 8/15/02 A 355 357
(+) State Street
Institutional Capital,
Series A
7.94%, 12/30/26 A 250 255
Wells Fargo Capital,
(+) Series A
8.125%, 12/1/26 BBB 100 103
Series B
7.95%, 12/1/26 BBB+ 250 252
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 248 251
96 WFP-D
6.95%, 9/1/13 AA- 350 354
- ------------------------------------------------------
GROUP TOTAL 9,955
- ------------------------------------------------------
FLOATING RATE NOTES (0.1%)
## Student Loan Marketing
Association,
Series:
95-1 A1
5.759%, 4/26/04 AAA 39 40
96-1 A1
5.744%, 7/26/04 AAA 34 34
- ------------------------------------------------------
GROUP TOTAL 74
- ------------------------------------------------------
FOREIGN GOVERNMENTS (1.1%)
Government of Germany
7.375%, 1/3/05 AAA DEM 1,200 763
- ------------------------------------------------------
INDUSTRIALS (0.6%)
(+) EES Coke Battery Co.,
Inc.
7.125%, 4/15/02 BBB $ 200 202
Philip Morris Cos., Inc.
6.375%, 2/1/06 A 55 53
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- ------------------------------------------------------
Scotia Pacific Holding Co.
7.95%, 7/20/15 BBB $ 83 $ 87
+ Sears Roebuck Acceptance
Corp.
6.86%, 8/6/01 A2 70 71
- ------------------------------------------------------
GROUP TOTAL 413
- ------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.1%)
Resolution Trust Corp.,
Series 92-5 C
8.618%, 1/25/26 AA 85 86
- ------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES-
AGENCY COLLATERAL SERIES (0.7%)
Federal National Mortgage
Association
Series:
249 1 PO
10/25/23 Agy 338 223
254 1 PO
1/1/24 Agy 44 31
260 1 PO
4/1/24 Agy 58 41
263 1 PO
5/25/24 Agy 62 41
93-M2 B IO REMIC
2.575%, 7/25/03 Agy 805 46
93-146 G PO REMIC
5/25/23 Agy 12 8
93-243 C PO REMIC
11/25/23 Agy 4 3
96-20 E PO
11/25/22 Agy 250 124
- ------------------------------------------------------
GROUP TOTAL 517
- ------------------------------------------------------
TELEPHONES (0.2%)
Tele-Communications, Inc.
8.75%, 2/15/23 BBB- 150 155
- ------------------------------------------------------
U.S. TREASURY SECURITIES (26.5%)
U.S. Treasury Notes
7.00%, 4/15/99 Tsy 550 560
6.25%, 5/31/99 Tsy 8,000 8,058
6.875%, 7/31/99 Tsy 2,850 2,901
(dd)7.50%, 2/15/05 Tsy 3,750 4,049
3.625%, 7/15/02
(Inflation Indexed) Tsy 2,180 2,172
3.375%, 1/15/07
(Inflation Indexed) Tsy 1,368 1,341
- ------------------------------------------------------
GROUP TOTAL 19,081
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
85
<PAGE> 88
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE DURATION
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
UTILITIES (0.1%)
(+) Edison Mission Energy
Funding Corp., Series B
7.33%, 9/15/08 BBB $ 100 $ 103
- ------------------------------------------------------
YANKEE (2.8%)
(+) Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB 384 392
AST Research, Inc.
7.45%, 10/1/02 A- 300 299
(+) Israel Electric Corp.,
Ltd
7.25%, 12/15/06 A- 100 101
Korea Development Bank
7.375%, 9/17/04 AA- 220 222
Petroliam Nasional Bhd.
7.125%, 10/18/06 A+ 225 223
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 350 370
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ 365 396
- ------------------------------------------------------
GROUP TOTAL 2,003
- ------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $68,139) 68,855
- ------------------------------------------------------
INTEREST RATE CAP (0.1%)-SEE NOTE A6
- ------------------------------------------------------
Bankers Trust Co.,
terminating 10/15/99, to
receive on 10/15/99 the
excess, as measured on
10/15/98, of 12 month
LIBOR over 6.34%
multiplied by the
notional amount.
(Premium Paid $85) N/R 25,000 76
- ------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)!
- ------------------------------------------------------
<S> <C> <C> <C>
CASH EQUIVALENTS (10.6%)
- ------------------------------------------------------
REPURCHASE AGREEMENTS (10.6%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97, to
be repurchased at $2,543,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99, valued at
$2,566 $ 2,542 $ 2,542
Goldman Sachs & Co. 6.15%, dated
9/30/97, due 10/1/97, to be
repurchased at $2,541,
collateralized by U.S. Treasury
Bonds, 8.00%, due 11/15/21,
valued at $2,593 2,541 2,541
Merrill Lynch & Co., Inc. 5.90%,
dated 9/30/97, due 10/1/97, to
be repurchased at $2,541,
collateralized by U.S. Treasury
Notes, 7.50%, due 10/31/99,
valued at $2,593 2,541 2,541
- ------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $7,624) 7,624
- ------------------------------------------------------
TOTAL INVESTMENTS (106.2%) (Cost $75,848) 76,555
- ------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-6.2%)
Dividends Receivable 22
Interest Receivable 966
Receivable for Investments Sold 8,276
Other Assets 1
Payable for Investments Purchased (8,516)
Payable for Shares Redeemed (5,077)
Payable for Investment Advisory Fees (57)
Payable for Administrative Fees (5)
Payable for Trustees' Deferred Compensation
Plan-Note F (1)
Unrealized Loss on Foreign Forward Currency
Contracts (7)
Payable for Daily Variation on Futures
Contract (1)
Other Liabilities (37)
-------
(4,436)
- ------------------------------------------------------
NET ASSETS (100%) $72,119
- ------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
86
<PAGE> 89
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- ------------------------------------------------------
<S> <C> <C> <C>
INSTITUTIONAL CLASS
- ------------------------------------------------------
NET ASSETS
Applicable to 6,883,396 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $72,119
- ------------------------------------------------------
NET ASSET VALUE PER SHARE $ 10.48
- ------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $69,694
Undistributed Net Investment Income (Loss) 1,188
Undistributed Realized Net Gain (Loss) 538
Unrealized Appreciation (Depreciation) on:
Investment Securities 707
Foreign Currency Transactions (7)
Futures (1)
- ------------------------------------------------------
NET ASSETS $72,119
- ------------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C> <C>
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
++ Fitch rating. Security is not rated by Standard
& Poor's Corporation or Moody's Investor
Service, Inc.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
CMO Collateralized Mortgage Obligation
DEM German Mark
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
87
<PAGE> 90
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
BALANCED
PORTFOLIO
STATEMENT OF NET ASSETS
FIXED INCOME SECURITIES (35.4%)
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS FACE
(STANDARD AMOUNT VALUE
SEPTEMBER 30, 1997 & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (3.7%)
## Government National
Mortgage Association
Various Pools:
6.00%,
8/20/27-11/20/27 Agy $ 10,950 $ 11,032
November TBA
6.00%, 11/20/27 Agy 2,800 2,817
- -------------------------------------------------------
GROUP TOTAL 13,849
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (4.7%)
Federal Home Loan
Mortgage Corporation
Conventional Pools:
10.00%, 9/1/17 Agy 644 703
10.50%, 8/1/19 Agy 503 561
11.00%, 5/1/20-9/1/20 Agy 946 1,060
12.00%, 3/1/15 Agy 359 416
Gold Pools:
7.00%, 1/1/24-6/1/25 Agy 3,034 3,039
Federal National Mortgage
Association
Conventional Pools:
10.00%, 7/1/17 Agy 783 858
10.50%, 8/1/12-4/1/22 Agy 1,646 1,844
Government National
Mortgage Association
Various Pools:
7.00%,
12/15/22-12/15/23 Agy 4,446 4,462
10.00%,
12/15/21-12/25/26 Agy 1,893 2,096
10.50%,
2/15/20-12/15/20 Agy 1,098 1,235
11.00%, 5/15/26 Agy 1,078 1,199
- -------------------------------------------------------
GROUP TOTAL 17,473
- -------------------------------------------------------
ASSET BACKED CORPORATES (2.2%)
## Airplanes Pass Through
Trust,
Series:
1 B
6.756%, 3/15/19 A 325 325
ALPS,
Series:
94-1 A4 CMO
7.80%, 9/15/04 AA 375 384
94-1 C2 CMO
9.35%, 9/15/04 BBB 622 640
96-1 D
12.75%, 6/15/06 BB- 1,097 1,184
Arcadia Auto, Series
97-CA4
6.375%, 1/15/03 AAA 640 642
CIT Group Home Equity
Loan Trust,
Series:
97-1 A3
6.25%, 9/15/01 AAA 375 375
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Federal Mortgage
Acceptance Corp. Loan
Receivables Trust,
Series:
96-B A1
7.629%, 11/1/18 A $ 382 $ 390
First Plus Home Loan
Trust,
Series:
97-3 A2
6.48%, 9/10/08 AAA 380 381
97-3 A3
6.57%, 10/10/10 AAA 375 376
Honda Auto Receivables
Grantor Trust,
Series:
97-A A
5.85%, 2/15/03 AAA 1,094 1,094
(+) Long Beach Auto,
Series:
97-2 A
6.69%, 9/25/04 AAA 494 494
(+) NAL Auto Trust,
Series:
96 3A
7.75%, 9/15/02 N/R 233 234
96-4 A
6.90%, 12/15/00 N/R 308 306
National Car Rental
Financing Ltd.,
Series:
96-1 A4
7.35%, 10/20/03 N/R 425 435
Security Pacific Home
Equity Trust,
Series:
91-AB
10.50%, 3/10/06 A+ 80 80
(+) Team Fleet Financing
Corp.,
Series:
96-1A
6.65%, 12/15/02 A- 300 300
WFS Financial Owner
Trust,
Series:
97-C A3
6.01%, 3/20/02 AAA 690 689
- -------------------------------------------------------
GROUP TOTAL 8,329
- -------------------------------------------------------
ASSET BACKED MORTGAGES (0.6%)
Cityscape Home Equity
Loan Trust,
Series:
96-2 A5
8.10%, 8/25/26 AAA 700 734
96-3 A IO
1.00%, 10/25/26 AAA 9,348 232
96-3 YMA
10/25/26 N/R 9,348 13
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
88
<PAGE> 91
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Contimortgage Home Equity
Loan Trust,
Series:
96-4 A11 IO
1.10%, 1/15/28 AAA $ 8,041 $ 212
(+) 96-4 A12 IO
1.05%, 1/15/28 AAA 2,596 68
96-4 A12 YMA
1/15/28 N/R 12,984 19
97-1 A10 YMA
3/15/28 N/R 9,505 13
(+) 97-1 A10I IO
1.10%, 3/15/28 AAA 9,285 254
First Union Residential
Securization Trust,
Series 96-2 A5
7.21%, 11/25/28 AAA 675 682
- -------------------------------------------------------
GROUP TOTAL 2,227
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
AGENCY COLLATERAL SERIES (1.1%)
Federal Home Loan
Mortgage Corporation,
Series:
93-149 O PO REMIC
8/25/23 Agy 113 71
1415-S Inv Fl IO CMO
19.125%, 11/15/07 Agy 373 172
1476-S Inv Fl IO REMIC
PAC
4.363%, 2/15/08 Agy 3,357 391
1485-S Inv Fl IO REMIC
3.913%, 3/15/08 Agy 3,315 294
1600-SA Inv Fl IO REMIC
2.313%, 10/15/08 Agy 5,887 325
1709 H PO REMIC
1/15/24 Agy 52 27
1750 C PD PO REMIC
3/15/24 Agy 78 56
1813 K PO REMIC
2/15/24 Agy 50 34
1844 PC PO REMIC
3/15/24 Agy 95 60
1887 I PO REMIC
10/15/22 Agy 55 37
Federal National Mortgage
Association,
Series:
282 1 PO
5/15/24 Agy 1,253 859
90-106 J PAC CMO
8.50%, 9/25/20 Agy 552 581
92-186 S Inv Fl IO CMO
3.363%, 10/25/07 Agy 6,381 548
93-205 G PO REMIC
9/25/23 Agy 308 198
93-235 H PO REMIC
9/25/23 Agy 122 96
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
96-14 PC PO REMIC
12/25/23 Agy $ 90 $ 52
96-46 PB PO REMIC
9/25/23 Agy 95 64
96-54 N PO REMIC
7/25/23 Agy 69 52
96-54 O PO REMIC
11/25/23 Agy 74 46
96-68 SC Inv Fl IO
REMIC
2.475%, 1/25/24 Agy 1,250 152
- -------------------------------------------------------
GROUP TOTAL 4,115
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (3.2%)
American Housing Trust,
Series:
V 1G
9.125%, 4/25/21 AAA 302 320
Chemical Mortgage
Securities, Inc.,
Series:
93-1 M
7.45%, 2/25/23 AA 444 448
Citicorp Mortgage
Securities, Inc.,
Series:
94-7 A5
6.25%, 4/25/24 AAA 825 742
CMC Securities Corp. IV,
Series:
94-G A4
7.00%, 9/25/24 AAA 675 645
DLJ Mortgage Acceptance
Corp.,
Series:
97-CF2 A1B
6.82%, 10/15/30 AAA 825 831
sec. First Boston
Mortgage Corp.,
Series:
92-4 B1
8.125%, 10/25/22
(acquired 1/25/93-
2/26/93, cost $239) A 244 249
GE Capital Mortgage
Services, Inc.,
Series:
94-24 A4
7.00%, 7/25/24 AAA 858 822
Independent National
Mortgage Corp.,
Series:
95-V A3
7.12%, 2/25/26 AAA 935 927
J. P. Morgan Commercial
Mortgage Finance Corp.
Series:
97-C5 A2
7.069%, 9/15/29 AAA 600 613
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
89
<PAGE> 92
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
sec.## Kidder Peabody
Funding Corp.,
Series 92-4 B2
8.467%, 5/28/22
(acquired 2/26/93,
cost $106) N/R $ 105 $ 105
Merrill Lynch Mortgage
Investors, Inc.,
Series 95-C1 IO
2.188%, 5/25/15 N/R 5,264 363
Prudential Home Mortgage
Securities Co.,
Series:
90-5 A3
9.50%, 5/25/05 AAA 107 107
(+) 92-A 2B4
7.90%, 4/28/22 N/R 370 362
(+) 92-A 3B2
7.90%, 4/28/22 N/R 1,000 600
(+)## 94-A 3B3
6.803%, 4/28/24 N/R 1,129 1,092
Residential Accredit
Loans, Inc.,
Series:
97-Q52 AB
7.75%, 3/25/27 AAA 325 335
97-QS4 A7
7.75%, 5/25/27 N/R 600 619
97-QS12 A8 TBA
7.25%, 12/25/27 AAA 825 826
Rural Housing Trust,
Series 87-1 M
3.33%, 10/1/28 A- 620 591
Ryland Mortgage
Securities Corp.,
Series:
## 92-A 1A
8.27%, 3/29/30 A- 458 464
94-7B 4A2
7.50%, 8/25/25 AAA 850 852
- -------------------------------------------------------
GROUP TOTAL 11,913
- -------------------------------------------------------
COMMERCIAL MORTGAGES (3.4%)
American Southwest
Financial Securities
Corp.,
Series:
93-2 A1
7.30%, 1/18/09 N/R 1,252 1,276
95-Cl A1B
7.40%, 11/17/04 N/R 650 672
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Asset Securitization
Corp.,
Series:
95-MD4 A1
7.10%, 8/13/29 AAA $ 1,315 $ 1,353
(+) 96-D3 A1C
7.40%, 10/13/26 N/R 525 552
96-MD6 A1C
7.04%, 11/13/26 AAA 575 591
(+) Carousel Center
Finance, Inc.,
Series:
1 A1
6.828%, 10/15/07 AA 525 529
CBM Funding Corp.,
Series:
96-1 A3PI
7.08%, 2/1/13 AA 600 618
(+) Creekwood Capital
Corp.,
Series:
95-1A
8.47%, 3/16/15 AA 556 620
CS First Boston Mortgage
Securities Corp.,
Series:
97-C1 A1C
7.24%, 6/20/29 AAA 700 726
(+) DLJ Mortgage
Acceptance Corp.,
Series:
95-CF2 A1B
7.29%, 7/15/06 AAA 165 171
## 96-CF2 S IO
1.643%, 11/12/21 N/R 1,655 147
(+) Equitable Life
Assurance Society of
the U.S.
6.633%, 7/23/03 AA 483 484
GMAC Commercial Mortgage
Securities, Inc.,
Series:
96-C1 X2 IO
1.96%, 3/15/21 N/R 2,318 216
GS Mortgage Securities Corp.,
Series:
97-GL A2D
6.94%, 7/13/30 N/R 650 664
97-GL X2 IO
1.07%, 7/13/30 N/R 1,699 91
LB Commercial Conduit
Mortgage Trust,
Series:
96-C2 A
7.416%, 10/25/26 N/R 641 666
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C2 A2
6.82%, 11/21/28 AAA 270 273
96-C2 IO
1.529%, 10/25/26 N/R 2,787 250
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
90
<PAGE> 93
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Midland Realty Acceptance
Corp.,
Series:
96-C2 A2
7.233%, 1/25/27 N/R $ 475 $ 491
Mortgage Capital Funding,
Inc.,
Series:
97-MC1 A3
7.288%, 7/20/27 N/R 800 832
Nomura Asset Securities
Corp.,
Series:
94-MD1 A3
8.026%, 3/15/18 N/R 525 565
Salomon Brothers Mortgage
Securities,
97-TZH A2
7.174%, 3/24/22 N/R 350 360
(+) Stratford Finance
Corp.
6.776%, 2/1/04 AA 800 796
- -------------------------------------------------------
GROUP TOTAL 12,943
- -------------------------------------------------------
ENERGY (0.3%)
(+) Excel Paralubes
Funding
7.43%, 11/1/15 A- 550 557
Mobile Energy Services
8.665%, 1/1/17 BBB- 494 526
- -------------------------------------------------------
GROUP TOTAL 1,083
- -------------------------------------------------------
FINANCE (4.4%)
(+) Anthem Insurance
Cos., Inc., Series A
9.00%, 4/1/27 BBB+ 650 701
(+) BankAmerica
Institutional,
Series A
8.07%, 12/31/26 A- 775 797
(+) BT Institutional
Capital Trust,
Series A
8.09%, 12/1/26 BBB+ 625 633
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 550 562
(+) Equitable Life
Assurance Society of
the U.S.,
Series 1 A
6.95%, 12/1/05 A 700 705
Farmers Insurance
Exchange
8.625%, 5/1/24 BBB- 725 772
(+) First Chicago NBD
Corp.,
Series A
7.95%, 12/1/26 A- 700 707
First Union Institutional
Capital,
Series I
8.04%, 12/1/26 BBB+ 725 743
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) Florida Property &
Casualty
7.375%, 7/1/03 A- $ 200 $ 206
(+) Florida Windstorm
6.70%, 8/25/04 A- 800 797
+ Home Ownership Funding
Corp.,
13.331% (Preferred
Stock) Aaa (1)3,025 2,936
(+) John Hancock Surplus
Note
7.375%, 2/15/24 AA- 625 625
Metropolitan Life
Insurance Co.
7.45%, 11/1/23 A+ 600 584
(+) Nationwide Mutual
Life Insurance Co.
7.50%, 2/15/24 A+ 525 517
NB Capital Trust
8.25%, 4/15/27 A- 300 316
(+) New York Life
Insurance Co.
7.50%, 12/15/23 AA 300 297
PNC Institutional
Capital,
Series A
7.95%, 12/15/26 BBB+ 725 728
(+) Prime Property
Funding
7.00%, 8/15/04 A 540 546
(+) State Street
Institutional Capital,
Series A
7.94%, 12/30/26 A 350 357
Series B
8.035%, 3/15/27 A 300 308
Washington Mutual Capital
8.375%, 6/1/27 BBB- 375 393
(+) Wells Fargo Capital,
Series A
8.125%, 12/1/26 BBB 700 720
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 843 852
96 WFP-D
6.95%, 9/1/13 AA- 525 532
- -------------------------------------------------------
GROUP TOTAL 16,334
- -------------------------------------------------------
FOREIGN GOVERNMENTS (0.3%)
Government of Germany
7.375%, 1/3/05 AAA DEM 2,000 1,271
- -------------------------------------------------------
INDUSTRIALS (1.8%)
Blue Bell Funding
11.85%, 5/1/99 BB- $ 85 87
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
91
<PAGE> 94
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
DR Securitized Lease
Trust,
Series:
93-K1 A1
6.66%, 8/15/10 BB- $ 138 $ 125
DR Structured Finance,
Series:
94-K2
9.35%, 8/15/19 BB- 375 380
Entertainment Properties
14.253% (Preferred
Stock) BBB- (1)575 553
Host Marriott Travel
Plaza
9.50%, 5/15/05 BB- 650 684
Kmart Funding Corp.,
Series F
8.80%, 7/1/10 BB 300 306
News America Holdings
7.75%, 1/20/24 BBB 140 138
8.875%, 4/26/23 BBB 340 376
(+) Oxymar
7.50%, 2/15/16 BBB 470 470
Paramount Communications,
Inc.
8.25%, 8/1/22 BB+ 860 849
Rhone-Poulenc Rorer,
Inc.,
Series:
92-A 3
8.62%, 1/5/21 BBB+ 400 438
Scotia Pacific Holding
Co.
7.95%, 7/20/15 BBB 607 635
Southland Corp.
5.00%, 12/15/03 BB+ 485 418
Tier One Properties,
11.095% (Preferred
Stock) A (1)250 245
Time Warner, Inc., 10.25%
(Preferred Stock)
Series K BB+ (1)786 900
- -------------------------------------------------------
GROUP TOTAL 6,604
- -------------------------------------------------------
RATED NON-AGENCY FIXED RATE MORTGAGES (0.1%)
First Federal Savings &
Loan Association,
Series:
92-C
8.75%, 6/1/06 AA 1 1
## Resolution Trust
Corp.,
Series:
92-5C
8.618%, 1/25/26 AA 313 315
Ryland Acceptance Corp.
IV,
Series 79-A
6.65%, 7/1/11 AA 83 80
- -------------------------------------------------------
GROUP TOTAL 396
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
STRIPPED MORTGAGE BACKED SECURITIES-AGENCY COLLATERAL
SERIES (0.7%)
Federal National Mortgage
Association,
Series:
249 1 PO
10/25/23 Agy $ 2,187 $ 1,445
254 1 PO
1/1/24 Agy 435 312
260 1 PO
4/1/24 Agy 580 412
93-146 G PO REMIC
5/25/23 Agy 382 250
93-243 C PO REMIC
11/25/23 Agy 84 65
- -------------------------------------------------------
GROUP TOTAL 2,484
- -------------------------------------------------------
TELEPHONES (0.5%)
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ 400 438
Tele-Communications, Inc.
9.25%, 1/15/23 BBB- 575 619
8.75%, 2/15/23 BBB- 225 233
# Teleport Communications
Group, Inc.
0.00%, 7/1/07 B 640 501
- -------------------------------------------------------
GROUP TOTAL 1,791
- -------------------------------------------------------
TRANSPORTATION (0.2%)
(+) Jet Equipment Trust,
Series 95-5A C
10.69%, 5/1/15 BBB 675 854
- -------------------------------------------------------
U.S. TREASURY SECURITIES (6.1%)
U.S. Treasury Bond
8.75%, 8/15/20 Tsy 3,475 4,406
U.S. Treasury Notes
6.25%, 5/31/99 Tsy 1,350 1,360
6.75%, 6/30/99 Tsy 2,375 2,412
(dd) 7.125%, 9/30/99 Tsy 9,000 9,219
3.375%, 1/15/07
(Inflation Indexed) Tsy 4,533 4,447
U.S. Treasury Strips, PO
11/15/18 Tsy 3,500 884
- -------------------------------------------------------
GROUP TOTAL 22,728
- -------------------------------------------------------
UTILITIES (0.1%)
(+) Edison Mission Energy
Funding,
Series B
7.33%, 9/15/08 BBB 375 386
- -------------------------------------------------------
YANKEE (2.0%)
(+) Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB 708 722
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
92
<PAGE> 95
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
(+) AST Research, Inc.
7.45%, 10/1/02 A- $ 500 $ 498
(+) Hyundai Semiconductor
America
8.625%, 5/15/07 BBB- 400 408
(+) Israel Electric
Corp., Ltd.
7.25%, 12/15/06 A- 525 532
Korea Development Bank
7.375%, 9/17/04 AA- 390 393
National Power Corp.
7.875%, 12/15/06 BB+ 450 439
8.40%, 12/15/16 BB+ 350 336
(+) Paiton Energy Funding
9.34%, 2/15/14 BBB- 545 598
(+) Petroliam Nasional
Bhd.
7.125%, 10/18/06 A+ 500 496
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 625 660
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ 1,000 1,086
## Republic of Argentina
Par,
Series L, 'Euro'
5.50%, 3/31/23 BB 900 680
Republic of Colombia
8.70%, 2/15/16 BBB- 375 382
United Mexican States,
Series B
6.25%, 12/31/19 BB 500 414
- -------------------------------------------------------
GROUP TOTAL 7,644
- -------------------------------------------------------
TOTAL FIXED INCOME SECURITIES (Cost $129,071) 132,424
- -------------------------------------------------------
COMMON STOCKS (58.0%)
- -------------------------------------------------------
<CAPTION>
SHARES
------
<S> <C> <C>
BANKS (2.3%)
BankBoston Corp. 35,300 3,122
Citicorp 16,300 2,183
First Union Corp. 46,528 2,329
Wells Fargo & Co. 3,500 963
- -------------------------------------------------------
GROUP TOTAL 8,597
- -------------------------------------------------------
BASIC RESOURCES (3.1%)
Boise Cascade Corp. 17,500 736
Bowater, Inc. 27,700 1,413
Champion International
Corp. 58,700 3,577
E.I. DuPont de Nemours &
Co. 55,000 3,386
Sealed Air Corp. 200 11
Weyerhaeuser Co. 16,000 950
W.R. Grace & Co. 23,200 1,708
- -------------------------------------------------------
GROUP TOTAL 11,781
- -------------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
BEVERAGE & PERSONAL PRODUCTS (0.3%)
Coca-Cola Enterprises,
Inc. 45,200 $ 1,218
Estee Lauder Cos., Class
A 200 9
- -------------------------------------------------------
GROUP TOTAL 1,227
- -------------------------------------------------------
CONSUMER DURABLES (3.8%)
Ford Motor Co. 118,300 5,353
General Motors Corp. 61,002 4,084
Goodyear Tire & Rubber
Co. 29,500 2,028
LucasVarity plc ADR 71,200 2,701
- -------------------------------------------------------
GROUP TOTAL 14,166
- -------------------------------------------------------
CONSUMER SERVICES (3.6%)
* Clear Channel Communications,
Inc. 40,900 2,653
* GTECH Holdings Corp. 27,400 937
* HFS, Inc. 53,100 3,953
Imax Corp. 600 16
Metro Networks, Inc. 400 12
News Corp. Ltd. ADR 60,900 1,092
Service Corp.
International 59,300 1,909
Tele-Communications Liberty
Media Group, Class A 41,525 1,243
Tele-Communications, Inc., Class
A 86,200 1,767
Univision Communications, Inc.,
Class A 200 11
- -------------------------------------------------------
GROUP TOTAL 13,593
- -------------------------------------------------------
CREDIT & FINANCE/
INVESTMENT COMPANIES (2.1%)
American Express Co. 13,300 1,089
Bear Stearns Co., Inc. 31,785 1,398
CMAC Investment Corp. 16,000 858
Lehman Brothers Holdings, Inc. 14,000 751
Money Store (The), Inc. 800 23
Sirrom Capital Corp. 400 21
SLM Holding Corp. 23,400 3,615
- -------------------------------------------------------
GROUP TOTAL 7,755
- -------------------------------------------------------
ENERGY (3.8%)
Atlantic Richfield Co. 19,400 1,657
British Petroleum plc ADR 45,800 4,159
Coastal Corp. 24,700 1,513
Columbia Gas System, Inc. 20,200 1,414
Phillips Petroleum Co. 64,400 3,325
Repsol SA ADR 27,200 1,180
Texaco, Inc. 18,400 1,130
- -------------------------------------------------------
GROUP TOTAL 14,378
- -------------------------------------------------------
FOOD, TOBACCO & OTHER (3.0%)
Philip Morris Cos., Inc. 197,700 8,217
RJR Nabisco Holdings
Corp. 89,220 3,067
- -------------------------------------------------------
GROUP TOTAL 11,284
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
93
<PAGE> 96
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED
PORTFOLIO
VALUE
(CONT'D) SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
HEALTH CARE (3.8%)
Aetna, Inc. 51,300 $ 4,178
Baxter International,
Inc. 24,200 1,264
Bristol-Myers Squibb Co. 29,200 2,416
Columbia/HCA Healthcare Corp. 37,660 1,082
* Health Management Associates,
Class A 44,800 1,417
Lincare Holdings, Inc. 27,000 1,362
Merck & Co., Inc. 15,600 1,559
SmithKline Beecham plc ADR 22,400 1,095
- -------------------------------------------------------
GROUP TOTAL 14,373
- -------------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (10.8%)
Aeroquip-Vickers, Inc. 26,300 1,289
Allied Signal, Inc. 27,600 1,173
American Disposal Services, Inc. 600 19
AMR Corp. 12,600 1,395
Berkshire Hathaway, Inc. 26 1,165
Boeing Co. 23,590 1,284
Case Corp. 54,900 3,658
Cummins Engine Co., Inc. 72,100 5,628
Delta Air Lines, Inc. 2,500 235
Eaton Corp. 15,800 1,460
FMC Corp. 28,900 2,565
Harnischfeger Industries,
Inc. 20,800 889
Lockheed Martin Corp. 38,200 4,073
Loral Space & Communications 400 8
Textron, Inc. 30,700 1,995
Union Pacific Corp. 28,000 1,753
United Technologies Corp. 66,100 5,354
Waste Management, Inc. 134,000 4,682
York International Corp. 39,100 1,750
- -------------------------------------------------------
GROUP TOTAL 40,375
- -------------------------------------------------------
INSURANCE (3.5%)
Allstate Corp. 24,800 1,993
CIGNA Corp. 8,100 1,509
Exel Ltd. 38,300 2,281
Hartford Financial
Services Group (The),
Inc. 35,700 3,073
Loews Corp. 36,500 4,122
- -------------------------------------------------------
GROUP TOTAL 12,978
- -------------------------------------------------------
MID CAP GROWTH (2.7%)
Advance Fibre
Communications, Inc. 2,800 115
Allied Waste Industries,
Inc. 2,100 40
ASE Test Ltd. 700 59
At Home Corp., Series A 3,700 86
Bell Canada
International, Inc. 2,500 47
* BioChem Pharmaceutical,
Inc. 3,500 110
* BMC Software, Inc. 2,400 155
* Borders Group, Inc. 5,600 154
* Brightpoint, Inc. 1,800 84
<CAPTION>
VALUE
SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
Brylane, Inc. 1,200 $ 55
* Cellular Communications
International, Inc. 700 29
* CIENA Corp. 2,300 114
* Cinar Films, Inc.,
Class B 3,500 133
Cintas Corp. 2,300 170
Coinstar, Inc. 3,800 49
Comcast Corp., Class A Special 6,100 157
Complete Business Solutions,
Inc. 2,600 74
* CompUSA, Inc. 2,800 98
* Computer Horizons Corp. 2,500 91
Cott Corp. 6,800 69
CVS Corp. 2,500 142
* Cyberonics, Inc. 3,700 60
Danaher Corp. 2,700 157
Diamond Offshore Drilling, Inc. 1,700 94
* Digital Microwave Corp. 2,000 90
* Electronics for
Imaging, Inc. 2,000 102
Estee Lauder Co., Class A 2,600 120
* Fiserv, Inc. 3,100 136
* Florida Panthers Holdings,
Inc. 700 17
Franklin Resources, Inc. 1,100 102
* Global Marine, Inc. 3,500 116
* Globalstar Telecommunications
Ltd. 6,690 351
HBO & Co. 3,800 143
Health Management Associates,
Class A 8,775 278
Healthcare Recoveries,
Inc. 3,800 86
* Heftel Broadcasting
Corp., Class A 1,500 114
* Imax Corp. 4,500 118
* Inter-Tel, Inc. 2,100 111
Ionica Group plc ADR 2,800 52
Jacor Communications,
Inc. 2,100 93
J. D. Edwards & Co. 2,000 67
J. Ray McDermott, S.A. 1,300 64
Jones Apparel Group, Inc. 2,000 108
Kemet Corp. 2,900 88
* Lincare Holdings, Inc. 5,400 272
* Loral Space & Communications 8,400 173
MAPICS, Inc. 6,100 79
* McAfee Associates, Inc. 3,012 160
McDermott International,
Inc. 1,500 55
Metro Networks, Inc. 3,100 93
MicroFocus Group ADR 2,900 102
Money Store (The), Inc. 100 3
Newbridge Networks Corp. 1,900 114
NEXTLINK Communications, Inc.,
Class A 1,700 41
* Office Depot, Inc. 2,700 55
* Orbotech Ltd. 1,600 92
* Orthodontic Centers of
America, Inc. 5,200 104
* Outdoor Systems, Inc. 3,900 102
* PanAmSat Corp. 2,600 112
* Pediatrix Medical
Group, Inc. 1,700 75
* Peoplesoft, Inc. 2,400 143
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
94
<PAGE> 97
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
Positron Fiber Systems
Corp. 3,200 $ 33
* Premier Parks, Inc. 2,700 102
ProBusiness Services,
Inc. 500 10
Qwest Communications
International, Inc. 2,600 120
* Republic Industries,
Inc. 3,200 105
* Rexall Sundown, Inc. 2,800 128
* Robert Mondavi Corp., Class A 2,200 120
Santa Fe International
Corp. 2,900 88
* Sapient Corp. 1,400 71
Saville Systems Ireland plc ADR 1,100 77
* Sealed Air Corp. 1,700 93
* Security Capital Group, Inc.,
Class B 1,300 45
Security Capital Industrial
Trust 4,200 98
* Security Capital U.S.
Realty 4,000 60
* Silicon Valley Group,
Inc. 1,700 60
Sirrom Capital Corp. 4,200 218
* Stage Stores, Inc. 1,900 82
State Street Corp. 1,900 116
SunAmerica, Inc. 2,050 80
* Tel-Save Holdings, Inc. 4,000 96
Tele-Communications Liberty
Media Group, Class A 5,314 159
Tele-Communications, Inc., Class
A 7,700 158
* Tellabs, Inc. 2,000 103
* 3Com Corp. 4,050 208
Tidewater, Inc. 2,100 124
* Tommy Hilfiger Corp. 1,600 80
* Total Renal Care Holdings,
Inc. 2,200 110
TV Azteca, SA de C.V. ADR 3,100 70
* U.S. Office Products
Co. 2,100 74
* Uniphase Corp. 900 72
* Univision Communications,
Inc., Class A 1,800 98
* Valassis Communications, Inc. 3,400 108
* Visio Corp. 1,900 79
Wesley Jessen VisionCare, Inc. 3,400 96
* Wind River Systems 1,600 66
* WorldCom, Inc. 4,840 171
- -------------------------------------------------------
GROUP TOTAL 10,051
- -------------------------------------------------------
RETAIL (2.1%)
Borders Group, Inc. 600 16
CVS Corp. 30,900 1,757
dELiA*s, Inc. 700 16
* Federated Department Stores,
Inc. 42,100 1,816
Home Depot, Inc. 29,800 1,553
McDonald's Corp. 9,700 462
* Office Depot, Inc. 64,600 1,304
Sears, Roebuck & Co. 19,700 1,122
- -------------------------------------------------------
GROUP TOTAL 8,046
- -------------------------------------------------------
TECHNOLOGY (5.4%)
* BMC Software, Inc. 37,100 2,402
* Cisco Systems, Inc. 36,000 2,630
Digital Microwave Corp. 400 18
<CAPTION>
VALUE
SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
Flextronics International Ltd. 1,000 $ 47
Intel Corp. 17,800 1,643
* McAfee Associates, Inc. 600 32
* Microsoft Corp. 35,100 4,644
* Oracle Corp. 53,212 1,939
RSL Communications Ltd., Class A 1,900 42
* Sabre Group Holdings,
Inc. 24,800 888
* Seagate Technology,
Inc. 56,700 2,049
* 3Com Corp. 50,400 2,583
Xerox Corp. 14,300 1,204
- -------------------------------------------------------
GROUP TOTAL 20,121
- -------------------------------------------------------
UTILITIES (2.4%)
* Airtouch Communications, Inc. 24,800 879
Duke Energy Corp. 2,088 103
GTE Corp. 47,900 2,173
SBC Communications, Inc. 29,500 1,811
Sprint Corp. 35,200 1,760
* WorldCom, Inc. 63,294 2,239
- -------------------------------------------------------
GROUP TOTAL 8,965
- -------------------------------------------------------
VALUE (5.3%)
Aeroquip-Vickers, Inc. 10,800 529
Allstate Corp. 3,427 275
American General Corp. 6,200 322
Amoco Corp. 2,200 212
* AMR Corp. 2,000 221
* Arrow Electronics, Inc. 700 41
Atlantic Richfield Co. 3,000 256
Bank of New York Co. 5,600 269
Beckman Instruments, Inc. 5,800 247
Bergen Brunswig Corp., Class A 10,625 429
British Petroleum plc ADR 2,500 227
Burlington Northern Santa Fe,
Inc. 1,400 135
Cabot Oil & Gas Corp., Class A 4,900 132
Capital One Financial
Corp. 6,232 285
Case Corp. 5,900 393
Caterpillar, Inc. 4,200 227
Chase Manhattan Corp. 3,401 401
Chubb Corp. 2,400 171
Citicorp 1,300 174
Columbia/HCA Healthcare Corp. 3,200 92
Crestar Financial Corp. 6,990 328
CSX Corp. 2,100 123
Cummins Engine Co., Inc. 8,700 679
Deere & Co. 3,300 177
Dillard's, Inc., Class A 4,500 197
Dow Chemical Co. 2,100 190
E.I. DuPont de Nemours & Co. 3,800 234
Eaton Corp. 4,400 406
Entergy Corp. 6,900 180
Federal National Mortgage
Association 2,500 118
First Union Corp. 2,800 140
* FMC Corp. 3,300 293
Ford Motor Co. 13,700 620
* Foundation Health Corp. 8,060 258
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
95
<PAGE> 98
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED
PORTFOLIO
VALUE
(CONT'D) SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
General Motors Corp. 5,696 $ 381
Goodyear Tire & Rubber
Co. 6,900 474
GPU, Inc. 8,500 305
Great Lakes Chemical
Corp. 3,000 148
Harnischfeger Industries,
Inc. 5,500 235
Hartford Financial
Services Group (The),
Inc. 2,700 232
IBP, Inc. 8,300 196
International Business Machines
Corp. 6,800 720
Kennametal, Inc. 2,925 142
Mallinckrodt, Inc. 6,200 223
MAPCO, Inc. 5,400 178
* Maxicare Health Plans, Inc. 7,600 142
Mellon Bank Corp. 4,400 241
Old Republic International Corp. 6,050 236
Olsten Corp. 7,600 141
Parker Hannifin Corp. 5,400 243
Phillip Morris Co., Inc. 13,800 574
Phillips Petroleum Co. 4,500 232
Raytheon Corp. 3,400 201
ReliaStar Financial Corp. 5,400 215
Repsol SA ADR 4,500 195
Republic New York Corp. 2,200 250
RJR Nabisco Holdings Corp. 8,700 299
Rohm & Haas Co. 3,800 365
Russell Corp. 4,700 138
* Seagate Technology, Inc. 5,700 206
Signet Banking Corp. 6,271 340
Springs Industries, Inc., Class
A 3,800 200
Standard Register Co. 6,100 203
Talbots, Inc. 5,200 149
Tecumseh Products Co., Class A 8,400 468
Tektronix, Inc. 4,900 331
TIG Holdings, Inc. 3,900 136
* Toys 'R' Us, Inc. 6,200 220
Transatlantic Holdings, Inc. 3,000 215
TRW, Inc. 3,800 209
Tupperware Corp. 4,200 118
* UAL Corp. 2,300 195
Ultramar Diamond Shamrock Corp.
6,500 210
Universal Foods Corp. 400 15
V.F. Corp. 3,700 343
Western Digital Corp. 4,800 192
* YPF SA ADR 6,900 254
- -------------------------------------------------------
GROUP TOTAL 19,691
- -------------------------------------------------------
TOTAL COMMON STOCKS (Cost $166,656) 217,381
- -------------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -------------------------------------------------------
<S> <C> <C>
UNIT TRUST (4.0%)
- -------------------------------------------------------
S&P 500 Depositary Receipt (Cost
$15,084) 157,700 $ 14,903
- -------------------------------------------------------
RIGHTS (0.0%)
- -------------------------------------------------------
<CAPTION>
NO. OF
RIGHTS
------
<S> <C> <C>
@ United Mexican States Recovery
Rights, expiring 6/30/03 (Cost
$0) 500 --
- -------------------------------------------------------
STRUCTURED INVESTMENTS (0.1%)-SEE NOTE A7
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT
& POOR'S) (000)
---------- -------
<S> <C> <C> <C>
Morgan Guaranty Trust Co,
11/20/05, monthly
payments equal to 1%
per annum of the
outstanding notional
balance, indexed to
GNMA ARM pools (Cost
$516) N/R $ 12,982 375
- -------------------------------------------------------
INTEREST RATE CAP (0.0%)-SEE NOTE A6
- -------------------------------------------------------
J.P. Morgan and Co., terminating
10/15/99, to receive on
10/15/99 the excess, as
measured on 10/15/98 of 12
month LIBOR over 6.34%
multiplied by the notional
amount (Premium Paid $150) N/R 35,500 107
- -------------------------------------------------------
CASH EQUIVALENTS (19.2%)
- -------------------------------------------------------
Short-term Investments Held as
Collateral for Loaned
Securities (16.4%) 61,539 61,539
- -------------------------------------------------------
REPURCHASE AGREEMENT (2.8%)
Chase Securities, Inc. 5.90%
dated 9/30/97, due 10/1/97, to
be repurchased at $10,649,
collateralized by various U.S.
Government Obligations, due
10/1/97-1/29/99 valued at
$10,747 (Cost $10,647) 10,647 10,647
- -------------------------------------------------------
TOTAL CASH EQUIVALENTS (Cost $72,186) 72,186
- -------------------------------------------------------
TOTAL INVESTMENTS (116.7%) (Cost $383,663) 437,376
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
96
<PAGE> 99
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-16.7%)
Dividends Receivable $ 517
Interest Receivable 1,744
Receivable for Investments Sold 3,246
Receivable for Fund Shares Sold 90
Receivable for Daily Variation on Futures
Contracts 13
Unrealized Gain on Swap Agreements 2
Other Assets 10
Payable for Investments Purchased (6,307)
Payable for Fund Shares Redeemed (7)
Payable for Investment Advisory Fees (416)
Payable for Administrative Fees (24)
Payable for Shareholder Servicing Fees-
Investment Class (1)
Payable for Distribution Fee-Adviser Class (5)
Payable for Deferred Trustees' Compensation
Plan-Note F (9)
Unrealized Loss on Forward Foreign Currency
Contracts (20)
Collateral on Securities Loaned, at Value (61,539)
Other Liabilities (77)
---------
(62,783)
- -------------------------------------------------------
NET ASSETS (100%) $ 374,593
- -------------------------------------------------------
INSTITUTIONAL CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 22,437,991 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $ 343,284
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.30
- -------------------------------------------------------
INVESTMENT CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 257,760 outstanding shares of
beneficial interest (unlimited
authorization, no par value) $ 3,943
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.30
- -------------------------------------------------------
ADVISER CLASS
- -------------------------------------------------------
NET ASSETS
Applicable to 1,789,135 outstanding shares
of beneficial interest (unlimited
authorization, no par value) $ 27,366
- -------------------------------------------------------
NET ASSET VALUE PER SHARE $ 15.30
- -------------------------------------------------------
<CAPTION>
VALUE
(000)!
- -------------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital $ 278,032
Undistributed Net Investment Income (Loss) 3,747
Undistributed Realized Net Gain (Loss) 39,266
Unrealized Appreciation (Depreciation) on:
Investment Securities 53,713
Foreign Currency Transactions (19)
Futures and Swaps (146)
- -------------------------------------------------------
NET ASSETS $374,593
- -------------------------------------------------------
sec. Restricted Security-Total market value of
restricted securities owned at September 30,
1997 was $354 or 0.1% of net assets.
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
* Non-income producing security.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
# Step Bond-Coupon increases in increments to
maturity. Rate disclosed is as of September 30,
1997. Maturity date disclosed is the ultimate
maturity.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
@ Value is less than $500.
(1) Amount represents shares held by the Portfolio.
ADR American Depositary Receipt
CMO Collateralized Mortgage Obligation
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1997
IO Interest Only
N/R Not rated by Moody's Investor Service, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
YMA Yield Maintenance Agreement
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
97
<PAGE> 100
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS
PORTFOLIO
STATEMENT OF NET ASSETS
EQUITY (49.6%)
<TABLE>
<CAPTION>
- -----------------------------------------------------
VALUE
SEPTEMBER 30, 1997 SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
U.S. COMMON STOCKS (49.6%)
- -----------------------------------------------------
BANKS (1.9%)
BankBoston Corp. 13,800 $ 1,220
Chase Manhattan Corp. 15 2
Citicorp 6,500 871
First Union Corp. 18,352 919
Wells Fargo & Co. 1,400 385
- -----------------------------------------------------
GROUP TOTAL 3,397
- -----------------------------------------------------
BASIC RESOURCES (2.6%)
Boise Cascade Corp. 7,000 294
Bowater, Inc. 10,100 515
Champion International Corp. 23,500 1,432
E.I. DuPont de Nemours & Co. 21,650 1,333
W.R. Grace & Co. 9,300 685
Weyerhaeuser Co. 6,400 380
- -----------------------------------------------------
GROUP TOTAL 4,639
- -----------------------------------------------------
BEVERAGE & PERSONAL PRODUCTS (0.3%)
Coca Cola Enterprises, Inc. 18,300 493
- -----------------------------------------------------
CONSUMER DURABLES (3.4%)
Ford Motor Corp. 52,600 2,380
General Motors Corp. 25,388 1,700
Goodyear Tire & Rubber Co. 12,300 846
LucasVarity plc ADR 28,900 1,096
- -----------------------------------------------------
GROUP TOTAL 6,022
- -----------------------------------------------------
CONSUMER SERVICES (3.1%)
* Clear Channel Communications
Inc. 16,300 1,057
* GTECH Holdings Corp. 11,000 376
* HFS, Inc. 21,200 1,578
News Corp., Ltd. ADR 25,700 461
Service Corp. International 26,100 840
TCI Satellite Entertainment,
Inc., Class A 100 1
Tele-Communications, Inc., Class
A 27,800 570
* Tele-Communications Liberty
Media Group, Class A 19,462 583
- -----------------------------------------------------
GROUP TOTAL 5,466
- -----------------------------------------------------
CREDIT & FINANCE/ INVESTMENT COMPANIES (1.7%)
American Express Co. 5,300 434
Bear Stearns Co., Inc. 12,755 561
CMAC Investment Corp. 6,400 343
Lehman Brothers Holdings, Inc. 6,100 327
SLM Holdings Corp. 9,300 1,437
- -----------------------------------------------------
GROUP TOTAL 3,102
- -----------------------------------------------------
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
ENERGY (3.3%)
Atlantic Richfield Co. 7,800 $ 666
British Petroleum plc ADR 18,000 1,634
Coastal Corp. 10,900 668
Columbia Gas System, Inc. 8,100 567
Phillips Petroleum Co. 25,700 1,327
Repsol SA ADR 11,200 486
Texaco, Inc. 7,600 467
- -----------------------------------------------------
GROUP TOTAL 5,815
- -----------------------------------------------------
FOOD, TOBACCO & OTHER (2.5%)
Philip Morris Cos., Inc. 77,300 3,213
RJR Nabisco Holdings Corp. 36,240 1,245
- -----------------------------------------------------
GROUP TOTAL 4,458
- -----------------------------------------------------
HEALTH CARE (3.3%)
Aetna, Inc. 20,500 1,669
Baxter International, Inc. 10,600 554
Bristol-Myers Squibb Co. 11,600 960
Columbia/HCA Healthcare Corp. 14,943 430
* Health Management Associates,
Class A 19,100 604
* Lincare Holdings, Inc. 10,800 545
Merck & Co., Inc. 6,400 639
SmithKline Beecham plc ADR 10,000 489
- -----------------------------------------------------
GROUP TOTAL 5,890
- -----------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (9.1%)
Aeroquip-Vickers, Inc. 11,500 563
Allied Signal, Inc. 12,200 519
* AMR Corp. 5,300 587
* Berkshire Hathaway, Inc. 10 448
Boeing Co. 9,430 513
Case Corp. 21,600 1,439
Cummins Engine Co., Inc. 30,200 2,357
Eaton Corp. 6,400 591
* FMC Corp. 11,400 1,012
Harnischfeger Industries, Inc. 8,300 355
Lockheed Martin Corp. 15,200 1,621
Textron, Inc. 12,600 819
Union Pacific Corp. 11,700 733
United Technologies Corp. 26,400 2,138
Waste Management, Inc. 52,900 1,848
York International Corp. 15,500 694
- -----------------------------------------------------
GROUP TOTAL 16,237
- -----------------------------------------------------
INSURANCE (3.1%)
Allstate Corp. 9,900 796
CIGNA Corp. 4,600 857
Exel Ltd. 15,700 935
Hartford Financial Services
Group (The), Inc. 15,700 1,351
Loews Corp. 14,300 1,615
- -----------------------------------------------------
GROUP TOTAL 5,554
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
98
<PAGE> 101
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
MID CAP GROWTH (2.3%)
BMC Software, Inc. 6,400 $ 414
* Borders Group, Inc. 13,800 379
Cintas Corp. 4,900 361
Danaher Corp. 7,100 412
Estee Lauder Cos., Class A 7,300 338
* Globalstar Telecommunications
Ltd. 12,144 638
* Health Management Associates,
Class A 12,425 393
* Lincare Holdings, Inc. 10,900 550
* Loral Space & Communications 18,900 390
* 3Com Corp. 5,425 278
- -----------------------------------------------------
GROUP TOTAL 4,153
- -----------------------------------------------------
RETAIL (1.9%)
* CompUSA, Inc. 3,900 137
CVS Corp. 12,200 694
* Federated Department Stores,
Inc. 18,800 811
Home Depot, Inc. 12,000 625
McDonald's Corp. 4,500 214
* Office Depot, Inc. 25,400 513
Sears, Roebuck & Co. 7,700 438
- -----------------------------------------------------
GROUP TOTAL 3,432
- -----------------------------------------------------
TECHNOLOGY (4.6%)
* BMC Software, Inc. 16,000 1,036
* Cisco Systems, Inc. 15,000 1,096
Intel Corp. 7,800 720
* Microsoft Corp. 14,000 1,852
* Oracle Corp. 23,362 851
Sabre Group Holdings, Inc. 7,600 272
* Seagate Technology, Inc. 23,100 835
* 3Com Corp. 21,000 1,076
Xerox Corp. 5,700 480
- -----------------------------------------------------
GROUP TOTAL 8,218
- -----------------------------------------------------
UTILITIES (2.1%)
* Airtouch Communications, Inc. 9,700 344
GTE Corp. 16,800 762
SBC Communications, Inc. 13,100 804
Sprint Corp. 15,700 785
* WorldCom, Inc. 27,620 977
- -----------------------------------------------------
GROUP TOTAL 3,672
- -----------------------------------------------------
VALUE (4.4%)
* Arrow Electronics, Inc. 17,000 986
Case Corp. 14,700 979
Chase Manhattan Corp. 9,400 1,109
* Federated Department Stores,
Inc. 26,800 1,156
Great Lakes Chemical Corp. 20,100 991
IMC Global, Inc. 27,000 952
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
Mallinckrodt, Inc. 24,100 $ 868
* Maxicare Health Plans, Inc. 40,200 749
- -----------------------------------------------------
GROUP TOTAL 7,790
- -----------------------------------------------------
TOTAL U.S. COMMON STOCKS (Cost $73,909) 88,338
- -----------------------------------------------------
U.S. FIXED INCOME (16.9%)
- -----------------------------------------------------
FIXED INCOME SECURITIES (16.9%)
(Unless otherwise noted)
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT
& POOR'S) (000)
- -----------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE MORTGAGES (1.8%)
## Government National
Mortgage Association
Various Pools:
6.00%, 9/20/27 Agy $ 2,525 2,544
November TBA
6.00% 11/20/27 Agy 650 654
- -------------------------------------------------------
GROUP TOTAL 3,198
- -------------------------------------------------------
AGENCY FIXED RATE MORTGAGES (2.4%)
Federal Home Loan Mortgage
Corporation Conventional
Pools:
10.50%, 4/1/19 Agy 296 330
11.00%, 9/1/16 Agy 108 121
11.50%, 7/1/15 Agy 98 112
Gold Pools:
7.00%, 1/1/24-12/1/24 Agy 843 845
9.50%, 12/1/16 Agy 242 263
Federal National Mortgage
Association Conventional
Pool:
11.00%, 11/1/20 Agy 139 157
Government National
Mortgage Association
Various Pools:
7.00%, 12/15/22-12/15/23 Agy 1,020 1,024
10.00%, 10/15/18 Agy 59 65
10.50%, 2/15/19-8/15/26 Agy 562 633
11.00%, 7/15/10-7/15/19 Agy 523 598
11.50%, 1/15/13-2/15/13 Agy 79 89
- -------------------------------------------------------
GROUP TOTAL 4,237
- -------------------------------------------------------
ASSET BACKED CORPORATES (0.9%)
Advanta Mortgage Loan
Trust, Series 97-3 A2
6.61%, 4/25/12 AAA 150 150
ALPS,
Series 94-1 C2 CMO
9.35%, 9/15/04 BBB 99 102
Arcadia Auto, Series 97-C
A4
6.375%, 1/15/03 AAA 150 151
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
99
<PAGE> 102
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MULTI-ASSET-CLASS
PORTFOLIO
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
CIT Group Home Equity Loan
Trust,
Series:
97-1 A3
6.25%, 9/15/01 AAA $ 100 $ 100
First Plus Home Loan Trust,
Series:
97-3 A2
6.48%, 9/10/08 AAA 100 100
97-3 A3
6.57%, 10/10/10 AAA 100 101
(+) FMAC Loan Receivables
Trust,
Series:
97-A A
7.35%, 4/15/19 AAA 247 255
Honda Auto Receivables
Grantor Trust,
Series:
97-A A
5.85%, 2/15/03 AAA 256 256
(+) Long Beach Auto,
Series:
97-2 A
6.69%, 9/25/04 AAA 125 125
(+) NAL Auto Trust,
Series:
96-4 A
6.90%, 12/15/00 N/R 103 102
WFS Financial Owner Trust,
Series:
97-C A3
6.01%, 3/20/02 AAA 160 160
- -------------------------------------------------------
GROUP TOTAL 1,602
- -------------------------------------------------------
ASSET BACKED MORTGAGES (0.3%)
Advanta Mortgage Loan
Trust,
Series:
96-2 A5
8.08%, 6/25/27 AAA 150 156
Delta Funding Home Equity
Loan Trust,
Series:
96-1 A7
7.95%, 6/25/27 AAA 150 158
IMC Home Equity Loan Trust,
Series:
96-3 A7
8.05%, 8/25/26 AAA 175 182
- -------------------------------------------------------
GROUP TOTAL 496
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS- AGENCY COLLATERAL
SERIES (0.3%)
Federal Home Loan Mortgage
Corporation,
Series:
1632-SA Inv Fl REMIC
5.336%, 11/15/23 Agy 75 63
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
1709 H PO REMIC
1/15/24 Agy $ 9 $ 5
1750 C PD PO REMIC
3/15/24 Agy 13 9
1813 K PO REMIC
2/15/24 Agy 10 7
1844 PC PO REMIC
3/15/24 Agy 15 9
1887 I PO REMIC
10/15/22 Agy 10 7
93-149 O PO REMIC
8/25/23 Agy 22 14
Federal National Mortgage
Association,
Series:
282 1 PO
5/15/24 Agy 289 198
92-89 SQ Inv Fl IO PAC
(11)
3321.956%, 6/25/22 Agy (2) -- 34
96-11 V PO REMIC
9/25/23 Agy 120 81
96-14 PC PO REMIC
12/25/23 Agy 15 9
96-46 PB PO REMIC
9/25/23 Agy 15 10
96-54 N PO REMIC
7/25/23 Agy 10 7
96-54 O PO REMIC
11/25/23 Agy 15 9
- -------------------------------------------------------
GROUP TOTAL 462
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-NON-AGENCY
COLLATERAL SERIES (1.2%)
American Housing Trust,
Series:
V 1G
9.125%, 4/25/21 AAA 167 178
Bear Stearns Mortgage
Securities Inc.,
Series:
96-9 AI11
8.00%, 6/15/26 AAA 150 156
Countrywide Mortgage Backed
Securities, Inc., Series
93-C A11
6.50%, 1/25/24 AAA 143 137
DLJ Mortgage Acceptance
Corp.,
Series:
(+) 97-CF1 A1B
7.60%, 5/15/30 AAA 125 133
(+) 97-CF1 S IO
1.097%, 5/15/30 AAA 797 53
97-CF2 A1B
6.82%, 10/15/30 AAA 175 176
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
100
<PAGE> 103
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
GE Capital Mortgage
Services, Inc.,
Series:
94-24 A4
7.00%, 7/25/24 AAA $ 220 $ 211
J.P. Morgan Commercial
Mortgage Finance Corp.,
Series:
97-C5 A2
7.069%, 9/15/29 AAA 150 153
Merrill Lynch Mortgage
Investors, Inc.,
Series:
## 95-C1 IO
2.188%, 5/25/15 N/R 1,237 85
Mid-State Trust II,
Series:
88-2 A4
9.625%, 4/1/03 AAA 188 204
Residential Accredit Loans,
Inc.
Series:
97-QS12 A8
7.25%, 12/25/27 AAA 175 175
Residential Asset
Securitization Trust,
Series:
96-A11 A9
7.75%, 2/25/27 AAA 175 179
Residential Funding
Mortgage Securities Co.,
Inc., Series: 93-MZ3 A2
6.97%, 8/28/23 N/R 100 98
94-S1 A19
6.75%, 1/25/24 AAA 191 186
Rural Housing Trust,
Series:
87-1 M
3.33%, 10/1/28 A- 85 81
- -------------------------------------------------------
GROUP TOTAL 2,205
- -------------------------------------------------------
COMMERCIAL MORTGAGES (1.6%)
American Southwest
Financial Securities
Corp.,
Series:
93-2 A1
7.30%, 1/18/09 N/R 132 134
## 93-2 S1 IO
1.056%, 1/18/09 N/R 1,093 55
+ 95-C1 A1B
7.40%, 11/17/04 Aaa 150 155
Asset Securitization Corp.,
Series:
95-D1 A1
7.59%, 8/11/27 AAA 117 123
95-MD4 A1
7.10%, 8/13/29 AAA 219 225
## 95-MD4 ACS2 IO
2.381%, 8/13/29 AAA 720 128
(+)+ 96-D3 A1C
7.40%, 10/13/26 Aaa 150 158
96-MD6 A1C
7.04%, 11/13/26 AAA 125 129
Beverly Finance Corp.
8.36%, 7/15/04 AA- 100 108
(+) Carousel Center
Finance, Inc.,
Series:
1 A1
6.828%, 10/15/07 AA 100 101
CBM Funding Corp.,
Series:
96-1 A3PI
7.08%, 2/1/13 AA 100 103
Chase Commercial Mortgage
Securities Corp., Series
96-2 B
6.90%, 10/19/06 AA 175 176
CS First Boston Mortgage
Securities Corp.,
Series:
97-C1 A1C
7.24%, 6/20/29 AAA 150 156
(+) DLJ Mortgage Acceptance
Corp.,
Series:
96-CF1 A1B
7.58%, 3/13/28 AAA 150 158
96-CF2 A1B
7.29%, 7/15/06 AAA 135 140
## 96-CF2 S IO
1.643%, 11/12/21 N/R 988 88
+ GS Mortgage Securities
Corp. II
Series:
97-GL A2D
6.94%, 7/13/30 Aaa 100 102
+ LB Commercial Conduit
Mortgage Trust,
Series:
96-C2 A
7.416%, 10/25/26 Aaa 173 179
Merrill Lynch Mortgage
Investors, Inc.,
Series:
96-C2 A2
6.82%, 11/21/28 AAA 65 66
96-C2 IO
1.529%, 10/25/26 N/R 700 63
+ Midland Realty Acceptance
Corp.,
Series:
96-C2 A2
7.233%, 1/25/27 Aaa 100 103
Mortgage Capital Funding,
Inc.,
Series:
95-MC1 A1B
7.60%, 5/25/27 AAA 125 129
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
101
<PAGE> 104
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
+ Salomon Brothers Mortgage
Securities,
Series:
97-TZH A2
7.174%, 3/24/22 Aa2 $ 100 $ 103
- -------------------------------------------------------
GROUP TOTAL 2,882
- -------------------------------------------------------
ENERGY (0.2%)
(+) Excel Paralubes Funding
7.43%, 11/1/15 A- 200 203
Mobile Energy Services
8.665%, 1/1/17 BBB- 95 101
- -------------------------------------------------------
GROUP TOTAL 304
- -------------------------------------------------------
FINANCE (1.7%)
(+) Anthem Insurance Cos.,
Inc.,
Series A
9.00%, 4/1/27 BBB+ 100 108
(+) BankAmerica
Institutional,
Series A
8.07%, 12/31/26 A- 100 103
(+) BT Institutional
Capital Trust,
Series A
8.09%, 12/1/26 BBB+ 125 126
(+) Corestates Capital
Corp.
8.00%, 12/15/26 A- 100 102
(+) Equitable Life
Assurance Society of the
U.S.,
Series 1A
6.95%, 12/1/05 A 100 101
(+) First Chicago NBD
Corp.,
Series A
7.95%, 12/1/26 A- 125 126
First Union Institutional
Capital,
Series I
8.04%, 12/1/26 BBB+ 225 231
(+) Florida Windstorm
6.70%, 8/25/04 A- 175 174
(+)+ Home Ownership Funding
Corp.
13.331% (Preferred
Stock) Aaa (1)600 582
(+) John Hancock Surplus
Note
7.375%, 2/15/24 AA- 250 250
(+) Nationwide Mutual Life
Insurance Co.
7.50%, 2/15/24 A+ 250 246
PNC Institutional Capital,
Series A
7.95%, 12/15/26 BBB+ 150 151
(+) Prime Property Funding
7.00%, 8/15/04 A 120 121
(+) State Street
Institutional Capital,
Series A
7.94%, 12/30/26 A 125 127
Washington Mutual Capital
8.375%, 6/1/27 BBB- 75 79
(+) Wells Fargo Capital,
Series A
8.125%, 12/1/26 BBB 200 206
(+) World Financial
Properties,
Series:
96 WFP-B
6.91%, 9/1/13 AA- 248 251
- -------------------------------------------------------
GROUP TOTAL 3,084
- -------------------------------------------------------
INDUSTRIALS (0.7%)
DR Securitized Lease Trust,
Series 93-K1 A2
7.43%, 8/15/18 BB- 180 156
DR Securitized Lease Trust,
Series 94-K1 A1
7.60%, 8/15/07 BB- 84 82
DR Structured Finance,
Series 94-K2
9.35%, 8/15/19 BB- 30 30
(+) HMH Properties, Inc.
8.875%, 7/15/07 BB- 40 41
News America Holdings
7.75%, 1/20/24 BBB 30 30
8.875%, 4/26/23 BBB 80 89
(+) Oxymar
7.50%, 2/15/16 BBB 100 100
Paramount Communications,
Inc.
8.25%, 8/1/22 BB+ 255 252
Rhone-Poulenc Rorer, Inc.,
Series 92-A 3
8.62%, 1/5/21 BBB+ 100 109
Scotia Pacific Holding Co.
7.95%, 7/20/15 BBB 104 109
Southland Corp.
5.00%, 12/15/03 BB+ 100 86
Time Warner, Inc., Series M
10.25% (Preferred Stock) BB+ (1)172 197
- -------------------------------------------------------
GROUP TOTAL 1,281
- -------------------------------------------------------
STRIPPED MORTGAGE BACKED SECURITIES- AGENCY COLLATERAL
SERIES (0.3%)
Federal Home Loan Mortgage
Corporation,
Series 1911 C PO
11/15/23 Agy 100 51
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
102
<PAGE> 105
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
Federal National Mortgage
Association,
Series:
249 1 PO
10/25/23 Agy $ 477 $ 315
254 1 PO
1/1/24 Agy 83 60
260 1 PO
4/1/24 Agy 111 79
96-34 C PO
3/25/23 Agy 225 120
- -------------------------------------------------------
GROUP TOTAL 625
- -------------------------------------------------------
TELEPHONES (0.2%)
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ 80 88
Tele-Communications, Inc.
8.75%, 2/15/23 BBB- 200 207
# Teleport Communications
Group, Inc.
0.00%, 7/1/07 B 140 109
- -------------------------------------------------------
GROUP TOTAL 404
- -------------------------------------------------------
TRANSPORTATION (0.1%)
(+) Jet Equipment Trust,
Series 94-A A11
10.00%, 6/15/12 A+ 125 155
- -------------------------------------------------------
U.S. TREASURY SECURITIES (4.1%)
U.S. Treasury Bond
(dd) 8.75%, 8/15/20 Tsy 850 1,078
U.S. Treasury Notes
6.25%, 5/31/99 Tsy 1,600 1,611
(dd) 7.125%, 9/30/99 Tsy 3,250 3,329
3.375%, 1/15/07
(Inflation Indexed) Tsy 1,038 1,018
U.S. Treasury Strip, PO
11/15/18 Tsy 1,000 253
- -------------------------------------------------------
GROUP TOTAL 7,289
- -------------------------------------------------------
UTILITIES (0.1%)
(+) Edison Mission Energy
Funding Corp., Series B
7.33%, 9/15/08 BBB 100 103
- -------------------------------------------------------
YANKEE (1.0%)
(+) Alcoa Aluminio SA,
Series 96-1
7.50%, 12/16/08 BBB 165 168
AST Research, Inc.
7.45%, 10/1/02 A- 125 124
(+) Israel Electric Corp.,
Ltd.
7.25%, 12/15/06 A- 125 127
Korea Development Bank
7.375%, 9/17/04 AA- 90 91
National Power Corp.
7.875%, 12/15/06 BB+ 105 102
8.40%, 12/15/16 BB+ 90 86
(+) Paiton Energy Funding
9.34%, 2/15/14 BBB- 100 110
Petroliam Nasional Bhd.
7.125%, 10/18/06 A+ 100 99
(+) Petrozuata Finance,
Inc.
8.22%, 4/1/17 BBB 100 106
(+) Ras Laffan Liquefied
Natural Gas Co.
8.294%, 3/15/14 BBB+ 215 233
Republic of Argentina
5.00%, 3/31/23 BB 220 166
Republic of Colombia
8.70%, 2/15/16 BBB- 95 97
United Mexican States,
Series B
6.25%, 12/31/19 BB 250 207
@ Republic of Venezuela,
Oil
Linked Payment Obligation
Zero coupon, 4/15/20 B+ 1 --
- -------------------------------------------------------
GROUP TOTAL 1,716
- -------------------------------------------------------
TOTAL U.S. FIXED INCOME (Cost $29,326) 30,043
- -------------------------------------------------------
INTERNATIONAL FIXED INCOME (3.0%)
- -------------------------------------------------------
FIXED INCOME SECURITIES (3.0%)
- -------------------------------------------------------
AUSTRALIAN DOLLAR (0.2%)
Commonwealth of
Australia
<CAPTION>
<S> <C> <C> <C> <C>
9.00%, 9/15/04 AAA AUD 300 254
Federal National
Mortgage Association
6.50%, 7/10/02 Agy 85 64
- -------------------------------------------------------
GROUP TOTAL 318
- -------------------------------------------------------
BRITISH POUND (0.3%)
United Kingdom
Treasury Bills
8.00%, 6/10/03 AAA GBP 60 104
8.00%, 6/7/21 AAA 65 123
8.50%, 7/16/07 AAA 195 359
- -------------------------------------------------------
GROUP TOTAL 586
- -------------------------------------------------------
CANADIAN DOLLAR (0.1%)
Government of Canada
7.50%, 3/1/01 AAA CAD 320 249
9.75%, 6/1/21 AA+ 50 52
- -------------------------------------------------------
GROUP TOTAL 301
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
103
<PAGE> 106
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
(CONT'D) & POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C> <C>
DANISH KRONE (0.1%)
Kingdom of Denmark
8.00%, 5/15/03 AA+ DKK 275 $ 46
8.00%, 3/15/06 AA+ 750 128
- -------------------------------------------------------
GROUP TOTAL 174
- -------------------------------------------------------
GERMAN MARK (0.8%)
Government of Germany
6.25%, 1/4/24 AAA DEM 150 86
+ 7.00%, 1/13/00 Aaa 290 174
7.125%, 1/29/03 AAA 170 106
7.375%, 1/3/05 AAA 245 156
7.50%, 9/9/04 AAA 410 262
8.375%, 5/21/01 AAA 875 556
International Bank for
Reconstruction &
Development
7.125%, 4/12/05 AAA 175 109
- -------------------------------------------------------
GROUP TOTAL 1,449
- -------------------------------------------------------
IRISH PUNT (0.1%)
Irish Government
8.00%, 8/18/06 AAA IEP 75 124
- -------------------------------------------------------
ITALIAN LIRA (0.3%)
Republic of Italy BTPS
9.50%, 2/1/06 AAA ITL 315,000 223
10.00%, 8/1/03 AA 410,000 285
- -------------------------------------------------------
GROUP TOTAL 508
- -------------------------------------------------------
JAPANESE YEN (0.8%)
European Investment
Bank
3.00%, 9/20/06 AAA JPY 4,000 36
Export-Import Bank of
Japan
2.875%, 7/28/05 AAA 50,000 444
International Bank for
Reconstruction &
Development
4.75%, 12/20/04 AAA 23,200 231
6.75%, 6/18/01 AAA 72,000 719
- -------------------------------------------------------
GROUP TOTAL 1,430
- -------------------------------------------------------
SWEDISH KRONA (0.3%)
Swedish Government
6.00%, 2/9/05 AAA SEK 2,100 278
13.00%, 6/15/01 AA+ 1,600 263
- -------------------------------------------------------
GROUP TOTAL 541
- -------------------------------------------------------
TOTAL INTERNATIONAL FIXED INCOME (Cost $5,540) 5,431
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
INTERNATIONAL EQUITY (15.9%)
- -----------------------------------------------------
COMMON STOCK (15.9%)
- -----------------------------------------------------
ARGENTINA (0.5%)
YPF SA ADR 25,200 $ 929
- -----------------------------------------------------
AUSTRIA (0.5%)
OMV AG 5,350 798
- -----------------------------------------------------
BRAZIL (0.2%)
Multicanal Participacoes SA
ADR 27,800 295
- -----------------------------------------------------
CANADA (0.2%)
TransCanada Pipelines Ltd. 15,900 308
- -----------------------------------------------------
FRANCE (1.5%)
Cie Generale des Eaux 5,126 603
Credit Local de France 6,100 578
Elf Aquitaine 6,710 895
Scor 15,110 653
- -----------------------------------------------------
GROUP TOTAL 2,729
- -----------------------------------------------------
GERMANY (1.5%)
Deutsche Bank AG 11,750 825
Henkel KGaA 9,790 551
Springer (Axel) Verlag AG 770 658
Veba AG 10,890 635
- -----------------------------------------------------
GROUP TOTAL 2,669
- -----------------------------------------------------
HONG KONG (0.6%)
Great Eagle Holdings Ltd. 118,000 326
HSBC Holdings plc 6,800 228
Jardine Strategic Holdings Ltd. 95,000 372
Wheelock & Co., Ltd. 86,000 175
- -----------------------------------------------------
GROUP TOTAL 1,101
- -----------------------------------------------------
INDIA (0.2%)
* Jardine Fleming India Fund,
Inc. 36,200 326
- -----------------------------------------------------
INDONESIA (0.4%)
* Gulf Indonesia Resources Ltd. 6,000 134
Lippo Securities 2,794,800 415
Pabrik Kertas Tjiwi Kimia 402,500 224
- -----------------------------------------------------
GROUP TOTAL 773
- -----------------------------------------------------
IRELAND (0.2%)
Irish Life plc 58,000 302
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
104
<PAGE> 107
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)!
- -----------------------------------------------------
<S> <C> <C>
ITALY (1.3%)
ENI S.p.A. 147,300 $ 928
Pirelli S.p.A. 162,000 475
Telecom Italia S.p.A. 233,604 909
- -----------------------------------------------------
GROUP TOTAL 2,312
- -----------------------------------------------------
JAPAN (2.3%)
Bridgestone Corp. 25,000 601
Canon, Inc. 16,000 468
Fuji Photo Film Ltd. 9,000 371
Mitsubishi Heavy Industries
Ltd. 33,000 181
Mitsui Fudosan Co., Ltd. 26,000 317
Nintendo Corp., Ltd. 4,000 374
Promise Co., Ltd. 6,160 322
Sankyo Corp., Ltd. 7,000 242
Takeda Chemical Industries 14,000 420
Takefuji Corp. 7,000 265
UNY Co., Ltd. 14,000 211
Yasuda Fire & Marine Insurance
Ltd. 46,000 271
- -----------------------------------------------------
GROUP TOTAL 4,043
- -----------------------------------------------------
NETHERLANDS (1.2%)
ING Groep N.V. 13,207 607
Philips Electronics N.V. 9,900 838
Vendex International N.V. 10,633 630
- -----------------------------------------------------
GROUP TOTAL 2,075
- -----------------------------------------------------
NORWAY (0.4%)
Christiania Bank OG
Kreditkasse 226,100 780
- -----------------------------------------------------
SINGAPORE (0.2%)
* Creative Technology Ltd. 14,500 371
- -----------------------------------------------------
SPAIN (0.4%)
Telefonica de Espana ADR 8,200 772
- -----------------------------------------------------
SWEDEN (0.9%)
Nordbanken AB 16,300 556
SKF AB, Class B 12,000 350
Sparbanken Sverige AB, Class A 30,585 738
- -----------------------------------------------------
GROUP TOTAL 1,644
- -----------------------------------------------------
SWITZERLAND (0.4%)
* Swissair AG (Registered) 551 737
- -----------------------------------------------------
THAILAND (0.1%)
Hana Microelectronics Public
Co., Ltd. (Foreign) 48,100 165
- -----------------------------------------------------
UNITED KINGDOM (2.8%)
Abbey National plc 11,800 182
B.A.T. Industries plc 53,611 470
Bank of Scotland plc 71,800 $ 594
Bass plc 32,300 436
BG plc 95,200 413
BOC Group plc 7,304 131
Burmah Castrol plc 29,000 517
Cable & Wireless plc 40,785 347
Imperial Tobacco Group plc 61,800 370
LucasVarity plc 87,000 328
Royal & Sun Alliance Insurance
Group plc 32,034 302
Sainsbury J plc 55,000 412
Tomkins plc 88,844 494
- -----------------------------------------------------
GROUP TOTAL 4,996
- -----------------------------------------------------
UNITED STATES (0.1%)
The India Fund, Inc. 25,100 232
- -----------------------------------------------------
TOTAL INTERNATIONAL EQUITY (Cost $23,917) 28,357
- -----------------------------------------------------
HIGH YIELD (7.5%)
- -----------------------------------------------------
FIXED INCOME SECURITIES (7.5%)
(Unless otherwise noted)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
!!RATINGS
(STANDARD FACE
& AMOUNT VALUE
POOR'S) (000) (000)!
---------- ------- ------
<S> <C> <C> <C>
CABLE (0.6%)
Cablevision Systems
Corp.
9.875%, 5/15/06 B $ 100 $ 108
Rogers Cablesystems Ltd.
10.00%, 3/15/05 BB+ 100 110
10.125%, 9/1/12 BB+ 175 190
Rogers Communications,
Inc.
9.125%, 1/15/06 BB- 50 51
TCI Pacific
Communications
5.00% (Convertible
Preferred Stock) BB- (1)600 75
Tele-Communications,
Inc.
9.25%, 1/15/23 BBB- 155 167
Time Warner, Inc.,
Series M,
10.25% (Preferred
Stock) BB+ (1)558 441
- -------------------------------------------------------
GROUP TOTAL 1,142
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-
NON-AGENCY COLLATERAL SERIES (0.5%)
+ Citicorp Mortgage
Securities, Inc.,
Series:
90-8 A7
9.50%, 6/25/05 B3 35 19
(+) Countrywide Funding
Corp.,
Series:
95-4 B3
7.50%, 9/25/25 N/R 393 308
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
105
<PAGE> 108
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS
(STANDARD FACE
& AMOUNT VALUE
(CONT'D) POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
DLJ Mortgage Acceptance
Corp.,
Series:
97-CF2
0.357%, 10/15/30 N/R $ 4,000 $ 106
FMAC Loan Receivables
Trust,
Series:
96-B C
7.929%, 11/1/18 N/R 100 89
(+) Prudential Home
Mortgage Securities
Co., Inc.,
Series 96-5 B3
7.25%, 4/25/26 N/R 397 360
- -------------------------------------------------------
GROUP TOTAL 882
- -------------------------------------------------------
COMMERCIAL MORTGAGES (0.1%)
CBM Funding Corp.,
Series:
96-1B D
8.645%, 2/1/08 AA 125 136
- -------------------------------------------------------
ENERGY (0.2%)
Nuevo Energy Co.
9.50%, 4/15/06 B+ 145 155
Snyder Oil Corp.
8.75%, 6/15/07 B+ 150 150
- -------------------------------------------------------
GROUP TOTAL 305
- -------------------------------------------------------
FINANCE (0.6%)
(+) Anthem Insurance
Cos., Inc.,
Series A
9.00%, 4/1/27 BBB+ 275 296
(+) Commercial Financial
Services, Inc.,
Series 97-5 A1
7.72%, 6/15/05 A 150 150
ITT Promedia
9.125%, 9/15/07 N/R DEM 250 147
Navistar Financial
Corp.,
Series B
9.00%, 6/1/02 B+ $ 35 36
(+)# PTC International
Finance
0.00%, 7/1/07 B+ 230 151
(+) RBS Participacos SA
11.00%, 4/1/07 BB- 135 142
(+) Riggs Capital Trust
II
8.875%,3/15/27 BB- 70 74
Western Financial Bank
8.875%, 8/1/07 BB+ 125 125
- -------------------------------------------------------
GROUP TOTAL 1,121
- -------------------------------------------------------
HOSPITALS (0.2%)
(+) Integrated Health
Services
9.50%, 9/15/07 B 115 119
Tenet Healthcare Corp.
8.625%, 1/15/07 B+ 120 124
(+) Vencor, Inc.
8.625%, 7/15/07 B+ 90 91
- -------------------------------------------------------
GROUP TOTAL 334
- -------------------------------------------------------
INDUSTRIALS (2.6%)
(+) Ameriserv Food Co.
10.125%, 7/15/07 B- 65 67
(+) Big Flower Press
8.875%, 7/1/07 B 135 135
(+) Cliffs Drilling Co.
10.25%, 5/15/03 B 20 22
DR Securitized Lease
Trust,
Series:
93-K1 A1
6.66%, 8/15/10 BB- 346 316
(+) EES Coke Battery
Co., Inc.
9.382%, 4/15/07 BB- 100 105
(+) Fleming Cos., Inc.
10.50%, 12/1/04 B+ 65 68
10.625%, 7/31/07 B+ 75 79
(+) Fox/Liberty Networks
# 0.00%, 8/15/07 B 50 32
8.875%, 8/15/07 B 60 60
Grand Casinos, Inc.
10.125%, 12/1/03 BB 160 170
(+) Hermes Europe
Railtel
11.50%, 8/15/07 B 30 32
+ HMC Acquisition
Properties
9.00%, 12/15/07 Ba3 135 139
(+) HMH Properties, Inc.
8.875%, 7/15/07 BB- 35 36
Horseshoe Gaming
9.375%, 6/15/07 B 125 129
Host Marriott Travel
Plaza
9.50%, 5/15/05 BB- 100 105
(+)## Huntsman Corp.
9.094%, 7/1/07 B+ 175 182
(+) Hylsa SA de CV
9.25%, 9/15/07 BB 200 203
ISP Holdings, Inc.,
Series B
9.00%, 10/15/03 B+ 205 215
Kmart Corp.
7.75%, 10/1/12 B+ 60 56
Kmart Funding Corp.,
Series F
8.80%, 7/1/10 BB 175 179
(+) Long Beach Auto,
Series:
97-1 B
14.22%, 10/26/03 N/R 250 252
(+) Murrin Murrin
Holdings
9.375%, 8/31/07 BB- 205 211
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
106
<PAGE> 109
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT VALUE
& POOR'S) (000) (000)!
- -------------------------------------------------------
<S> <C> <C> <C>
# Norcal Waste Systems
13.00%, 11/15/05 BB- $ 100 $ 115
Outdoor Systems, Inc.
8.875%, 6/15/07 B 210 214
Paramount
Communications, Inc.
8.25%, 8/1/22 BB+ 225 222
Revlon Worldwide, Series
B
0.00%, 3/15/01 B- 190 138
SD Warren Co.
12.00%, 12/15/04 B+ 130 147
(+) Sinclair Broadcast
Group, Inc.
9.00%, 715/07 B 105 104
(+) Sinclair Capital
11.625% (Preferred
Stock) B (1)1,300 141
Southland Corp.
5.00%, 12/15/03 BB+ 219 189
Station Casinos
9.75%, 4/15/07 B+ 100 100
(+)# TCI Satellite
Entertainment, Inc.
0.00%, 2/15/07 B- 485 316
- -------------------------------------------------------
GROUP TOTAL 4,479
- -------------------------------------------------------
TECHNOLOGY (0.3%)
Advanced Micro Devices,
Inc.
11.00%, 8/1/03 BB- 145 162
## Blue Bell Funding
11.85%, 5/1/99 BB- 25 26
(+) Hyundai
Semiconductor America
8.625%, 5/15/07 BBB- 100 102
(+) Impress Metal
Packaging
9.875%, 5/29/07 B DEM 200 120
- -------------------------------------------------------
GROUP TOTAL 410
- -------------------------------------------------------
TELEPHONES (1.1%)
# Brooks Fiber
Properties, Inc.
0.00%, 3/1/06 N/R $ 450 361
0.00%, 11/1/06 N/R 70 54
Comcast Cellular Corp.,
Series A
9.50%, 5/1/07 BB+ 160 167
Globalstar LP
11.375%, 2/15/04 N/R 125 131
(+) Intermedia
Communications
11.25%, 7/15/07 B 300 208
(+) Iridium Capital
Corp.
13.00%, 7/15/05 B 70 73
+ IXC Communications,
Inc., Series B
12.50%, 10/1/05 B2 100 116
(+) IXC Communications,
Inc. 12.50%
(Preferred Stock) CCC+ (1)75 87
# Nextel Communications,
Inc.
0.00%, 8/15/04 CCC 635 550
Qwest Communications
International, Inc.,
Series B
10.875%, 4/1/07 B+ 65 73
# Teleport
Communications Group,
Inc.
0.00%, 7/1/07 B 185 145
Total Access
Communications Corp.
(Convertible)
2.00%, 5/31/06 BBB- 50 50
- -------------------------------------------------------
GROUP TOTAL 2,015
- -------------------------------------------------------
TRANSPORTATION (0.2%)
ALPS,
Series 96-1 D
12.75%, 6/15/06 BB- 150 161
(+) Jet Equipment Trust,
Series 94-A
11.79%, 6/15/13 BBB- 150 196
(+)# Transamerica Energy
Corp.
0.00%, 6/15/02 B+ 55 44
- -------------------------------------------------------
GROUP TOTAL 401
- -------------------------------------------------------
UTILITIES (0.2%)
Cleveland Electric
Illuminating Co.,
Series B
8.375%, 8/1/12 BB+ 30 31
Midland Cogeneration
Ltd. Venture LP,
Series C-91
10.33%, 7/23/02 BB- 22 24
Midland Funding Corp. I,
Series C-94
10.33%, 7/23/02 BB- 85 90
Midland Funding II,
Series A
11.75%, 7/23/05 B- 75 88
Quezon Power Ltd.
8.86%, 6/15/17 BB+ 250 252
- -------------------------------------------------------
GROUP TOTAL 485
- -------------------------------------------------------
YANKEE (0.9%)
Asia Pulp & Paper,
Series A
12.00%, 2/15/04 B+ 175 178
(+) Azteca Holdings S.A.
11.00%, 6/15/02 B- 50 52
## Central Bank of
Argentina Bocon PIK
Pre 4
5.00%, 9/1/02 N/R 85 103
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
107
<PAGE> 110
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
MULTI-ASSET-CLASS
PORTFOLIO
<TABLE>
<CAPTION>
!!RATINGS
(STANDARD FACE
& AMOUNT VALUE
(CONT'D) POOR'S) (000) (000)!
<S> <C> <C> <C>
(+) Geberit
International S.A.
10.125%, 4/15/07 N/R $ 130 $ 81
(+) Globo Communicacoes
10.50%, 12/20/06 BB- 80 84
(+) Government of
Jamaica
9.625%, 7/2/02 N/R 100 101
Multicanal S.A.
10.50%, 2/1/07 BB- 100 107
# Occidente y Caribe
Cellular
0.00%, 3/15/04 B 185 146
Pindo Deli Fin Mauritius
10.75%, 10/1/07 BB 180 183
## Republic of Argentina
5.50%, 3/31/23 BB 200 151
(+) Republic of Panama
7.875%, 2/13/02 BB+ 150 151
TV Azteca SA de CV,
Series B
10.50%, 2/15/07 N/R 150 159
United Mexican States,
Series B
6.25%, 12/31/19 BB 200 166
- -------------------------------------------------------
GROUP TOTAL 1,662
- -------------------------------------------------------
TOTAL HIGH YIELD (Cost $12,608) 13,372
- -------------------------------------------------------
WARRANTS (0.0%)
- -------------------------------------------------------
NO. OF
WARRANTS
---------
* Cie General des Eaux,
expiring 5/2/01 3,720 2
(+)* Globalstar
Telecommunications
Ltd., expiring 2/15/04 125 15
(+)* Iridium World
Communications,
expiring 7/15/05 70 11
*@ Nextel
Communications, Inc.,
expiring 1/1/99 75 --
*@ Occidente y Caribe
Cellular, expiring
3/15/04 740 --
- -------------------------------------------------------
TOTAL WARRANTS (Cost $14) 28
- -------------------------------------------------------
<CAPTION>
NO. OF VALUE
RIGHTS (000)!
- -------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
- -------------------------------------------------------
@ United Mexican States
Recovery Rights,
expiring 6/30/03 (Cost $0) 1,675,000 $ --
- -------------------------------------------------------
INTEREST RATE CAP (0.0%)-SEE NOTE A6
- -------------------------------------------------------
<CAPTION>
!!RATINGS FACE
(STANDARD AMOUNT
& POOR'S) (000)
--------- -------
<S> <C> <C> <C>
J.P. Morgan and Co.,
terminating 10/15/99,
to receive on 10/15/99
the excess, as
measured on 10/15/98,
of 12 month LIBOR over
6.34% multiplied by
the notional amount
(Premium Paid $32) N/R $ 7,600 23
- -------------------------------------------------------
CASH EQUIVALENT (6.9%)
- -------------------------------------------------------
REPURCHASE AGREEMENT (6.9%)
Chase Securities, Inc. 5.90%,
dated 9/30/97, due 10/1/97,
to be repurchased at $12,336,
collateralized by various
U.S. Government Obligations,
due 10/1/97-12/1/99, valued
at $12,450 (Cost $12,334) 12,334 12,334
- -------------------------------------------------------
FOREIGN CURRENCY (0.1%)
- -------------------------------------------------------
British Pound GBP 6 10
French Franc FRF 271 46
Italian Lira ITL 30,570 18
Japanese Yen JPY 1,754 14
- -------------------------------------------------------
TOTAL FOREIGN CURRENCY (Cost $87) 88
- -------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (Cost $157,767) 178,014
- -------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
108
<PAGE> 111
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)!
- ----------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.1%)
Cash $ 411
Foreign Currency Held as Collateral on
Futures Contracts (Cost $177) 177
Dividends Receivable 230
Interest Receivable 757
Receivable for Withholding Tax Reclaim 18
Receivable for Investments Sold 13,441
Receivable for Fund Shares Sold 158
Unrealized Gain on Futures Contracts 33
Unrealized Gain on Swap Agreements 1
Unrealized Gain on Forward Foreign
Currency Contracts 145
Other Assets 31
Payable for Investments Purchased (14,806)
Payable for Fund Shares Redeemed (9)
Payable to Custodian (38)
Payable for Investment Advisory Fees (237)
Payable for Administrative Fees (11)
Payable for Shareholder Servicing Fees-
Investment Class (1)
Payable for Trustees' Deferred
Compensation Plan-Note F (4)
Other Liabilities (80)
---------
216
- ----------------------------------------------------
NET ASSETS (100%) $ 178,230
- ----------------------------------------------------
INSTITUTIONAL CLASS
- ----------------------------------------------------
NET ASSETS
Applicable to 12,694,118 outstanding
shares of beneficial interest
(unlimited authorization, no par value) $ 173,155
- ----------------------------------------------------
NET ASSET VALUE PER SHARE $ 13.64
- ----------------------------------------------------
INVESTMENT CLASS
- ----------------------------------------------------
NET ASSETS
Applicable to 372,302 outstanding
shares of beneficial interest
(unlimited authorization, no par value) $ 5,075
- ----------------------------------------------------
NET ASSET VALUE PER SHARE $ 13.63
- ----------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital $ 139,265
Undistributed Net Investment Income
(Loss) 1,202
Undistributed Realized Net Gain (Loss) 17,385
Unrealized Appreciation (Depreciation)
on:
Investment Securities 20,246
Foreign Currency 124
Futures and Swaps 8
- ----------------------------------------------------
NET ASSETS $ 178,230
- ----------------------------------------------------
</TABLE>
- ---------------------------------------------------------
<TABLE>
<S> <C>
! See Note A1 to Financial Statements.
!! Ratings are unaudited.
* Non-Income Producing Security.
(+) 144A security. Certain conditions for public
sale may exist.
(dd) A portion of these securities was pledged to
cover margin requirements for futures
contracts.
+ Moody's Investor Service, Inc. rating. Security
is not rated by Standard & Poor's Corporation.
# Step Bond-Coupon rate increases in increments to
maturity. Rate disclosed is as of September
30, 1997. Maturity date disclosed is the
ultimate maturity.
## Variable or floating rate security-rate
disclosed is as of September 30, 1997.
(1) Amount represents shares held by the Portfolio.
(2) Face amount is less than $500.
@ Value is less than $500.
ADR American Depositary Receipt
CMO Collateralized Mortgage Obligation
Inv Fl Inverse Floating Rate-Interest rate fluctuates
with an inverse relationship to an associated
interest rate. Indicated rate is the effective
rate at September 30, 1997.
IO Interest Only
N/R Not rated by Moody's Investor Services, Inc.,
Standard & Poor's Corporation or Fitch.
PAC Planned Amortization Class
PIK Payment-In Kind Security
PO Principal Only
REMIC Real Estate Mortgage Investment Conduit.
TBA Security is subject to delayed delivery. See
Note A8 to Financial Statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
109
<PAGE> 112
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL INTER-
CAP NATIONAL MID CAP
VALUE EQUITY VALUE EQUITY GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
Year Ended September 30, 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME +
Dividends $ 49,237 $ 22,626 $ 9,347 $ 13,271 $ 1,056
Interest 21,710 3,614 1,384 2,538 1,036
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 70,947 26,240 10,731 15,809 2,092
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B 14,010 6,928 5,161 3,236 1,961
Administrative Fee--Note C 2,285 1,136 550 544 314
Custodian Fee--Note E 310 129 71 380 83
Audit Fee 23 30 12 54 15
Shareholder Servicing Fee--Investment Class
shares--Note D 28 3 -- 1 --
Distribution Fees--Adviser Class shares--Note D 201 -- -- -- 1
Other Expenses 704 169 125 96 85
Reimbursement of Expenses--Note B (18) (26) -- (26) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 17,543 8,369 5,919 4,285 2,459
- ------------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note K (310) (129) (19) (180) (83)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 17,233 8,240 5,900 4,105 2,376
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 53,714 18,000 4,831 11,704 (284)
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities 376,797 379,936 113,081 39,018 66,879
Foreign Currency Transactions -- -- -- (1,662) --
Futures (814) -- -- 6,109 --
- ------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 375,983 379,936 113,081 43,465 66,879
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 512,130 58,032 175,057 80,379 29,836
Foreign Currency Transactions -- -- -- 892 --
Futures 3,948 -- -- (1,357) --
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) 516,078 58,032 175,057 79,914 29,836
- ------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 892,061 437,968 288,138 123,379 96,715
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $945,775 $455,968 $292,969 $135,083 $96,431
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Net of $1,654 withholding tax for International Equity Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
110
<PAGE> 113
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC
MID CAP EMERGING FIXED FIXED HIGH
VALUE MARKETS INCOME INCOME YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
Year Ended September 30, 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ++ $ 1,201 $ 181 $ 8,065 $ 275 $ 1,443
Interest 229 564 173,302 6,854 38,219
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 1,430 745 181,367 7,129 39,662
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $924 $225 9,431 $383 1,558
Less: Waived Fees (28) 896 (30) 195 -- (11) 372 --
Administrative Fee--Note C 123 24 2,030 82 356
Custodian Fee--Note E 46 80 293 21 70
Audit Fee 12 44 42 13 16
Shareholder Servicing Fee--Investment Class
shares--Note D 1 -- 11 -- 13
Distribution Fees--Adviser Class shares--Note D -- -- 67 -- 3
Other Expenses 62 12 644 28 128
Reimbursement of Expenses--Note B (24) -- (13) -- (19)
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 1,116 355 12,505 516 2,125
- ------------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note K (30) -- (292) (6) (44)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 1,086 355 12,213 510 2,081
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 344 390 169,154 6,619 37,581
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities 24,403 563 52,720 1,793 14,841
Foreign Currency Transactions -- (93) 11,172 -- 321
Futures, Written Floors and Swaps -- 2,528 (1,029) 99 (118)
- ------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 24,403 2,998 62,863 1,892 15,044
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities* 38,391 2,010 42,306 1,382 24,616
Foreign Currency Transactions -- (1) (1,972) -- (57)
Futures, Swaps and Written Floors -- 18 (1,972) (70) (554)
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) 38,391 2,027 38,362 1,312 24,005
- ------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 62,794 5,025 101,225 3,204 39,049
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $63,138 $5,415 $270,379 $9,823 $76,630
==============================================================================================================================
</TABLE>
++ Net of $30 withholding tax for the Emerging Markets Portfolio.
* Net of foreign capital gain taxes of $38 on unrealized gains for Emerging
Markets Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
111
<PAGE> 114
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
MORTGAGE- PURPOSE
CASH FIXED BACKED LIMITED FIXED
RESERVES INCOME SECURITIES DURATION INCOME
PORTFOLIO PORTFOLIO II PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------
Year Ended September 30, 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ -- $ 516 $ 88 $ 151 $ 1,471
Interest 5,108 14,032 4,202 8,780 34,172
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 5,108 14,548 4,290 8,931 35,643
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $231 776 $195 $408 1,816
Less: Waived Fees (65) 166 -- (22) 173 (4) 404 --
Administrative Fee--Note C 74 165 42 109 414
Custodian Fee--Note E 23 32 10 11 54
Audit Fee 9 16 15 13 24
Shareholder Servicing Fee--Investment
Class shares--Note D -- -- -- -- 2
Other Expenses 33 46 19 43 79
Reimbursement of Expenses--Note B -- -- -- -- (26)
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 305 1,035 259 580 2,363
- ------------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note K (9) (24) -- (9) (28)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 296 1,011 259 571 2,335
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 4,812 13,537 4,031 8,360 33,308
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities -- 2,958 1,784 357 12,744
Foreign Currency Transactions -- 1,085 -- -- 2,511
Futures and Written Floors -- 290 (595) 15 (303)
- ------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) -- 4,333 1,189 372 14,952
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities -- 3,648 71 519 6,272
Foreign Currency Transactions -- (241) -- -- (506)
Futures and Swaps -- (388) (115) (9) (505)
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) -- 3,019 (44) 510 5,261
- ------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) -- 7,352 1,145 882 20,213
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $4,812 $20,889 $5,176 $9,242 $53,521
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
112
<PAGE> 115
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTER-
GLOBAL NATIONAL
PA FIXED FIXED INTERMEDIATE
MUNICIPAL MUNICIPAL INCOME INCOME DURATION
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------
Year Ended September 30, 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ -- $ -- $ 213 $ -- $ 54
Interest + 3,341 1,468 4,583 8,480 2,816
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 3,341 1,468 4,796 8,480 2,870
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B $241 $105 289 549 $167
Less: Waived Fees (30) 211 (26) 79 -- -- (23) 144
Administrative Fee--Note C 51 22 62 117 36
Custodian Fee--Note E 6 5 31 45 18
Audit Fee 18 18 32 32 12
Other Expenses 38 18 29 32 32
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 324 142 443 775 242
- ------------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note K (3) (2) (2) (3) (11)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 321 140 441 772 231
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 3,020 1,328 4,355 7,708 2,639
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities 29 (68) 260 (2,002) 520
Foreign Currency Transactions -- -- (933) (5,388) 221
Futures and Swaps (14) 76 490 1,970 (60)
- ------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 15 8 (183) (5,420) 681
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 2,568 883 (1,498) (2,952) 697
Foreign Currency Transactions -- -- (145) 620 (17)
Futures and Swaps (271) (86) 17 (2) --
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) 2,297 797 (1,626) (2,334) 680
- ------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 2,312 805 (1,809) (7,754) 1,361
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $5,332 $2,133 $2,546 $ (46) $4,000
==============================================================================================================================
</TABLE>
+ Net of $35 and $90 withholding tax for the Global Fixed Income and
International Fixed Income Portfolios, respectively.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
113
<PAGE> 116
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MULTI-
BALANCED ASSET-CLASS
PORTFOLIO PORTFOLIO
---------------------------------
Year Ended September 30, 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME +
Dividends $ 3,815 $ 1,775
Interest 10,178 3,986
- ------------------------------------------------------------------------------------------------------------------------------
Total Income 13,993 5,761
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Services--Note B 1,527 $923
Less: Waived Fees -- (126) 797
Administrative Fee--Note C 280 143
Custodian Fee--Note E 51 87
Audit Fee 32 44
Shareholder Servicing Fee--Investment Class shares--Note D 2 6
Distribution Fees--Adviser Class shares--Note D 37 --
Other Expenses 84 75
Reimbursement of Expenses--Note B (4) (19)
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses 2,009 1,133
- ------------------------------------------------------------------------------------------------------------------------------
Expense Offset--Note K (48) (4)
- ------------------------------------------------------------------------------------------------------------------------------
Net Expenses 1,961 1,129
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 12,032 4,632
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities 44,002 17,557
Foreign Currency Transactions 574 (403)
Futures and Written Floors 602 1,727
- ------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 45,178 18,881
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 24,877 11,568
Foreign Currency Transactions (148) 185
Futures and Swaps (50) (117)
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized Appreciation (Depreciation) 24,679 11,636
- ------------------------------------------------------------------------------------------------------------------------------
Net Gain (Loss) 69,857 30,517
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $81,889 $35,149
==============================================================================================================================
</TABLE>
+ Net of $79 withholding tax for the Multi-Asset-Class Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
114
<PAGE> 117
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY VALUE
PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
(In Thousands) --------------------- --------------------- -------------------
1996 1997 1996 1997 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 32,015 $ 53,714 $ 30,500 $ 18,000 $ 4,607 $ 4,831
Realized Net Gain (Loss) 138,640 375,983 237,632 379,936 80,888 113,081
Change in Unrealized
Appreciation (Depreciation) 97,514 516,078 (24,506) 58,032 20,530 175,057
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting
from Operations 268,169 945,775 243,626 455,968 106,025 292,969
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A11
INSTITUTIONAL CLASS:
Net Investment Income (30,765) (43,078) (31,471) (21,326) (4,652) (3,283)
Realized Net Gain (130,677) (135,541) (132,351) (234,965) (52,103) (92,539)
INVESTMENT CLASS +:
Net Investment Income (12) (249) (1) (19) -- --
Realized Net Gain -- (851) -- (298) -- --
ADVISER CLASS ++:
Net Investment Income -- (894) -- -- -- --
Realized Net Gain -- (1,156) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (161,454) (181,769) (163,823) (256,608) (56,755) (95,822)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 930,274 1,576,439 186,997 122,058 128,125 125,463
In Lieu of Cash Distributions 143,059 156,287 157,127 250,540 55,347 94,545
Redeemed (606,431) (769,989) (579,292) (701,366) (77,653) (105,216)
INVESTMENT CLASS +:
Issued 8,889 21,268 117 2,983 -- --
In Lieu of Cash Distributions 12 1,086 1 316 -- --
Redeemed (49) (6,754) (11) (1,364) -- --
ADVISER CLASS ++:
Issued 15,433 172,033 -- -- -- --
In Lieu of Cash Distributions -- 1,868 -- -- -- --
Redeemed (11) (11,849) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease)
from Capital Share
Transactions 491,176 1,140,389 (235,061) (326,833) 105,819 114,792
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 597,891 1,904,395 (155,258) (127,473) 155,089 311,939
NET ASSETS:
Beginning of Period 1,271,586 1,869,477 1,597,632 1,442,374 430,368 585,457
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $1,869,477 $3,773,872 $1,442,374 $1,314,901 $585,457 $897,396
==============================================================================================================================
Undistributed net investment
income (loss) included in end
of period net assets $ 9,064 $ 18,442 $ 7,536 $ 4,070 $ 1,636 $ 2,064
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 63,277 90,227 7,686 4,762 7,158 6,240
In Lieu of Cash Distributions 10,269 9,563 6,676 10,687 3,496 5,253
Shares Redeemed (40,739) (44,093) (23,580) (27,052) (4,377) (5,376)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Institutional Class Shares
Outstanding 32,807 55,697 (9,218) (11,603) 6,277 6,117
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS +:
Shares Issued 595 1,187 5 113 -- --
In Lieu of Cash Distributions 1 66 -- 14 -- --
Shares Redeemed (3) (380) (1) (51) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Investment Class Shares
Outstanding 593 873 4 76 -- --
- ------------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS ++:
Shares Issued 994 9,462 -- -- -- --
In Lieu of Cash Distributions -- 112 -- -- -- --
Shares Redeemed (1) (676) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Adviser Class Shares
Outstanding 993 8,898 -- -- -- --
==============================================================================================================================
</TABLE>
+ The Value and the Equity Portfolios began offering Investment Class Shares on
May 6, 1996 and April 10, 1996, respectively.
++ The Value Portfolio began offering Adviser Class Shares on July 17, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
115
<PAGE> 118
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTER-
NATIONAL MID CAP MID CAP EMERGING
EQUITY GROWTH VALUE MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30,
-------------------- ------------------- ----------------- -----------------
(In Thousands) 1996 1997 1996 1997 1996 1997 1996 1997
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSETS
OPERATIONS:
Net
Investment
Income
(Loss) $ 13,039 $ 11,704 $ 173 $ (284) $ 405 $ 344 $ 622 $ 390
Realized Net
Gain (Loss) 101,007 43,465 71,168 66,879 1,658 24,403 2,070 2,998
Change in
Unrealized
Appreciation
(Depreciation) (57,241) 79,914 27,593 29,836 3,145 38,391 (496) 2,027
- ------------------------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease)
in Net
Assets
Resulting
from
Operations 56,805 135,083 98,934 96,431 5,208 63,138 2,196 5,415
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note
A11
INSTITUTIONAL
CLASS:
Net
Investment
Income (16,536) (12,515) (580) -- (214) (404) (641) (572)
Realized
Net Gain (3,421) (12,996) (53,149) (67,632) (405) (4,075) (2,186) (2,288)
INVESTMENT
CLASS +:
Net
Investment
Income -- (4) -- -- -- (1) -- --
Realized
Net Gain -- (5) -- -- -- (9) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total
Distributions (19,957) (25,520) (53,729) (67,632) (619) (4,489) (2,827) (2,860)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE
TRANSACTIONS:
(1)
INSTITUTIONAL
CLASS:
Issued 145,686 96,568 58,508 72,700 41,529 137,940 9,068 5,587
In Lieu of
Cash
Distributions 14,783 21,690 52,044 65,823 611 4,424 2,439 2,586
Redeemed (722,596) (213,704) (126,023) (123,453) (782) (30,955) (20,351) (20,904)
INVESTMENT
CLASS +:
Issued 268 325 -- -- 122 854 -- --
In Lieu of
Cash
Distributions -- 9 -- -- -- 10 -- --
Redeemed (34) (6) -- -- -- -- -- --
ADVISER CLASS
++:
Issued -- -- -- 1,813 -- -- -- --
Redeemed -- -- -- (800) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease)
from
Capital
Share
Transactions (561,893) (95,118) (15,471) 16,083 41,480 112,273 (8,844) (12,731)
- ------------------------------------------------------------------------------------------------------------------------------
Total
Increase
(Decrease) (525,045) 14,445 29,734 44,882 46,069 170,922 (9,475) (10,176)
NET ASSETS:
Beginning of
Period 1,160,986 635,941 373,547 403,281 4,507 50,576 42,459 32,984
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 635,941 $ 650,386 $ 403,281 $ 448,163 $50,576 $221,498 $ 32,984 $ 22,808
==============================================================================================================================
Undistributed
net
investment
income
(loss)
included in
end of
period net
assets $ 12,067 $ 9,914 $ -- $ -- $ 372 $ 310 $ 277 $ 91
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares
Issued and
Redeemed
INSTITUTIONAL
CLASS:
Shares
Issued 11,400 6,875 3,094 4,220 3,154 8,139 801 488
In Lieu of
Cash
Distributions 1,211 1,662 3,126 3,909 52 290 235 249
Shares
Redeemed (57,391) (15,096) (6,657) (7,311) (59) (1,808) (1,823) (1,762)
- ------------------------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease)
in
Institutional
Class
Shares
Outstanding (44,780) (6,559) (437) 818 3,147 6,621 (787) (1,025)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT
CLASS +:
Shares
Issued 21 22 -- -- 9 47 -- --
In Lieu of
Cash
Distributions -- 1 -- -- -- 1 -- --
Shares
Redeemed (3) -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease)
in
Investment
Class
Shares
Outstanding 18 23 -- -- 9 48 -- --
- ------------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS
++:
Shares
Issued -- -- -- 98 -- -- -- --
Shares
Redeemed -- -- -- (43) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease)
in
Adviser
Class
Shares
Outstanding -- -- -- 55 -- -- -- --
==============================================================================================================================
</TABLE>
+ The International Equity and the Mid Cap Value Portfolios began offering
Investment Class shares on April 10, 1996 and May 10, 1996, respectively.
++ The Mid Cap Growth Portfolio began offering Adviser Class shares on January
31, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
116
<PAGE> 119
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC
FIXED FIXED HIGH
INCOME INCOME YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
Year Ended Year Ended
September 30, September 30, September 30,
--------------------- ---------------- -------------------
(In Thousands) 1996 1997 1996 1997 1996 1997
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 107,138 $ 169,154 $ 3,944 $ 6,619 $ 28,826 $ 37,581
Realized Net Gain (Loss) 21,756 62,863 (937) 1,892 3,717 15,044
Change in Unrealized Appreciation
(Depreciation) (11,844) 38,362 (474) 1,312 4,627 24,005
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from
Operations 117,050 270,379 2,533 9,823 37,170 76,630
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A11
INSTITUTIONAL CLASS:
Net Investment Income (103,292) (149,960) (3,127) (6,034) (27,729) (34,334)
Realized Net Gain (7,817) (20,590) -- (179) -- (1,171)
In Excess of Realized Net Gain -- -- (185) -- -- --
INVESTMENT CLASS +:
Net Investment Income -- (341) -- -- (49) (628)
Realized Net Gain -- (47) -- -- -- (20)
ADVISER CLASS ++:
Net Investment Income -- (1,187) -- -- -- (66)
Realized Net Gain -- (61) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (111,109) (172,186) (3,312) (6,213) (27,778) (36,219)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 440,801 1,506,277 62,619 32,103 157,380 294,848
In Lieu of Cash Distributions 88,188 141,335 3,009 5,270 16,060 21,776
Redeemed (232,193) (314,144) (5,634) (39,391) (113,632) (121,867)
INVESTMENT CLASS +:
Issued -- 10,498 -- -- 4,915 12,531
In Lieu of Cash Distributions -- 305 -- -- 49 451
Redeemed -- (1,587) -- -- -- (8,118)
ADVISER CLASS ++:
Issued -- 82,302 -- -- -- 5,616
In Lieu of Cash Distributions -- 587 -- -- -- 66
Redeemed -- (7,715) -- -- -- (1,521)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 296,796 1,417,858 59,994 (2,018) 64,772 203,782
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 302,737 1,516,051 59,215 1,592 74,164 244,193
NET ASSETS:
Beginning of Period 1,487,409 1,790,146 36,147 95,362 220,785 294,949
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $1,790,146 $3,306,197 $95,362 $ 96,954 $ 294,949 $ 539,142
==============================================================================================================================
Undistributed net investment income
(loss) included in end of period
net assets $ 42,529 $ 57,872 $ 1,348 $ 1,805 $ 8,657 $ 11,795
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 37,653 126,596 5,724 2,909 17,602 30,974
In Lieu of Cash Distributions 7,612 12,016 279 484 1,830 2,349
Shares Redeemed (19,803) (26,436) (520) (3,553) (12,631) (12,813)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Institutional Class Shares
Outstanding 25,462 112,176 5,483 (160) 6,801 20,510
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS +:
Shares Issued -- 886 -- -- 546 1,307
In Lieu of Cash Distributions -- 26 -- -- 6 49
Shares Redeemed -- (133) -- -- -- (833)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Investment Class Shares
Outstanding -- 779 -- -- 552 523
- ------------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS ++:
Issued -- 6,870 -- -- -- 577
In Lieu of Cash Distributions -- 50 -- -- -- 7
Redeemed -- (645) -- -- -- (158)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Adviser Class Shares
Outstanding -- 6,275 -- -- -- 426
==============================================================================================================================
</TABLE>
+ The Fixed Income and High Yield Portfolios began offering Investment Class
shares on October 15, 1996 and May 21, 1996, respectively.
++ The Fixed Income and High Yield Portfolios began offering Adviser Class
shares on November 7, 1996 and January 31, 1997, respectively.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
117
<PAGE> 120
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MORTGAGE-
CASH FIXED BACKED
RESERVES INCOME SECURITIES
PORTFOLIO PORTFOLIO II PORTFOLIO
---------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
------------------- ------------------ ----------------
(In Thousands) 1996 1997 1996 1997 1996 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,882 $ 4,812 $ 12,542 $ 13,537 $ 3,059 $ 4,031
Realized Net Gain (Loss) -- -- 1,754 4,333 (663) 1,189
Change in Unrealized Appreciation
(Depreciation) -- -- (2,268) 3,019 502 (44)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 2,882 4,812 12,028 20,889 2,898 5,176
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A11
INSTITUTIONAL CLASS:
Net Investment Income (2,882) (4,812) (11,608) (13,889) (3,033) (3,646)
Realized Net Gain -- -- (1,360) (1,963) -- --
In Excess of Realized Net Gain -- -- (446) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2,882) (4,812) (13,414) (15,852) (3,033) (3,646)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 143,726 334,996 49,696 74,512 5,648 1,046
In Lieu of Cash Distributions 2,738 4,389 8,664 11,590 2,036 2,618
Redeemed (112,591) (319,418) (42,179) (56,217) (6,390) (18,034)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 33,873 19,967 16,181 29,885 1,294 (14,370)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 33,873 19,967 14,795 34,922 1,159 (12,840)
NET ASSETS:
Beginning of Period 44,624 78,497 176,945 191,740 49,766 50,925
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 78,497 $ 98,464 $191,740 $226,662 $50,925 $ 38,085
==============================================================================================================================
Undistributed net investment income
(loss) included in end of period
net assets $ -- $ -- $ 4,660 $ 4,574 $ 1,056 $ 1,007
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 143,726 334,996 4,438 6,638 552 99
In Lieu of Cash Distributions 2,738 4,389 781 1,045 199 252
Shares Redeemed (112,591) (319,418) (3,763) (4,981) (608) (1,695)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Institutional Class Shares
Outstanding 33,873 19,967 1,456 2,702 143 (1,344)
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
118
<PAGE> 121
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL
LIMITED PURPOSE
DURATION FIXED INCOME MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
------------------ ------------------ ----------------
(In Thousands) 1996 1997 1996 1997 1996 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 6,630 $ 8,360 $ 27,370 $ 33,308 $ 2,081 $ 3,020
Realized Net Gain (Loss) (47) 372 6,698 14,952 (42) 15
Change in Unrealized Appreciation
(Depreciation) (428) 510 (3,052) 5,261 1,780 2,297
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 6,155 9,242 31,016 53,521 3,819 5,332
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A11
INSTITUTIONAL CLASS:
Net Investment Income (6,274) (7,415) (27,847) (33,514) (2,096) (2,960)
Realized Net Gain -- -- (9,325) (6,885) -- --
INVESTMENT CLASS +:
Net Investment Income -- -- (8) (68) -- --
Realized Net Gain -- -- -- (12) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (6,274) (7,415) (37,180) (40,479) (2,096) (2,960)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 99,082 59,060 103,802 90,134 17,213 20,270
In Lieu of Cash Distributions 4,921 6,560 34,094 35,130 1,443 2,235
Redeemed (80,843) (35,104) (74,328) (93,136) (1,883) (4,293)
INVESTMENT CLASS +:
Issued -- -- 758 414 -- --
In Lieu of Cash Distributions -- -- 8 80 -- --
Redeemed -- -- -- (47) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 23,160 30,516 64,334 32,575 16,773 18,212
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 23,041 32,343 58,170 45,617 18,496 20,584
NET ASSETS:
Beginning of Period 100,186 123,227 390,258 448,428 36,040 54,536
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $123,227 $155,570 $448,428 $494,045 $54,536 $75,120
==============================================================================================================================
Undistributed net investment income (loss)
included in end of period net assets $ 1,710 $ 2,361 $ 11,292 $ 9,955 $ 11 $ 71
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 9,585 5,709 8,626 7,318 1,542 1,774
In Lieu of Cash Distributions 480 637 2,827 2,902 130 195
Shares Redeemed (7,817) (3,383) (6,091) (7,553) (169) (375)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Institutional
Class Shares Outstanding 2,248 2,963 5,362 2,667 1,503 1,594
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS +:
Shares Issued -- -- 63 34 -- --
In Lieu of Cash Distributions -- -- 1 7 -- --
Shares Redeemed -- -- -- (4) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Investment
Class Shares Outstanding -- -- 64 37 -- --
==============================================================================================================================
</TABLE>
+ The Special Purpose Fixed Income Portfolio began offering Investment Class
shares on April 10, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
119
<PAGE> 122
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTER-
PA GLOBAL NATIONAL
MUNICIPAL FIXED INCOME FIXED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
---------------- ---------------- ------------------
(In Thousands) 1996 1997 1996 1997 1996 1997
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 944 $ 1,328 $ 2,888 $ 4,355 $ 8,012 $ 7,708
Realized Net Gain (Loss) 555 8 2,936 (183) 4,561 (5,420)
Change in Unrealized Appreciation
(Depreciation) 208 797 (2,051) (1,626) (4,920) (2,334)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,707 2,133 3,773 2,546 7,653 (46)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A11
INSTITUTIONAL CLASS:
Net Investment Income (934) (1,330) (3,105) (4,111) (10,889) (5,327)
Realized Net Gain -- -- (186) (1,137) (1,028) (3,700)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (934) (1,330) (3,291) (5,248) (11,917) (9,027)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 13,003 7,972 27,692 14,273 70,949 44,423
In Lieu of Cash Distributions 838 888 3,129 4,700 11,131 8,576
Redeemed (1,860) (10,690) (19,168) (6,060) (62,561) (34,311)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 11,981 (1,830) 11,653 12,913 19,519 18,688
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 12,754 (1,027) 12,135 10,211 15,255 9,615
NET ASSETS:
Beginning of Period 15,734 28,488 55,147 67,282 127,882 143,137
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $28,488 $ 27,461 $ 67,282 $77,493 $143,137 $152,752
==============================================================================================================================
Undistributed net investment income (loss)
included in end of period net assets $ 22 $ 20 $ 2,358 $ 1,414 $ 3,997 $ (372)
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 1,154 698 2,557 1,308 6,561 4,363
In Lieu of Cash Distributions 74 77 291 439 1,054 817
Shares Redeemed (165) (935) (1,725) (579) (5,940) (3,475)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Institutional Class Shares Outstanding 1,063 (160) 1,123 1,168 1,675 1,705
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
120
<PAGE> 123
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE MULTI-ASSET-
DURATION BALANCED CLASS
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
----------------- ------------------ ------------------
(In Thousands) 1996 1997 1996 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 862 $ 2,639 $ 13,041 $ 12,032 $ 5,405 $ 4,632
Realized Net Gain (Loss) 489 681 30,074 45,178 12,244 18,881
Change in Unrealized Appreciation
(Depreciation) (424) 680 (2,265) 24,679 1,249 11,636
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 927 4,000 40,850 81,889 18,898 35,149
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:--Note A11
INSTITUTIONAL CLASS:
Net Investment Income (1,050) (1,772) (12,942) (12,124) (4,740) (5,893)
Realized Net Gain (697) (349) (11,250) (30,896) (1,968) (11,866)
INVESTMENT CLASS +:
Net Investment Income -- -- -- (26) (27) (143)
Realized Net Gain -- -- -- -- -- (275)
ADVISER CLASS ++:
Net Investment Income -- -- -- (416) -- --
Realized Net Gain -- -- -- (1,236) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,747) (2,121) (24,192) (44,698) (6,735) (18,177)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
INSTITUTIONAL CLASS:
Issued 21,694 73,710 40,647 43,464 76,136 75,946
In Lieu of Cash Distributions 1,746 930 24,119 42,958 6,226 16,451
Redeemed (29,840) (16,417) (115,186) (79,189) (61,779) (65,247)
INVESTMENT CLASS +:
Issued -- -- -- 3,910 3,020 1,103
In Lieu of Cash Distributions -- -- -- 26 27 418
Redeemed -- -- -- (460) -- (45)
ADVISER CLASS ++:
Issued -- -- -- 26,300 -- --
In Lieu of Cash Distributions -- -- -- 1,653 -- --
Redeemed -- -- -- (2,128) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (6,400) 58,223 (50,420) 36,534 23,630 28,626
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (7,220) 60,102 (33,762) 73,725 35,793 45,598
NET ASSETS:
Beginning of Period 19,237 12,017 334,630 300,868 96,839 132,632
- ------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 12,017 $ 72,119 $ 300,868 $374,593 $132,632 $178,230
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income
(loss) included in end of period net
assets $ 295 $ 1,188 $ 4,707 $ 3,747 $ 3,042 $ 1,202
- ------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed
INSTITUTIONAL CLASS:
Shares Issued 2,133 7,235 3,040 3,110 6,609 6,059
In Lieu of Cash Distributions 171 91 1,858 3,271 541 1,403
Shares Redeemed (2,936) (1,612) (8,744) (5,724) (5,135) (5,319)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Institutional Class Shares
Outstanding (632) 5,714 (3,846) 657 2,015 2,143
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT CLASS +:
Shares Issued -- -- -- 287 248 90
In Lieu of Cash Distributions -- -- -- 2 2 36
Shares Redeemed -- -- -- (31) -- (4)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Investment Class Shares Outstanding -- -- -- 258 250 122
- ------------------------------------------------------------------------------------------------------------------------------
ADVISER CLASS ++:
Shares Issued -- -- -- 1,812 -- --
In Lieu of Cash Distributions -- -- -- 126 -- --
Shares Redeemed -- -- -- (149) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Adviser
Class Shares Outstanding -- -- -- 1,789 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ The Multi-Asset-Class and Balanced Portfolios began offering Investment Class
shares on June 10, 1996 and April 4, 1997, respectively.
++ The Balanced Portfolio began offering Adviser Class shares on November 1,
1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
121
<PAGE> 124
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
----------------------------------------------------------------------
Year Ended September 30,
VALUE PORTFOLIO --------------------------------------------------------------
1993 1994 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.67 $ 12.76 $ 12.63 $ 14.89 $ 15.61
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.30 0.30 0.31 0.30 0.34
Net Realized and Unrealized Gain (Loss) on
Investments 1.92 0.59 3.34 2.20 5.75
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.22 0.89 3.65 2.50 6.09
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.31) (0.29) (0.31) (0.32) (0.30)
Realized Net Gain (1.82) (0.73) (1.08) (1.46) (1.03)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.13) (1.02) (1.39) (1.78) (1.33)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.76 $ 12.63 $ 14.89 $ 15.61 $ 20.37
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 19.67% 7.45% 32.58% 18.41% 41.25%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $762,175 $981,337 $1,271,586 $1,844,740 $3,542,772
Ratio of Expenses to Average Net Assets (1) 0.59% 0.61% 0.60% 0.61% 0.62%
Ratio of Net Investment Income to Average Net
Assets 2.48% 2.40% 2.43% 2.07% 1.93%
Portfolio Turnover Rate 43% 54% 56% 53% 46%
Average Commission Rate ### N/A N/A N/A $ 0.0572 $ 0.0577
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.60% 0.60% 0.61%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Class Adviser Class
--------------------------------------------------------------------------------
May 6, Year July 17, Year
1996** to Ended 1996*** to Ended
September 30, September 30, September 30, September 30,
1996 1997!! 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.97 $ 15.60 $ 14.11 $ 15.61
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.12 0.31 0.01 0.30
Net Realized and Unrealized Gain
(Loss) on Investments 0.59 5.75 1.49 5.74
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.71 6.06 1.50 6.04
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.08) (0.27) -- (0.27)
Realized Net Gain -- (1.03) -- (1.03)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.08) (1.30) -- (1.30)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.60 $ 20.36 $ 15.61 $ 20.35
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 4.78% 41.01% 10.63% 40.87%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands) $ 9,244 $29,847 $15,493 $201,253
Ratio of Expenses to Average Net
Assets (2) 0.76%* 0.80% 0.86%* 0.90%
Ratio of Net Investment Income
to Average Net Assets 2.05%* 1.75% 1.66%* 1.63%
Portfolio Turnover Rate 53% 46% 53% 46%
Average Commission Rate ### $0.0572 $0.0577 $0.0572 $ 0.0577
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON
THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to
Expense Reimbursement/Waiver N/A 0.09% N/A N/A
Ratio Including Expense Offsets 0.75%* 0.79% 0.85%* 0.89%
- ------------------------------------------------------------------------------------------------------------------------------
-
* Annualized
** Initial offering of Investment Class shares
*** Initial offering of Adviser Class shares
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
122
<PAGE> 125
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
------------------------------------------------------------------------
Year Ended September 30,
EQUITY PORTFOLIO ----------------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.04 $ 22.82 $ 21.05 $ 24.43 $ 25.67
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.41 0.44 0.52 0.50 0.36
Net Realized and Unrealized Gain (Loss)
on Investments 1.95 0.41 4.55 3.26 8.22
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.36 0.85 5.07 3.76 8.58
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.43) (0.41) (0.52) (0.50) (0.40)
Realized Net Gain (1.15) (2.21) (1.17) (2.02) (4.40)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.58) (2.62) (1.69) (2.52) (4.80)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.82 $ 21.05 $ 24.43 $ 25.67 $ 29.45
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.05% 4.11% 26.15% 16.48% 38.46%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $1,098,003 $1,193,017 $1,597,632 $1,442,261 $1,312,547
Ratio of Expenses to Average Net Assets
(1) 0.59% 0.60% 0.61% 0.60% 0.60%
Ratio of Net Investment Income to Average
Net Assets 1.86% 2.10% 2.39% 1.95% 1.30%
Portfolio Turnover Rate 51% 41% 67% 67% 85%
Average Commission Rate ### N/A N/A N/A $ 0.0557 $ 0.0294
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO
OF EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.60% 0.60% 0.59%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Class
------------------------------------------
April 10, Year
1996** to Ended
September 30, September 30,
1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 24.31 $ 25.66
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.22 0.34
Net Realized and Unrealized Gain (Loss) on Investments 1.24 8.17
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.46 8.51
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.11) (0.35)
Realized Net Gain -- (4.40)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.11) (4.75)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 25.66 $ 29.42
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 6.02% 38.12%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 113 $ 2,354
Ratio of Expenses to Average Net Assets (2) 0.75%* 0.80%
Ratio of Net Investment Income to Average Net Assets 1.83%* 1.12%
Portfolio Turnover Rate 67% 85%
Average Commission Rate ### $0.0557 $0.0294
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET
ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver N/A 1.28%
Ratio Including Expense Offsets 0.75%* 0.80%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Initial offering of Investment Class shares
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
123
<PAGE> 126
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
--------------------------------------------------------------
Year Ended September 30,
SMALL CAP VALUE PORTFOLIO --------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.84 $ 17.55 $ 17.67 $ 18.28 $ 19.64
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.18 0.16 0.19 0.18 0.15
Net Realized and Unrealized Gain (Loss) on
Investments 4.64 1.14 2.49 3.62 8.39
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.82 1.30 2.68 3.80 8.54
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.11) (0.24) (0.14) (0.20) (0.11)
Realized Net Gain -- (0.94) (1.93) (2.24) (3.10)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.11) (1.18) (2.07) (2.44) (3.21)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.55 $ 17.67 $ 18.28 $ 19.64 $ 24.97
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 37.72% 8.04% 18.39% 24.00% 49.81%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $175,029 $308,156 $430,368 $585,457 $897,396
Ratio of Expenses to Average Net Assets (1) 0.88% 0.88% 0.87% 0.86% 0.86%
Ratio of Net Investment Income to Average Net
Assets 1.33% 0.91% 1.20% 0.99% 0.70%
Portfolio Turnover Rate 93% 162% 119% 145% 107%
Average Commission Rate ### N/A N/A N/A $ 0.0498 $ 0.0480
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.87% 0.86% 0.86%
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
124
<PAGE> 127
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
--------------------------------------------------------------------
Year Ended September 30,
INTERNATIONAL EQUITY PORTFOLIO ------------------------------------------------------------
1993 1994 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.03 $ 13.18 $ 14.52 $ 12.51 $ 13.24
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21 0.12 0.19 0.31 0.25
Net Realized and Unrealized Gain (Loss) on
Investments 2.14 1.63 (0.75) 0.77 2.71
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.35 1.75 (0.56) 1.08 2.96
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.20) (0.16) -- (0.29) (0.26)
Realized Net Gain -- (0.25) (1.35) (0.06) (0.27)
In Excess of Realized Net Gain -- -- (0.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.20) (0.41) (1.45) (0.35) (0.53)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.18 $ 14.52 $ 12.51 $ 13.24 $ 15.67
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 21.64% 13.33% (3.36%) 8.87% 23.16%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $891,675 $1,132,867 $1,160,986 $635,706 $649,755
Ratio of Expenses to Average Net Assets (1) 0.66% 0.64% 0.70% 0.69% 0.66%
Ratio of Net Investment Income to Average Net
Assets 1.23% 0.89% 1.90% 1.88% 1.81%
Portfolio Turnover Rate 43% 69% 112% 78% 62%
Average Commission Rate ### N/A N/A N/A $ 0.0093 $ 0.0035
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.66% 0.65% 0.63%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Class
------------------------------------
April 10, Year
1996** to Ended
September 30, September 30,
1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.02 $ 13.23
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.09 0.23
Net Realized and Unrealized Gain (Loss) on Investments 0.12 2.69
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.21 2.92
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (0.25)
Realized Net Gain -- (0.27)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (0.52)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.23 $ 15.63
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 1.61% 22.85%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 235 $ 631
Ratio of Expenses to Average Net Assets (2) 0.81%* 0.89%
Ratio of Net Investment Income to Average Net Assets 1.81%* 1.60%
Portfolio Turnover Rate 78% 62%
Average Commission Rate ### $0.0093 $0.0035
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET
ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver N/A 6.83%
Ratio Including Expense Offsets 0.77%* 0.86%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Initial offering of Investment Class shares
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
125
<PAGE> 128
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
----------------------------------------------------------
Year Ended September 30,
MID CAP GROWTH PORTFOLIO ----------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.51 $ 18.56 $ 16.29 $ 18.60 $ 20.53
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.02 0.03 0.01 (0.01)
Net Realized and Unrealized Gain (Loss) on Investments 4.80 (0.58) 4.21 4.70 4.75
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.81 (0.56) 4.24 4.71 4.74
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (0.01) (0.03) (0.03) --
Realized Net Gain (0.76) (1.70) (1.90) (2.75) (3.43)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.76) (1.71) (1.93) (2.78) (3.43)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.56 $ 16.29 $ 18.60 $ 20.53 $ 21.84
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 33.92% (3.28%) 30.56% 28.81% 28.05%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $309,459 $302,995 $373,547 $403,281 $446,963
Ratio of Expenses to Average Net Assets (1) 0.59% 0.60% 0.61% 0.60% 0.63%
Ratio of Net Investment Income to Average Net Assets 0.07% 0.12% 0.21% 0.04% (0.07%)
Portfolio Turnover Rate 69% 55% 129% 141% 134%
Average Commission Rate ### N/A N/A N/A $ 0.0491 $ 0.0514
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.60% 0.60% 0.61%
- ------------------------------------------------------------------------------------------------------------------------------
Adviser Class
-----------------------
January 31,
1997** to
September 30,
1997
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.04
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.02)
Net Realized and Unrealized Gain (Loss) on Investments 4.79
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.77
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 21.81
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 27.99%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 1,200
Ratio of Expenses to Average Net Assets (2) 0.88%*
Ratio of Net Investment Income to Average Net Assets (0.41%)*
Portfolio Turnover Rate 134%
Average Commission Rate ### $0.0514
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets 0.86%*
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Initial offering of Adviser Class shares
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
126
<PAGE> 129
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------------------------
December 30,
1994** to Year Ended September 30,
September 30, ---------------------------
MID CAP VALUE PORTFOLIO 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 13.45 $ 14.49
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.55T 0.11 0.05
Net Realized and Unrealized Gain (Loss) on Investments 2.90 2.52 8.37
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 3.45 2.63 8.42
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (0.55) (0.10)
Realized Net Gain -- (1.04) (1.01)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (1.59) (1.11)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.45 $ 14.49 $ 21.80
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 34.50% 22.30% 61.40%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 4,507 $50,449 $220,260
Ratio of Expenses to Average Net Assets (1) 0.93%* 0.88% 0.90%
Ratio of Net Investment Income to Average Net Assets 10.13%*T 1.61% 0.28%
Portfolio Turnover Rate 639%T 377% 184%
Average Commission Rate ### N/A $0.0462 $ 0.0467
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 2.13%* 0.18% 0.02%
Ratio Including Expense Offsets 0.88%* 0.88% 0.88%
- ------------------------------------------------------------------------------------------------------------------------------
** Commencement of Operations
T Net Investment Income, the Ratio of Net Investment Income to Average Net Assets and the Portfolio Turnover Rate reflect
activity relating to a nonrecurring initiative to invest in higher-paying dividend income producing securities.
</TABLE>
<TABLE>
<CAPTION>
Investment Class
----------------------------------------
May 10, Year
1996*** to Ended
September 30, September 30,
1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.77 $ 14.48
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.01
Net Realized and Unrealized Gain (Loss) on Investments 0.67 8.36
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.71 8.37
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (0.09)
Realized Net Gain -- (1.01)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (1.10)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.48 $ 21.75
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.16% 61.05%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 127 $ 1,238
Ratio of Expenses to Average Net Assets (2) 1.03%* 1.09%
Ratio of Net Investment Income to Average Net Assets 0.86%* 0.04%
Portfolio Turnover Rate 377% 184%
Average Commission Rate ### $0.0462 $0.0467
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.14%* 4.60%
Ratio Including Expense Offsets 1.03%* 1.07%
- ------------------------------------------------------------------------------------------------------------------------------
*** Initial offering of Investment Class shares
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
127
<PAGE> 130
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
---------------------------------------------------
February 28,
1995** to
September Year Ended September 30,
30, ------------------------
EMERGING MARKETS PORTFOLIO 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 11.63 $ 11.52
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10 0.19 0.16
Net Realized and Unrealized Gain (Loss) on Investments 1.53 0.45 1.73
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.63 0.64 1.89
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (0.17) (0.20)
Realized Net Gain -- (0.58) (0.80)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (0.75) (1.00)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.63 $ 11.52 $ 12.41
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 16.30% 6.21% 18.08%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $42,459 $32,984 $22,808
Ratio of Expenses to Average Net Assets (1) 1.18%* 1.18% 1.18%
Ratio of Net Investment Income to Average Net Assets 2.04%* 1.62% 1.30%
Portfolio Turnover Rate 63% 108% 64%
Average Commission Rate ### N/A $0.0014 $0.0019
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE
NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.29%* 0.11% 0.10%
Ratio Including Expense Offsets 1.18%* 1.18% N/A
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
128
<PAGE> 131
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
--------------------------------------------------------------------
Year Ended September 30,
FIXED INCOME PORTFOLIO --------------------------------------------------------------------
1993 1994 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.67 $ 12.86 $ 10.93 $ 11.82 $ 11.83
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.88 0.77 0.80 0.78 0.80
Net Realized and Unrealized Gain (Loss) on
Investments 0.75 (1.28) 0.69 0.08 0.50
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.63 (0.51) 1.49 0.86 1.30
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.83) (0.82) (0.60) (0.79) (0.78)
Realized Net Gain (0.61) (0.47) -- (0.06) (0.13)
In Excess of Realized Net Gain -- (0.13) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.44) (1.42) (0.60) (0.85) (0.91)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 10.93 $ 11.82 $ 11.83 $ 12.22
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 14.26% (4.43%) 14.19% 7.63% 11.47%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $909,738 $1,194,957 $1,487,409 $1,790,146 $3,219,987
Ratio of Expenses to Average Net Assets (1) 0.47% 0.49% 0.49% 0.48% 0.49%
Ratio of Net Investment Income to Average Net
Assets 7.06% 6.79% 7.28% 6.77% 6.73%
Portfolio Turnover Rate 144% 100% 140% 162% 179%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.48% 0.48% 0.48%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Class Adviser Class
--------------------------------------------------
October 15, November 7,
1996** to 1996*** to
September 30, September 30,
1997!! 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.80 $ 12.04
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.75 0.70
Net Realized and Unrealized Gain (Loss) on Investments 0.40 0.20
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.15 0.90
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.60) (0.59)
Realized Net Gain (0.13) (0.13)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.73) (0.72)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.22 $ 12.22
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 10.07% 7.79%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 9,527 $76,683
Ratio of Expenses to Average Net Assets (2) 0.66%* 0.77%*
Ratio of Net Investment Income to Average Net Assets 6.57%* 6.50%*
Portfolio Turnover Rate 179% 179%
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE
NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.12%* 0.01%*
Ratio Including Expense Offsets 0.65%* 0.76%*
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Initial offering of Investment Class shares
*** Initial offering of Adviser Class shares
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
129
<PAGE> 132
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------------------------------------
Year Ended September 30,
-----------------------------------------------------------------------
DOMESTIC FIXED INCOME PORTFOLIO 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.80 $ 11.99 $ 9.87 $ 11.03 $ 10.89
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.84 0.94 0.52 0.56 0.74
Net Realized and Unrealized Gain (Loss)
on Investments 0.66 (1.23) 0.87 (0.09) 0.33
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.50 (0.29) 1.39 0.47 1.07
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.78) (0.95) (0.23) (0.57) (0.67)
Realized Net Gain (0.53) (0.73) -- -- (0.02)
In Excess of Realized Net Gain -- (0.15) -- (0.04) --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.31) (1.83) (0.23) (0.61) (0.69)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.99 $ 9.87 $ 11.03 $ 10.89 $ 11.27
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 14.08% (2.87%) 14.33% 4.41% 10.20%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $90,350 $36,521 $36,147 $95,362 $96,954
Ratio of Expenses to Average Net Assets
(1) 0.50% 0.50% 0.51% 0.52% 0.51%
Ratio of Net Investment Income to
Average Net Assets 7.15% 7.65% 6.80% 5.73% 6.48%
Portfolio Turnover Rate 96% 78% 313% 168% 217%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense
Reimbursement/Waiver N/A 0.03% 0.09% 0.01% 0.01%
Ratio Including Expense Offsets N/A N/A 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
! Reflects a 2.5 for 1 share split effective August 13, 1993.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
130
<PAGE> 133
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
----------------------------------------------------
HIGH YIELD PORTFOLIO
Institutional Class
----------------------------------------------------
Year Ended September 30,
-----------------------------------------------
1993 1994 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.58 $ 9.49 $ 8.97 $ 9.08 $ 9.32
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.73 0.75 0.90 0.88 0.86
Net Realized and Unrealized Gain (Loss) on
Investments 0.90 (0.42) 0.19 0.28 0.87
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.63 0.33 1.09 1.16 1.73
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.72) (0.69) (0.85) (0.92) (0.87)
Realized Net Gain -- (0.16) (0.08) -- (0.03)
In Excess of Realized Net Gain -- -- (0.05) -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.72) (0.85) (0.98) (0.92) (0.90)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 8.97 $ 9.08 $ 9.32 $ 10.15
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 20.12% 3.57% 13.58% 13.83% 19.90%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $50,396 $182,969 $220,785 $289,810 $523,899
Ratio of Expenses to Average Net Assets (1) 0.53% 0.50% 0.50% 0.49% 0.51%
Ratio of Net Investment Income to Average Net Assets 8.94% 9.01% 10.68% 10.04% 9.05%
Portfolio Turnover Rate 99% 112% 96% 115% 96%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES
TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense
Reimbursement/Waiver 0.09% N/A N/A N/A N/A
Ratio Including Expense Offsets N/A N/A 0.49% 0.48% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Class Adviser Class
-------------------------------------------------------
May 21, Year January 31,
1996** to Ended 1997*** to
September 30, September 30, September 30,
1996 1997!! 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.06 $ 9.31 $ 9.39
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.31 0.84 0.56
Net Realized and Unrealized Gain (Loss) on Investments 0.16 0.88 0.59
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.47 1.72 1.15
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.22) (0.84) (0.39)
Realized Net Gain -- (0.03) --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.22) (0.87) (0.39)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.31 $ 10.16 $10.15
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.34% 19.77% 12.63%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $5,139 $10,916 $ 4,327
Ratio of Expenses to Average Net Assets (2) 0.62%* 0.70% 0.78%*
Ratio of Net Investment Income to Average Net Assets 11.06%* 8.84% 8.68%*
Portfolio Turnover Rate 115% 96% 96%
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver N/A 0.22% N/A
Ratio Including Expense Offsets 0.61%* 0.69% 0.76%*
- ------------------------------------------------------------------------------------------------------------------------------
-
* Annualized
** Initial offering of Investment Class shares.
*** Initial offering of Adviser Class shares.
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
131
<PAGE> 134
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
----------------------------------------------------
Year Ended September 30,
CASH RESERVES PORTFOLIO -------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.028 0.034 0.055 0.052 0.052
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.028 0.034 0.055 0.052 0.052
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.028) (0.034) (0.055) (0.052) (0.052)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 2.81% 3.40% 5.57% 5.35% 5.32%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $10,717 $37,933 $44,624 $78,497 $98,464
Ratio of Expenses to Average Net Assets (1) 0.32% 0.32% 0.33% 0.33% 0.33%
Ratio of Net Investment Income to Average Net Assets 2.78% 3.70% 5.45% 5.19% 5.20%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction of Ratio due to Expense Reimbursement/Waiver 0.24% 0.14% 0.11% 0.09% 0.07%
Ratio Including Expense Offsets N/A N/A 0.32% 0.32% 0.32%
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
</TABLE>
<TABLE>
<CAPTION>
Institutional Class
--------------------------------------------------------
Year Ended September 30,
FIXED INCOME PORTFOLIO II -----------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.67 $ 11.97 $ 10.42 $ 11.33 $ 11.23
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.69 0.63 0.71 0.70 0.74
Net Realized and Unrealized Gain (Loss) on
Investments 0.77 (1.16) 0.71 (0.03) 0.39
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.46 (0.53) 1.42 0.67 1.13
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.61) (0.67) (0.51) (0.66) (0.79)
Realized Net Gain (0.55) (0.21) -- (0.08) (0.11)
In Excess of Realized Net Gain -- (0.14) -- (0.03) --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.16) (1.02) (0.51) (0.77) (0.90)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.97 $ 10.42 $ 11.33 $ 11.23 $ 11.46
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 13.53% (4.76%) 14.13% 6.12% 10.58%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $94,836 $129,902 $176,945 $191,740 $226,662
Ratio of Expenses to Average Net Assets (1) 0.51% 0.51% 0.51% 0.50% 0.50%
Ratio of Net Investment Income to Average Net Assets 6.17% 6.07% 6.75% 6.06% 6.54%
Portfolio Turnover Rate 101% 137% 153% 165% 182%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.49% 0.49% 0.49%
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
132
<PAGE> 135
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
Year Ended September 30,
MORTGAGE-BACKED SECURITIES PORTFOLIO --------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.44 $ 10.95 $ 9.95 $ 10.49 $ 10.42
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63 0.52 0.72 0.68 0.91
Net Realized and Unrealized Gain (Loss) on Investments 0.48 (0.83) 0.47 (0.07) 0.16
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.11 (0.31) 1.19 0.61 1.07
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.60) (0.45) (0.65) (0.68) (0.73)
Realized Net Gain -- (0.21) -- -- --
In Excess of Realized Net Gain -- (0.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.60) (0.69) (0.65) (0.68) (0.73)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.95 $ 9.95 $ 10.49 $ 10.42 $ 10.76
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.03% (2.95%) 12.52% 6.10% 10.70%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $50,249 $119,518 $49,766 $50,925 $38,085
Ratio of Expenses to Average Net Assets (1) 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to Average Net Assets 6.92% 5.30% 6.35% 6.46% 7.79%
Portfolio Turnover Rate 93% 220% 107% 116% 164%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.06% 0.01% 0.01% 0.04% 0.04%
Ratio Including Expense Offsets N/A N/A 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
</TABLE>
<TABLE>
<CAPTION>
Institutional Class
Year Ended September 30,
LIMITED DURATION PORTFOLIO ------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.58 $ 10.72 $ 10.19 $ 10.41 $ 10.38
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.32 0.56 0.56 0.58 0.62
Net Realized and Unrealized Gain (Loss) on
Investments 0.22 (0.52) 0.22 (0.03) 0.08
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.54 0.04 0.78 0.55 0.70
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.32) (0.51) (0.55) (0.58) (0.59)
Realized Net Gain (0.08) (0.04) -- -- --
In Excess of Realized Net Gain -- (0.02) (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.57) (0.56) (0.58) (0.59)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.72 $ 10.19 $ 10.41 $ 10.38 $ 10.49
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.33% 0.40% 7.95% 5.47% 6.98%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $128,991 $ 62,775 $100,186 $123,227 $155,570
Ratio of Expenses to Average Net Assets (1) 0.42% 0.41% 0.43% 0.43% 0.43%
Ratio of Net Investment Income to Average Net Assets 3.92% 4.16% 5.96% 5.65% 6.15%
Portfolio Turnover Rate 217% 192% 119% 174% 130%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense
Reimbursement/Waiver 0.03% N/A 0.02% N/A 0.00%#
Ratio Including Expense Offsets N/A N/A 0.42% 0.42% 0.42%
- ------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
# Amount is less than 0.01%.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
133
<PAGE> 136
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
Year Ended September 30,
SPECIAL PURPOSE FIXED INCOME PORTFOLIO -------------------------------------------------------------
1993 1994 1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.72 $ 13.40 $ 11.52 $ 12.53 $ 12.26
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.88 0.80 0.91 0.83 0.85
Net Realized and Unrealized Gain (Loss) on
Investments 0.92 (1.28) 0.75 0.08 0.52
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.80 (0.48) 1.66 0.91 1.37
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.82) (0.78) (0.65) (0.88) (0.87)
Realized Net Gain (0.30) (0.53) -- (0.30) (0.18)
In Excess of Realized Net Gain -- (0.09) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.12) (1.40) (0.65) (1.18) (1.05)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.40 $ 11.52 $ 12.53 $ 12.26 $ 12.58
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 15.19% (4.00%) 14.97% 7.74% 11.78%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $300,185 $384,731 $390,258 $447,646 $492,784
Ratio of Expenses to Average Net Assets (1) 0.48% 0.50% 0.49% 0.49% 0.49%
Ratio of Net Investment Income to Average Net Assets 6.84% 6.66% 7.33% 6.75% 6.88%
Portfolio Turnover Rate 124% 100% 143% 151% 198%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.48% 0.49% 0.48%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Class
------------------------------------
April 10, Year
1996** to Ended
September 30, September 30,
1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.89 $12.24
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.27 0.82
Net Realized and Unrealized Gain (Loss) on Investments 0.23 0.53
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.50 1.35
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.15) (0.85)
Realized Net Gain -- (0.18)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.15) (1.03)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.24 $12.56
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 4.25% 11.62%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 782 $1,261
Ratio of Expenses to Average Net Assets (2) 0.63%* 0.67%
Ratio of Net Investment Income to Average Net Assets 6.32%* 6.72%
Portfolio Turnover Rate 151% 198%
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET
ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver N/A 2.43%
Ratio Including Expense Offsets 0.63%* 0.66%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Initial Offering of Investment Class Shares.
------------------------------------------------------------------------------------------------------------------------------
! Reflects a 2.5 for 1 share split effective August 13, 1993.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
134
<PAGE> 137
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
MUNICIPAL PORTFOLIO
October 1,
1992** to
September 30, Year Ended September 30,
1993 ----------------------------------
1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 11.15 $ 10.04 $ 10.75 $ 11.23
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.37 0.51 0.59 0.51 0.53
Net Realized and Unrealized Gain (Loss) on
Investments 1.04 (1.01) 0.71 0.49 0.40
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.41 (0.50) 1.30 1.00 0.93
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.26) (0.54) (0.59) (0.52) (0.52)
In Excess of Net Investment Income -- (0.07) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.26) (0.61) (0.59) (0.52) (0.52)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.15 $ 10.04 $ 10.75 $ 11.23 $ 11.64
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 14.20% (4.64%) 13.37% 9.46% 8.47%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $26,914 $38,549 $36,040 $54,536 $75,120
Ratio of Expenses to Average Net Assets (1) 0.50%* 0.50% 0.50% 0.51% 0.51%
Ratio of Net Investment Income to Average Net
Assets 4.65%* 4.98% 5.64% 4.66% 4.70%
Portfolio Turnover Rate 66% 34% 58% 78% 54%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense
Reimbursement/Waiver 0.20%* 0.06% 0.09% 0.09% 0.05%
Ratio including Expense Offsets N/A N/A 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized.
** Commencement of Operations.
! Reflects a 2.5 for 1 share split effective August 13, 1993.
</TABLE>
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------------------------------
October 1,
1992** to Year Ended September 30,
September 30, -----------------------------------------
PA MUNICIPAL PORTFOLIO 1993
1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 11.26 $ 10.13 $ 10.91 $ 11.37
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.39 0.56 0.58 0.51 0.55
Net Realized and Unrealized Gain (Loss) on
Investments 1.17 (1.00) 0.77 0.46 0.34
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.56 (0.44) 1.35 0.97 0.89
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.30) (0.64) (0.57) (0.51) (0.55)
In Excess of Realized Net Gain -- (0.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.30) (0.69) (0.57) (0.51) (0.55)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.26 $ 10.13 $ 10.91 $ 11.37 $ 11.71
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 15.81% (4.08%) 13.74% 9.03% 8.01%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $15,633 $23,515 $15,734 $28,488 $27,461
Ratio of Expenses to Average Net Assets (1) 0.50%* 0.50% 0.50% 0.51% 0.51%
Ratio of Net Investment Income to Average Net Assets 4.74%* 5.39% 5.56% 4.58% 4.74%
Portfolio Turnover Rate 94% 69% 57% 51% 64%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES
TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense
Reimbursement/Waiver 0.25%* 0.09% 0.19% 0.15% 0.09%
Ratio Including Expense Offsets N/A N/A N/A 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations.
! Reflects a 2.5 for 1 share split effective August 13, 1993
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
135
<PAGE> 138
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
April 30, Year Ended September 30,
1993** to ----------------------------------
September 30, 1995 1997!!
GLOBAL FIXED INCOME PORTFOLIO 1993
1996
1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.67 $ 10.20 $ 11.05 $ 11.01
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.13 0.58 0.71 0.63 0.60
Net Realized and Unrealized Gain (Loss) on
Investments 0.61 (0.61) 0.81 0.09 (0.22)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.74 (0.03) 1.52 0.72 0.38
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.07) (0.41) (0.67) (0.71) (0.59)
Realized Net Gain -- (0.03) -- (0.05) (0.16)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.07) (0.44) (0.67) (0.76) (0.75)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.67 $ 10.20 $ 11.05 $ 11.01 $ 10.64
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 7.43% (0.29%) 15.54% 6.83% 3.53%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $53,164 $43,066 $55,147 $67,282 $77,493
Ratio of Expenses to Average Net Assets (1) 0.58%* 0.57% 0.58% 0.60% 0.57%
Ratio of Net Investment Income to Average Net
Assets 5.08%* 5.48% 6.34% 5.25% 5.65%
Portfolio Turnover Rate 30% 117% 118% 133% 137%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense
Reimbursement/Waiver 0.18%* N/A N/A N/A N/A
Ratio Including Expense Offsets N/A N/A 0.56% 0.58% 0.57%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
---------------------------------------------------
April 29,
1994** to Year Ended September 30,
September 30, ---------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO 1994
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.05 $ 11.01 $ 10.77
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21 0.67 0.52 0.50
Net Realized and Unrealized Gain (Loss) on Investments (0.11) 0.92 0.12 (0.44)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.10 1.59 0.64 0.06
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.05) (0.63) (0.80) (0.38)
Realized Net Gain -- -- (0.08) (0.26)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.05) (0.63) (0.88) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.05 $ 11.01 $ 10.77 $ 10.19
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 1.01% 16.36% 6.13% 0.44%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $66,879 $127,882 $143,137 $152,752
Ratio of Expenses to Average Net Assets (1) 0.60%* 0.54% 0.53% 0.53%
Ratio of Net Investment Income to Average Net Assets 5.83%* 6.35% 5.39% 5.27%
Portfolio Turnover Rate 31% 140% 124% 107%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.11%* N/A N/A N/A
Ratio Including Expense Offsets N/A 0.54% 0.53% 0.53%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
136
<PAGE> 139
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
-----------------------------------------
October 3,
1994** to Year Ended
September 30, September 30,
INTERMEDIATE DURATION PORTFOLIO 1995 -------------
1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.68 $ 10.28
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.69 0.60 0.61
Net Realized and Unrealized Gain (Loss) on Investments 0.42 0.03 0.27
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.11 0.63 0.88
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.43) (0.65) (0.53)
Realized Net Gain -- (0.38) (0.15)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.43) (1.03) (0.68)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.68 $ 10.28 $ 10.48
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.39% 6.27% 8.93%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $19,237 $12,017 $72,119
Ratio of Expenses to Average Net Assets (1) 0.52%* 0.56% 0.55%
Ratio of Net Investment Income to Average Net Assets 6.56%* 6.17% 5.93%
Portfolio Turnover Rate 168% 251% 204%
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.08%* 0.13% 0.05%
Ratio Including Expense Offsets 0.52%* 0.52% 0.52%
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized
** Commencement of Operations.
!! Per share amounts for the year ended September 30, 1997, are based on average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
137
<PAGE> 140
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period !
<TABLE>
<CAPTION>
Institutional Class
==========================================================
December 31,
1992** to
September Year Ended September 30,
30, -----------------------------------
BALANCED PORTFOLIO 1993
1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.06 $ 11.84 $ 11.28 $ 13.06 $ 13.81
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.47 0.54 0.53 0.51
Net Realized and Unrealized Gain (Loss) on
Investments 0.66 (0.45) 1.78 1.15 2.91
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.91 0.02 2.32 1.68 3.42
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.13) (0.43) (0.47) (0.50) (0.54)
Realized Net Gain -- (0.15) (0.07) (0.43) (1.39)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.13) (0.58) (0.54) (0.93) (1.93)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.84 $ 11.28 $ 13.06 $ 13.81 $ 15.30
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 8.31% 0.19% 21.37% 13.47% 27.44%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $291,762 $309,596 $334,630 $300,868 $343,284
Ratio of Expenses to Average Net Assets (1) 0.58%* 0.58% 0.58% 0.57% 0.58%
Ratio of Net Investment Income to Average
Net Assets 3.99%* 4.06% 4.55% 3.85% 3.56%
Portfolio Turnover Rate 62% 75% 95% 110% 145%
Average Commission Rate ### N/A N/A N/A $ 0.0521 $ 0.0578
- -------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS:
Ratio Including Expense Offsets N/A N/A 0.57% 0.57% 0.56%
- -------------------------------------------------------------------------------------------------------------------------
** Commencement of Operations
</TABLE>
<TABLE>
<CAPTION>
Investment Class Adviser Class
---------------------------------------
April 4, November 1,
1997*** to 1996**** to
September 30, September 30,
1997 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.11 $ 14.05
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.30 0.42
Net Realized and Unrealized Gain (Loss) on Investments 2.09 2.60
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.39 3.02
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.20) (0.38)
Realized Net Gain -- (1.39)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.20) (1.77)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.30 $ 15.30
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 18.40% 23.82%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $3,943 $ 27,366
Ratio of Expenses to Average Net Assets (2) 0.73%* 0.85%*
Ratio of Net Investment Income to Average Net Assets 3.32%* 3.24%*
Portfolio Turnover Rate 145% 145%
Average Commission Rate ### $ 0.0578 $0.0578
- -------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver N/A 0.03%*
Ratio Including Expense Offsets 0.70%* 0.84%*
- -------------------------------------------------------------------------------------------------------------------------
*** Initial offering of Investment Class shares
**** Initial offering of Adviser Class shares
- -------------------------------------------------------------------------------------------------------------------------
* Annualized
! Reflects a 2.5 for 1 split effective August 13, 1993.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
138
<PAGE> 141
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Institutional Class
July 29,
1994** to
September 30, Year End September 30,
MULTI-ASSET-CLASS PORTFOLIO 1994 --------------------------
1995 1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.97 $ 11.34 $ 12.28
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07 0.44 0.46 0.38
Net Realized and Unrealized Gain (Loss) on Investments (0.10) 1.33 1.05 2.57
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.03) 1.77 1.51 2.95
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (0.40) (0.42) (0.51)
Realized Net Gain -- -- (0.15) (1.08)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (0.40) (0.57) (1.59)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.97 $ 11.34 $ 12.28 $ 13.64
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (0.30%) 18.28% 13.75% 26.50%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $51,877 $96,839 $129,558 $173,155
Ratio of Expenses to Average Net Assets (1) 0.58%* 0.58% 0.58% 0.74%
Ratio of Net Investment Income to Average Net Assets 4.39%* 4.56% 3.82% 3.07%
Portfolio Turnover Rate 20% 112% 122% 141%
Average Commission Rate ### N/A N/A $ 0.0225 $ 0.0114
- ------------------------------------------------------------------------------------------------------------------------------
(1) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.26%* 0.14% 0.08% 0.08%
Ratio Including Expense Offsets N/A 0.58% 0.58% 0.74%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Commencement of Operations
<TABLE>
<CAPTION>
Investment Class
June 10, Year
1996*** to Ended
September 30, September 30,
1996 1997!!
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.17 $ 12.27
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.13 0.36
Net Realized and Unrealized Gain (Loss) on Investments 0.08 2.57
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.21 2.93
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (0.11) (0.49)
Realized Net Gain -- (1.08)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.11) (1.57)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.27 $ 13.63
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 1.75% 26.32%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) $ 3,074 $ 5,075
Ratio of Expenses to Average Net Assets (2) 0.73%* 0.96%
Ratio of Net Investment Income to Average Net Assets 3.68%* 2.85%
Portfolio Turnover Rate 122% 141%
Average Commission Rate ### $0.0225 $0.0114
- ------------------------------------------------------------------------------------------------------------------------------
(2) SUPPLEMENTAL INFORMATION ON THE RATIO OF EXPENSES TO AVERAGE NET
ASSETS:
Reduction in Ratio due to Expense Reimbursement/Waiver 0.08%* 0.55%
Ratio Including Expense Offsets 0.73%* 0.96%
- ------------------------------------------------------------------------------------------------------------------------------
*** Initial offering of Investment Class shares.
- ------------------------------------------------------------------------------------------------------------------------------
* Annualized.
!! Per share amount for the year ended September 30, 1997, are based on average shares outstanding.
### For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average commission rate per
share it paid for security transactions on which commissions were charged.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
139
<PAGE> 142
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MAS Funds (the "Fund") is registered under the Investment Company Act of 1940
as an open-end investment company. At September 30, 1997, the Fund was
comprised of twenty-four active portfolios (each referred to as a "Portfolio").
The Fund may offer up to three different classes of shares for certain
Portfolios -- Institutional Class shares, Investment Class shares and Adviser
Class shares.
The Fixed Income and Balanced Portfolios began offering Investment Class shares
on October 15, 1996 and April 4, 1997, respectively. The Fixed Income and
Balanced Portfolios began offering Adviser Class shares on November 7, 1996 and
November 1, 1996, respectively, and the Mid Cap Growth and High Yield Portfolios
each began offering Adviser Class shares on January 31, 1997. Each class of
shares has identical voting rights (except shareholders of a Class have
exclusive voting rights regarding any matter relating solely to that Class of
shares), dividend, liquidation and other rights, except each class bears
different distribution fees as described in Note D. The financial statements for
the Advisory Foreign Fixed Income and Advisory Mortgage Portfolios are presented
separately.
A. SIGNIFICANT 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 its 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: Market values for equity securities listed on the New
York Stock Exchange ("NYSE") or other U.S. exchanges or NASDAQ are based on
the latest quoted sales prices as of the close of the NYSE (normally 4:00
p.m. Eastern Time) on the valuation date; securities not traded on the
valuation date are valued at the mean of the most recent quoted bid and
asked prices. Equity securities not listed are valued at the mean of the
most recent bid and asked prices. Securities listed on foreign exchanges
are valued at the latest quoted sales prices. Bonds, including municipal
bonds, and other fixed income securities are valued using brokers'
quotations or on the basis of prices, provided by a pricing service, which
are based primarily on institutional size trading in similar groups of
securities. Mortgage-backed securities issued by certain government-related
organizations are valued using brokers' quotations which are based on a
matrix system which considers such factors as other security prices, yields
and maturities. Securities in the Cash Reserves Portfolio, and other
Portfolios' short term securities, are valued using the amortized cost
method of valuation, which in the opinion of the Board of Trustees reflects
fair value. Securities for which no quotations are readily available
(including restricted securities) are valued at their fair value as
determined in good faith using methods approved by the Board of Trustees.
2. FEDERAL INCOME TAXES: It is each Portfolio's intention to continue 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.
3. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by the Portfolios' custodian bank until maturity of the
repurchase agreements. Provisions of the agreements ensure that the market
value of the collateral is at least equal to the repurchase value in the
event of a default; however, in the event of default or bankruptcy by the
other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Portfolios may transfer their uninvested cash balances into
a joint trading account with other Portfolios of the Fund which
- --------------------------------------------------------------------------------
140
<PAGE> 143
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
invests in one or more repurchase agreement. This joint repurchase
agreement is covered by the same collateral requirements as discussed
above.
4. FUTURES: Futures contracts (secured by cash and securities deposited with
brokers 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.
Futures contracts may be used by each Portfolio, except the Cash Reserves
Portfolio, in order to hedge against unfavorable changes in the value of
securities or to attempt to realize profits from the value of the
underlying securities.
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.
5. SWAP AGREEMENTS: Each Portfolio, except the Cash Reserves Portfolio, may
enter into swap agreements to exchange the return generated by one
instrument for the return generated by another instrument. The following
summarizes swaps 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 or index underlying the transaction
exceeds or falls short of the offsetting interest rate obligation, the
Portfolio will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked-to-market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gains or losses in the Statement of Operations.
Periodic payments received or made at the end of each measurement period,
but prior to termination, are recorded as realized gains or losses in the
Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value 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, if any, at
the date of the default.
6. INTEREST RATE FLOOR AND CAP AGREEMENTS: Each Portfolio, except the Cash
Reserves Portfolio, may hold or write interest rate floors or caps to
protect itself against fluctuation in interest rates. When a Portfolio
writes an interest rate floor, it agrees to make periodic interest payments
to the holder of the interest rate floor based on a
- --------------------------------------------------------------------------------
141
<PAGE> 144
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
notional principal amount to the extent that a specified interest index
falls below a specified interest rate. When a Portfolio writes an interest
rate cap, it agrees to make periodic interest payments to the holder of the
interest rate cap based on a notional principal amount to the extent that a
specified interest index rises above a specified interest rate. Any premium
received by a Portfolio is recorded as a liability and is amortized to
interest income over the term of the agreement. Any premium paid by a
Portfolio is recorded as an asset and is accreted against interest income
over the term of the agreement. Interest rate caps and floors are
marked-to-market daily based on quotations from market makers and the
change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations. Periodic receipts or payments of interest, if
any, are recorded in the interest income account on the Statement of
Operations. Realized gains or losses from these agreements are disclosed in
the Statement of Operations.
Because there is no organized market for these agreements, the value
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. Entering into these agreements involves, to varying degrees,
elements of interest rate and market risk in excess of the amount
recognized in the Statement of Net Assets. Such risks involve the
possibility that there may be no liquid market for these agreements and
that there may be adverse changes in the interest rates or the index
underlying these transactions. 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.
7. STRUCTURED INVESTMENTS: Certain Portfolios may invest in structured
investments whose values are linked either directly or inversely to changes
in foreign currencies, interest rates, commodities, indices, or other
underlying instruments. A Portfolio uses these securities to increase or
decrease its exposure to different underlying instruments and to gain
exposure to markets that might be difficult to invest in through
conventional securities. Structured investments may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
8. DELAYED DELIVERY COMMITMENTS: Each Portfolio, except the Cash Reserves
Portfolio, may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more after
the date of the transaction. The price of the underlying securities and the
date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. Collateral consisting of liquid
securities or cash is maintained in an amount at least equal to these
commitments.
9. PURCHASED OPTIONS: Certain Portfolios may purchase call and put options on
their portfolio securities. A call option, upon payment of a premium, gives
the purchaser of the option the right to buy, and the seller the obligation
to sell, the underlying instrument at the exercise price. The purchase of a
call option might be intended to protect the Portfolio against an increase
in the price of the underlying instrument that it intends to purchase in
the future by fixing the price at which it may purchase the instrument. A
put option gives the purchaser, upon payment of a premium, the right to
sell, and the writer the obligation to buy, the instrument at the exercise
price. A Portfolio may purchase a put option to protect its holdings in the
underlying instrument, or a similar instrument, against a substantial
decline in the market value of such instrument by giving the Portfolio the
right to sell the instrument at the option exercise price. Possible losses
- --------------------------------------------------------------------------------
142
<PAGE> 145
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
from purchased options cannot exceed the total amount invested.
10. FOREIGN EXCHANGE AND FORWARD CURRENCY CONTRACTS: The books and records of
the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the bid prices of such currencies against
U.S. dollars quoted by a bank. Net realized gains (losses) on foreign
currency transactions represent net foreign exchange gains (losses) from
forward foreign currency 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 Portfolio's
books and the U.S. dollar equivalent of amounts actually received or paid.
A forward foreign currency contract is an agreement between two parties to
buy or sell currency at a set price on a future date. Each Portfolio
(except the Domestic Fixed Income, Cash Reserves, Mortgage-Backed
Securities, and Limited Duration Portfolios) may enter into forward foreign
currency contracts to protect securities and related receivables and
payables against future changes in foreign exchange rates. Fluctuations in
the value of such contracts are recorded as unrealized appreciation or
depreciation; realized gains or losses, which are disclosed in the
Statement of Operations, include net gains or losses on contracts which
have been terminated by settlements. Risks may arise upon entering into
these contracts from the potential inability of counterparties to meet the
terms of their contracts and are generally limited to the amount of
unrealized gain on the contract, if any, at the date of default. Risks may
also arise from unanticipated movements in the value of the foreign
currency relative to the U.S. dollar.
11. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are declared and paid quarterly except for the Municipal
and PA Municipal Portfolios which are declared and paid monthly, Small Cap
Value, International Equity, Mid Cap Growth, Mid Cap Value, and Emerging
Markets Portfolios which are declared and paid annually, and Cash Reserves
Portfolio which are declared daily and paid monthly. Net realized capital
gains are distributed at least annually. The amount and character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing book and tax treatments in
the timing of the recognition of gains or losses on securities, forwards
and futures, including Post October Losses and permanent differences such
as gain (loss) on in-kind redemptions (Note I), foreign currency
transactions and gains on certain equity securities designated as issued by
"passive foreign investment companies".
Permanent book and tax differences relating to shareholder distributions
may result in reclassifications to undistributed net investment income
(loss), undistributed realized net gain (loss) and paid in capital.
12. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are amortized over their
respective lives. Securities classified as Value and Mid Cap Growth in the
Equity, Balanced and Multi-Asset-Class Portfolios are those acquired on the
basis of measures of value and growth, respectively, deemed appropriate by
the Investment Adviser. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are
- --------------------------------------------------------------------------------
143
<PAGE> 146
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
apportioned among the Portfolios on the basis of their relative net assets.
Income, expenses (other than class specific expenses) and realized and
unrealized gains or losses are allocated to each class of shares based upon
their relative net assets.
Permanent book-tax differences, if any, are not included in ending
undistributed net investment income (loss) for the purpose of calculating
net investment income (loss) per share in the Financial Highlights.
B. INVESTMENT ADVISORY FEE. Under the terms of an Investment Advisory
Agreement, each Portfolio pays Miller Anderson & Sherrerd, LLP ("MAS" or the
"Adviser"), wholly owned by indirect subsidiaries of Morgan Stanley, Dean
Witter, Discover & Co., for investment advisory services performed at a fee
calculated by applying a quarterly rate based on an annual percentage rate to
each Portfolio's average daily net assets for the quarter. For the year ended
September 30, 1997 the investment advisory fees of each of the Portfolios were:
<TABLE>
<CAPTION>
Voluntary Expense Limitations
Annual at September 30, 1997
Investment ------------------------------------
Advisory Institutional Investment Adviser
Portfolio Fee Class Class Class
- ----------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Value 0.500% --% 0.80% 0.90%
Equity 0.500 -- 0.80 --
Small Cap Value 0.750 -- -- --
International
Equity 0.500 -- -- --
Mid Cap Growth 0.500 -- -- --
Mid Cap Value 0.750 0.88 1.10 --
Emerging Markets 0.750 1.18 -- --
Fixed Income 0.375 -- -- --
Domestic Fixed
Income 0.375 0.50 -- --
High Yield 0.375 -- 0.70 --
Cash Reserves 0.250 0.32 -- --
Fixed Income II 0.375 -- -- --
Mortgage-Backed
Securities 0.375 0.50 -- --
Limited Duration 0.300 0.42 -- 0.70
Special Purpose
Fixed Income 0.375 -- 0.68 --
Municipal 0.375 0.50 -- --
PA Municipal 0.375 0.50 -- --
Global Fixed
Income 0.375 -- -- --
International
Fixed Income 0.375 -- -- --
Intermediate
Duration 0.375 0.52 -- --
Balanced 0.450 -- -- --
Multi-Asset-Class 0.650 0.78 1.05 --
</TABLE>
The Adviser has voluntarily agreed to reduce the fees payable to it and, if
necessary, reimburse the Portfolios for certain expenses so that annual
operating expenses will not exceed voluntary expense limitations established for
each class of shares as presented in the table above.
C. ADMINISTRATION FEE. MAS serves as Administrator to the Fund pursuant to an
Administration Agreement. Under the agreement, MAS receives an annual fee,
accrued daily and payable monthly, of 0.08% of each Portfolio's average daily
net assets. Chase Global Funds Services Company ("CGFSC") serves as Transfer
Agent to the Fund and provides fund accounting and other services pursuant to a
sub-administration agreement with MAS and receives compensation from MAS for
these services. CGFSC also received additional class specific administration
fees for the Investment Class shares and Adviser Class shares. For the year
ended September 30, 1997, CGFSC earned $183,000 and $35,000 in class specific
administration fees for the Investment Class shares and Adviser Class shares,
respectively.
D. DISTRIBUTOR. MAS Funds Distribution, Inc. ("MASDI" or the "Distributor"), a
wholly owned subsidiary of Morgan Stanley Asset Management Holdings, Inc., is
the distributor for the Fund. MASDI is a limited-purpose broker/dealer whose
only function is to distribute open-end mutual fund shares. The Distributor
provides all classes of shares in each Portfolio with distribution services
pursuant to separate Distribution Plans (the "Plans") in accordance with Rule
12b-1 under the Investment Company Act of 1940.
Under the Plans, the Distributor is entitled to distribution fees and
shareholder servicing fees for Adviser Class and Investment Class shares,
respectively. The distribution fee is an asset-based fee to support
distribution efforts and/or servicing accounts. The Adviser Class of shares
pays an annual service and distribution fee of 0.25% of average net assets of
the class for such services under the 12b-1 plan adopted by the Fund. The
Investment Class of shares pays an annual shareholder servicing fee of 0.15% of
average net assets of the class. The shareholder servicing fee is not a
distribution fee and is used to support the expenses associated with servicing
and maintaining accounts. Both fees are paid
- --------------------------------------------------------------------------------
144
<PAGE> 147
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
directly to MASDI. The distribution fee may be retained by MASDI if an Adviser
Class shareholder invests directly through MASDI. Usually the fees are paid by
MASDI to external organizations such as 401(k) alliance sponsors, discount
brokers and bank trust departments who distribute MAS Funds to the public.
E. CUSTODY. Morgan Stanley Trust Company (NY) ("MSTC"), an affiliate of the
Fund, serves as custodian for certain of the Fund's assets held outside of the
United States in accordance with a custodian agreement. MSTC is a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
For the year ended September 30, 1997, the following Portfolios incurred
custody fees and had amounts payable to MSTC at September 30, 1997:
<TABLE>
<CAPTION>
MSTC Custody
Custody Fees Fees Payable
Incurred to MSTC
(000) (000)
------------- -------------
<S> <C> <C>
International
Equity $ 200 $37
Emerging Markets 79 14
Global Fixed Income 29 4
International Fixed
Income 43 4
Multi-Asset-Class 38 8
</TABLE>
For the year ended September 30, 1997, the following Portfolios paid brokerage
commissions to Morgan Stanley & Co. and Dean Witter Reynolds, Inc., affiliated
broker/dealers:
<TABLE>
<CAPTION>
Brokerage
Commissions
(000)
---------------------------------
Morgan Stanley Dean Witter
& Co., Inc. Reynolds, Inc.
-------------- --------------
<S> <C> <C>
Value $ -- $ 8
Equity -- 6
Small Cap Value -- 69
Mid Cap Growth 3 --
Mid Cap Value -- 35
</TABLE>
F. TRUSTEES' FEES. The Fund pays each Trustee, who is not also an officer or
affiliated person, an annual fee plus travel and other expenses incurred in
attending Board meetings. Trustees who are also officers or affiliated persons
receive no remuneration for their service as Trustees.
Each eligible Trustee of the Fund who is not an officer or affiliated person, as
defined under the Investment Company Act of 1940, as amended, participates in
the Trustees' Deferred Compensation Plan. Under the Trustees' Deferred
Compensation Plan, such Trustees must defer at least 25% of their fees and may
elect to defer payment up to 100% of their total fees earned as a Trustee of the
Fund. These deferred amounts are invested in the Portfolios selected by the
Trustee. Total trustees fees incurred, for the year ended September 30, 1997 by
the Portfolios were $216,000.
Expenses for the year ended September 30, 1997 include legal fees paid to
Morgan, Lewis & Bockius, LLP in the amount of $272,000. A partner of that firm
is secretary of the Fund.
G. PORTFOLIO INVESTMENT ACTIVITY.
1. PURCHASES AND SALES OF SECURITIES: For the year ended September 30, 1997,
purchases and sales of investment securities other than temporary cash
investments were:
<TABLE>
<CAPTION>
(000)
------------------------
Portfolio Purchases Sales
- ----------------------- ----------- -----------
<S> <C> <C>
Value $ 1,616,377 $ 1,106,356
Equity 1,118,530 1,683,052
Small Cap Value 714,263 725,133
International Equity 366,382 406,834
Mid Cap Growth 502,727 558,738
Mid Cap Value 325,676 222,740
Emerging Markets 17,777 29,543
Fixed Income 5,629,767 4,224,703
Domestic Fixed Income 203,102 205,102
High Yield 531,662 370,685
Cash Reserves -- --
Fixed Income II 365,702 554,522
Mortgage-Backed
Securities 85,554 107,285
Limited Duration 193,545 167,709
Special Purpose Fixed
Income 939,632 926,752
Municipal 53,409 34,537
PA Municipal 17,529 19,416
Global Fixed Income 94,915 85,923
International Fixed
Income 115,544 114,611
Intermediate Duration 143,494 85,450
Balanced 472,737 467,823
Multi-Asset-Class 204,601 197,347
</TABLE>
- --------------------------------------------------------------------------------
145
<PAGE> 148
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. FEDERAL INCOME TAX COST AND UNREALIZED APPRECIATION (DEPRECIATION): At
September 30, 1997, cost, unrealized appreciation, unrealized depreciation
and net unrealized appreciation (depreciation) of securities for Federal
income tax purposes were:
<TABLE>
<CAPTION>
(000)
------------------------------------------------
Portfolio Cost Appreciation Depreciation Net
- ------------------ ---------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Value $3,260,174 $829,135 $(17,497) $811,638
Equity 1,117,524 305,435 (6,546) 298,889
Small Cap Value 685,105 230,056 (13,614) 216,442
International
Equity 563,965 143,862 (27,995) 115,867
Mid Cap Growth 411,096 128,711 (433) 128,278
Mid Cap Value 180,333 42,981 (1,349) 41,632
Emerging Markets 21,050 5,739 (3,717) 2,022
Fixed Income 3,955,761 63,846 (8,867) 54,979
Domestic Fixed
Income 100,627 1,741 (290) 1,451
High Yield 508,850 31,555 (2,955) 28,600
Cash Reserves 98,515 -- -- --
Fixed Income II 227,854 4,629 (607) 4,022
Mortgage-Backed
Securities 41,894 1,020 (254) 766
Limited Duration 153,511 711 (308) 403
Special Purpose
Fixed Income 516,281 13,029 (1,527) 11,502
Municipal 72,030 4,920 (101) 4,819
PA Municipal 26,210 1,972 (9) 1,963
Global Fixed
Income 77,132 867 (1,648) (781)
International
Fixed Income 151,970 1,721 (4,256) (2,535)
Intermediate
Duration 75,863 774 (82) 692
Balanced 384,114 55,213 (1,951) 53,262
Multi-Asset-Class 157,958 22,629 (2,661) 19,968
</TABLE>
3. FORWARD FOREIGN CURRENCY CONTRACTS: Under the terms of the forward foreign
currency contracts open at September 30, 1997, each Portfolio is obligated
to deliver or receive currency in exchange for U.S. dollars as indicated in
the following table:
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Portfolio Deliver For Date Value (Depreciation)
- --------- ------- -------- ---------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY
Purchases
US$ 15,599 JPY 1,869,120 11/20/97 US$ 15,600 US$ 1
-----------
Sales
JPY 1,869,120 US$ 16,500 11/20/97 US$ 15,600 US$ 900
-----------
NET US$ 901
===========
FIXED INCOME
Sales
DEM 53,230 US$ 29,796 12/2/97 US$ 30,250 US$ (454)
===========
HIGH YIELD
Sales
DEM 4,935 US$ 2,815 10/17/97 US$ 2,796 US$ 19
DEM 8,145 4,563 11/28/97 4,628 (65)
DEM 8,500 4,824 12/23/97 4,837 (13)
DEM 375 214 12/23/97 213 1
-----------
US$ (58)
===========
<CAPTION>
(000)
------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Portfolio Deliver For Date Value (Depreciation)
- --------- ------- -------- ---------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
FIXED INCOME II
Sales
DEM 3,575 US$ 2,001 12/2/97 US$ 2,032 US$ (31)
===========
SPECIAL PURPOSE FIXED INCOME
Sales
DEM 8,430 US$ 4,719 12/2/97 US$ 4,791 US$ (72)
===========
GLOBAL FIXED INCOME
Purchases
US$ 630 ITL 1,105,768 10/20/97 US$ 641 US$ 11
3,042 DEM 5,340 10/23/97 3,027 (15)
6,475 DEM 11,430 10/23/97 6,479 4
382 ESP 56,750 10/23/97 380 (2)
863 AUD 1,170 10/27/97 849 (14)
1,569 CAD 2,155 10/31/97 1,562 (7)
1,122 GBP 690 11/4/97 1,112 (10)
1,841 JPY 215,000 11/6/97 1,791 (50)
370 IEP 255 11/18/97 370 --
1,049 CAD 1,450 11/19/97 1,052 3
14 DEM 25 11/19/97 14 --
4,072 JPY 475,250 11/19/97 3,966 (106)
2,393 ESP 365,000 11/19/97 2,448 55
2,321 SEK 17,625 11/20/97 2,328 7
1,710 DEM 3,055 11/24/97 1,735 25
-----------
US$ (99)
===========
Sales
DEM 4,440 US$ 2,460 10/23/97 US$ 2,517 US$ (57)
DEM 4,085 2,317 10/23/97 2,316 1
AUD 1,170 871 10/27/97 849 22
AUD 715 532 11/3/97 519 13
DEM 25 13 11/5/97 14 (1)
IEP 750 1,082 11/6/97 1,088 (6)
SEK 12,740 1,601 11/13/97 1,682 (81)
IEP 255 380 11/18/97 370 10
GBP 605 969 11/19/97 974 (5)
JPY 63,000 535 11/19/97 526 9
SEK 21,390 2,680 11/20/97 2,825 (145)
CAD 1,070 775 12/2/97 777 (2)
DKK 2,695 396 12/2/97 402 (6)
FRF 3,130 518 12/10/97 530 (12)
IEP 260 387 12/18/97 377 10
AUD 3,555 2,555 12/19/97 2,583 (28)
ITL 810,000 468 12/23/97 469 (1)
CHF 3,270 2,274 12/31/97 2,273 1
-----------
US$ (278)
-----------
NET US$ (377)
===========
INTERNATIONAL FIXED INCOME
Purchases
US$ 1,812 ITL 3,180,675 10/20/97 US$ 1,843 US$ 31
13,842 DEM 24,335 10/23/97 13,795 (47)
14,279 DEM 25,195 10/23/97 14,282 3
1,814 AUD 2,460 10/27/97 1,785 (29)
2,609 CAD 3,585 10/31/97 2,599 (10)
2,634 GBP 1,620 11/4/97 2,609 (25)
1,277 IEP 880 11/18/97 1,277 --
3,060 CAD 4,230 11/19/97 3,070 10
9,109 JPY 1,063,000 11/19/97 8,871 (238)
6,183 ESP 942,000 11/19/97 6,317 134
4,365 SEK 33,150 11/20/97 4,379 14
6,737 JPY 805,000 12/10/97 6,742 5
4,770 FRF 28,240 12/23/97 4,786 16
743 ITL 1,300,000 12/23/97 752 9
-----------
US$ (127)
-----------
</TABLE>
- --------------------------------------------------------------------------------
146
<PAGE> 149
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Portfolio Deliver For Date Value (Depreciation)
- --------- ------- -------- ---------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales
DEM 5,240 US$ 2,950 10/23/97 US$ 2,970 US$ (20)
DEM 7,680 4,355 10/23/97 4,354 1
AUD 2,460 1,831 10/27/97 1,785 46
JPY 305,000 2,607 10/31/97 2,538 69
NLG 4,910 2,387 10/31/97 2,472 (85)
AUD 840 625 11/3/97 610 15
IEP 1,760 2,540 11/6/97 2,554 (14)
SEK 5,130 645 11/13/97 677 (32)
IEP 880 1,311 11/18/97 1,277 34
GBP 1,965 3,146 11/19/97 3,163 (17)
JPY 119,000 1,009 11/19/97 993 16
SEK 55,455 6,949 11/20/97 7,325 (376)
IEP 575 857 12/18/97 834 23
AUD 6,785 4,877 12/19/97 4,931 (54)
ITL 2,585,000 1,493 12/23/97 1,496 (3)
CHF 6,110 4,249 12/31/97 4,248 1
----------
US$ (396)
----------
NET US$ (523)
==========
INTERMEDIATE DURATION
Purchases
US$ 1,784 CAD 2,465 12/16/97 US$ 1,792 US$ 8
----------
Sales
DEM 1,420 US$ 805 12/2/97 US$ 807 US$ (2)
CAD 2,465 1,779 12/16/97 1,792 (13)
----------
US$ (15)
----------
NET US$ (7)
==========
BALANCED
Sales
DEM 2,325 US$ 1,301 12/2/97 US$ 1,321 US$ (20)
==========
MULTI-ASSET-CLASS
Purchases
US$ 90 DKK 595 10/14/97 US$ 89 (1)
132 ITL 231,910 10/20/97 134 2
421 DEM 740 10/23/97 419 (2)
66 AUD 90 10/27/97 65 (1)
91 CAD 125 10/31/97 91 --
300 JPY 36,100 10/31/97 300 --
170 GBP 105 11/4/97 169 (1)
47 DEM 85 11/5/97 48 1
141 SEK 1,070 11/13/97 142 1
109 IEP 75 11/18/97 109 --
33 CAD 45 11/19/97 33 --
353 ESP 54,000 11/19/97 362 9
2,345 JPY 281,000 11/20/97 2,345 --
43 SEK 325 11/20/97 43 --
377 FRF 2,230 12/23/97 378 1
----------
US$ 9
----------
<CAPTION>
(000)
------------------------------------------------------------------
Net
Currency In Unrealized
to Exchange Settlement Appreciation
Portfolio Deliver For Date Value (Depreciation)
- --------- ------- -------- ---------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales
DEM 145 US$ 83 10/17/97 US$ 82 US$ 1
DEM 110 62 10/23/97 63 (1)
AUD 90 67 10/27/97 65 2
FRF 555 90 10/31/97 94 (4)
JPY 37,000 316 10/31/97 308 8
AUD 55 41 11/3/97 40 1
DEM 160 86 11/5/97 91 (5)
IEP 115 166 11/6/97 167 (1)
SEK 2,600 327 11/13/97 343 (16)
IEP 60 89 11/18/97 87 2
GBP 110 176 11/19/97 177 (1)
JPY 6,000 51 11/19/97 50 1
JPY 281,000 2,500 11/20/97 2,345 155
SEK 325 41 11/20/97 43 (2)
DEM 220 123 11/28/97 125 (2)
DEM 325 185 12/18/97 185 --
AUD 270 194 12/19/97 196 (2)
DEM 260 148 12/23/97 148 --
ITL 108,000 62 12/23/97 62 --
CHF 295 205 12/31/97 205 --
----------
US$ 136
----------
NET US$ 145
==========
AUD -- Australian Dollar
CAD -- Canadian Dollar
CHF -- Swiss Franc
DEM -- German Mark
DKK -- Danish Krone
ESP -- Spanish Peseta
FRF -- French Franc
GBP -- British Pound
IEP -- Irish Punt
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
SEK -- Swedish Krona
US$ -- U.S. Dollar
</TABLE>
4. FUTURES CONTRACTS: At September 30, 1997, the following Portfolios had
futures contracts open:
<TABLE>
<CAPTION>
Unrealized
Aggregate Appreciation
Number of Face Value Expiration (Depreciation)
Portfolio Contracts (000) Date (000)
- ----------------- --------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Purchases:
VALUE
S&P 500 Index 400 US$ 190,900 Dec-97 US$ 3,948
EMERGING MARKETS
Hang Seng Index 7 HKD 5,269 Oct-97 18
FIXED INCOME
U.S. Treasury 2 1,080 US$ 223,611 Dec-97 854
yr. Note
DOMESTIC FIXED
INCOME
U.S. Treasury 2 43 US$ 8,903 Dec-97 38
yr. Note
U.S. Treasury 5 US$ 576 Dec-97 12
Long Bond
FIXED INCOME II
U.S. Treasury 2 70 US$ 14,493 Dec-97 62
yr. Note
</TABLE>
- --------------------------------------------------------------------------------
147
<PAGE> 150
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Aggregate Appreciation
Number of Face Value Expiration (Depreciation)
Portfolio Contracts (000) Date (000)
- ----------------- --------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED
SECURITIES
U.S. Treasury 2 20 US$ 4,141 Dec-97 US$ 11
yr. Note
U.S. Treasury 5 US$ 576 Dec-97 8
Long Bond
LIMITED DURATION
U.S. Treasury 2 55 US$ 11,388 Dec-97 49
yr. Note
SPECIAL PURPOSE
FIXED INCOME
U.S. Treasury 2 165 US$ 34,163 Dec-97 146
yr. Note
MUNICIPAL
U.S. Treasury 5 44 US$ 4,726 Dec-97 27
yr. Note
U.S. Treasury 39 US$ 4,295 Dec-97 63
10 yr. Note
PA MUNICIPAL
U.S. Treasury 5 10 US$ 1,074 Dec-97 10
yr. Note
U.S. Treasury 41 US$ 4,515 Dec-97 54
10 yr. Note
GLOBAL FIXED
INCOME
Japanese 10 yr. 4 JPY 514,440 Dec-97 67
Government
Bond
INTERNATIONAL
FIXED INCOME
German 10 yr. 56 DEM 14,413 Dec-97 118
Government
Bond
Japanese 10 yr. 13 JPY 1,671,930 Dec-97 190
Government
Bond
INTERMEDIATE
DURATION
U.S. Treasury 2 68 US$ 14,079 Dec-97 54
yr. Note
BALANCED
U.S. Treasury 2 30 US$ 6,211 Dec-97 27
yr. Note
MULTI-ASSET-CLASS
U.S. Treasury 2 14 US$ 2,900 Dec-97 12
yr. Note
U.S. Treasury 5 7 US$ 752 Dec-97 7
yr. Note
Nikkei 225 22 JPY 195,745 Dec-97 (73)
Index
MIB 30 Index 9 ITL 2,175,570 Dec-97 106
Sales:
FIXED INCOME
90 day 143 US$ 33,544 Dec-97- (2)
Eurodollar
Mar-01
U.S. Treasury 1,990 US$ 219,149 Dec-97 (2,928)
10 yr. Note
DOMESTIC FIXED
INCOME
U.S. Treasury 36 US$ 3,965 Dec-97 (52)
10 yr. Note
HIGH YIELD
U.S. Treasury 170 US$ 19,598 Dec-97 (554)
Bond
FIXED INCOME II
U.S. Treasury 189 US$ 20,814 Dec-97 (209)
10 yr. Note
<CAPTION> Unrealized
Aggregate Appreciation
Number of Face Value Expiration (Depreciation)
Portfolio Contracts (000) Date (000)
- ----------------- --------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED
SECURITIES
U.S. Treasury 2 60 US$ 12,423 Dec-97 US$ (27)
yr. Note
U.S. Treasury 5 11 US$ 1,181 Dec-97 (8)
yr. Note
U.S. Treasury 27 US$ 2,973 Dec-97 (27)
10 yr. Note
U.S. Treasury 7 US$ 807 Dec-97 (14)
Long Bond
LIMITED DURATION
U.S. Treasury 40 US$ 4,405 Dec-97 (58)
10 yr. Note
SPECIAL PURPOSE
FIXED INCOME
U.S. Treasury 641 US$ 70,590 Dec-97 (893)
10 yr. Note
MUNICIPAL
U.S. Treasury 32 US$ 3,689 Dec-97 17
Long Bond
PA MUNICIPAL
U.S. Treasury 2 9 US$ 1,863 Dec-97 (7)
yr. Note
U.S. Treasury 19 US$ 2,190 Dec-97 10
Long Bond
INTERMEDIATE
DURATION
U.S. Treasury 38 US$ 4,185 Dec-97 (55)
10 yr. Note
BALANCED
U.S. Treasury 121 US$ 13,325 Dec-97 (175)
10 yr. Note
MULTI-ASSET-CLASS
U.S. Treasury 13 US$ 1,432 Dec-97 (19)
10 yr. Note
U.S. Treasury 8 US$ 922 Dec-97 (26)
Long Bond
DEM -- German Mark
HKD -- Hong Kong Dollar
ITL -- Italian Lira
JPY -- Japanese Yen
US$ -- U.S. Dollar
</TABLE>
5. SWAP AGREEMENTS: At September 30, 1997, the following Portfolios had open
Interest Rate Swap Agreements:
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
--------------------------------------------------------
<C> <S> <C>
FIXED INCOME
$150,000 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $54
========
</TABLE>
- --------------------------------------------------------------------------------
148
<PAGE> 151
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
--------------------------------------------------------
<C> <S> <C>
DOMESTIC FIXED INCOME
$5,000 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $2
======
FIXED INCOME II
$11,000 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $4
======
MORTGAGE-BACKED SECURITIES
$2,750 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $1
$7,000 Agreement with Salomon Brothers
terminating July 1, 1998 to pay
monthly if positive (receive if
negative), the total rate of
return on the Salomon Brothers
Benchmark Yield Curve Average
2-Year Index based on the
previous month's return and
receive 1 month LIBOR less 38
basis points. (52)
------
NET $(51)
======
SPECIAL PURPOSE FIXED INCOME
$25,000 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $9
======
MUNICIPAL
$10,300 Agreement with Bankers Trust
Company terminating January 9,
2006 to pay fixed rate at 6.05%
semiannually and to receive 3
month LIBOR quarterly. $283
======
PA MUNICIPAL
$4,650 Agreement with Bankers Trust
Company terminating January 9,
2006 to pay fixed rate at 6.05%
semiannually and to receive 3
month LIBOR quarterly. $128
------
<CAPTION>
Unrealized
Notional Appreciation
Amount (Depreciation)
(000) Description (000)
--------------------------------------------------------
<S> <C> <C>
BALANCED
$7,000 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $2
======
MULTI-ASSET-CLASS
$1,500 Agreement with Bankers Trust
Company terminating July 21,
1999 to pay 1 month LIBOR
monthly and to receive fixed
rate at 6.12% semiannually. $1
======
</TABLE>
LIBOR -- London Interbank Offer Rate
H. CAPITAL LOSS CARRY FORWARD. At September 30, 1997, the following Portfolios
had available for Federal income tax purposes unused capital losses, all of
which will expire on the indicated dates:
<TABLE>
<CAPTION>
Expiration
Date
September 30,
(000)
-------------
Portfolio 2003 2004
- -------------------------------- ------ ----
<S> <C> <C>
Mortgage-Backed Securities $2,746 $ --
Limited Duration 3,769 172
Municipal -- 74
PA Municipal 23 --
</TABLE>
I. POST OCTOBER LOSSES. Under current tax law, certain capital and net foreign
exchange losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended September 30, 1997, the following Portfolios may elect to defer capital
losses occurring between November 1, 1996 and September 30, 1997 up to the
following amounts:
<TABLE>
<CAPTION>
Portfolio (000)
- ------------------------------------- -------
<S> <C>
Global Fixed Income $42
</TABLE>
- --------------------------------------------------------------------------------
149
<PAGE> 152
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The International Equity, Global Fixed Income and International Fixed Income
Portfolios may elect to defer net foreign currency losses occurring between
November 1, 1996 and September 30, 1997 up to the amount of $414,000, $1,141,000
and $5,713,000, respectively.
J. IN-KIND TRANSACTIONS. For the year ended September 30, 1997, the following
Portfolios realized gains (losses) from in-kind redemptions of approximately:
<TABLE>
<CAPTION>
Portfolio (000)
- ------------------------------------- -------
<S> <C>
Value $57,390
Equity 6,870
Small Cap Value 46
Mid Cap Growth 7,054
Mortgage-Backed Securities 230
Multi-Asset-Class 83
</TABLE>
K. SECURITIES LENDING. Certain Portfolios loan securities to certain brokers
and receive security lending fees. Security lending fees are included as
expense offsets in the Statement of Operations. Fees greater than custodian
expenses are included in interest income. During the year ended September 30,
1997, the following Port-folios had security lending fees totaling:
<TABLE>
<CAPTION>
Fees
Portfolio (000)
- --------------------------------------- -----
<S> <C>
Value $166
Equity 222
International Equity 175
Mid Cap Growth 254
Fixed Income 172
Domestic Fixed Income 2
Fixed Income II 7
Special Purpose Fixed Income 18
Balanced 37
</TABLE>
Portfolios that lend securities receive securities issued or guaranteed by the
U.S. Government or its agencies, cash or letters of credit as collateral in an
amount at least equal to 100% of the current market value of loaned securities.
The value of loaned securities and related collateral outstanding at September
30, 1997, were as follows:
<TABLE>
<CAPTION>
Value of Value
Loaned of
Securities Collateral
Portfolio (000) (000)
- -------------------------- -------- --------
<S> <C> <C>
Value $291,013 $295,614
Equity 102,802 104,927
International Equity 31,938 33,926
Mid Cap Growth 106,508 107,435
Fixed Income 531,230 544,483
Domestic Fixed Income 2,913 2,970
Fixed Income II 821 844
Special Purpose Fixed
Income 23,721 24,378
Balanced 59,609 61,539
</TABLE>
Custodian fees appearing in the Statement of Operations have been adjusted to
include expense offsets for custodian balance credits and security lending fees
totaling $720,000 and $517,000 respectively, for the year ended September 30,
1997.
L. OTHER. At September 30, 1997, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. The net
assets of these Portfolios are presented at the foreign exchange rates and
market values at the close of the period. The Portfolios do 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 Portfolios do 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. Changes in currency exchange rates will
affect the value of and investment income from such securities and currency.
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.
- --------------------------------------------------------------------------------
150
<PAGE> 153
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At September 30, 1997, the High Yield Port-folio's net assets were
substantially comprised of high yield fixed income securities. The financial
condition of an issuer of these securities and general economic and industry
specific conditions may affect the issuer's ability to make payments of income
and principal on these securities.
A portion of the securities of the Municipal and PA Municipal Portfolios are
insured by certain companies specializing in the insurance of municipal debt
obligations. At September 30, 1997, approximately 52.1% and 52.0% of the net
assets of the Municipal and PA Municipal Portfolios, respectively, are covered
by such insurance. Listed below are the insurers that insure obligations
constituting more than 10% of the Portfolios' net assets:
<TABLE>
<CAPTION>
MUNICIPAL PA MUNICIPAL
--------- ------------
<S> <C> <C>
AMBAC 13.7% 18.7%
FGIC 12.8 16.7
MBIA 12.8 11.9
</TABLE>
At September 30, 1997, certain employees of Miller Anderson & Sherrerd, LLP
were record owners of approximately 20.0% of the PA Municipal Portfolio. In
addition, the Fund had Portfolios with otherwise unaffiliated record owners of
10% or greater. Investment activities of these shareholders could have a
material impact on these Portfolios. These Portfolios and the aggregate
percentage of such owners was as follows:
<TABLE>
<CAPTION>
Percentage
of Ownership
--------------------------------------
Institutional Investment Adviser
Portfolio Class Class Class
- ------------------ ------------- ---------- -------
<S> <C> <C> <C>
Value 14.3% 48.0% 95.5%
Equity -- 88.8 --
Small Cap Value 10.8 -- --
International
Equity 22.5 90.0 --
Mid Cap Growth 22.9 -- 98.7
Mid Cap Value 22.0 91.1 --
Emerging Markets 69.1 -- --
Fixed Income -- 92.5 95.5
Domestic Fixed
Income 21.7 -- --
High Yield -- 72.5 98.9
Cash Reserves 45.1 -- --
Fixed Income II 10.5 -- --
Mortgage-Backed
Securities 90.7 -- --
Limited Duration 25.9 -- --
Special Purpose
Fixed Income -- 91.4 --
Municipal 33.3 -- --
PA Municipal 47.8 -- --
Global Fixed
Income 52.1 -- --
International
Fixed Income 60.3 -- --
Intermediate
Duration 52.8 -- --
Balanced 31.7 95.8 99.5
Multi-Asset-Class 30.5 92.7 --
</TABLE>
- --------------------------------------------------------------------------------
151
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
MAS Funds
In our opinion, the accompanying statements of net assets (excluding Standard
& Poor's ratings) 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 each of the twenty-two (22) Portfolios of the MAS
Funds listed in the accompanying table of contents, (hereafter referred to as
the "Fund") at September 30, 1997 and the results of each of their operations,
the changes in each of their net assets and their financial highlights for the
periods presented, 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 securities at
September 30, 1997 by correspondence with the custodians and the application of
alternative auditing procedures where securities purchased were not yet received
by the custodians, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
November 20, 1997
- --------------------------------------------------------------------------------
152
<PAGE> 155
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
Each Portfolio hereby designates the following amount as a long-term capital
gain dividend for the purpose of the dividend paid deduction on its federal
income tax return.
<TABLE>
<CAPTION>
AMOUNT
PORTFOLIO (000)
------------------------------------ --------
<S> <C>
Value $ 92,144
Equity 220,827
Small Cap Value 32,239
International Equity 13,001
Mid Cap Growth 42,412
Mid Cap Value 17
Emerging Markets 257*
Fixed Income 2,484
Fixed Income II 357
Special Purpose Fixed Income 1,134
Global Fixed 71
International Fixed 569
Balanced 29,821
Multi-Asset-Class 7,644
</TABLE>
For the year ended September 30, 1997, the percentage of dividends that qualify
for the 70% dividend received deduction for corporate shareholders for each
Portfolio were:
<TABLE>
<CAPTION>
PORTFOLIO AMOUNT
------------------------------------ --------
<S> <C>
Value 35.1%
Equity 44.9
Small Cap Value 8.3
Mid Cap Growth 5.3
Mid Cap Value 10.0
High Yield 3.0
Balanced 19.6
Multi-Asset-Class 13.4
</TABLE>
Foreign taxes accrued during the fiscal year ended September 30, 1997 amounting
to $1,816,000, $152,000* and $90,000 for the International Equity Portfolio,
Emerging Markets Portfolio and the International Fixed Income Portfolio,
respectively, are expected to be passed through to shareholders as foreign tax
credits on Form 1099-DIV for the year ending December 31, 1997. In addition, for
the year ended September 30, 1997, gross income derived from sources within
foreign countries amounted to $15,937,000, $628,000* and $7,982,000 for the
International Equity Portfolio, Emerging Markets Portfolio and the International
Fixed Income Portfolio, respectively.
For the fiscal year ended September 30, 1997**, the percentage of exempt
interest dividends paid by the Municipal Portfolio and the PA Municipal
Portfolio was 91.7% and 92.7%, respectively.
For the year ended September 30, 1997**, the percentage of income earned from
direct U.S. treasury obligations was as follows:
<TABLE>
<CAPTION>
INCOME
PORTFOLIO EARNED
------------------------------------ --------
<S> <C>
Fixed Income 33.2%
Domestic Fixed Income 31.8
Fixed Income II 29.9
Limited Duration 43.1
Mortgage-Backed Securities 11.6
Special Purpose Fixed Income 24.7
Municipal 11.5
PA Municipal 10.4
Global Fixed Income 27.2
International Fixed Income 11.8
Intermediate Duration 39.0
Balanced 22.7
Multi-Asset-Class 18.2
</TABLE>
* Amount is based on October 31 tax year end.
** Amounts for the period ending December 31, 1997 will be provided with Form
1099-DIV to be mailed in January 1998.
- --------------------------------------------------------------------------------
153
<PAGE> 156
- --------------------------------------------------------------------------------
SHAREHOLDER MEETINGS: (UNAUDITED)
At two special shareholder meetings held on May 1 and May 12, 1997, the
shareholders of Miller Anderson & Sherrerd, LLP (the "Fund") were held for the
purpose of voting on the following proposals:
1. To approve an amendment to the investment advisory agreement between the Fund
and Miller Anderson & Sherrerd, LLP.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAIN
PORTFOLIO FOR AGAINST VOTES
-------------------------------------------------------------------- ----------- -------- ----------
<S> <C> <C> <C>
Value 81,180,469 226,027 525,982
Equity 27,722,514 2,303 1,428
Small Cap Value 17,726,537 909 822
International Equity 24,221,994 0 2,680
Mid Cap Growth 13,913,156 7,215 2,491
Mid Cap Value 4,158,735 4,271 22,651
Emerging Markets 2,141,399 0 0
Fixed Income 103,442,530 14,455 2,231,853
Domestic Fixed Income 5,746,614 0 1,760
High Yield 24,149,301 167,610 489,552
Cash Reserves 49,933,537 653,200 87
Fixed Income II 10,207,399 0 6,425
Mortgage-Backed Securities 3,521,496 0 0
Limited Duration 5,965,091 0 0
Special Purpose Fixed Income 21,722,881 61 24,665
Municipal 3,163,783 0 43,192
PA Municipal 1,567,944 0 0
Global Fixed Income 4,420,125 0 0
International Fixed Income 10,534,872 229 1,013
Intermediate Duration 2,976,756 0 0
Balanced 12,108,669 2,268 1,018,999
Multi-Asset-Class 7,671,603 0 516,117
</TABLE>
2. To elect the following Trustees to serve the Fund effective May 1, 1997 until
such time as their successors have been duly appointed.
<TABLE>
<CAPTION>
VOTED
FOR WITHHELD
----------- ----------
<S> <C> <C>
Thomas L. Bennett 532,682,575 2,503,229
Thomas P. Gerrity 532,791,783 2,274,021
Joseph P. Healey 532,778,972 2,286,832
Joseph J. Kearns 532,802,368 2,263,436
Vincent R. McLean 532,776,415 2,289,389
C. Oscar Morong, Jr. 532,791,627 2,274,177
</TABLE>
3. To approve the proposal of the Board of Trustees' selection of Price
Waterhouse LLP as the Fund's independent accountants.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAIN
FOR AGAINST VOTES
----------- -------- ----------
<S> <C> <C> <C>
530,883,223 655,873 3,528,115
</TABLE>
4. To amend the investment objective and certain investment limitations of the
Domestic Fixed Income Portfolio.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAIN
FOR AGAINST VOTES
----------- -------- ----------
<S> <C> <C> <C>
5,120,238 484,851 1,760
</TABLE>
5. To amend the investment objective and certain investment limitations of the
Fixed Income Portfolio II.
<TABLE>
<CAPTION>
VOTED VOTED ABSTAIN
FOR AGAINST VOTES
----------- -------- ----------
<S> <C> <C> <C>
8,089,070 2,076,819 6,425
</TABLE>
- --------------------------------------------------------------------------------
154
<PAGE> 157
MAS FUNDS TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The following is a list of the Trustees and the principal executive officers of
the Fund and a brief statement of their present positions and principal
occupations during the past five years.
<TABLE>
<S> <C>
THOMAS L. BENNETT, CFA* C. OSCAR MORONG, JR.
Chairman of the Board of Trustees; Managing Director, Trustee; Managing Director, Morong Capital Management;
Morgan Stanley; Portfolio Manager and member of the Director, Ministers and Missionaries Benefit Board of
Executive Committee, Miller Anderson & Sherrerd, LLP; American Baptist Churches, The Indonesia Fund, The
Director, MAS Fund Distribution, Inc.; formerly Landmark Funds; formerly Senior Vice President and
Director, Morgan Stanley Universal Fund, Inc. Investment Manager for CREF, TIAA-CREF Investment
Management, Inc.
THOMAS P. GERRITY JAMES D. SCHMID
Trustee; Dean and Reliance Professor of Management and President, MAS Funds; Principal, Morgan Stanley; Head
Private Enterprise, Wharton School of Business, of Mutual Funds, Miller Anderson & Sherrerd, LLP;
University of Pennsylvania; Director, Digital Director, MAS Fund Distribution, Inc.; Chairman of the
Equipment Corporation; Director, Sun Company, Inc.; Board of Directors, The Minerva Fund, Inc.
Director, Fannie Mae; Director, Reliance Group
Holdings; Director, Melville Corporation.
JOSEPH P. HEALY LORRAINE TRUTEN, CFA
Trustee; Headmaster, Haverford School; formerly; Dean, Vice President, MAS Funds; Principal, Morgan Stanley;
Hobart College; Associate Dean, William & Mary Head of Mutual Fund Services, Miller Anderson &
College. Sherrerd, LLP; President, MAS Fund Distribution, Inc.
JOSEPH J. KEARNS DOUGLAS W. KUGLER, CFA
Trustee; Vice President and Treasurer, The J. Paul Treasurer, MAS Funds; Vice President, Morgan Stanley;
Getty Trust; Director, Electro Rent Corporation; Head of Mutual Fund Administration, Miller Anderson &
Trustee, Southern California Edison Nuclear Sherrerd, LLP.
Decommissioning Trust; Director, The Ford Family
Foundation.
VINCENT R. MCLEAN JOHN H. GRADY, JR.
Trustee; Director, Alexander and Alexander Services, Secretary, MAS Funds; Partner, Morgan, Lewis &
Inc., Director, Legal and General America, Inc., Bockius, LLP.
Director, William Penn Life Insurance Company of New
York; formerly Executive Vice President, Chief
Financial Officer, Director and Member of the
Executive Committee of Sperry Corporation (now part of
Unisys Corporation).
</TABLE>
*Trustee Bennett is deemed to be an "interested person" of the Fund as that term
is defined in the Investment Company Act of 1940, as amended.
- --------------------------------------------------------------------------------
155
<PAGE> 158
[MAS FUNDS LOGO]
MILLER
ANDERSON
& SHERRERD, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899
Investment Adviser: (610) 940-5000
MAS Funds: (800) 354-8185
Printed in U.S.A.
This Report has been prepared for
shareholders and may be distributed to
others only if preceded or accompanied by a
current prospectus.
<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1996
[LOGO]
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active Country Allocation................. 4
Asian Equity.............................. 14
Emerging Markets.......................... 20
European Equity .......................... 30
Global Equity ............................ 36
Gold...................................... 41
International Equity ..................... 44
International Magnum ..................... 53
International Small Cap................... 59
Japanese Equity........................... 64
Latin American............................ 68
U.S. Equity Portfolios:
Aggressive Equity......................... 74
Emerging Growth........................... 78
Equity Growth............................. 82
Small Cap Value Equity.................... 88
Technology................................ 93
U.S. Real Estate.......................... 97
Value Equity.............................. 102
Balanced Portfolio.......................... 107
Fixed Income Portfolios:
Emerging Markets Debt..................... 112
Fixed Income.............................. 118
Global Fixed Income....................... 122
High Yield................................ 128
Municipal Bond............................ 134
Money Market Portfolios:
Money Market.............................. 138
Municipal Money Market.................... 142
Statement of Operations..................... 150
Statement of Changes in Net Assets.......... 154
Statement of Cash Flows..................... 167
Financial Highlights ....................... 168
Notes to Financial Statements............... 193
Report of Independent Accountants........... 201
Federal Tax Information..................... 202
Officers and Directors ..................... 203
</TABLE>
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Fund, Inc. Prospectuses
describe in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectuses carefully before you invest
or send money.
- --------------------------------------------------------------------------------
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
FELLOW SHAREHOLDERS:
We are very pleased to present to you the Fund's Annual Report for the year
ended December 31, 1996. Our Fund now offers 26 portfolios, including 11 global
and international portfolios, 7 U.S. equity portfolios, 5 fixed-income
portfolios, a balanced portfolio and 2 money market portfolios.
The performance of each of the portfolios and commentaries by portfolio
managers discussing the results of each portfolio are contained in this Report.
The investment performance of each portfolio relative to its respective
benchmark is summarized in the performance table on pages 2 and 3.
After a very strong performance in 1995, the U.S. equity market continued
its bull run in 1996, despite a large pullback in July followed by increased
volatility. A passive Federal Reserve Bank won a major credibility battle as
inflation risks were tempered by a softening economy. July's panic selling and
steep price declines, followed by the subsequent market rebound seemed once
again to demonstrate the conviction of many investors that it is a good strategy
to buy quality stocks on market dips. Despite its strength, the U.S. equity
market under-performed a number of international markets including, for example,
Spain, Hong Kong and the United Kingdom, among major markets, and Russia,
Hungary, the Czech Republic and Brazil, among emerging markets, according to
Morgan Stanley Capital International (MSCI).
1996 was a year of ups and downs for the bond markets. After an excellent
performance in 1995, the domestic fixed-income market provided rather
disappointing results while international bond markets turned in mixed
performances. The real bright spot was in emerging markets debt, which recorded
its second consecutive year of impressive performance.
We are pleased to report that 18 of our 24 non-money market portfolios
exceeded their benchmarks in 1996. Domestically, our Aggressive Equity and
Equity Growth Portfolios turned in stellar absolute and relative performance,
returning 40.90% and 30.97%, respectively. The U.S. Real Estate Portfolio also
had a very strong year, with a return of 39.56%. Among domestic bond portfolios,
both the Fixed-Income and High Yield Portfolios outperformed their respective
benchmarks.
Among our global and international portfolios, the Latin American Portfolio
returned 48.77% (for Class A shares) against a 21.95% return for the MSCI
Emerging Markets Global Latin America Index. In addition, each of the
International Equity, Global Equity and European Equity Portfolios continued its
impressive absolute and relative performance in 1996. After a difficult 1995,
emerging market equities showed improvement in a number of markets and our
Emerging Markets Portfolio was up 12.19% (for Class A shares). Finally, our
Emerging Markets Debt Portfolio gained an impressive 50.52% (for Class A shares)
in 1996 after returning 28.23% in 1995.
While in overall performance terms, 1996 was a very good year for our Fund,
it should also be stressed that each of our portfolios closely adhered to its
respective investment strategy and style in 1996. It remains our philosophy that
superior long-term results are best achieved by following a well thought out and
consistently applied investment strategy.
We hope you find the enclosed Report informative. We very much appreciate
your support of the Fund.
Sincerely,
(SIGNATURE)
Warren J. Olsen
PRESIDENT
February 18, 1997
AT THIS WRITING, MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE
FUND'S INVESTMENT ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., HAD RECENTLY
ANNOUNCED ITS INTENTION TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN
STANLEY, DEAN WITTER, DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE
TRANSACTION WILL CLOSE IN MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT
INC. WILL BE A SUBSIDIARY OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
- --------------------------------------------------------------------------------
1
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY (UNAUDITED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE
-------------------- ----------------------- --------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 1/02/96 $ 183,193 $ 633 $ 11.44 $ 11.44
Asian Equity 7/01/91 1/02/96 363,498 11,002 18.73 18.74
Emerging Markets 9/25/92 1/02/96 1,304,006 14,213 14.66 14.66
European Equity 4/02/93 1/02/96 178,356 2,654 16.70 16.67
Global Equity 7/15/92 1/02/96 80,297 3,928 16.24 16.21
Gold 2/01/94 1/02/96 27,810 1,370 9.30 9.28
International Equity 8/04/89 1/02/96 2,264,424 5,393 16.95 16.93
International Magnum 3/15/96 3/15/96 85,316 23,173 10.66 10.63
International Small Cap 12/15/92 -- 234,743 -- 16.83 --
Japanese Equity 4/25/94 1/02/96 152,229 3,431 7.96 7.94
Latin American 1/18/95 1/02/96 30,409 1,333 11.32 11.31
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 68,480 8,805 14.43 14.42
Emerging Growth 11/01/89 1/02/96 62,793 3,997 13.50 13.45
Equity Growth 4/02/91 1/02/96 352,703 5,498 14.94 14.92
Small Cap Value Equity 12/17/92 1/02/96 23,970 1,689 10.89 10.88
Technology 9/16/96 9/16/96 3,595 1,487 10.71 10.71
U.S. Real Estate 2/24/95 1/02/96 210,368 8,734 14.41 14.39
Value Equity 1/31/90 1/02/96 106,128 2,555 13.89 13.89
BALANCED PORTFOLIO 2/20/90 1/02/96 5,992 2,197 8.19 8.18
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 152,142 4,253 7.54 7.53
Fixed Income 5/15/91 1/02/96 130,733 1,462 10.58 10.58
Global Fixed Income 5/01/91 1/02/96 112,888 1,559 11.30 11.29
High Yield 9/28/92 1/02/96 95,663 5,665 10.91 10.90
Municipal Bond 1/18/95 1/02/96 40,227 69 10.25 10.24
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,284,633 -- 1.00 --
Municipal Money Market 2/10/89 -- 721,410 -- 1.00 --
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
30 DAY
CURRENT YIELD++ 7 DAY 7 DAY 30 DAY 30 DAY
----------------- CURRENT EFFECTIVE CURRENT COMPARABLE
CLASS A CLASS B YIELD+ YIELD+ YIELD++ YIELD
------- ------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolios: Money Market Portfolios:
Emerging Markets Debt 10.46% 10.16% Money Market 4.99% 5.11% 4.97% 4.85%(19)
Fixed Income 6.39 6.27 Municipal Money Market 3.38 3.43 3.03 3.06(20)
Global Fixed Income 4.91 4.76
High Yield 9.31 9.05
Municipal Bond 4.35 4.11
</TABLE>
- --------------------------------------------------------------------------------
+ The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at December 31, 1996 with all dividends reinvested. As
with all money market portfolios, yields fluctuate as market conditions
change and the 7 day yields are not necessarily indicative of future
performance.
++ The current 30 day yield reflects the net investment income generated by the
Portfolio over a specified 30-day period expressed as an annual percentage.
Expenses accrued for the 30-day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL FIVE YEAR AVERAGE ANNUAL TOTAL
ONE YEAR TOTAL RETURN TOTAL RETURN RETURN SINCE INCEPTION
- ----------------------------------------- --------------------------- ---------------------------
COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B** INDICES CLASS A INDICES CLASS A INDICES
- ----------- ----------- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
9.71% 9.22% 6.05% (1) -- -- 8.71% 9.22%(1)
3.49 2.92 9.18 (2) 19.35% 17.34%(2) 18.28 16.93(2)
12.19 11.04 7.89 (3) -- -- 12.93 12.64(3)
22.29 20.76 21.09 (4) -- -- 19.62 17.45(4)
22.83 22.04 13.48 (5) -- -- 19.22 13.22(5)
16.94 13.21 -2.28 (6) -- -- 6.80 -4.91(6)
19.64 18.58 6.05 (1) 16.41 8.15(1) 11.96 3.88(1)
8.25* 7.90* 5.26 (1) -- -- -- --
16.82 -- 6.05 (1) -- -- 16.42 13.70(1)
-1.40 -1.67 -15.50 (7) -- -- -2.51 -5.00(7)
48.77 42.44 21.95 (8) -- -- 16.98 6.04(8)
40.90 39.72 22.96 (10) -- -- 45.98 29.51(10)
3.72 3.58 22.71 (9) 4.10 17.10(9) 11.96 15.63(9)
30.97 29.92 22.96 (10) 16.99 15.20(10) 17.06 15.86(10)
22.99 22.33 19.05 (11) -- -- 14.32 16.71(11)
7.10* 7.10* 8.88 (10) -- -- -- --
39.56 38.23 36.40 (12) -- -- 32.73 27.19(12)
19.73 18.57 22.96 (10) 14.92 15.20(10) 12.95 15.72(10)
10.93 10.24 14.39 (13) 10.15 11.01(13) 10.39 11.61(13)
50.52 48.52 33.97 (14) -- -- 18.94 11.94(14)
4.61 4.35 3.63 (15) 7.00 7.04(15) 8.35 8.31(15)
6.44 6.12 4.40 (16) 7.17 8.17(16) 8.50 9.84(16)
15.01 14.37 12.40 (17) -- -- 12.91 11.30(17)
3.67 3.55 4.37 (18) -- -- 6.36 8.34(18)
5.03 -- -- -- -- -- --
3.02 -- -- -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
* Cumulative (unannualized) total return since inception of the Portfolio.
** The Portfolios began offering Class B Shares on January 2, 1996, except for
the International Magnum and Technology Portfolios, which began offering
Class B Shares on March 15, 1996 and September 16, 1996, respectively.
<TABLE>
<C> <S>
INDICES:
(1) MSCI EAFE (Europe, Australia, and Far East)
(2) MSCI Combined Far East Free ex-Japan
(3) IFC Global Total Return Composite
(4) MSCI Europe
(5) MSCI World
(6) Philadelphia Gold and Silver
(7) MSCI Japan
(8) MSCI Emerging Markets Global Latin America
(9) NASDAQ Composite
(10) S&P 500
(11) Russell 2500
(12) NAREIT
(13) Indata Balanced-Median
(14) J.P. Morgan Emerging Markets Bond
(15) Lehman Aggregate Bond
(16) J.P. Morgan Traded Global Bond
(17) CS First Boston High Yield
(18) Lehman 7 Year Municipal Bond
(19) Donaghue's/IBC Money Fund Comparable Yield
(20) Donaghue's/IBC Municipal Money Market Fund Comparable
Yield
</TABLE>
Past performance should not be construed as a guarantee 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.
Investments in the Money Market and Municipal Money Market Portfolios are
neither insured nor guaranteed by the U.S. Government. There is no assurance
that the Money Market and Municipal Money Market Portfolios will be able to
maintain a stable net asset value of $1.00 per share. Please read the
Portfolios' prospectuses carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.2%
Brazil 1.7%
France 7.2%
Germany 7.9%
Hong Kong 6.7%
Italy 4.0%
Japan 33.8%
Korea 0.8%
Netherlands 3.5%
Singapore 2.7%
Spain 4.4%
Sweden 3.6%
Thailand 1.4%
United Kingdom 11.6%
Other 8.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACTIVE COUNTRY ALLOCATION
MSCI EAFE INDEX (1) PORTFOLIO-CLASS A
<S> <C> <C>
01/17/92* 500,000 500,000
10/31/1992 452,945 468,500
12/31/1992 459,595 479,500
12/31/1993 609,250 626,820
12/31/1994 656,600 623,550
12/31/1995 730,205 689,459
12/31/1996 774,382 756,405
*Commencement of Operations
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
-------------
ONE YEAR
-------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 9.71%
PORTFOLIO -- CLASS B(3)............................................................................ 9.22
INDEX.............................................................................................. 6.05
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A............................................................................... 8.71%
PORTFOLIO -- CLASS B(3)............................................................................ N/A
INDEX.............................................................................................. 9.22
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE 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 Active Country Allocation Portfolio invests in international equity markets,
with emphasis placed upon countries, rather than stock selection. This approach
reflects our belief that a diversified selection of securities representing
exposure to countries that we find attractive provides an effective way to
maximize the return and minimize the risk associated with global investing.
For the year ended December 31, 1996, the Portfolio had a total return of 9.71%
for the Class A shares and 9.22% for the Class B shares, as compared to a total
return of 6.05% for the Morgan Stanley Capital International (MSCI) EAFE Index.
The average annual total return for the period from inception on January 17,
1992 through December 31, 1996 was 8.71% for the Class A shares as compared to
9.22% for the Index.
In a volatile year for financial assets, the U.S. equity market continued its
strong performance (+23.2%) but ranked 11th in global markets beaten by fully
half of the international markets (in U.S. dollars), notably, Spain (+40.1%),
Sweden (+37.2%) and Hong Kong (+33.1%). Markets were boosted by abundant
liquidity provided through loose monetary policy, moderate economic growth and a
benign inflation environment.
Portfolio decisions to overweight Hong Kong, Spain, Sweden and Germany and our
hedges out of the Japanese yen and Deutsche mark bloc contributed substantially
to performance. Underweight allocations relative to the benchmark in the U.K.,
the Netherlands and Switzerland detracted from results. Opportunistic
commitments to emerging markets were mixed as Brazil and Indonesia performed
strongly while the developing Asian positions of Korea and Thailand woefully
underperformed. The Japanese market, the single biggest benchmark weight and
portfolio decision, was volatile in 1996 with positive returns in the first half
followed by a market sell off in the second half. On balance, our Japanese
market allocations were slightly positive, aided by our decision in mid-August
to sell all exposure to the bank sector.
After a strong year for global equity markets, we made an interim move to
increase cash in mid-December. Market strength in combination with general
financial market euphoria caused us to pause and take profits by reducing
selected country overweights. We trimmed overweight positions back to moderate
overweights in Germany and Hong Kong
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
which had performed well. Germany had discounted much of the good news on
restructuring and European Monetary Union (EMU) while Hong Kong had surged to
new highs as fears of the Chinese takeover subsided.
Currently the Portfolio has 8% in cash with an overweight in Asia ex-Japan, a
neutral stance in Japan ex-banks and an underweight in Europe based on the
following observations.
JAPAN
The Japanese market fell in 1996 as investors downgraded their expectations for
recovery and significant political and economic reform in 1997. The Japanese
authorities now find themselves in a very difficult situation. The structural
problems in the banking and property sectors remain and the consumption tax
hike, needed to reduce the now large budget deficit, is a significant threat to
the economic recovery and to consumer sentiment.
We believe the negative sentiment in the market is overdone with the overall
picture being one of benign inflation and 2.5% to 3.0% GDP growth. Deregulation
measures announced in the retail and telecommunications sectors have already had
positive effects on real spending in the economy and we expect financial
deregulation to go through and have similar positive effects on the economy.
A flight to quality by investors has created a two-tier market. A small number
of high quality (i.e. restructured), attractively valued export-related stocks
have significantly outperformed the broader market. These stocks will benefit
from the weaker yen and a pick up in global growth. Domestic companies will
suffer from increased competition, less government support and a weaker yen.
Reflecting this segmentation, we believe bank stocks will continue to
underperform.
EUROPE
The brightened prospects for economic growth, EMU, and corporate restructuring
underpinned the positive performance of the European markets in 1996. Europe in
local currencies returned 20% for the year with many markets reaching all-time
highs. Investors became less skeptical of the viability of the Union as
governments presented budgets to rein in their fiscal deficits and as progress
was made on the outstanding structural issues for EMU. Bond yields, within the
core markets and the periphery, converged sharply, providing further support for
equities.
We remain positive on the prospects for earnings and economic growth based on
the lagged effects of a weaker Deutsche mark and aggressive monetary
accommodation. However, investors have begun to discount the benefits of
corporate restructuring and an asset allocation shift into equities. In
addition, at current levels many European markets are increasingly sensitive to
events that could upset existing market perception about who will be "in and
out" of monetary union in 1999.
ASIA
In general, Asian markets suffered in 1996 as investors were concerned that the
economic growth and exports slowdown were secular and not cyclical in nature.
Throughout the year, the markets belabored under the fear of an upturn in U.S.
interest rates, concerns about persistent current account deficits and political
turmoil in several Asian countries.
We remain overweight in Asia based on expectations that an upturn in global
economic growth should provide a stimulus to export performance, improve trade
balances and produce momentum for earnings growth. An improvement in the trade
and current accounts, together with reduced inflationary pressures, should
produce a climate for monetary easing following several years of tightening. We
are optimistic about the prospects for the Asian markets in 1997.
Barton M. Biggs
PORTFOLIO MANAGER
Madhav Dhar
PORTFOLIO MANAGER
Francine J. Bovich
PORTFOLIO MANAGER
Ann D. Thivierge
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (89.9%)
AUSTRALIA (2.0%)
16,300 Amcor Ltd......................................... $ 105
20,600 Australian National Industries Ltd................ 20
26,713 Boral Ltd......................................... 76
6,500 Brambles Industries Ltd........................... 127
46,523 Broken Hill Proprietary Co., Ltd.................. 662
14,300 Burns, Philip & Co., Ltd.......................... 25
12,173 Coca-Cola Amatil Ltd.............................. 130
33,247 Coles Myer Ltd.................................... 137
7,700 CRA Ltd........................................... 121
26,300 CSR Ltd........................................... 92
59,100 Fosters Brewing Corp.............................. 120
12,207 Gio Australia Holdings Ltd........................ 31
33,432 Goodman Fielder Ltd............................... 41
8,337 Highlands Gold Ltd................................ 5
8,400 ICI Australia Ltd................................. 91
7,056 Lend Lease Corp., Ltd............................. 137
41,043 MIM Holdings Ltd.................................. 57
34,980 National Australia Bank Ltd....................... 411
8,137 Newcrest Mining Ltd............................... 32
46,916 News Corp., Ltd................................... 248
40,197 Normandy Mining Ltd............................... 56
18,976 North Ltd......................................... 56
26,700 Pacific Dunlop Ltd................................ 68
25,300 Pioneer International Ltd......................... 75
5,803 Renison Goldfields Consolidated Ltd............... 26
16,100 Santos Ltd........................................ 65
3,500 Sons of Gwalia Ltd................................ 21
19,754 Southcorp Holdings Ltd............................ 63
10,500 TABCORP Holdings Ltd.............................. 50
26,075 Western Mining Corp. Holdings Ltd................. 164
46,000 Westpac Banking Corp.............................. 262
----------
3,574
----------
BRAZIL (0.5%)
(a)495,000 Cia Paulista de Forca E Luz S.A................... 59
1,624,000 Cia Siderurgica Nacional S.A...................... 46
1,783,000 Eletrobras S.A.................................... 638
354,000 Lightpar.......................................... 126
(a)425,000 Lightpar S.A...................................... 103
(a)27,342 TELESP S.A........................................ 6
----------
978
----------
FRANCE (7.2%)
1,133 Accor S.A......................................... 144
3,915 Air Liquide....................................... 611
4,739 Alcatel Alsthom................................... 381
6,577 AXA S.A........................................... 418
6,623 Banque Nationale de Paris......................... 256
1,250 BIC Corp.......................................... 187
1,163 Bouygues.......................................... 121
864 Canal Plus........................................ 191
1,300 Carrefour S.A..................................... 846
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,000 Casino Guichard Perrachon......................... $ 140
861 Cie Bancaire S.A.................................. 102
3,339 Cie de Saint Gobain............................... 472
5,963 Cie de Suez S.A................................... 254
3,361 Cie Financiere de Paribas S.A., Class A........... 227
3,583 Cie Generale des Eaux............................. 444
10,000 Elf Aquitaine..................................... 911
1,250 Eridania Beghin-Say S.A........................... 201
400 Essilor International............................. 121
2,733 Groupe Danone..................................... 381
2,246 Havas S.A......................................... 158
3,942 Lafarge S.A....................................... 237
1,080 Legrand........................................... 184
2,335 L'OREAL........................................... 880
3,350 LVMH Moet Hennessy Louis Vuitton.................. 936
2,089 Lyonnaise des Eaux................................ 194
5,764 Michelin Compagnie Generale des Etablissements,
Class B......................................... 311
2,250 Pernod Ricard..................................... 124
2,100 Peugeot Citroen S.A............................... 236
730 Pinault-Printemps S.A............................. 290
670 Promodes.......................................... 189
11,747 Rhone-Poulenc S.A., Class A....................... 401
80 Sagem............................................. 48
360 Saint Louis....................................... 90
3,626 Sanofi S.A........................................ 361
5,141 Schneider S.A..................................... 238
57 Simco S.A. (RFD).................................. 5
1,175 Simco S.A......................................... 103
150 Societe Eurafrance S.A............................ 65
2,724 Societe Generale.................................. 295
250 Sodexho S.A....................................... 139
4,596 Thomson CSF....................................... 149
8,204 Total S.A., Class B............................... 667
11,454 UAP (Compagnie)................................... 286
9,800 Usinor Sacilor.................................... 143
----------
13,137
----------
GERMANY (7.7%)
1,600 Adidas AG......................................... 138
(a)1,500 AGIV AG........................................... 22
750 Allianz AG........................................ 1,350
150 AMB Aachener & Muenchener Beteiligungs AG......... 107
18,400 BASF AG........................................... 705
23,500 Bayer AG.......................................... 954
7,900 Bayerische Hypotheken Bank AG..................... 238
8,250 Bayerische Vereinsbank AG......................... 335
2,750 Beiersdorf AG..................................... 136
1,600 Bilfinger & Berger Bau AG......................... 59
(a)250 Brau Und Brunnen AG............................... 17
900 CKAG Colonia Konzern AG........................... 75
3,100 Continental AG.................................... 56
(a)15,950 Daimler-Benz AG................................... 1,094
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
GERMANY (CONT.)
<TABLE>
<C> <S> <C>
300 Degussa AG........................................ $ 136
15,900 Deutsche Bank AG.................................. 742
(a)67,306 Deutsche Telekom AG............................... 1,404
13,900 Dresdner Bank AG.................................. 416
1,500 Heidelberger Zement AG............................ 121
2,900 Hochtief AG....................................... 114
300 Karstadt AG....................................... 100
(a)2,000 Kloeckner-Humboldt-Deutz AG....................... 9
300 Linde AG.......................................... 182
12,050 Lufthansa AG...................................... 163
400 MAN AG............................................ 97
1,150 Mannesmann AG..................................... 495
5,050 Merck KGaA........................................ 182
(a)3,215 Metro AG.......................................... 252
259 Muenchener Rueck AG (Registered).................. 629
550 Preussag AG....................................... 124
10,550 RWE AG............................................ 442
1,900 SAP AG............................................ 260
2,250 Schering AG....................................... 190
17,850 Siemens AG........................................ 828
(a)100 STRABAG AG........................................ 6
1,200 Thyssen AG........................................ 213
15,650 VEBA AG........................................... 900
900 Viag AG........................................... 352
(a)256 Viag AG (RFD)..................................... 98
950 Volkswagen AG..................................... 394
----------
14,135
----------
HONG KONG (6.7%)
(a)38,000 Applied International Holdings.................... 2
48,319 Bank of East Asia Ltd............................. 215
181,000 Cathay Pacific Airways Ltd........................ 286
136,000 Cheung Kong Holdings Ltd.......................... 1,209
114,000 China Light & Power Co., Ltd...................... 507
99,985 Chinese Estates Holdings.......................... 111
40,000 Giordano Holdings Ltd............................. 34
77,000 Hang Lung Development Co.......................... 169
118,500 Hang Seng Bank Ltd................................ 1,440
11,200 Hong Kong Aircraft Engineering Co., Ltd........... 34
172,400 Hong Kong & China Gas Co., Ltd.................... 333
79,082 Hong Kong & Shanghai Hotel Ltd.................... 149
691,868 Hong Kong Telecommunications Ltd.................. 1,114
267,198 Hopewell Holdings Ltd............................. 173
208,000 Hutchison Whampoa Ltd............................. 1,634
66,000 Hysan Development Co., Ltd........................ 263
24,500 Johnson Electric Holdings Ltd..................... 68
36,000 Miramar Hotel & Investment Ltd.................... 72
94,228 New World Development Co., Ltd.................... 637
87,000 Oriental Press Group Ltd.......................... 39
24,500 Peregrine Investment Holdings Ltd................. 42
98,340 Shangri-La Asia Ltd............................... 146
102,000 Shun Tak Holdings Ltd............................. 68
114,000 South China Morning Post Holdings Ltd............. 94
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
64,000 Stelux Holdings Ltd............................... $ 17
138,000 Sun Hung Kai Properties Ltd....................... 1,691
96,500 Swire Pacific Ltd., Class A....................... 920
27,000 Television Broadcasts Ltd......................... 108
134,000 Wharf Holdings Ltd................................ 669
9,360 Wing Lung Bank Ltd................................ 64
21,500 Winsor Industrial Corp., Ltd...................... 5
----------
12,313
----------
ITALY (4.0%)
38,512 Assicurazioni Generali S.p.A...................... 730
56,700 Banca Commerciale Italiana........................ 103
22,300 Banco Ambrosiano Veneto S.p.A..................... 54
9,600 Benetton Group S.p.A.............................. 121
6,500 Cartiere Burgo.................................... 30
111,000 Credito Italiano.................................. 122
30,000 Edison S.p.A...................................... 190
350,000 ENI S.p.A......................................... 1,796
4,800 Falck Acciaierie & Ferriere Lombarde.............. 19
139,500 Fiat S.p.A........................................ 422
34,800 Fiat S.p.A. Di Risp (NCS)......................... 61
(a)11,500 Impregilo S.p.A................................... 9
38,000 Istituto Bancario San Paolo....................... 233
27,450 Istituto Mobiliare Italiano S.p.A................. 235
171,900 Istituto Nazionale delle Assicurazioni............ 224
6,300 Italcementi....................................... 15
11,850 Italcementi Di Risp............................... 66
27,800 Italgas........................................... 116
18,900 Magneti Marelli S.p.A............................. 23
(a)53,500 Mediaset S.p.A.................................... 247
20,000 Mediobanca S.p.A.................................. 108
(a)185,574 Montedison S.p.A.................................. 127
(a)41,900 Montedison S.p.A. Di Risp (NCS)................... 27
(a)153,250 Olivetti S.p.A.................................... 54
61,920 Parmalat Finanziaria S.p.A........................ 95
78,000 Pirelli S.p.A..................................... 145
14,265 R.A.S. S.p.A...................................... 133
11,000 Rinascente........................................ 64
(a)2,200 Saffa S.p.A....................................... 4
5,900 SAI............................................... 54
5,900 Sasib S.p.A....................................... 18
12,000 Sirti S.p.A....................................... 73
28,000 Snia BPD S.p.A.................................... 29
293,900 Telecom Italia Mobile S.p.A....................... 743
285,500 Telecom Italia S.p.A.............................. 742
70,500 Telecom Italia S.p.A. Di Risp (NCS)............... 138
----------
7,370
----------
JAPAN (33.8%)
4,100 Advantest Corp.................................... 192
66,000 Ajinomoto Co...................................... 673
(a)33,000 Aoki Corp......................................... 69
3,300 Aoyama Trading Co................................. 88
33,000 Asahi Breweries Ltd............................... 342
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
100,000 Asahi Chemical Industry Co., Ltd.................. $ 566
95,000 Asahi Glass Co., Ltd.............................. 894
33,000 Bridgestone Co.................................... 627
50,000 Canon, Inc........................................ 1,105
20,000 Casio Computer Co................................. 155
13,000 Chiyoda Corp...................................... 84
33,000 Chugai Pharmaceuticals Co......................... 276
66,000 Dai Nippon Printing Co., Ltd...................... 1,157
46,000 Daiei, Inc........................................ 352
33,000 Daikin Industries Ltd............................. 294
33,000 Daiwa House Industry.............................. 425
66,000 Daiwa Securities Co., Ltd......................... 587
33,000 Denso Corp........................................ 795
22,000 Ebara Corp........................................ 287
14,200 Fanuc............................................. 455
26,000 Fuji Photo Film Ltd............................... 858
107,000 Fujitsu Ltd....................................... 998
54,000 Furukawa Electric Co.............................. 256
66,000 Hankyu Corp....................................... 328
33,000 Hazama Corp....................................... 91
166,000 Hitachi Ltd....................................... 1,548
52,000 Honda Motor Co.................................... 1,486
320 Industrial Bank of Japan.......................... 6
22,000 Ito-Yokado Co., Ltd............................... 957
(a)133,000 Japan Airlines Co................................. 706
83,000 Japan Energy Corp................................. 226
26,000 Jusco Co., Ltd.................................... 882
66,000 Kajima Corp....................................... 472
35,400 Kansai Electric Power Co.......................... 734
61,000 Kao Corp.......................................... 711
171,000 Kawasaki Steel Corp............................... 492
100,000 Kinki Nippon Railway.............................. 624
66,000 Kirin Brewery Co., Ltd............................ 650
66,000 Komatsu Ltd....................................... 541
100,000 Kubota Corp....................................... 483
66,000 Kumagai Gumi Co................................... 164
10,000 Kyocera Corp...................................... 623
33,000 Kyowa Hakko Kogyo................................. 252
100,000 Marubeni Corp..................................... 430
21,000 Marui Co., Ltd.................................... 379
100,000 Matsushita Electric Industries Ltd................ 1,632
100,000 Mitsubishi Chemical Corp.......................... 324
92,000 Mitsubishi Corp................................... 953
117,000 Mitsubishi Electric Corp.......................... 697
71,000 Mitsubishi Estate Co., Ltd........................ 730
182,000 Mitsubishi Heavy Industries Ltd................... 1,446
67,000 Mitsubishi Materials Corp......................... 271
(a)100,000 Mitsui & Co....................................... 812
66,000 Mitsui Engineering & Shipbuilding................. 135
54,000 Mitsui Fudosan Co................................. 541
37,000 Mitsukoshi Ltd.................................... 263
13,000 Murata Manufacturing Co., Ltd..................... 432
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
79,000 NEC Corp.......................................... $ 955
33,000 NGK Insulators.................................... 313
65,000 Nippon Express Co., Ltd........................... 446
33,000 Nippon Fire & Marine Insurance Co................. 150
32,000 Nippon Light Metal Co............................. 132
33,000 Nippon Meat Packers, Inc.......................... 427
100,000 Nippon Oil Co..................................... 514
369,000 Nippon Steel Co................................... 1,090
100,000 Nippon Yusen Kabushiki Kaisha..................... 452
126,000 Nissan Motor Co................................... 731
(a)194,000 NKK Corp.......................................... 437
100,000 Nomura Securities Co., Ltd........................ 1,502
66,000 Odakyu Electric Railway Corp...................... 396
66,000 Oji Paper Co., Ltd. (New)......................... 418
147,000 Osaka Gas Co...................................... 402
33,000 Penta-Ocean Construction.......................... 147
10,000 Pioneer Electric Corp............................. 191
3,000 Rohm Co........................................... 197
33,000 Sankyo Co., Ltd................................... 935
100,000 Sanyo Electric Co., Ltd........................... 414
7,000 Secom Co., Ltd.................................... 424
6,500 Sega Enterprises.................................. 219
33,000 Sekisui House Co., Ltd............................ 336
66,000 Sharp Corp........................................ 940
9,000 Shimano, Inc...................................... 153
47,000 Shimizu Corp...................................... 351
14,000 Shin-Etsu Chemical Co............................. 255
14,000 Shiseido Co., Ltd................................. 162
(a)66,000 Showa Denko....................................... 152
15,200 Sony Corp......................................... 996
133,000 Sumitomo Chemical Co.............................. 527
66,000 Sumitomo Corp..................................... 520
45,000 Sumitomo Electric................................. 629
14,000 Sumitomo Forestry Co., Ltd........................ 170
32,000 Sumitomo Metal & Mining Co........................ 216
233,000 Sumitomo Metal Industries......................... 573
34,000 Sumitomo Osaka Cement Co., Ltd.................... 112
66,000 Taisei Corp., Ltd................................. 342
51,000 Takeda Chemical................................... 1,070
66,000 Teijin Ltd........................................ 288
66,000 Tobu Railway Co................................... 323
23,800 Tohoku Electric Power............................. 473
100,000 Tokio Marine & Fire Insurance Co.................. 941
15,000 Tokyo Dome Corp................................... 262
61,700 Tokyo Electric Power Co........................... 1,353
8,000 Tokyo Electron Ltd................................ 245
96,000 Tokyo Gas Co...................................... 260
66,000 Tokyu Corp........................................ 375
46,000 Toppan Printing Co., Ltd.......................... 576
100,000 Toray Industries, Inc............................. 617
33,000 Toto Ltd.......................................... 376
66,000 Toyoba Co......................................... 198
154,000 Toyota Motor Corp................................. 4,428
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
66,000 Ube Industries Ltd................................ $ 187
66,000 Yamaichi Securities Co............................ 294
----------
62,148
----------
KOREA (0.8%)
(d)5,770 Cho Hung Bank Co., Ltd. (Foreign)................. 47
5,170 Commercial Bank of Korea.......................... 34
4,000 Daewoo Corp....................................... 31
12,520 Daewoo Heavy Industries........................... 77
(a)1,730 Daewoo Securities Co.............................. 22
(a)1,270 Dong-Ah Construction Industrial Co................ 27
5,880 Hanil Bank........................................ 40
1,740 Hyundai Engineering & Construction Co.
(Foreign)....................................... 41
(d)1,420 Hyundai Motor Co., Ltd............................ 37
17,710 Korea Electric Power.............................. 516
(a)5,310 Korea First Bank.................................. 27
(d)130 Korea Mobile Telecommunications Corp.............. 130
2,730 L.G. Chemical Ltd................................. 26
(d)3,310 Pohang Iron & Steel Co., Ltd...................... 190
(a)2,080 Samsung Corp...................................... 25
870 Samsung Display Devices Co........................ 50
(d)2,460 Samsung Electronics............................... 146
340 Tong Yang Cement Co............................... 6
2,606 Yukong Ltd........................................ 49
----------
1,521
----------
NETHERLANDS (3.5%)
7,774 ABN Amro Holdings N.V............................. 506
1,850 Akzo Nobel N.V.................................... 253
15,600 Elsevier N.V...................................... 264
950 Heineken N.V...................................... 168
17,149 ING Groep N.V..................................... 617
2,156 KLM Royal Dutch Airlines N.V...................... 61
3,166 Koninklijke Ahold N.V............................. 198
750 Koninklijke Hoogovens N.V......................... 31
2,500 Koninklijke KNP BT N.V............................ 54
22,101 Koninklijke PTT Nederland N.V..................... 843
550 Nedlloyd Groep N.V................................ 15
7,900 Philips Electronics N.V........................... 320
12,700 Royal Dutch Petroleum Co.......................... 2,227
721 Stork N.V......................................... 25
3,800 Unilever N.V...................................... 672
1,668 Wolters Kluwer N.V................................ 222
----------
6,476
----------
SINGAPORE (2.7%)
(d)24,000 Amcol Holdings Ltd................................ --
41,000 City Developments Ltd............................. 369
10,000 Cycle & Carriage Ltd.............................. 122
49,000 DBS Land Ltd...................................... 180
34,000 Development Bank of Singapore Ltd. (Foreign)...... 459
12,000 First Capital Corp. Ltd........................... 36
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
15,800 Fraser & Neave Ltd................................ $ 163
20,000 Hai Sun Hup Group Ltd............................. 15
24,000 Hotel Properties Ltd.............................. 39
10,000 Inchcape Bhd...................................... 35
7,000 Jurong Shipyard Ltd............................... 35
27,000 Keppel Corp., Ltd................................. 210
21,000 Natsteel Ltd...................................... 48
42,000 Neptune Orient Lines Ltd. (Foreign)............... 36
50,300 Oversea-Chinese Banking Corp. (Foreign)........... 625
7,000 Overseas Union Enterprise Ltd..................... 35
16,000 Parkway Holdings Ltd.............................. 63
5,000 Robinson & Co. Ltd................................ 20
8,600 Shangri-La Hotel Ltd.............................. 29
65,000 Singapore Airlines Ltd. (Foreign)................. 590
17,800 Singapore Press Holdings (Foreign)................ 351
38,000 Singapore Technologies Industrial Corp............ 95
314,000 Singapore Telecommunications Ltd.................. 741
20,000 Straits Trading Co., Ltd.......................... 49
75,000 United Industrial Corp., Ltd...................... 63
46,000 United Overseas Bank Ltd. (Foreign)............... 513
----------
4,921
----------
SPAIN (4.4%)
735 Acerinox S.A...................................... 106
2,730 Aguas de Barcelona................................ 114
39 Aguas de Barcelona (New).......................... --
7,900 Argentaria S.A.................................... 354
13,369 Autopistas Concesionaria Espanola S.A............. 184
14,100 Banco Bilbao Vizcaya S.A.......................... 761
10,300 Banco Central Hispano Americano S.A............... 265
10,000 Banco Santander S.A............................... 640
1,000 Corporacion Financiera Alba....................... 101
1,700 Corporacion Mapfre................................ 104
(d)145 Corporacion Mapfre (New).......................... 6
3,600 Dragados y Construccion S.A....................... 55
3,050 Ebro Agricolas S.A................................ 54
1,350 ENCE S.A.......................................... 16
16,000 Endesa S.A........................................ 1,139
(a)15,500 Ercros S.A........................................ 10
1,100 FASA Renault S.A.................................. 23
950 Fomento Construction y Contractas S.A............. 88
2,350 Gas Natural SDG S.A............................... 547
58,300 Iberdrola S.A..................................... 826
1,400 Metro Vacesa...................................... 51
500 Portland Valderrivas S.A.......................... 34
18,800 Repsol S.A........................................ 721
2,300 Tabacalera S.A., Class A.......................... 99
58,900 Telefonica de Espana S.A.......................... 1,368
18,300 Union Electrica Fenosa S.A........................ 197
3,250 Uralita S.A....................................... 25
2,700 Vallehermoso S.A.................................. 59
1,450 Viscofan Envolturas Celulosicas S.A............... 21
594 Zardoya Otis S.A.................................. 69
----------
8,037
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SWEDEN (3.6%)
3,950 ABB AB, Class A................................... $ 446
2,300 AGA AB, Class A................................... 35
(a)6,500 AGA AB, Class B................................... 97
27,800 Astra AB, Class A................................. 1,374
9,150 Atlas Copco AB, Class A........................... 221
(a)2,600 Autoliv AB........................................ 114
(a)2,600 Diligentia AB..................................... 41
3,600 Electrolux AB, Series B........................... 209
45,400 Ericsson LM, Class B.............................. 1,405
1,800 Esselte AB, Class A............................... 41
2,000 Hennes & Mauritz AB, Class B...................... 277
400 Scancem AB, Class A............................... 15
4,400 Securitas AB, Class B............................. 128
5,600 Skandia Forsakrings AB............................ 159
26,000 Skandinaviska Enskilda Banken, Class A............ 267
6,100 Skanska AB, Class B............................... 270
6,000 S.K.F. AB, Class B................................ 142
6,200 Stadshypotek AB................................... 170
15,050 Stora Kopparbergs Bergslags Aktiebolag, Class A... 208
9,200 Svenska Cellulosa AB, Class B..................... 187
10,000 Svenska Handelsbanken, Class A.................... 287
(a)23,200 Swedish Match AB.................................. 82
6,600 Trelleborg AB, Class B............................ 88
19,250 Volvo AB, Class B................................. 425
----------
6,688
----------
THAILAND (1.4%)
21,500 Advanced Information Services PCL (Foreign)....... 201
(d)32,400 Bangchak Petroleum PCL (Foreign).................. 29
126,809 Bangkok Metropolitan Bank PCL (Foreign)........... 50
14,875 Bank of Ayudhya PCL (Foreign)..................... 35
(d)11,800 CMIC Finance & Securities PCL (Foreign)........... 17
3,600 CP Feedmill PCL (Foreign)......................... 13
23,200 Dhana Siam Finance & Securities PCL (Foreign)..... 55
(d)27,400 General Finance & Securities PCL (Foreign)........ 47
(d)22,900 Italian Thai Development PCL (Foreign)............ 146
(d)20,700 Jasmine International PCL (Foreign)............... 32
127,500 Krung Thai Bank PCL (Foreign)..................... 246
19,600 National Finance & Securities PCL (Foreign)....... 37
(d)19,200 National Petrochemical PCL (Foreign).............. 15
(d)19,800 One Holding PCL (Foreign)......................... 8
16,900 Phatra Thanakit PCL (Foreign)..................... 48
28,400 PTT Exploration & Production PCL (Foreign)........ 410
34,500 Quality House PCL (Foreign)....................... 35
(a,d)46,900 Sahaviriya Steel Industry PCL (Foreign)........... 16
(d)12,700 Shinawatra Computer PCL (Foreign)................. 154
(d)21,700 Shinawatra Satellite PCL (Foreign)................ 25
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,600 Siam Cement PCL (Foreign)......................... $ 113
37,300 Siam City Bank PCL (Foreign)...................... 35
(d)3,500 Siam City Cement PCL (Foreign).................... 18
(a)204,100 TelecomAsia Corp. PCL (Foreign)................... 426
(d)41,600 Thai Airways International PCL (Foreign).......... 60
26,500 Thai Military Bank PCL (Foreign).................. 52
21,500 United Communication Industry PCL (Foreign)....... 231
----------
2,554
----------
UNITED KINGDOM (11.6%)
29,200 Abbey National plc................................ 383
15,500 Arjo Wiggins Appleton plc......................... 48
11,500 Associated British Foods plc...................... 95
36,535 Barclays plc...................................... 626
24,300 Bass plc.......................................... 342
68,135 BAT Industries plc................................ 565
15,454 BICC plc.......................................... 73
28,510 Blue Circle Industries plc........................ 173
13,847 BOC Group plc..................................... 207
23,000 Boots Co. plc..................................... 237
14,200 BPB Industries plc................................ 93
11,175 British Aerospace plc............................. 245
24,625 British Airways plc............................... 255
93,100 British Gas plc................................... 358
119,849 British Petroleum Co. plc......................... 1,438
35,000 British Sky Broadcasting plc...................... 313
43,400 British Steel plc................................. 119
124,700 British Telecommunications plc.................... 843
89,505 BTR plc........................................... 436
6,526 Burmah Castrol plc................................ 123
53,576 Cable & Wireless plc.............................. 446
24,180 Cadbury Schweppes plc............................. 204
17,900 Caradon plc....................................... 73
19,543 Coats Viyella plc................................. 45
14,296 Commercial Union plc.............................. 167
10,400 Courtaulds plc.................................... 70
3,116 De La Rue Co. plc................................. 31
10,731 EMI Group plc..................................... 254
61,400 General Electric plc.............................. 402
12,215 GKN plc........................................... 210
68,800 Glaxo Wellcome plc................................ 1,117
15,612 Granada Group plc................................. 230
45,672 Grand Metropolitan plc............................ 359
25,700 Great Universal Stores plc........................ 269
18,163 Guardian Royal Exchange plc....................... 87
47,200 Guinness plc...................................... 370
110,521 Hanson plc........................................ 154
27,700 Harrisons & Crosfield plc......................... 63
47,788 HSBC Holdings plc................................. 1,041
18,300 Imperial Chemical Industries plc.................. 241
25,819 Ladbroke Group plc................................ 102
17,100 Land Securities plc............................... 218
17,600 Lasmo plc......................................... 72
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
26,600 Legal & General Group plc......................... $ 170
116,700 Lloyds TSB Group plc.............................. 862
17,905 Lonrho plc........................................ 38
73,900 Marks and Spencer plc............................. 622
13,000 MEPC plc.......................................... 96
30,700 National Power plc................................ 257
16,800 Peninsular & Oriental Steam Navigation Co. plc.... 170
32,604 Pilkington plc.................................... 87
42,762 Prudential Corp. plc.............................. 360
18,200 Rank Group plc.................................... 137
12,916 Redland plc....................................... 81
15,300 Reed International plc............................ 289
36,400 Reuters Holdings plc.............................. 469
12,200 Rexam plc......................................... 75
7,300 RMC Group plc..................................... 125
30,428 Royal & Sun Alliance Insurance Group plc.......... 232
11,385 Royal Bank of Scotland Group plc.................. 110
25,399 RTZ Corp. plc..................................... 408
18,414 Safeway plc....................................... 127
33,246 Sainsbury (J) plc................................. 221
4,600 Schroders plc..................................... 119
20,430 Scottish Power plc................................ 123
42,300 Sears plc......................................... 69
12,100 Sedgwick Group plc................................ 27
9,700 Slough Estates plc................................ 46
52,710 Smithkline Beecham plc............................ 730
6,150 Southern Electric plc............................. 84
31,307 Tarmac plc........................................ 53
16,316 Taylor Woodrow plc................................ 43
41,220 Tesco plc......................................... 250
15,752 Thames Water plc.................................. 165
11,150 Thorn plc......................................... 48
11,417 TI Group plc...................................... 114
14,500 Unilever plc...................................... 352
14,682 United Utilities plc.............................. 156
69,207 Vodafone Group plc................................ 292
19,200 Zeneca Group plc.................................. 542
----------
21,346
----------
TOTAL COMMON STOCKS (Cost $158,289)........................... 165,198
----------
PREFERRED STOCKS (1.5%)
AUSTRALIA (0.1%)
23,171 News Corp., Ltd................................... 103
----------
BRAZIL (NON-VOTING STOCKS) (1.2%)
22,666 Aracruz Celelose S.A., Class B.................... 37
19,179,873 Banco Bradesco S.A................................ 139
(a)1,922,000 Banco do Brasil................................... 17
(a)1,118,000 Banco do Estado Sao Paulo......................... 5
165,663 Brahma............................................ 91
847,000 Ceval Alimentos S.A............................... 7
1,064,000 Cia Brasileira de Petroleo Ipiranga............... 15
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
2,861,500 Cia Energetica de Minas Gerais.................... $ 97
(a)71,000 Cia Energetica de Sao Paulo....................... 3
1,818,000 Cia Siderurgica de Tubarao........................ 28
8,136 Cia Vale Do Rio Doce.............................. 157
1,020,000 Eletrobras, Class B............................... 379
21,500 Industrias Klabin de Papel e Celulose S.A......... 20
222,000 Itaubanco......................................... 96
81,000 Itausa Investimentos Itau S.A..................... 61
2,044,000 Petrobras......................................... 325
20,000 Sadia Concordia................................... 15
7,618,000 Telebras.......................................... 587
638,000 Telesp............................................ 138
42,268,000 Usiminas.......................................... 43
----------
2,260
----------
GERMANY (0.2%)
7,200 RWE AG............................................ 241
1,300 SAP AG............................................ 179
----------
420
----------
ITALY (0.0%)
44,000 Fiat S.p.A........................................ 73
----------
TOTAL PREFERRED STOCKS (Cost $2,217).......................... 2,856
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)2,876 Cia Paulista de Forca e Luz....................... --
----------
TOTAL RIGHTS (Cost $0)........................................ --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
BRAZIL (0.0%)
(a)384,400 Banco Do Brasil, Series A, expiring 6/30/01....... 1
(a)576,600 Banco Do Brasil, Series B, expiring 6/30/06....... 1
(a)961,000 Banco Do Brasil, Series C, expiring 6/30/11....... 1
----------
3
----------
FRANCE (0.0%)
(a)620 Casino Guichard - Perrachon, expiring 12/31/99.... 7
----------
HONG KONG (0.0%)
(a)4,400 Applied International Holdings, expiring
12/30/99........................................ --
(a)13,700 Hong Kong & China Gas Co., Ltd., expiring
9/30/97......................................... 8
(a)2,300 Hysan Development Co., Ltd., expiring 4/30/98..... 2
(a)11,500 Oriental Press Group, expiring 10/02/98........... 1
(a)1,750 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... --
----------
11
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ITALY (0.0%)
(a)2,950 R.A.S. S.p.A, expiring 12/31/97................... $ 8
(a)1,550 R.A.S. S.p.A. Saving Shares, expiring 12/31/97.... 2
(a,d)1,050 Rinascente S.p.A., expiring 12/31/99.............. --
----------
10
----------
SINGAPORE (0.0%)
(a)11,750 Straits Steamship, expiring 12/20/00.............. 13
----------
SWITZERLAND (0.0%)
(a)112 Roche Holdings, expiring 5/05/98.................. 4
----------
THAILAND (0.0%)
(a,d)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ 5
(a)1,980 One Holding PCL, expiring 10/14/01................ --
----------
5
----------
TOTAL WARRANTS (Cost $10)..................................... 53
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.1%)
AUSTRALIA (0.1%)
20,821 General Property Trust............................ 40
26,348 Westfield Trust................................... 50
----------
TOTAL UNITS (Cost $80)........................................ 90
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE DEBENTURE (0.0%)
FRANCE (0.0%)
FRF 60 Sanofi 4.00%, 1/01/00............................. 66
----------
TOTAL CONVERTIBLE DEBENTURE (Cost $38)........................ 66
----------
FIXED INCOME SECURITY (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01......................................... 29
----------
TOTAL FIXED INCOME SECURITY (Cost $27)........................ 29
----------
TOTAL FOREIGN SECURITIES (91.5%) (Cost $160,661).............. 168,292
----------
SHORT-TERM INVESTMENT (7.9%)
REPURCHASE AGREEMENT (7.9%)
$ 14,432 Chase Securities Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $14,437,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $14,823 (Cost $14,432)... 14,432
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOREIGN CURRENCY (0.1%)
AUD 42 Australian Dollar................................. $ 34
ATS 23 Austrian Schilling................................ 2
BEF 6 Belgian Franc..................................... --
BRL 1 Brazilian Real.................................... 1
GBP 2 British Pound..................................... 4
FRF 36 French Franc...................................... 7
IDR 6,833 Indonesian Rupiah................................. 3
ITL 7,194 Italian Lira...................................... 5
JPY 801 Japanese Yen...................................... 7
KRW 7 Korean Won........................................ --
MYR 22 Malaysian Ringgit................................. 9
NLG 81 Netherlands Guilder............................... 46
ESP 3,842 Spanish Peseta.................................... 29
CHF 2 Swiss Franc....................................... 1
THB 325 Thai Baht......................................... 13
----------
TOTAL FOREIGN CURRENCY (Cost $163)............................ 161
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.5%) (Cost $175,256)................ 182,885
--------
OTHER ASSETS (19.9%)
Securities at Value, Held as Collateral for
Securities Lending....................... $ 34,886
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 1,232
Dividends Receivable....................... 204
Receivable for Portfolio Shares Sold....... 183
Foreign Withholding Tax Reclaim
Receivable............................... 54
Receivable for Investments Sold............ 26
Security Lending Income Receivable......... 16
Interest Receivable........................ 3
Other...................................... 13 36,617
----------
LIABILITIES (-19.4%)
Collateral on Securities Loaned, at
Value.................................... (34,886)
Payable for Portfolio Shares Redeemed...... (346)
Investment Advisory Fees Payable........... (214)
Payable for Investments Purchased.......... (57)
Custodian Fees Payable..................... (49)
Administrative Fees Payable................ (31)
Bank Overdraft............................. (27)
Security Lending Expense Payable........... (11)
Dividends Payable.......................... (7)
Directors' Fees and Expenses Payable....... (5)
Sub-Administrative Fees Payable............ (2)
Other Liabilities.......................... (41) (35,676)
---------- --------
NET ASSETS (100%)........................................ $183,826
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $172,825
Overdistributed Net Investment Income............. (308)
Accumulated Net Realized Gain..................... 2,449
Unrealized Appreciation on Investments and Foreign
Currency Translations (Net of accrual for
foreign tax of $4 on unrealized appreciation on
investments).................................... 8,860
--------
NET ASSETS........................................ $183,826
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $183,193
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,009,331 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.44
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $633
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 55,366 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.44
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- ------------
U.S.$ 1,491 $ 1,491 1/24/97 DEM 2,313 $ 1,506 $ 15
DEM 16,624 10,821 1/24/97 U.S.$ 10,931 10,931 110
DEM 2,166 1,410 1/24/97 U.S.$ 1,400 1,400 (10)
JPY 619,026 5,368 1/30/97 U.S.$ 5,501 5,501 133
NLG 9,072 5,265 2/10/97 U.S.$ 5,394 5,394 129
JPY 1,399,413 12,172 2/21/97 U.S.$ 12,700 12,700 528
FRF 32,396 6,265 2/24/97 U.S.$ 6,400 6,400 135
FRF 17,451 3,375 2/24/97 U.S.$ 3,400 3,400 25
JPY 725,916 6,336 3/17/97 U.S.$ 6,481 6,481 145
150,668 1,315 3/17/97 U.S.$ 1,337 1,337 22
-------- -------- ------
$ 53,818 $ 55,050 $ 1,232
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
DEM -- Deutsche Mark
NCS -- Non Convertible Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 24,915 13.5%
Consumer Goods......................... 35,227 19.1
Energy................................. 19,469 10.6
Finance................................ 31,743 17.4
Gold Mines............................. 96 --
Materials.............................. 21,267 11.5
Multi-Industry......................... 5,120 2.8
Services............................... 30,455 16.6
--------- ---
$ 168,292 91.5%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 0.5%
Hong Kong 30.4%
India 0.5%
Indonesia 5.7%
Korea 4.4%
Malaysia 24.0%
Philippines 5.0%
Singapore 15.2%
Taiwan 4.0%
Thailand 8.6%
Other 1.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASIAN EQUITY PORTFOLIO-CLASS
MSCI COMBINED FAR EAST FREE EX-JAPAN INDEX (1) A
<S> <C> <C>
7/1/91* 500,000 500,000
10/31/1991 493,080 483,500
10/31/1992 676,180 684,130
12/31/1992 630,045 658,030
12/31/1993 1,252,425 1,353,595
12/31/1994 1,014,350 1,139,550
12/31/1995 1,083,427 1,217,837
12/31/1996 1,182,886 1,260,340
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) COMBINED FAR EAST FREE EX-JAPAN INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A................... 3.49% 19.35% 18.28%
PORTFOLIO -- CLASS
B(3)................ 2.92 N/A N/A
INDEX............... 9.18 17.34 16.93
</TABLE>
1. The MSCI Combined 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 (assumes dividends are reinvested).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
COMBINED 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 which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.
For the year ended December 31, 1996, the Portfolio had a total return of 3.49%
for the Class A shares and 2.92% for the Class B shares, as compared to a total
return of 9.18% for the Morgan Stanley Capital International (MSCI) combined Far
East Free ex-Japan Index. The average annual total return for the five year
period ended December 31, 1996 and for the period from inception on July 1, 1991
through December 31, 1996 was 19.35% and 18.28%, respectively, for the Class A
shares as compared with 17.34% and 16.93%, respectively, for the Index.
PERFORMANCE REVIEW
Over the year, the Portfolio underperformed the Index. This was attributable to
a large extent to security selection, principally in Malaysia where stocks such
as Genting and Resorts World fell victim to natural disasters and severely
trailed the overall market. The Portfolio also missed a portion of the large
move in Taiwan, as the Portfolio did not participate in the speculative frenzy
which seized the financial sector, instead concentrating on the undervalued
electronic stocks. Security selection in Thailand also hampered the Portfolio's
performance. The effect on the Portfolio of asset allocation was slightly
negative.
MARKET REVIEW
Asian markets exceeded the modest gains they displayed in 1995, rising 9.2% in
1996. This increase disguised a huge disparity between the performance of
different markets, however. Most of the markets were up strongly, led by
Taiwan's 38.9% increase, followed by China (+35.1%) and Hong Kong (+28.9%).
Indonesia and Malaysia also posted returns in excess of 20%. This is in sharp
contrast to the performance of other markets in the region, as South Korea
plummeted -38.4% and Thailand tumbled -38.0%.
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
Despite a series of political confrontations with China in the first quarter,
Taiwan rallied to become the region's best performing market. Lee Teng-Hui
emerged as the country's first democratically elected leader, and relations with
China softened following the live missile exercises that began the year.
Confidence returned to domestic investors who formed the major component of the
rally, especially in financial stocks. Taiwan's inclusion in the MSCI regional
index also impacted the markets, as foreign investors sought exposure to the
market. Investors have remained concerned, however, as the collapse in
semiconductor prices has led to pressure on many of the island's top exporters.
Lessened anxiety over relations with China also spurred the Hong Kong market.
Investor sentiment over the prospects of a smooth transition improved gradually
throughout the year and stock prices reacted accordingly. As widely expected,
shipping magnate C.H. Tung was appointed Chief Executive of the Special
Administrative Region that will encompass Hong Kong after the handover. Economic
fundamentals also buoyed the market as the U.S. Federal Reserve resisted raising
interest rates, spurring property prices throughout Hong Kong. China stocks also
benefited from improved relations. The major impetus behind the MSCI China
Index's 35% move, however, was frantic local buying in the fourth quarter. The
government brought to a close its 3-year austerity program and cut interest
rates twice in 1996, injecting a large amount of liquidity into the domestic
market. This led to the unusual occurrence of local shares actually trading at a
premium to foreign shares.
The South Korean market was the region's worst performer, losing 38.4% of its
value based on the MSCI index. The current account deficit increased
substantially, exceeding $22 billion in 1996. Exporters suffered severely as the
prices for key Korean exports of semiconductors and petrochemicals fell sharply.
Though the Korean Won devalued throughout the year, the comparative weakening of
the Yen prevented any consequent gains in Korean product competitiveness. The
situation continued to be exacerbated by the zeal with which the chaebols have
built up capacity, far in excess of any reasonable expectation of short-term
demand. A final blow to the overall market landed at year's end, as many labor
unions went on strike following changes to national labor laws by the Korean
government.
The Thai market also suffered a significant decline this year. Worries about the
nature and term of the capital inflows mounted throughout the year, leading to a
downgrading of Thai debt by Moody's in May. The Thai central bank responded to
concerns over the stability of the financial sector by imposing stiff new
regulations which severely impacted the short-term profitability of the banks,
which then proceeded to lead the market into its decline. The market suffered
further setbacks as the government of Chuan Leekpai lost a no-confidence motion
in parliament and was replaced by a shaky minority coalition under General
Chavalit's New Aspiration Party. A large and persistent current account deficit
has also plagued the country, as the government has remained firm to their
commitment to maintain the value of the Thai Baht at current levels.
PORTFOLIO ACTIVITIES
The Portfolio this year saw a net increase in subscriptions of $79.3 million,
with subscribers amounting to $370.5 million and redemptions of $291.2 million.
Large net purchases were made in Malaysia as the market continued its upward
trend, and in Thailand and Korea where large market declines led to attractive
buying opportunities. Some of the major purchases in Malaysia included Sime
Darby, Genting and Petronas Gas. The Portfolio also made major purchases of Siam
Commercial Bank, which despite a strong balance sheet was sold off with the rest
of the financial sector.
The Portfolio made minor net sales in China, Hong Kong, and the Philippines. In
Hong Kong we sold Guangdong Investments as it became fully valued, and trimmed
our holdings of Cheung Kong to its original allocation following large price
increases. A range of property stocks in the Philippines declined as property
prices began to take on a speculative tone. A large net sale was also made of
the Malaysian national electric company, Tenaga Nasional, as it was felt that
the market was overvaluing changes in the regulatory environment.
MARKET OUTLOOK
Against the background of an increase in global growth, Asian markets in general
should continue to appreciate in 1997. In Hong Kong, strong corporate earnings
growth and liquidity are likely to provide support for the market despite its
recent strength. Stock valuations are no longer cheap, and will likely remain
close to the recent historical average. As the
- --------------------------------------------------------------------------------
Asian Equity Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
handover to China becomes reality, China related stocks and red-chips will
remain the focus of the market. Shares of companies listed in China should also
come under increasing interest from both foreign and local investors, and
volatility will remain high. Both markets will be susceptible to China's foreign
relations with the U.S. and Taiwan, and Hong Kong will continue to be vulnerable
to changes in U.S. interest rates (the Chinese government has pledged to keep
the Hong Kong dollar pegged to the U.S. dollar). Shares in Taiwan should benefit
from an improvement in global demand for electronics, as well as improving
economic fundamentals and a benign interest rate environment.
Although it is premature in the near term to envision a sustained fundamental
turnaround in the Korean economy and stock market, with a reduction in
facilities investment, de-stocking of inventory levels, and gradual recovery of
prices, improvements should impact the market starting in the second half. A
reduction in facilities investment during this period of oversupply should help
reduce import growth and in turn shrink the current account deficit, which will
reduce the need for working capital financing and lower market interest rates.
However, the uncertain political situation ahead of this year's presidential
election and the pace of chaebols to focus on production efficiency will
determine the speed of a sustained recovery.
Despite strong upward moves in 1996, the Malaysian market prospective 1997 price
earnings ratio (18.5 times) is at the low end of the past 5-year historical
range. Whereas gains in 1996 were led by small and medium cap firms, large cap
companies are expected to generate better earnings growth in 1997. Singapore is
likely to trade within a narrow range, though with a definite upward bias led by
small cap electronic stocks.
Indonesia's macroeconomic environment should continue to buoy the stock market
with healthy economic growth and lower inflation. Earnings growth is predicted
to top 20%, yielding a 15 times prospective 1997 price earnings ratio.
Parliamentary elections in May should not provide any major surprises, and
concerns over Suharto's health have lessened, though not dissipated. The
Philippines will also retain the high earnings and GDP growth it enjoyed in
1996. However, stock prices here look fairly valued if not expensive, and record
property prices have raised concerns over the asset quality of some banks. The
market is also vulnerable to increasing uncertainty ahead of the Presidential
elections in 1998, where Ramos, the architect of the country's economic success,
is required to step down under the current constitution.
The market in Thailand is likely to trend sideways as investors await
indications of the future of the economy. The finance sector was forced to
swallow stern medicine by the central bank, and it remains to be seen whether
they will be able to grow out of their current problems. Record low valuations
should provide a floor under the current market level, though institutional
selling and lackluster earnings growth will impede large upside moves in the
immediate future.
PORTFOLIO STRATEGY
In Hong Kong we will continue to look for companies with China interests, as
well as increase our exposure in China itself on a selective basis. Our approach
in Taiwan is to remain with the electronic stocks which maintain very low
valuations, while avoiding the financial stocks which have been driven to
unsustainable price earnings ratios. In Korea, while stock valuations are
compelling, lack of fundamental improvements should dictate selective bottom-up
investing in the first half. Stronger credit banks and domestic plays, such as
telecoms remain attractive.
In Malaysia, the Portfolio will continue to add to positions which reflect the
changing structure of this dynamic economy. We will increase our exposure to
automotive stocks in Indonesia, especially Astra which has shaken off the
competition from a national car and proceeded to perform strongly. In the
Philippines, the Portfolio will continue to trim its exposure to the hot
property sector, while in Singapore it will increase its holdings in stocks in
the electronic sector. The incredibly low valuations have made investment in
Thailand very compelling, and we will continue to invest in banks with the
strongest balance sheets.
Ean Wah Chin
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.0%)
CHINA (0.5%)
(a)240,300 Changchai Co., Ltd., Class B...................... $ 209
(a)24,000 Guangshen Railway Co., Ltd. ADR................... 495
(a)2,800,000 Guangshen Railway Co., Ltd., Class H.............. 1,213
----------
1,917
----------
HONG KONG (30.4%)
(a)253,000 Asia Satellite Telecommunications Holdings Ltd.... 587
2,032,000 CDL Hotels International Ltd...................... 1,162
1,667,000 Cheung Kong Holdings Ltd.......................... 14,818
(a)679,000 Cheung Kong Infrastructure Holdings............... 1,800
(a)2,036,000 China Resources Beijing Land...................... 1,290
1,968,000 China Resources Enterprise Ltd.................... 4,427
1,352,500 Citic Pacific Ltd................................. 7,851
768,000 Cosco Pacific Ltd................................. 894
170,000 Great Eagle Holdings Ltd.......................... 701
340,300 Hang Seng Bank Ltd................................ 4,136
355,000 Henderson Land Development Co., Ltd............... 3,580
205,000 Hong Kong Ferry Holdings.......................... 400
137,000 Hong Kong Land Holdings Ltd....................... 381
490,020 Hong Kong & Shanghai Bank Holdings plc............ 10,485
4,549,000 Hong Kong Telecommunications Ltd.................. 7,322
2,123,000 Hutchison Whampoa Ltd............................. 16,675
(a)1,405,000 Kerry Properties Ltd.............................. 3,851
1,567,000 New World Development Co., Ltd.................... 10,586
(a)387,000 Shanghai Industrial Holdings Ltd.................. 1,411
661,100 Sun Hung Kai Properties Ltd....................... 8,099
769,060 Swire Pacific Ltd., Class A....................... 7,333
1,214,000 Wharf Holdings Ltd................................ 6,059
----------
113,848
----------
INDIA (0.5%)
(e)25,500 Hindalco Industries Ltd. GDR...................... 638
63,500 Mahindra & Mahindra Ltd. GDR...................... 746
(a)24,000 State Bank of India GDR........................... 420
----------
1,804
----------
INDONESIA (5.7%)
788,500 Astra International (Foreign)..................... 2,170
(d)1,948,010 Bank International Indonesia (Foreign)............ 1,917
(a,d)963,000 Daya Guna Samuder (Foreign)....................... 1,121
(d)531,000 Gudang Garam (Foreign)............................ 2,293
(d)775,200 Hanjaya Mandala Sampoerna (Foreign)............... 4,135
(d)2,564,824 Indah Kiat Pulp & Paper Corp. (Foreign)........... 1,873
(a,d)1,123,998 Sorini Corp. (Foreign)............................ 524
(d)4,251,000 Telekomunikasi Indonesia (Foreign)................ 7,334
----------
21,367
----------
KOREA (4.4%)
(a,d)80,050 Housing & Commercial Bank, Korea (New)............ 1,219
(a)40,000 Kookmin Bank GDR.................................. 727
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
53,900 Korea Electric Power.............................. $ 1,569
(d)2,503 Korea Mobile Telecommunications Corp.............. 2,499
61,800 Korea Mobile Telecommunications Corp. ADR......... 796
16,130 LG Information & Communication Ltd. RFD (New)..... 1,143
22,660 LG Information & Communications Ltd. (Old)........ 1,448
61,600 Pohang Iron & Steel Co., Ltd. ADR................. 1,247
(d)26,618 Samsung Electronics............................... 1,577
(a)7,533 Samsung Electronics GDR (New)..................... 306
(a,e)300 Samsung Electronics GDR........................... 12
(a,d)27,595 Samsung Electronics RFD........................... 1,634
(d)133,761 Shinhan Bank Co., Ltd............................. 2,148
----------
16,325
----------
MALAYSIA (24.0%)
552,000 Commerce Asset Holding Bhd........................ 4,153
119,000 Dialog Group Bhd.................................. 1,696
501,000 Edaran Otomobil Nasional Bhd...................... 5,009
1,626,700 Genting Bhd....................................... 11,207
741,000 Hicom Holdings Bhd................................ 2,127
871,000 IJM Corp. Bhd..................................... 2,052
848,000 Leader Universal Holdings Bhd..................... 1,780
1,083,500 Malayan Banking Bhd............................... 12,013
1,441,316 Malaysian International Shipping Bhd (Foreign).... 4,280
1,878,000 Petronas Gas Bhd.................................. 7,808
2,974,000 Renong Bhd........................................ 5,276
1,570,000 Resorts World Bhd................................. 7,149
3,142,000 Sime Darby Bhd.................................... 12,379
1,197,000 Telekom Malaysia Bhd.............................. 10,664
278,757 United Engineers Ltd.............................. 2,517
----------
90,110
----------
PHILIPPINES (5.0%)
1,613,237 Ayala Land, Inc., Class B......................... 1,840
(a)15,461,000 Digital Telecommunications Philippines, Inc....... 1,293
(a)1,865,100 DMCI Holdings, Inc................................ 1,223
17,982,100 JG Summit Holding, Class B........................ 5,060
385,565 Manila Electric Co., Class B...................... 3,152
6,309,075 Petron Corp....................................... 2,135
26,960 Philippine Long Distance Telephone Co., Class B... 1,481
9,231,400 SM Prime Holdings, Inc., Class B.................. 2,387
----------
18,571
----------
SINGAPORE (14.9%)
2,499,000 Comfort Group Ltd................................. 2,215
563,500 Development Bank of Singapore Ltd. (Foreign)...... 7,611
117,560 Fraser & Neave Ltd................................ 1,210
265,000 Jurong Shipyard Ltd............................... 1,335
1,175,000 Keppel Corp., Ltd................................. 9,153
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SINGAPORE (CONT.)
<TABLE>
<C> <S> <C>
607,482 Oversea-Chinese Banking Corp. (Foreign)........... $ 7,554
522,000 Parkway Holdings Ltd.............................. 2,052
468,000 Sembawang Corp. Ltd............................... 2,475
305,000 Singapore Airlines Ltd. (Foreign)................. 2,768
248,400 Singapore Press Holdings (Foreign)................ 4,899
1,004,000 Straits Steamship Land Ltd........................ 3,214
477,000 Straits Trading Co., Ltd.......................... 1,159
666,200 United Overseas Bank Ltd. (Foreign)............... 7,427
(a)1,006,000 Want Want Holdings................................ 2,646
----------
55,718
----------
TAIWAN (4.0%)
828,150 Cathay Life Insurance Co., Ltd.................... 5,270
6,254,000 China Steel Corp.................................. 5,867
(a)702,000 Siliconware Precision Industries Co............... 1,481
1,663,890 Yang Ming Marine Transport........................ 2,202
----------
14,820
----------
THAILAND (8.6%)
467,400 Advance Information Service PCL (Foreign)......... 4,374
709,100 Bangkok Bank PCL (Foreign)........................ 6,857
1,046,800 Finance One PCL (Foreign)......................... 2,122
(d)487,000 Shinawatra Computer Co. plc (Foreign)............. 5,887
780,800 Siam Commercial Bank PCL (Foreign)................ 5,663
847,270 Thai Farmers Bank PCL (Foreign)................... 5,286
189,700 United Communications Industry PCL (Foreign)...... 2,042
----------
32,231
----------
TOTAL COMMON STOCKS (Cost $347,284)........................... 366,711
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
</TABLE>
<TABLE>
<C> <S> <C>
WARRANTS (0.3%)
SINGAPORE (0.3%)
(a)1,178,750 Straits Steamship Land Ltd., expiring 12/12/00.... 1,272
----------
THAILAND (0.0%)
(a,d)98,821 Thai Farmers Bank PCL (Foreign) expiring
09/15/02........................................ --
----------
TOTAL WARRANTS (Cost $1,652).................................. 1,272
----------
TOTAL FOREIGN SECURITIES (98.3%) (Cost $348,936).............. 367,983
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- ----------
FOREIGN CURRENCY (0.3%)
HKD 233 Hong Kong Dollar.................................. 30
KRW 227,231 Korean Won........................................ 269
MYR 40 Malaysian Ringgit................................. $ 16
PHP 10,646 Philippines Peso.................................. 405
SGD 287 Singapore Dollar.................................. 205
TWD 5,839 Taiwan Dollar..................................... 212
----------
TOTAL FOREIGN CURRENCY (Cost $1,137).......................... 1,137
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.6%) (Cost $350,073)................ 369,120
--------
OTHER ASSETS (11.0%)
Securities, at Value, Held as Collateral
for Securities Loaned.................... $ 23,576
Receivable for Investments Sold............ 16,002
Receivable for Portfolio Shares Sold....... 1,106
Dividends Receivable....................... 551
Security Lending Income Receivable......... 54
Foreign Withholding Tax Reclaim
Receivable............................... 20
Other...................................... 23 41,332
----------
LIABILITIES (-9.6%)
Collateral for Securities Loaned, at
Value.................................... (23,576)
Bank Overdraft............................. (10,517)
Payable for Portfolio Shares Redeemed...... (723)
Investment Advisory Fees Payable........... (666)
Custodian Fees Payable..................... (184)
Deferred Foreign Taxes Payable............. (115)
Administrative Fees Payable................ (52)
Security Lending Fees Payable.............. (27)
Directors' Fees and Expenses Payable....... (11)
Distribution Fees Payable.................. (8)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (8)
Other Liabilities.......................... (65) (35,952)
---------- --------
NET ASSETS (100%)........................................ $374,500
--------
--------
</TABLE>
<TABLE>
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................. $ 348,095
Overdistributed Net Investment Income........ (4)
Accumulated Net Realized Gain................ 7,479
Unrealized Appreciation on Investments and
Foreign Currency Translations (Net of
accrual for foreign taxes of $115 on
unrealized appreciation on investments).... 18,930
--------
NET ASSETS............................................... $374,500
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------------
<S> <C> <C>
CLASS A:
- ---------------------------------------------
NET ASSETS................................... $363,498
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 19,408,234 outstanding $0.001
par value
shares (authorized 500,000,000 shares)..... $18.73
--------
--------
CLASS B:
- ---------------------------------------------
NET ASSETS................................... $11,002
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 586,978 outstanding $0.001
par value
shares (authorized 500,000,000 shares)..... $18.74
--------
--------
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- ------- ---------- ----------- ------- -----------
HKD 23,272 $ 3,009 1/02/97 U.S.$ 3,008 $ 3,008 $ (1)
HKD 35,794 4,628 1/03/97 U.S.$ 4,627 4,627 (1)
MYR 1,277 506 1/03/97 U.S.$ 505 505 (1)
SGD 1,566 1,119 1/03/97 U.S.$ 1,118 1,118 (1)
SGD 1,832 1,310 1/06/97 U.S.$ 1,309 1,309 (1)
MYR 7,890 3,123 1/06/97 U.S.$ 3,120 3,120 (3)
------- -------
--
$13,695 $13,687 $ (8)
------- ------- --
------- ------- --
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $34,161 or 9.1% of net assets at December 31,
1996) 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
RFD -- Ranked for Dividend
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------
Capital Equipment...................... $ 21,595 5.8%
Consumer Goods......................... 9,797 2.6
Energy................................. 14,664 4.0
Finance................................ 152,409 40.7
Materials.............................. 14,826 3.9
Multi-Industry......................... 55,714 14.9
Services............................... 98,978 26.4
-------- ---
$367,983 98.3%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.6%
Brazil 14.4%
Bulgaria 1.0%
Chile 0.5%
China 1.2%
Colombia 0.4%
Egypt 1.3%
Greece 0.1%
Hong Kong 9.3%
Hungary 0.5%
India 10.1%
Indonesia 7.1%
Israel 2.6%
Korea 6.9%
Mexico 9.9%
Morocco 0.8%
Pakistan 2.5%
Peru 0.3%
Philippines 1.9%
Poland 1.7%
Russia 7.5%
Singapore 0.3%
South Africa 4.1%
Taiwan 2.0%
Thailand 4.8%
Turkey 3.5%
United Kingdom 0.1%
Venezuela 0.2%
Zimbabwe 0.5%
Other 1.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IFC GLOBAL TOTAL RETURN COMPOSITE INDEX EMERGING MARKETS PORTFOLIO-CLASS
(1) A
<S> <C> <C>
9/25/92* 500,000 500,000
10/31/1992 525,300 505,500
12/31/1992 527,370 511,000
12/31/1993 880,750 950,000
12/31/1994 878,950 858,500
12/31/1995 770,488 748,870
12/31/1996 831,280 840,157
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL
RETURN COMPOSITE INDEX(1)
- ------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 12.19% 12.93%
PORTFOLIO -- CLASS B(3)............................................................................ 11.04 N/A
INDEX.............................................................................................. 7.89 12.64
</TABLE>
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (assumes dividends are reinvested).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES, 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 Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.
For the year ended December 31, 1996, the Portfolio had a total return of 12.19%
for the Class A shares and 11.04% for the Class B shares, as compared to a total
return of 7.89% for the IFC Global Total Return Composite Index. The average
annual total return for the period from inception on September 25, 1992 through
December 31, 1996 was 12.93% for the Class A shares as compared to 12.64% for
the Index.
The Emerging Markets Portfolio also outperformed the MSCI Emerging Markets Free
(EMF) Index, with the MSCI EMF Index showing a return of 3.9% for the year. The
Portfolio's strong out-performance during the year was attributable in large
part to country selection and security selection was also positive.
Following two weak years, hopes ran high in early 1996 that the emerging markets
would recover. After a relatively strong first half, however, the emerging
markets lost ground in the second half of the year. The first six months of 1996
were dominated by politics as several of the larger emerging markets, notably
Russia, South Korea, India and Taiwan, held successful elections. Fears of
contagion from a decline in the lofty U.S. equity market and concerns of a rise
in U.S. interest rates sapped support from emerging market equities and led to a
weak second half. As always in the emerging market universe, there were major
disparities in performance among the markets (see Chart on page 21).
Overall, the 3.9% return for the MSCI EMF Index was somewhat muted. By region,
Latin America out-performed Europe/Middle East and Asia (see Table below). Three
emerging markets achieved results in excess of 100% for the year--Russia,
Venezuela and Hungary posted returns of 151.1%, 127.9% and 104.2%, respectively.
The emerging Asian markets offered some of the best and worst to investors.
Taiwan ended the year up 38.9%, and Hong Kong finished the year up 28.9%.
Thailand and Korea, beset with export and liquidity problems, were the worst
performing emerging markets of 1996, off 38.0% and
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI EMERGING MARKETS INDICES
<S> <C>
Performance ($US)
12 Months to December 31, 1996
Venezuela 127.90%
Poland 57.20%
Taiwan 38.90%
Brazil 38.00%
Portugal 32.30%
Turkey 31.90%
Hong Kong 28.90%
Indonesia 25.40%
Malaysia 24.50%
Argentina 16.80%
Mexico 16.10%
Philippines 15.10%
Colombia 6.60%
Greece 1.40%
Peru -2.80%
India -3.80%
Israel -3.90%
Jordan -11.40%
Sri Lanka -16.30%
Chile -16.40%
Pakistan -19.40%
South Africa -20.10%
Thailand -38.00%
Korea -38.40%
% change
</TABLE>
TABLE 1:
<TABLE>
<CAPTION>
VALUATION
PERFORMANCE 12 MONTH TRAILING
1996 PRICE/EARNINGS
--------------- -------------------
<S> <C> <C>
MSCI U.S. 21.4% 19.3x
MSCI EAFE 4.4 25.8x
MSCI EMF 3.9 16.2x
EMF Asia 1.6 19.1x
EMF Europe/Middle East 11.3 13.0x
EMF Latin America 18.9 14.1x
</TABLE>
Source: Morgan Stanley Capital International
38.4%, respectively. India had a very strong first quarter, rallying 11.5%, but
lost virtually all the gain to end the year down 3.8%.
The largest contributors to the Portfolio's out-performance, relative to the
benchmark, came from Brazil, Turkey, Russia and Hong Kong--all overweight
positions. Underweights in Thailand, South Africa and Chile also added to
performance. Being underweight Malaysia however and overweight India and Israel
all had negative impacts. Stock selection was extremely positive in Brazil and
Mexico.
There are several reasons to be optimistic about the outlook for the emerging
markets in 1997. First, as a group, the emerging economies are in much better
financial shape than three years ago when the Federal Reserve began to raise
interest rates. Major inroads have been made on inflation, leaving scope for
interest rates to continue to decline in the majority of emerging markets,
despite the path of U.S. rates. Inflation in the OECD economies is expected to
increase during 1997, but in Latin America and emerging Europe it is forecasted
to steadily decline. Only in Asia is there expected to be an increase in
inflation, but even here it is from a very low base. One clear signal of
successful economic strengthening has been the performance of emerging markets
debt. Reacting to the numerous credit upgrades and improved economic management,
emerging market debt was the best performing asset class during 1996. Emerging
market stocks, on the other hand, have lagged both developed markets and debt,
and emerging market equity performance has yet to reflect the fundamental
improvements.
Second, foreign direct investment (FDI) in the emerging markets is running in
excess of $100 billion per annum underpinning future growth prospects for these
economies. Foreign reserves of the emerging economies--currently around $700
billion--have doubled since 1993 and are now almost equal to the aggregate
reserves of the industrialized countries. In addition, portfolio flows which, by
nature, have shorter time horizons than FDI have also picked up from the hiatus
following the Mexican peso crisis suggesting confidence is returning. We expect
portfolio flows to total approximately $30 billion in 1997. At their peak in
1993, almost $1 billion per week was being invested in the emerging markets.
Third, on a valuation basis, the emerging markets (see Table 1 above) sell at a
16.2 times trailing price to
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
earnings ratio, which is lower than 1991 levels of valuation and compare very
favorably with the U.S. and international EAFE markets. During the last two
years, global financial markets have focused on the bull market in the U.S., but
the emerging markets have made tremendous fundamental progress and are laggards
in performance terms.
While the economic picture for the emerging markets overall continues to
improve, there are still hurdles to be overcome in individual countries. Some of
the emerging markets have to make progress on reducing their government deficits
(India, Pakistan, Brazil, and Russia) and on their current account deficits
(Thailand and Turkey). In aggregate, however, the outlook is for continued
progress to be made by all these countries on their deficits. We anticipate that
the emerging markets will do well, relative to other asset classes in 1997,
based on their good value, continued premium earnings growth prospects and their
persistence in improving their economic standing in the world.
Madhav Dhar
PORTFOLIO MANAGER
Marianne L. Hay
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (87.5%)
ARGENTINA (2.6%)
(a)6 Acindar "B" shares................................ $ --
293,038 Quilmes (Registered).............................. 2,344
241,868 Telecom Argentina ADR............................. 9,765
580,045 Telefonica Argentina ADR.......................... 15,009
291,740 YPF ADR........................................... 7,367
----------
34,485
----------
BRAZIL (5.7%)
(a,e)20,000 CELESC GDR........................................ 1,810
17,566 CEMIG ADR......................................... 598
(e)84,361 CEMIG ADR......................................... 2,826
7,737,000 Coteminas......................................... 2,469
80,137,000 Eletrobras........................................ 28,689
332,375 Eletrobras ADR.................................... 5,950
1,542,000 Itausa............................................ 1,158
2,554,000 Light............................................. 907
(a,d)9,268,000 Lightpar.......................................... 1,971
(a)175,880 Multicanal Participaccoes ADR..................... 2,253
39,236,000 Pao de Acucar..................................... 699
(e)196,119 Pao de Acucar ADR................................. 3,420
286,099,000 Telebras.......................................... 20,512
(a)8,853,162 Telesp............................................ 1,914
----------
75,176
----------
CHILE (0.5%)
147,900 CCU ADR........................................... 2,385
167,112 Santa Isabel ADR.................................. 3,781
----------
6,166
----------
CHINA (1.2%)
5,000,500 China International Marine Container Ltd., Class
B............................................... 5,819
(a)60,000 Guangshen Railway Co., Ltd., ADR.................. 1,238
(a)4,056,000 Guangshen Railway Co., Ltd., Class H.............. 1,757
162,400 Shandong Huaneng Power Co., Ltd., ADR............. 1,583
13,658,000 Yizheng Chemical Fibre Co. Ltd., Class H.......... 3,320
7,998,000 Zhenhai Refining & Chemical Co., Ltd., Class H.... 2,947
----------
16,664
----------
COLOMBIA (0.4%)
12,728,000 Banco de Colombia................................. 5,250
----------
EGYPT (1.3%)
89,993 Ameriyah Cement Co................................ 1,698
18,584 Commercial International Bank..................... 2,804
(a)187,700 Commercial International Bank GDR (Registered).... 2,647
114,650 Eastern Tobacco................................... 1,774
14,525 Egypt American Bank............................... 646
(a)49,350 Egyptian Finance & Industrial..................... 1,564
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
78,000 Helwan Portland Cement............................ $ 1,379
10,230 Madinet Nasr Housing & Development................ 1,155
21,655 North Cairo Mills Co.............................. 855
125,765 Torah Portland Cement............................. 2,539
----------
17,061
----------
GREECE (0.1%)
325,179 Aegek Ltd. (Registered)........................... 1,199
----------
HONG KONG (9.3%)
(a)621,500 Asia Satellite Telecommunications Holdings Ltd.... 1,442
1,689,000 Cheung Kong Holdings Ltd.......................... 15,013
(a)1,363,000 Cheung Kong Infrastructure Holdings............... 3,613
(a)4,029,000 China Resources Beijing Land...................... 2,553
5,635,000 China Resources Enterprise Ltd.................... 12,677
2,590,000 Citic Pacific Ltd................................. 15,035
3,951,000 Cosco Pacific Ltd................................. 4,597
203,000 Hang Seng Bank Ltd................................ 2,467
671,000 Henderson Land Development Co., Ltd............... 6,767
595,000 Hong Kong Ferry Holdings Co., Ltd................. 1,162
2,098,200 Hong Kong Telecommunications Ltd.................. 3,377
2,144,000 Hutchison Whampoa Ltd............................. 16,840
2,053,000 New World Development Co., Ltd.................... 13,869
(a)333,000 Shanghai Industrial Holdings Ltd.................. 1,214
812,000 Sun Hung Kai Properties Ltd....................... 9,947
896,500 Swire Pacific Ltd., Class A....................... 8,548
(a)12,064,000 Tingyi (Cayman Islands) Holding Co................ 3,159
----------
122,280
----------
HUNGARY (0.5%)
9,978 Borsod Chem Rt. GDR (Registered).................. 246
(a)23,700 Cofinec S.A. GDR (Registered)..................... 714
22,500 Gedeon Richter GDR (Registered)................... 1,311
158,984 MOL Magyar GDR (Registered)....................... 2,011
19,750 Pannonplast Industries PLC........................ 727
(a)117,500 Tisza Vegyi Kombinat Rt. GDR (Registered)......... 1,345
----------
6,354
----------
INDIA (9.8%)
(a)230,000 American Dry Fruits............................... 79
11,700 Andhra Valley Power Supply Co., Ltd............... 36
493,300 Apollo Tyres Ltd.................................. 1,612
54,500 AP Rayon Ltd., Class B............................ 55
48,623 Associated Cement Companies Ltd................... 1,663
(a)891,500 Balaji Foods & Feeds.............................. 124
252,255 Bharat Forge Co., Ltd., Class A................... 651
4,001,400 Bharat Heavy Electricals.......................... 24,220
(a)499,600 Bharat Pipes & Fittings Ltd., Class B............. 49
710,040 Birla VXL Ltd..................................... 498
80,400 BPL Ltd........................................... 65
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
INDIA (CONT.)
141,642 Carrier Aircon Ltd................................ $ 691
335,400 Ceat Ltd.......................................... 599
8,777 Century Textiles and Industries Ltd. GDR.......... 481
1,048,400 Container Corp. of India Ltd...................... 10,089
86,000 Cosmo Films Ltd................................... 94
380,100 Crompton Greaves Ltd. GDR......................... 1,272
118,900 Dabur India Ltd................................... 829
(a)600,000 DCL Polyesters Ltd................................ 184
77,000 DCM Shriram Industries Ltd........................ 57
(a)38,800 Delta Industries Ltd.............................. 23
185,000 Esab India Ltd.................................... 452
50,000 Essel Packagings, Ltd............................. 138
4,650 Federal Bank Ltd.................................. 13
(a,d)5,950 Federal Bank Ltd. (New)........................... 16
4,900 Fuller Kep........................................ 16
(a)200,300 Garware Plastics & Polyester (New)................ 508
376,700 Garware Plastics & Polyester, Class A............. 956
688,500 Godrej Soaps Ltd.................................. 731
3,109,500 Great Eastern Shipping Co......................... 3,036
387,800 Gujarat Ambuja Cements Ltd........................ 2,547
75,100 Gujarat Narmada Valley Fertilizers Co., Ltd....... 52
322,750 Hero Honda, Class B............................... 2,179
817,500 Hindustan Development Corp. Ltd................... 363
126,206 Housing Development Finance Corp.................. 7,787
122,650 ICI India Ltd..................................... 469
(a,f,g)78,000 India Magnum Fund Ltd., (The) Class A (acquired
11/25/92-3/01/94, Cost $3,872).................. 3,120
(a,g)55,194 India Magnum Fund Ltd., (The) Class B............. 2,208
(a)644,625 India Organic Chemical Ltd........................ 218
1,000,000 Indian Petrochemicals Corp. Ltd. GDR.............. 3,278
(a,d)16,500 Indian Seamless Financial Services Ltd. (New)..... 14
(a)40,000 Indian Seamless Steel & Alloys.................... 5
571,047 Indo Rama Synthetics Ltd.......................... 376
(d)171,154 Indo Rama Synthetics Ltd. (New)................... 102
1,215,500 Industrial Finance Corp. of India................. 1,095
100,000 Infosys Technology Ltd............................ 2,148
(a)246,400 ITC Agrotech Ltd., Class B........................ 310
388,350 ITC Bhadrachalam Paperboards Ltd.................. 688
(a,d)500,913 ITC Bhadrachalam Paperboards Ltd. (New)........... 845
233,500 ITC Ltd........................................... 2,153
5,292 JCT Ltd. GDR...................................... 11
(a)1,500,162 JK Synthetics Ltd................................. 513
490,000 KEC International Ltd............................. 760
110,200 Kirloskar Oil Engines Ltd......................... 215
185,450 Lakme Ltd., Class B............................... 1,273
150,000 Lakshmi Precision Screws.......................... 142
145,000 Laser Lamp Ltd.................................... 73
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
1,760 Madras Cement Ltd................................. $ 393
798,800 Mahanagar Telephone Nigam......................... 5,125
306,484 Mahavir Spinning Mills Ltd........................ 567
(a)300,700 Maikaal Fibres.................................... 75
(a,g)42,697,100 Morgan Stanley Growth Fund........................ 7,205
(a,g)19,389 Morgan Stanley India Investment Fund, Inc......... 184
73,581 MRF Ltd., Class B................................. 5,800
25,000 OM Sindoori Hotels Ltd............................ 44
350,000 Patheja Forgings & Auto Parts, Class B............ 360
1,055 PCS Data Products Ltd., Class B................... --
218,500 Philips India Ltd................................. 465
(a)135,500 Polar Latex....................................... 19
232,700 Priyadarshini Cement Ltd., Class B................ 171
(a)350,000 PVD Plastic Mouldings Inds. Ltd., Class B......... 56
209,750 Raymond Ltd....................................... 667
(a,d)104,875 Raymond Ltd. (Bonus Shares)....................... 319
(e)3,770 Reliance Industries Ltd. GDS...................... 47
(a)73,581 Reliance Industries Ltd. GDS (New)................ 800
(a,d)84,500 Rossel Industries Ltd............................. 73
(d)25,350 Rossel Tea Ltd.................................... --
1,248,100 Sanghi Polyesters Ltd............................. 381
450 SCICI Ltd., Class B............................... --
135,400 Shanti Gears Ltd.................................. 638
697,500 Shipping Corp. of India........................... 564
150,636 Shree Vindhya Paper Mills......................... 66
188,000 Siemens India Ltd................................. 2,231
45,000 Sri Venkatesa Mills Ltd........................... 125
1,605,150 State Bank of India............................... 10,488
37,250 Sudarshan Chemical Industries Ltd................. 88
(a)725,950 Super Forgings & Steels........................... 213
439,762 Tata Engineering & Locomotive, Class A............ 4,171
9,870 Tata Hydro Electric Power......................... 27
12,600 Tata Iron and Steel Co., Ltd...................... 59
200 Thiru Arooran Sugars Ltd.......................... --
196,100 Tube Investments of India......................... 345
1,676 United Phosphorus Ltd. GDR........................ 12
1,566,000 Uttam Steels Ltd., Class A........................ 535
100 Videocon International Ltd., Class A.............. --
146,800 Videsh Sanchar Nigam Ltd.......................... 3,890
89,600 Wartsila Diesel Ltd............................... 614
----------
128,998
----------
INDONESIA (7.1%)
3,174,500 Astra International (Foreign)..................... 8,736
(d)6,772,976 Bank International Indonesia (Foreign)............ 6,667
(d)4,580,500 Bimantara Citra (Foreign)......................... 6,109
(a,d)6,647,000 Daya Guna Samudera (Foreign)...................... 7,739
(d)2,705,500 Gudang Garam (Foreign)............................ 11,683
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
INDONESIA (CONT.)
(d)2,973,000 Hanjaya Mandala Sampoerna (Foreign)............... $ 15,859
(d)7,404,777 Indah Kiat Pulp & Paper Corp. (Foreign)........... 5,408
(d)3,658,500 Sorini Corp. (Foreign)............................ 1,704
(d)17,145,000 Telekomunikasi Indonesia (Foreign)................ 29,579
----------
93,484
----------
ISRAEL (2.6%)
(a)152,300 Blue Square ADR................................... 2,170
124,141 Elbit Ltd......................................... 891
413,803 Elbit Medical Imaging Ltd......................... 1,722
413,803 Elbit Systems Ltd................................. 3,166
5,250 First International Bank of Israel, Class 1....... 582
22,807 First International Bank of Israel, Class 5....... 2,632
(a)342,350 Israel Land Development Co........................ 1,255
106,835 Koor Industries Ltd............................... 9,310
768,000 Osem Investment Ltd............................... 4,316
325,497 Supersol Ltd...................................... 7,971
----------
34,015
----------
KOREA (6.9%)
(a,d)154,800 Cho Hung Bank Co., Ltd............................ 1,270
374,700 Cho Hung Bank Co., Ltd. GDR....................... 2,810
(a,d)20,110 Chosun Brewery Co., Ltd........................... 522
1,349,270 Hanwa Chemical Corp............................... 10,459
(a,d)286,590 Housing & Commercial Bank Korea................... 4,362
202,500 Hyundai Engineering & Construction Co............. 4,697
(a)281,900 Kookmin Bank GDR.................................. 5,123
208,810 Korea Electric Power.............................. 6,079
184,400 Korea Exchange Bank............................... 1,669
618,401 Korea Mobile Telecommunications Corp. ADR......... 7,962
(d)6,805 Korea Mobile Telecommunications Corp.............. 6,794
147,700 LG Information & Communications
Ltd............................................. 9,439
(a)15,060 LG Information & Communication
Ltd. (New)...................................... 1,068
(d)7,890 Pohang Iron & Steel............................... 453
145,670 Pohang Iron & Steel Co., Ltd., ADR................ 2,950
(a,e)110,620 Samsung Electronics GDR........................... 4,577
(d)147,060 Samsung Electronics............................... 8,711
(a,d)34,311 Samsung Electronics (RFD)......................... 2,032
(d)343,639 Shinhan Bank...................................... 5,519
195,830 Ssangyong Oil Refining Co. Ltd.................... 4,287
----------
90,783
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
MEXICO (9.9%)
590,602 Apasco, Class A................................... $ 4,045
4,945,660 Banacci, Class B.................................. 10,424
966,103 Banacci, Class L.................................. 1,833
(a)11,745,228 Bancomer, Class B................................. 4,692
(a,e)1,364,075 Bancomer, Class B ADR............................. 11,083
1,212,460 Carso, Class A1................................... 6,381
320,690 Carso, ADR, Class A1.............................. 3,367
2,928,245 Cemex CPO......................................... 10,473
1,143,322 Cemex CPO ADR..................................... 8,206
149,940 Cemex, Class B.................................... 584
(a)1,434,360 Cifra, Class B.................................... 1,754
(a)2,393,695 Cifra, Class C.................................... 2,914
(a)205,620 Desc ADR.......................................... 4,524
7,310,872 FEMSA, Class B.................................... 25,034
(a)124,890 Gruma ADR......................................... 3,028
(a)509,044 Gruma, Class B.................................... 3,099
(a)121,547 ICA ADR........................................... 1,778
1,901,119 Maseca, Class B................................... 2,401
(a)854,034 Televisa GDR CPO.................................. 21,885
65,353 Panamco, Class A.................................. 3,063
----------
130,568
----------
MOROCCO (0.8%)
163,200 SNI Maroc, Series 'V' (Bearer).................... 10,178
----------
PAKISTAN (2.5%)
41,816 Adamjee Insurance Co., Ltd........................ 91
142,649 Cherat Cement Ltd................................. 67
(a)1,814 Crescent Investment Bank.......................... 1
(a)6,741 Crescent Textile Mills Ltd........................ 2
31,200 Dewan Salman Fibre................................ 24
(a)1,225,539 D.G. Khan Cement Ltd.............................. 283
5,972,000 Fauji Fertilizer Co., Ltd......................... 10,058
(a)2,068,660 Karachi Electric Supply Corp...................... 968
(a)113,127 Muslim Commercial Bank Ltd........................ 85
(a)1,256,519 Nishat Mills Ltd.................................. 501
626,106 Pakistan State Oil Co., Ltd....................... 4,046
(a)17,239,000 Pakistan Telecommunications Corp.................. 10,796
(a)38,350 Pakistan Telecommunications Corp. GDS............. 2,378
(a)4,225,960 Sui Northern Gas.................................. 3,216
(a)298,000 Zahur Textile Mills............................... 14
----------
32,530
----------
PERU (0.3%)
42 Cementos Lima..................................... --
199,350 Telefonica del Peru ADR........................... 3,763
----------
3,763
----------
PHILIPPINES (1.9%)
3,201,843 Ayala Land, Inc., Class B......................... 3,652
(a)5,688,300 DMCI Holdings, Inc................................ 3,731
21,094,030 JG Summit Holdings, Class B....................... 5,935
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (CONT.)
904,901 Manila Electric Co., Class B...................... $ 7,398
81,235 Philippine Long Distance Telephone Co., Class B... 4,463
----------
25,179
----------
POLAND (1.7%)
(a)165,000 Agros Holding S.A., Class C....................... 4,345
8,640 Bank Slaski S.A................................... 880
68,000 BRE Bank.......................................... 2,039
(a)85,960 Debica S.A........................................ 1,919
(d)33,400 Eastbridge N.V.................................... 2,245
537,000 Elektrim.......................................... 4,869
(a)142,468 Exbud S.A......................................... 1,317
(a)2,085,038 International UNP Holdings Ltd.................... 426
(a)373,740 Mostostal Exports S.A............................. 886
266,000 Polifarb Wroclaw S.A.............................. 1,503
(a)56,500 Rafako............................................ 321
80,000 WBR S.A........................................... 541
11,125 Wedel S.A......................................... 547
22,135 Zywiec............................................ 1,027
----------
22,865
----------
RUSSIA (6.9%)
(d)592,359 Alliance Cellulose Ltd............................ 3,981
(d)400,000 Global Tele-Systems Group, Inc. (Registered)...... 8,000
(a)54,315,000 Irkutskenergo..................................... 7,197
710,100 LUKoil Holding.................................... 8,024
(e)275,730 LUKoil Holding ADR................................ 12,615
80,000 LUKoil Holding ADR................................ 3,660
16,490,000 Mosenergo......................................... 16,820
(a)3,528,500 Rostelecom........................................ 8,539
(d)317,851 Russian Telecomm Development Corp................. 3,178
(d)990 Storyfirst Communications, Inc., Class C.......... 660
(d)2,640 Storyfirst Communications, Inc., Class D.......... 1,980
(d)3,250 Storyfirst Communications, Inc., Class E.......... 3,250
(d)1,331 Storyfirst Communications, Inc., Class F.......... 3,327
(a)112,039,000 United Energy System.............................. 10,196
----------
91,427
----------
SINGAPORE (0.3%)
(a)1,576,000 Want Want Holdings................................ 4,145
----------
SOUTH AFRICA (4.1%)
81,050 Anglo American Industrial Corp., Ltd.............. 2,936
500,000 Barlow Rand Ltd................................... 4,435
360,600 Bidvest Group Ltd................................. 1,869
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
287,500 Dreifontein Consolidated Ltd...................... $ 3,026
949,600 Gencor Ltd........................................ 3,451
(g)224,490 Morgan Stanley Africa Investment Fund, Inc........ 3,059
547,900 Sage Group Ltd.................................... 2,225
2,645,000 Sasol Ltd......................................... 31,377
800,000 Spur Holdings Ltd................................. 1,411
----------
53,789
----------
TAIWAN (2.0%)
1,605,500 Cathay Life Insurance Co., Ltd.................... 10,217
3,624,000 China Steel Corp.................................. 3,400
1,410,000 Formosa Plastics Corp............................. 3,538
(a)1,575,000 Pacific Construction.............................. 1,346
(a)1,945,000 Siliconware Precision Industries Co............... 4,102
2,791,340 Yang Ming Marine Transport........................ 3,694
----------
26,297
----------
THAILAND (4.8%)
1,207,650 Advanced Information Service PCL (Foreign)........ 11,302
1,469,400 Bangkok Bank PCL (Foreign)........................ 14,209
2,216,400 Finance One PCL (Foreign)......................... 4,494
(d)1,053,400 Shinawatra Computer Co. plc (Foreign)............. 12,733
1,617,800 Siam Commercial Bank PCL (Foreign)................ 11,733
1,382,700 Thai Farmers Bank, PCL (Foreign).................. 8,626
----------
63,097
----------
TURKEY (3.5%)
7,259,000 Aksa.............................................. 987
25,953,000 Arcelik........................................... 2,632
23,161,000 Bossa............................................. 1,944
41,314,050 Ege Biracilik..................................... 8,857
43,404,000 Erciyas Biracilik................................. 4,703
85,854,000 Eregli Demir Ve Celik............................. 10,291
(e)61,671,000 Garanti Bankasi A.S............................... 2,786
496,085 Garanti Bankasi A.S. ADR.......................... 2,228
3,375,750 Guney Biracilik Ve Malt Sanayii................... 215
2,320,000 Migros (Registered)............................... 2,835
85,761,000 Sabah............................................. 1,107
7,244,998 Tat Konserve Sanayii.............................. 1,086
22,215,000 Trakya Cam Sanayii................................ 1,127
225,665,000 Yapi Ve Kredi Bankasi A.S......................... 5,618
----------
46,416
----------
UNITED KINGDOM (0.1%)
929,039 Lonrho plc........................................ 1,989
----------
VENEZUELA (0.2%)
(a)114,925 CANTV ADR......................................... 3,232
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
ZIMBABWE (0.5%)
(e)1,980,000 Trans Zambezi Industries Ltd...................... $ 4,752
760,000 Trans Zambezi Industries Ltd. (Registered)........ 1,824
----------
6,576
----------
TOTAL COMMON STOCKS (Cost $1,144,149)................................ 1,153,966
----------
PREFERRED STOCKS (8.7%)
BRAZIL (NON-VOTING STOCKS) (8.7%)
1,997,728,448 Banco Bradesco.................................... 14,477
(a,d)295,998,880 Banco Nacional.................................... 14
35,313,030 Brahma............................................ 19,303
620,000 Brasmotor......................................... 172
86,587,993 CEMIG............................................. 2,950
42,835,850 Eletrobras, Class B............................... 15,913
37,900 Eletrobras Class B, ADR........................... 704
24,276,800 Itaubanco......................................... 10,514
74,270,333 Petrobras......................................... 11,829
12,500 Sadia Concordia................................... 10
75,975,000 Telebras.......................................... 5,849
(e)7,769 Telebras ADR...................................... 594
390,495 Telebras ADR...................................... 29,873
7,058,615 Telesp............................................ 1,528
----------
113,730
----------
GREECE (0.0%)
69,738 Aegek Ltd......................................... 206
----------
INDIA (0.0%)
2,700 Fabworth (India) Ltd.............................. 1
----------
TOTAL PREFERRED STOCKS (Cost $95,490)................................ 113,937
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
INDIA (0.0%)
(a,d)159 Indo Rama Synthetics Ltd.......................... --
(a,d)155,100 ITC Agrotech Ltd.................................. --
(a,d)50 Thiru Arooran Sugars Ltd.......................... --
----------
--
----------
POLAND (0.0%)
(a,d)373,740 Mostostal Exports S.A............................. 15
----------
TOTAL RIGHTS (Cost $0)............................................... 15
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------------
WARRANTS (0.0%)
INDIA (0.0%)
(a,d)176,850 Apollo Tyres Ltd., expiring 2/28/98............... 109
(a,d)27,383 Flex Industries Ltd., expiring 11/23/97........... 40
(a,d)44,702 Garware Plastics & Polyesters, expiring 4/04/98... 62
----------
211
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
THAILAND (0.0%)
(d)117,662 Thai Farmers Bank, PCL (Foreign), expiring
9/15/02......................................... $ --
----------
TOTAL WARRANTS (Cost $465)........................................... 211
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FIXED INCOME SECURITIES (1.1%)
BULGARIA (1.0%)
U.S.$ (n)17,250 Bulgaria Front Loaded Interest Reduction Bond,
Series A, 2.25%, 7/28/12........................ 6,630
13,000 Bulgaria Discount Bond, Series A, "Euro",
(floating rate), 6.688%, 7/28/24................ 7,386
----------
14,016
----------
RUSSIA (0.1%)
(d)1 Storyfirst Communications Convertible Bond,
4/30/97......................................... 844
----------
TOTAL FIXED INCOME SECURITIES (Cost $14,215)......................... 14,860
----------
CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR (d)33,574 DCM Shriram Industries
14.50%, 3/04/00................................. 354
(d)1,467 Mahavir Spinning Mills Ltd., Series A, 15.40%,
3/22/00......................................... 37
(d)50,000 Raymond Ltd. 16.00%, 12/31/99..................... 1,235
U.S.$ 130 Tata Iron & Steel Co. Ltd.,
2.25%, 4/01/99.................................. 118
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $2,233)........................... 1,744
----------
NON-CONVERTIBLE DEBENTURES (0.2%)
INDIA (0.2%)
INR (d)3,357 Bharat Forge Co., Ltd. 7.25%, 3/04/00............. 37
(d)34,055 DCM Shriram Industries Ltd. 9.90%, 2/21/01........ 452
(d)4,470 Garware Plastics & Polyester 16.00%, 4/04/98...... 106
(d)70,000 Saurashtra Cement & Chemicals Ltd. 18.00%,
11/27/98........................................ 1,645
----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $3,426)....................... 2,240
----------
LOAN AGREEMENTS (0.5%)
POLAND (0.0%)
U.S.$ (e)54 Republic of Poland Interest Arrears PDI Bonds,
(Floating Rate) 3.75%, 10/27/14................. 46
----------
RUSSIA (0.5%)
CHF (b)11,910 Bank for Foreign Economic Affairs................. 6,807
----------
TOTAL LOAN AGREEMENTS (Cost $3,270).................................. 6,853
----------
TOTAL FOREIGN SECURITIES (98.1%) (Cost $1,263,248)................... 1,293,826
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT (2.5%)
$ 32,934 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $32,944,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/21, valued at $33,776 (Cost $32,934)... $ 32,934
----------
FOREIGN CURRENCY (0.8%)
ARP 4 Argentine Peso.................................... 4
BRL 2,663 Brazilian Real.................................... 2,562
GRD 54,347 Greek Drachma..................................... 220
HKD 7,994 Hong Kong Dollar.................................. 1,034
HUF 59,707 Hungarian Forint.................................. 369
INR 189,139 Indian Rupee...................................... 5,276
KRW 99,338 Korean Won........................................ 118
MXP 17 Mexican Peso...................................... 2
MAD 980 Morrocan Dirham................................... 112
PKR 8,251 Pakistani Rupee................................... 206
PHP 2,098 Philippine Peso................................... 80
PLZ 1,700 Polish Zloty...................................... 593
ZAR 170 South African Rand................................ 36
LKR 2 Sri Lankan Rupee.................................. --
TWD 5,571 Taiwan Dollar..................................... 203
TRL 15,301,500 Turkish Lira...................................... 141
----------
TOTAL FOREIGN CURRENCY (Cost $11,013)................................ 10,956
----------
TOTAL INVESTMENTS (101.4%) (Cost $1,307,195)......................... 1,337,716
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.9%)
Cash................................................... $ 3,379
Receivable for Portfolio Shares Sold................... 3,193
Dividends Receivable................................... 3,186
Receivable for Investments Sold........................ 1,202
Interest Receivable.................................... 802
Foreign Withholding Tax Reclaim Receivable............. 51
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................ 1
Other.................................................. 315 12,129
----------
LIABILITIES (-2.3%)
Payable for Investments Purchased...................... (16,670)
Payable for Portfolio Shares Redeemed.................. (8,839)
Investment Advisory Fees Payable....................... (4,157)
Custodian Fees Payable................................. (864)
Payable for Foreign Taxes.............................. (219)
Bank Overdraft......................................... (190)
Administrative Fees Payable............................ (169)
Sub-Administrative Fees Payable........................ (60)
Payable for Stamp Duty Tax............................. (53)
Directors' Fees and Expenses Payable................... (35)
Distribution Fees Payable.............................. (9)
Other Liabilities...................................... (361) (31,626)
---------- ----------
NET ASSETS (100%).................................................... $1,318,219
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- -----------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital................................ $1,302,754
Overdistributed Net Investment Income.......... (198)
Accumulated Net Realized Loss.................. (14,577)
Unrealized Appreciation on Investment and
Foreign Currency Translations (Net of accrual
for foreign taxes of $219 on unrealized
appreciation on investments)................. 30,240
----------
NET ASSETS..................................... $1,318,219
----------
----------
CLASS A:
- -----------------------------------------------
NET ASSETS..................................... $1,304,006
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 88,929,927 outstanding $0.001 par
value shares (authorized 500,000,000 shares)... $14.66
----------
----------
CLASS B:
- -----------------------------------------------
NET ASSETS..................................... $ 14,213
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 969,196 outstanding $0.001 par
value shares (authorized 500,000,000 shares)... $14.66
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------- ----------- ------------ ------- ------------
U.S.$ 1,919 $ 1,919 1/02/97 BRL 1,995 $ 1,920 $ 1
------- ------- ---
------- ------- ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing-in default
(d) -- Securities (totaling $162,055 or 12.3% of net assets at December 31,
1996) valued at fair value -- See note A-1 to financial statements
(e) -- 144A Security -- Certain conditions for public sale may exist
(f) -- Restricted as to public resale. Total value of restricted securities
at December 31, 1996 was $3,120 of 0.2% of net assets. (Total Cost
$3,782)
(g) -- The fund is advised by an affiliate
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
PCL -- Public Company Limited
PDI -- Past Due Interest
RFD -- Ranked for Dividend
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate.The rates shown are those in effect on
December 31, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 74,203 5.6%
Consumer Goods......................... 190,758 14.5
Energy................................. 171,728 13.0
Finance................................ 283,278 21.5
Gold Mines............................. 3,026 0.2
Loan Agreements........................ 20,869 1.6
Materials.............................. 105,439 8.0
Multi-Industry......................... 162,688 12.3
Services............................... 281,837 21.4
----------- ---
$ 1,293,826 98.1%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Austria 0.7%
Belgium 2.3%
Denmark 2.1%
Finland 2.6%
France 11.6%
Germany 11.4%
Italy 6.6%
Netherlands 9.5%
Norway 2.5%
Portugal 0.5%
Spain 7.2%
Sweden 4.5%
Switzerland 11.7%
United Kingdom 16.6%
Other 10.2%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EUROPEAN EQUITY PORTFOLIO-CLASS
A MSCI EUROPE INDEX (1)
<S> <C> <C>
4/2/1993* 500,000 500,000
12/31/1993 645,500 606,808
12/31/1994 715,750 620,650
12/31/1995 800,566 754,835
12/31/1996 979,012 914,030
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 22.29% 19.62%
PORTFOLIO -- CLASS B(3)............................................................................ 20.76 N/A
INDEX.............................................................................................. 21.09 17.45
</TABLE>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (assumes
dividends are reinvested).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE MEASURED BY THE MSCI
EUROPE 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 European Equity Portfolio is to seek long-term
capital growth through investment in equity securities of European issuers.
Equity securities for this purpose include stocks and stock equivalents such as
securities convertible into common and preferred stocks and securities having
equity characteristics, such as rights and warrants to purchase common stock.
The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.
For the year ended December 31, 1996, the Portfolio had a total return of 22.29%
for the Class A shares and 20.76% for the Class B shares as compared to a total
return of 21.09% for the Morgan Stanley Capital International (MSCI) Europe
Index. The average annual total return for the period from inception on April 2,
1993 through December 31, 1996 was 19.62%, for the Class A shares as compared to
17.45% for the Index.
In 1996 we have witnessed some changes in the European investment environment
from that seen in 1995. One of the most prominent changes has been the weakness
of most continental European currencies against the U.S. dollar following an
extended period of strength. The weakest currency was the Swiss franc which lost
15.6% against the dollar during the year. Of the other main currencies, the
deutschemark fell by 8% and the French franc by 6.3%. There were two currencies
that appreciated against the dollar, the Italian lira, following a period of
weakness, and sterling which gained 10%. Sterling was particularly strong in the
final quarter of the year following an increase in U.K. interest rates and the
potential for further rises early in the new year. The other main trend was
mentioned in our mid-year report, the strength of smaller cap stocks. This was
mainly in the first half of the year and we continue to see this as an area of
investment opportunity in the coming year.
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
During the year, the top performing equity market in Europe and the world's
developed markets was Spain, up 40% in U.S. dollar terms. Sectors that performed
well included electrical utilities, an industry that continues to restructure
and telecommunications with Telefonica showing particularly good returns.
Another area of strong performance was the Baltic region of Europe with the
Swedish market returning 37% and Finland 34%. The poorer performing markets
included Switzerland up only 2.3% and Austria up 4.5%. Both of these returns
were influenced by weakness of the local currency.
In general, the economies in Europe have continued to grow steadily throughout
the year. The best performance in the main markets has come from the Netherlands
where strong levels of consumer spending has sustained an annual growth rate of
3%. In Germany, domestic demand remains poor but export growth, helped by the
relative weakness of the deutschemark, has helped the economy grow. There has
been volatility in the performance of the French economy primarily due to
savings in consumption as consumers follow government tax incentives. In the
U.K., strong growth has resulted in an increase in interest rates and a further
potential rise has led to sterling being strong against most major currencies.
In recent months we have added the following stocks to the Portfolio:
SCHINDLER is the world's second largest installer of elevator systems after
Otis, a division of United Technologies. Current earnings are being depressed by
aggressive pricing to gain market share but this augurs well for long term
recurrent service revenue. The company has net cash and sells on 6 times
depressed cash flow.
LUFTHANSA, the German national airline, is currently 52% owned by the German
Government. It is the world's third largest cross-border airline, and boasts the
youngest fleet of any first world airline, averaging about seven years.
Lufthansa has an excellent reputation for safety and reliability. The German
Government is under pressure from the Bundesbank to finance the cost of
unification and a sale of the remaining 52% of Lufthansa therefore seems likely.
MERITA BANK is the result of a merger at the beginning of 1996 of the previous 2
largest commercial banks in Finland, Kansalis-Osake-Pankki and Unitas. The
combined banks have suffered catastrophic capital losses arising out of severe
asset quality problems in the wake of the Nordic banking crisis of the early
1990's and the deep recession in Finland. The combined entity is now on the
recovery path following government assistance to shore up its Tier 1 Capital and
now enjoys the position of domestic market share of over 50% in both deposits
and lending. However, the bank's continued large exposure to Finnish property is
holding up the pace of this recovery.
SGS THOMSON is a semiconductor company that has over the years been migrating
its product mix to proprietary products and lessening its exposure to commodity
products, with the consequence that it has no exposure to the heavily
commoditized DRAM chips that are responsible for the bulk of volatility in
semiconductor markets. The company does now appear to have genuine defensible
positions in its product line and has an admirable record in terms of growth in
both top line earnings and profits.
USINOR SACILOR is the largest producer of flat and specialty steel products in
Europe and the second largest producer of stainless steel in the world. The
company has been realigning its activities over the past few years away from the
commodity, spot market end of the business to more stable higher value added
businesses, and has attempted to move further downstream in distribution and
finishing.
BT is one of the world's leading providers of telecommunication services. BT
offers a full range of telephone services to a domestic and international client
base. BT is concentrating on expanding its international activities to offset an
increasingly competitive domestic market.
SOUTHERN ELECTRIC is a Regional Electricity Company (REC) which distributes
electricity principally in central southern England. It also has interests in
electricity generation and electrical and utility contracting. The company is
currently suffering from market concerns on what it will do with its strong
balance sheet and the size of likely windfall taxes to be imposed by a potential
Labour government. A satisfactory outcome for both of these concerns should lead
to a re-rating of the stock.
MARZOTTO is an Italian textile and clothing group active in yarns, fabrics and
apparel. Marzotto acquired the Hugo Boss group in 1992, which it has
subsequently managed to turn around by restoring the brand and subcontracting
the manufacturing process. Marzotto's own apparel division is currently
generating poor levels of profitability but with the appointment as
- --------------------------------------------------------------------------------
European Equity Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
CEO of one of the people responsible for the Hugo Boss transformation, we expect
it to be restored to an adequate level of profitability.
KLM is the Dutch national airline operating the youngest fleet in Europe with an
average of only seven years. They were one of the first European airlines to
realize the need to restructure the group and reduce costs to remain positive.
KLM are studying possibilities of cooperation with SAS, Swissair and Austrian
Airlines; if this resulted in a merger, it would create the world's largest
airline in terms of turnover and balance sheet. The Dutch and U.S. authorities
have recently signed an 'open skies' deal allowing carriers to fly to all
destinations in each country. This will allow KLM to strengthen their
trans-Atlantic position while traffic will increase on short haul flights from
Amsterdam. KLM is one of the cheapest stocks in the sector trading at a 40%
discount to book value and a price to cash flow ratio of 2.2 times.
UNI STOREBRAND is the market leader in Norway in both Life and Non Life
insurance. Following a period of attempted international expansion which nearly
bankrupted the company, Storebrand is now concentrated on direct insurance in
Norway. Life insurance should see quite robust growth over the next year due to
the demographics facing Norway as with the rest of Europe, although forecast
growth rates for this market are at present clouded by lack of a clear
government policy regarding private sector savings in Norway.
SVENSKA HANDELSBANKEN is consistently the most cost efficient bank in
Continental Europe while at the same time has managed to post improvements in
its cost/income ratio, in spite of being a full service universal bank with a
large branch network and a foreign expansion program. The bank is managing to
show significant top-line growth in a scenario of a very mature and stagnant
Swedish lending market, and now has sizable retail operations in both Finland
and Norway (both the result of acquisitions).
DEUTSCHE TELEKOM is the recently privatized national telephone operator in
Germany. Benefiting from an initially benign regulatory regime, the company is a
substantial generator of free cash flow and has the potential for significant
further cost and debt reduction and dividend growth.
Robert Sargent
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (86.2%)
AUSTRIA (0.7%)
17,000 Boehler-Uddeholm AG............................... $ 1,217
----------
BELGIUM (2.3%)
12,500 Arbed S.A......................................... 1,359
13,000 Delhaize, 'Le Lion' S.A........................... 772
45,000 G.I.B. Holdings Ltd............................... 2,017
55 G.I.B. Holdings Ltd. VVPR (New)................... 3
----------
4,151
----------
DENMARK (2.1%)
22,000 BG Bank A/S....................................... 1,031
6,300 Jyske Bank A/S (Registered)....................... 474
45,200 Unidanmark A/S, Class A (Registered).............. 2,340
----------
3,845
----------
FINLAND (2.6%)
78,000 Amer-Yhtymae Oy, Class A.......................... 1,611
50,000 Huhtamaki Oy, Series 1............................ 2,326
(a)250,000 Merita Ltd., Class A.............................. 777
----------
4,714
----------
FRANCE (11.6%)
38,704 Banque Nationale de Paris......................... 1,498
3,654 Bongrain S.A...................................... 1,414
17,526 Cie de Saint Gobain............................... 2,480
20,000 Elf Aquitaine S.A................................. 1,821
13,500 Eridania Beghin-Say S.A........................... 2,173
12,300 Groupe Danone..................................... 1,715
41,711 Lafarge S.A....................................... 2,503
42,005 Legris Industries S.A............................. 1,769
8,500 PSA Peugeot Citroen............................... 957
(a)15,200 SGS-Thompson Microelectronics N.V................. 1,076
24,100 Total S.A., Class B............................... 1,961
107,700 Usinor Sacilor.................................... 1,568
----------
20,935
----------
GERMANY (7.8%)
42,000 BASF AG........................................... 1,610
60,000 Bayer AG.......................................... 2,435
825 Buderus AG........................................ 413
(a)42,900 Deutsche Telekom AG ADR........................... 874
77,050 Gerresheimer Glas AG.............................. 1,680
4,900 Karstadt AG....................................... 1,630
51,400 Lufthansa AG...................................... 694
2,000 Mannesmann AG..................................... 861
(a)5,000 Varta AG.......................................... 894
32,000 VEBA AG........................................... 1,841
3,000 Volkswagen AG..................................... 1,243
----------
14,175
----------
ITALY (6.6%)
(a)518,000 Editoriale L'Expresso S.p.A....................... 1,434
228,150 Marzotto (Gaetano) & Figli S.p.A.................. 1,474
(a)2,610,000 Olivetti S.p.A.................................... 920
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
239,100 Pirelli S.p.A..................................... $ 444
869,000 Sogefi S.p.A...................................... 1,930
660,000 Stet Di Risp (NCS)................................ 2,230
811,000 Telecom Italia S.p.A.............................. 2,106
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,366
----------
11,904
----------
NETHERLANDS (9.5%)
30,891 ABN Amro Holdings N.V............................. 2,010
16,000 Akzo Nobel N.V.................................... 2,185
9,000 DSM N.V........................................... 888
8,957 Hollandsche Beton Groep N.V....................... 1,855
51,710 ING Groep N.V..................................... 1,862
76,000 KLM Royal Dutch Airlines N.V...................... 2,138
20,200 Koninklijke Bijenkorf Beheer N.V.................. 1,456
36,000 Koninklijke Van Ommeren N.V....................... 1,625
78,400 Philips Electronics N.V........................... 3,177
----------
17,196
----------
NORWAY (2.5%)
568,000 Den Norske Bank ASA............................... 2,176
51,000 Saga Petroleum A/S, Class B....................... 801
(a)254,000 Storebrand ASA.................................... 1,475
----------
4,452
----------
PORTUGAL (0.5%)
53,000 Banco Totta & Acores, S.A., Class B
(Registered).................................... 999
----------
SPAIN (7.2%)
11,518 Bodegas y Bebidas S.A............................. 302
(a)200,000 Grupo Duro Felguera S.A........................... 2,041
185,300 Iberdrola S.A..................................... 2,626
47,000 Repsol S.A........................................ 1,803
58,528 Sevillana de Electricidad S.A..................... 665
158,000 Telefonica de Espana S.A.......................... 3,669
250,000 Uralita S.A....................................... 1,955
----------
13,061
----------
SWEDEN (4.5%)
11,000 Electrolux AB, Series B........................... 639
101,000 Nordbanken AB..................................... 3,060
48,400 Skandia Forsakrings AB............................ 1,370
67,000 S.K.F. AB, Class B................................ 1,588
54,900 Sparbanken Sverige AB, Class A.................... 942
16,700 Svenska Handelsbanken, Class A.................... 480
----------
8,079
----------
SWITZERLAND (11.7%)
2,440 Ascom Holdings AG (Bearer)........................ 2,485
1,200 Bobst AG (Bearer)................................. 1,623
6,500 Forbo Holding AG (Registered)..................... 2,622
3,270 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 2,336
4,000 Magazine Globus (Participating Certificates)...... 1,847
140 Magazine Globus (Registered)...................... 73
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
2,100 Nestle S.A. (Registered).......................... $ 2,254
(a)1,013 Novartis AG....................................... 1,160
(a)746 Novartis AG (Bearer).............................. 854
(a)20,300 Oerlikon-Buehrle Holding AG (Registered).......... 2,002
600 Schindler Holding AG (Participating
Certificates)................................... 652
1,360 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 1,651
1,800 Sulzer AG (Participating Certificates)............ 963
1,230 Sulzer AG (Registered)............................ 710
----------
21,232
----------
UNITED KINGDOM (16.6%)
207,000 Associated British Foods plc...................... 1,718
65,000 Bass plc.......................................... 914
346,892 BAT Industries plc................................ 2,876
363,000 British Telecommunications plc.................... 2,453
384,300 Calor Group plc................................... 1,952
450,000 Christian Salvesen plc............................ 2,213
446,000 Courtaulds Textiles plc........................... 1,696
88,900 Grand Metropolitan plc............................ 699
(a)265,000 Imperial Tobacco Group plc........................ 1,712
417,624 John Mowlem & Co. plc............................. 812
158,350 Kwik Save Group plc............................... 871
98,100 Railtrack Group plc PP............................ 649
206,721 Reckitt & Colman plc.............................. 2,560
298,522 Royal & Sun Alliance Insurance Group plc.......... 2,278
77,200 Southern Electric plc............................. 1,053
320,000 Tate & Lyle plc................................... 2,598
67,800 Unilever plc...................................... 1,645
300,000 WPP Group plc..................................... 1,305
----------
30,004
----------
TOTAL COMMON STOCKS (Cost $131,963)............................. 155,964
----------
PREFERRED STOCKS (3.6%)
GERMANY (3.6%)
7,163 Dyckerhoff AG..................................... 1,978
28,000 Hornbach Holding AG............................... 2,002
25,000 RWE AG............................................ 837
60,000 Spar Handels AG................................... 733
3,200 Volkswagen AG..................................... 1,021
----------
TOTAL PREFERRED STOCKS (Cost $5,474)............................ 6,571
----------
TOTAL FOREIGN SECURITIES (89.8%) (Cost $137,437)................ 162,535
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (5.7%)
REPURCHASE AGREEMENT (5.7%)
$ 10,261 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $10,264,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $10,533 (Cost $10,261)... $ 10,261
----------
FOREIGN CURRENCY (2.4%)
GBP 10 British Pound..................................... 17
DEM 6,741 Deutsche Mark..................................... 4,381
FRF 3 French Franc...................................... 1
ITL 262 Italian Lira...................................... --
NLG 1 Netherlands Guilder............................... --
ESP 247 Spanish Peseta.................................... 2
----------
TOTAL FOREIGN CURRENCY (Cost $4,379)............................ 4,401
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.9%) (Cost $152,077)................ 177,197
--------
OTHER ASSETS (2.8%)
Cash....................................... $ 1
Receivable for Portfolio Shares Sold....... 4,465
Dividends Receivable....................... 373
Foreign Withholding Tax Reclaim
Receivable............................... 145
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 6
Interest Receivable........................ 2
Other...................................... 3 4,995
----------
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (687)
Investment Advisory Fees Payable........... (283)
Payable for Portfolio Shares Redeemed...... (107)
Custodian Fees Payable..................... (27)
Administrative Fees Payable................ (22)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (51) (1,182)
---------- --------
NET ASSETS (100%)........................................ $181,010
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $154,554
Overdistributed Net Investment Income............. (223)
Accumulated Net Realized Gain..................... 1,559
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 25,120
--------
NET ASSETS........................................ $181,010
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $178,356
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 10,680,943 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $16.70
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,654
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 159,157 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $16.67
----------
----------
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------ ----------- ------------ ------ ------------
U.S.$ 309 $ 309 1/02/97 GBP 184 $ 315 $ 6
------ ------ ---
------ ------ ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
NCS -- Non Convertible Shares
PP -- Partially Paid
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 26,874 14.8%
Consumer Goods......................... 29,017 16.0
Energy................................. 12,732 7.0
Finance................................ 22,774 12.6
Materials.............................. 36,049 20.0
Multi-Industry......................... 6,098 3.4
Services............................... 28,991 16.0
--------- ---
$ 162,535 89.8%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.5%
Canada 0.5%
France 4.4%
Germany 8.8%
Hong Kong 0.8%
Ireland 3.6%
Italy 3.4%
Japan 10.5%
Netherlands 4.4%
Spain 4.8%
Sweden 0.5%
Switzerland 5.9%
United Kingdom 9.4%
United States 36.7%
Other 4.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GLOBAL EQUITY PORTFOLIO-CLASS
A MSCI WORLD INDEX(1)
<S> <C> <C>
7/15/92* $500,000 $500,000
10/31/1992 467,500 482,000
12/31/1992 455,813 475,879
12/31/1993 703,145 604,750
12/31/1994 752,000 635,450
12/31/1995 892,323 767,115
12/31/1996 1,096,041 870,522
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 22.83% 19.22%
PORTFOLIO -- CLASS B(3).......... 22.04 N/A
INDEX............................ 13.48 13.22
</TABLE>
1. The MSCI World Index is an unmanaged index of common stocks and includes
securities listed on the stock exchanges of the U.S., Europe, Canada,
Australia, New Zealand and the Far East (assumes dividends reinvested).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OF 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 a high
total return by investing in markets worldwide, including the United States.
Investments may also be made with discretion in smaller companies or emerging
markets.
For the year ended December 31, 1996, the Portfolio had a total return of 22.83%
for the Class A shares and 22.04% for the Class B shares, as compared to a total
return of 13.48% for the Morgan Stanley Capital International (MSCI) World
Index. The average annual total return for the period from inception on July 15,
1992 through December 31, 1996 was 19.22% for the Class A shares, as compared to
13.22% for the Index.
The outperformance was principally attributable to the Portfolio's underweight
position in Japan, and stock selection in the United States, Japan, Germany,
Spain, the Netherlands and Ireland.
A particularly strong fourth quarter resulted in another robust performance from
equities in 1996 in all major markets other than Japan, which fell 16% in dollar
terms. The MSCI U.S. Index was up 23% on top of 1995's 37% rise; the U.K.
markets rose 27% and Continental European markets largely all finished in record
territory, although the strength of the dollar shaved returns in dollar terms.
Peripheral markets such as Ireland, Hong Kong and the Scandinavian bloc also
performed strongly, registering returns in excess of 30%.
During the year, U.S. indices were driven higher by a continuation of the low
inflation and steady growth environment -- helped by the 75 basis points of
monetary easing in 1995. Further merger activity, particularly in the
deregulated banking and telecommunications sectors and a mammoth $220 billion of
inflows into equity mutual funds were also key factors. This latter "wall of
money" more than offset growing unease over valuations, earnings sustainability,
consumer debt levels, and rising wage pressure, as unemployment nudged 5% and
the House passed an increased minimum wage. The return of the Republican
Congress in November was greeted with relief as was the defeat of a proposal in
California which if enacted, would have increased company management's liability
for inaccurate business forecasts.
In Europe, steepening yield curves, restructuring and the improved
competitiveness of the Deutschemark bloc currencies all provided support for
continental
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
stocks. Domestic conditions however remained difficult with double digit
unemployment in both Germany and France combined with renewed fiscal discipline
as EMU candidates strove to meet the [Maastrict] criteria.
The U.K., being substantially further advanced in the business cycle than its
continental peers, enjoyed a broadly based manufacturing recovery. Falling
unemployment, continued takeover activity among the utilities ahead of the
imminent election, deregulation of the building societies and recently, rising
house prices, all contributed to surprising strength in final demand.
Japan was the exception. After seeming to recover from its worst recession since
World War II, and aided by a weaker yen and loose monetary policy, many
commentators expected the Japanese market to outperform in 1996. Unhappily, it
remained beleaguered by continuing instability in the banking and property
sectors with corporates facing the daunting prospect of deregulation in a number
of highly protected industries. This outlook combined with a planned rise in
consumption tax in April augurs for another difficult year and despite its
substantial underperformance in 1996, Japan remains expensive from a value
perspective.
Looking forward, the Portfolio is likely to remain slightly underweight in the
U.S., substantially so in Japan and overweight in Continental Europe. We tend to
agree with the consensus that a gradual intensification on inflationary
pressures may lead to a moderate move up in U.S. interest rates, particularly if
the fourth quarter's likely 4% GDP growth rate continues for any length of time.
Moreover, there is a risk that earning growth could slow to between mid and high
single digits. All of this underscores the need to focus on Mr. Greenspan's
recent warning of "irrational market exuberance" at a time when the Dow Jones
was in fact several hundred points lower than it is today.
U.S. corporates do however remain the key beneficiaries of globalization, which
combined with their leadership in technology, and a decade's experience of
restructuring, suggests that certain companies can continue to generate
substantial free cashflows over the foreseeable future. Restructuring remains
the central theme in Europe while governments there face the dilemma of having
to reconcile accommodative monetary policies with tight fiscal policies,
dictated by the political commitment to monetary union, in a climate of labor
market rigidities and high levels of structural unemployment.
The long term return for equities is typically 6% per annum over and above
consumer price inflation. With global inflation likely to be in the 2.5-3.5%
range, barring another oil shock, an increase of 8-10% in the MSCI World Index
is considered achievable although at this stage of the cycle the need for
clearly focused stock picking is paramount.
Frances Campion
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Global Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (94.1%)
AUSTRALIA (1.5%)
13,350 Brambles Industries Ltd........................... $ 260
163,407 Coles Myer Ltd.................................... 673
105,100 CSR Ltd........................................... 367
----------
1,300
----------
CANADA (0.5%)
22,900 Hudson's Bay Co................................... 383
----------
FRANCE (4.4%)
19,303 Banque Nationale de Paris......................... 747
2,010 Bongrain S.A...................................... 778
(a)12,000 Credit Lyonnaise CDI.............................. 308
9,266 Elf Aquitaine S.A................................. 844
11,000 Scor S.A.......................................... 387
10,365 Valeo S.A......................................... 639
----------
3,703
----------
GERMANY (7.7%)
25,900 BASF AG........................................... 993
32,920 Bayer AG.......................................... 1,336
(a)20,800 Deutsche Telekom AG ADR........................... 424
3,470 Karstadt AG....................................... 1,155
3,000 Mannesmann AG..................................... 1,291
(a)2,364 Sinn AG........................................... 450
(a)2,225 Varta AG.......................................... 398
1,000 Volkswagen AG..................................... 414
----------
6,461
----------
HONG KONG (0.8%)
189,600 Jardine Strategic Holdings, Inc................... 686
----------
IRELAND (3.6%)
690,253 Anglo Irish Bank Corp. plc........................ 824
405,100 Avonmore Foods plc, Class A....................... 1,194
264,836 Green Property plc................................ 1,077
----------
3,095
----------
ITALY (3.4%)
(a)624,000 Olivetti S.p.A.................................... 220
431,000 Stet Di Risp (NCS)................................ 1,456
603,400 Telecom Italia S.p.A. Di Risp (NCS)............... 1,178
----------
2,854
----------
JAPAN (10.5%)
140 East Japan Railway Co............................. 630
66,000 Fuji Photo Film Ltd............................... 2,177
21,000 Hitachi Ltd....................................... 196
122,000 Kao Corp.......................................... 1,422
47,000 Matsushita Electric Industries Co., Ltd........... 767
140,000 Nichido Fire & Marine Insurance Co., Ltd.......... 798
9,000 Sony Corp......................................... 590
86,000 Sumitomo Rubber Industries........................ 641
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
13,000 TDK Corp.......................................... $ 847
34,000 Toyo Seikan Kaisha Ltd............................ 819
----------
8,887
----------
NETHERLANDS (4.4%)
20,753 ABN Amro Holdings N.V............................. 1,350
1,888 Hollandsche Beton Groep N.V....................... 391
34,797 ING Groep N.V..................................... 1,253
17,200 Philips Electronics N.V........................... 697
----------
3,691
----------
SPAIN (4.8%)
51,300 Iberdrola S.A..................................... 727
26,900 Repsol S.A........................................ 1,032
96,800 Telefonica de Espana S.A.......................... 2,248
----------
4,007
----------
SWEDEN (0.5%)
14,300 Skandia Forsakrings AB............................ 405
----------
SWITZERLAND (5.9%)
400 Ascom Holdings AG (Bearer)........................ 407
370 Bobst AG (Bearer)................................. 500
1,200 Forbo Holding AG (Registered)..................... 484
835 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 597
1,200 Magazine Globus (Participating Certificates)...... 554
(a)917 Novartis AG (Registered).......................... 1,050
780 Schweizerische Industrie-Gesellschaft Holding AG
(Registered).................................... 947
680 Sulzer AG (Registered)............................ 393
----------
4,932
----------
UNITED KINGDOM (9.4%)
28,500 Calor Group plc................................... 145
257,500 Christian Salvesen plc............................ 1,266
103,413 John Mowlem & Co. plc............................. 201
30,500 Kwik Save Group plc............................... 168
241,400 Matthews (Bernard) plc............................ 519
(a,d)653,333 Pentos plc........................................ --
61,700 Railtrack Group plc PP............................ 408
138,491 Reckitt & Colman plc.............................. 1,715
63,702 Rolls-Royce plc................................... 281
68,550 Southern Electric plc............................. 935
99,100 Tate & Lyle plc................................... 805
40,000 Unilever plc...................................... 970
113,800 WPP Group plc..................................... 495
----------
7,908
----------
UNITED STATES (36.7%)
17,750 Aluminum Company of America....................... 1,132
(a)13,300 AMR Corp.......................................... 1,172
16,200 AT&T Corp......................................... 705
55,300 Bank of New York Co., Inc......................... 1,866
(a)26,300 Beazer Homes USA, Inc............................. 487
33,300 Browning-Ferris Industries, Inc................... 874
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
(a)129,300 Cadiz Land Co., Inc............................... $ 671
75,500 Comsat Corp....................................... 1,859
(a)69,000 Data General Corp................................. 1,001
(a)109,000 Egghead, Inc...................................... 572
43,100 Enhance Financial Services Group, Inc............. 1,573
32,800 Finova Group, Inc................................. 2,107
2,000 General Motors Corp............................... 112
(a)90,600 GenRad, Inc....................................... 2,106
13,800 Georgia Pacific Corp.............................. 994
22,600 Greenfield Industries, Inc........................ 692
19,100 Houghton Mifflin Co............................... 1,082
(a)83,000 InteliData Technologies Corp...................... 602
6,092 Lucent Technologies Inc........................... 282
20,900 Lukens, Inc....................................... 421
11,200 MBIA, Inc......................................... 1,134
61,400 MCI Communications Corp........................... 2,007
12,300 Mellon Bank Corp.................................. 873
28,700 Penncorp Financial Group, Inc..................... 1,033
16,000 Philip Morris Cos., Inc........................... 1,802
12,000 Prime Retail, Inc................................. 150
(a)2,802 Silicon Graphics, Inc............................. 71
14,050 Tandy Corp........................................ 618
11,300 Tecumseh Products Co., Class A.................... 648
23,300 UST Corp.......................................... 481
(a)47,400 Waban, Inc........................................ 1,232
(a)135,400 WorldCorp, Inc.................................... 592
----------
30,951
----------
TOTAL COMMON STOCKS (Cost $63,224)............................... 79,263
----------
PREFERRED STOCKS (1.1%)
GERMANY (1.1%)
3,000 Volkswagen AG (Cost $647)......................... 957
----------
CONVERTIBLE PREFERRED SECURITY (0.0%)
HONG KONG (0.0%)
21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97 (Cost $21).............................. 25
----------
TOTAL FOREIGN & U.S. SECURITIES (95.2%) (Cost $63,892)........... 80,245
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -------------
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT (4.2%)
$ 3,521 Chase Securities Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $3,522,
collateralized by U.S. Treasury Bonds, 7.25%,
due 5/15/16, valued at $3,588 (Cost $3,521)..... 3,521
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOREIGN CURRENCY (0.2%)
AUD 160 Australian Dollar................................. $ 127
GBP 28 British Pound..................................... 49
JPY 2,168 Japanese Yen...................................... 19
NLG 2 Netherlands Guilder............................... 1
ESP 2 Spanish Peseta.................................... --
----------
TOTAL FOREIGN CURRENCY (Cost $196)............................... 196
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.6%) (Cost $67,609)................. 83,962
--------
OTHER ASSETS (0.9%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 226
Receivable for Investments Sold............ 215
Dividends Receivable....................... 197
Foreign Withholding Tax Reclaim
Receivable............................... 54
Receivable for Portfolio Shares Sold....... 6
Interest Receivable........................ 1
Other...................................... 6 705
----------
LIABILITIES (-0.5%)
Payable for Investments Purchased.......... (243)
Investment Advisory Fees Payable........... (144)
Administrative Fees Payable................ (12)
Custodian Fees Payable..................... (8)
Distribution Fees Payable.................. (2)
Directors' Fees and Expenses Payable....... (2)
Other Liabilities.......................... (31) (442)
---------- --------
NET ASSETS (100%)........................................ $84,225
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 67,523
Undistributed Net Investment Income................ 19
Accumulated Net Realized Gain...................... 101
Unrealized Appreciation on Investments and Foreign
Currency Translations............................ 16,582
--------
NET ASSETS......................................... $ 84,225
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $ 80,297
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,944,210 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $16.24
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $3,928
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 242,347 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $16.21
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------- ----------- ------------ ------- ------------
AUD 259 $ 206 1/03/97 U.S.$ 206 $ 206 $ --
NLG 6,900 4,008 2/24/97 U.S.$ 4,201 4,201 193
U.S.$ 587 587 2/24/97 NLG 1,000 581 (6)
FRF 17,668 3,461 9/12/97 U.S.$ 3,500 3,500 39
------- ------- -----
$ 8,262 $ 8,488 $ 226
-------
------- ------- -----
------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
ADR -- American Depositary Receipt
CDI -- Certificate of Investment
FRF -- French Franc
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
PP -- Partially Paid
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 20,506 24.3%
Consumer Goods......................... 12,262 14.5
Energy................................. 4,973 5.9
Finance................................ 16,090 19.1
Materials.............................. 5,549 6.6
Multi-Industry......................... 4,010 4.8
Services............................... 16,855 20.0
-------- ---
$ 80,245 95.2%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Africa 25.3%
Australia 18.4%
Canada 24.9%
United Kingdom 1.7%
United States 16.3%
Other 13.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOLD PORTFOLIO - CLASS PHILADELPHIA GOLD AND SILVER
A INDEX(1)
<S> <C> <C>
2/01/94* $500,000 $500,000
12/31/94 457,550 396,150
12/31/95 517,992 440,281
12/31/96 605,740 430,243
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ ----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 16.94% 6.80%
PORTFOLIO -- CLASS B(3)............................................................................ 13.21 N/A
INDEX.............................................................................................. -2.28 -4.91
</TABLE>
1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of the
leading companies involved in the mining of gold and silver.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 Gold Portfolio seeks to provide long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged in
gold-related activities.
Companies involved in the exploration, mining, fabrication, processing,
distribution or trading of gold (or, to a lesser degree, silver, platinum, or
other precious metals or minerals) qualify as Portfolio candidates. Mining
shares differ fundamentally from investments in gold bullion. Because companies
can produce positive cash flows and increase gold reserves in the ground through
exploration and discovery, mining company equity shares provide investors with a
more dynamic investment vehicle. Portfolio securities are selected on the basis
of relative valuation, liquidity, and risk diversification.
For the year ended December 31, 1996, the Portfolio had a total return of 16.94%
for the Class A shares and 13.21% for the Class B shares as compared to -2.28%
for the Philadelphia Gold and Silver Index. The average annual total return for
the Portfolio for the period from inception on February 1, 1994 through December
31, 1996 was 6.80% for the Class A shares compared to -4.91% for the
Philadelphia Gold and Silver (XAU) Index.
The Portfolio benefited from a strong gold rally in January, continued relative
strength in gold shares through year-end, and an underweight in North American
gold shares which remain overvalued on a fundamental basis. Within the gold
share universe, the Portfolio continues to benefit from corporate exposure to
favorable exploration results, a trend we expect to continue based on an
improved global political climate for the past several years. Notable for
investors is that an exploration strategy can yield positive investment results
in a neutral gold price environment. Nonetheless, the gold price does directly
influence cash flows from projected operations and how much investors are
willing to pay for undeveloped precious metals deposits.
The primary challenge to performance has been a gold market which posted
declines for 10 of the 11 months following gold's $418.40 high on February 2.
Following every intermediate "buy" signal since the January high, gold has been
unable to mount anything but minor countertrend rallies. Four factors hurt gold:
(1) competing financial assets provided strong returns, (2) a higher dollar
increased the gold price in foreign currencies and dampened global fabrication
demand,
- --------------------------------------------------------------------------------
Gold Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO (CONT.)
(3) mining producers stepped up forward sales ahead of rumored central bank
sales, and (4) the Dutch central bank sold 300 tonnes of gold during late 1996,
confirming miners' fears (announced January 1997).
Viewed in retrospect, the January 1996 high can be seen as the culmination of
supply and demand imbalances which dominated the fundamental outlook since late
1992. Professional investors, using the price discovery function, identified
this disequilibrium following the November 1995 "lease rate spike" and drove
gold higher during January in an effort to seek out a new equilibrium. Bullion
investors unknowingly bought gold from the Bank of Belgium during the year's
first central bank sale, which helped cap the extent of the rally. And with an
improving macroeconomic backdrop favoring financial assets, the next "wave" of
investors who were supposed to push gold to $500 held fast in equity mutual fund
investments.
Investment demand has always been the key factor in gold price determination.
With continued strong returns from financial asset classes, there is little need
for investors to alter their successful capital growth strategy by moving assets
towards gold, a capital preservation asset. Sir Isaac Newton's 1(st) Law of
Motion aptly describes the present situation. The 1(st) law states that an
object at rest will remain at rest and an object in motion will remain in motion
at constant velocity unless acted upon by an unbalanced force. Applying the law,
we observe that financial asset returns demonstrate a high constant velocity and
that gold shows a constant velocity of zero. What is required to alter the
current state of affairs is an unbalanced force. Because of the "regression to
mean" phenomenon, we believe it is inevitable that an unbalanced force will
enter the markets and cause above-average financial returns to revert to their
historical mean. In this scenario, we believe that gold will reassert its role
as a capital preservation asset and provide significant Portfolio
diversification benefits.
With limited investability (-$300 billion for bullion, another -$75 billion for
mining equities), it doesn't take many investment dollars to generate a sizable
market impact on precious metal returns, especially considering that the world's
pool of fixed income and equity assets now exceeds $30 trillion. For this
reason, we recommend that investors make precious metals allocations on a
contrary basis rather than a momentum play. Even a trickle of funds diverted
from the financial asset pool towards gold will cause new investors to pay a
substantial premium for precious metals investments. During 1997, we will
continue to monitor for emergence of an "unbalanced force" and will direct our
efforts on stock selection until that day arrives.
Peter F. Palmedo
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (86.6%)
AFRICA (25.3%)
99,000 Ashanti Goldfields Co. GDR........................ $ 1,225
(a)179,521 Avgold Ltd........................................ 480
153,000 Free State Consolidated Gold Mines Ltd. ADR....... 1,100
(a)93,000 Harmony Gold Mining Co., Ltd. ADR................. 732
58,000 JCI Co., Ltd...................................... 570
114,000 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 705
93,205 Western Area Gold Mining ADR...................... 1,285
42,700 Western Deep Levels Ltd. ADR...................... 1,281
----------
7,378
----------
AUSTRALIA (18.4%)
(a)1,000 Delta Gold N.L.................................... 2
214,400 Great Central Mines N.L........................... 610
(a)300,000 Lihir Gold Ltd.................................... 572
496,988 Newcrest Mining Ltd............................... 1,974
705,002 Normandy Mining Ltd............................... 974
190,000 Plutonic Resources Ltd............................ 883
(a)500,000 Wiluna Mines Ltd.................................. 365
----------
5,380
----------
CANADA (24.9%)
62,000 Agnico-Eagle Mines Ltd............................ 871
(a)209,000 Arizona Star Resource Corp........................ 1,564
(a)50,000 Bema Gold Corp.................................... 296
(a)106,100 Bre-X Minerals Ltd................................ 1,681
8,210 Bro-X Minerals Ltd................................ 14
(a)200,000 Meridian Gold, Inc. -- Installment Receipts....... 474
(a)130,600 Miramar Mining Corp............................... 572
41,000 Placer Dome, Inc.................................. 892
88,000 Prime Resource Group, Inc......................... 623
(a)290,000 TVI Pacific, Inc.................................. 269
----------
7,256
----------
UNITED KINGDOM (1.7%)
227,200 Lonrho plc........................................ 487
----------
UNITED STATES (16.3%)
(a)206,000 Dakota Mining Corp................................ 348
(a)126,000 Gold Reserve Corp................................. 1,205
(a)103,600 Pegasus Gold, Inc................................. 784
(a)387,000 Royal Oak Mines, Inc.............................. 1,258
(a)65,000 Stillwater Mining Co.............................. 1,178
----------
4,773
----------
TOTAL COMMON STOCKS (Cost $30,152)............................ 25,274
----------
FOREIGN CURRENCY (3.3%)
ZAR 4,448 South African Rand (Cost $952).................... 951
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (89.9%) (Cost $31,104)................. $26,225
--------
OTHER ASSETS (11.0%)
Receivable for Investments Sold............ $ 2,368
Receivable for Portfolio Shares Sold....... 846
Other...................................... 1 3,215
----------
LIABILITIES (-0.9%)
Payable for Portfolio Shares Redeemed...... (92)
Payable for Investments Purchased.......... (76)
Sub-Advisory Fees Payable.................. (32)
Investment Advisory Fees Payable........... (14)
Custodian Fees Payable..................... (5)
Administrative Fees Payable................ (4)
Bank Overdraft............................. (3)
Distribution Fees Payable.................. (1)
Directors' Fees and Expenses Payable....... (1)
Other Liabilities.......................... (32) (260)
---------- --------
NET ASSETS (100%)........................................ $29,180
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 36,072
Overdistributed Net Investment Income.............. (30)
Accumulated Net Realized Loss...................... (1,978)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................ (4,884)
--------
NET ASSETS......................................... $ 29,180
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $27,810
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,988,808 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $9.30
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,370
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 147,615 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $9.28
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Finance................................ $ 570 1.9%
Gold Mines............................. 23,050 79.0
Materials.............................. 1,167 4.0
Multi-Industry......................... 487 1.7
-------- ---
$ 25,274 86.6%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Gold Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 3.6%
Belgium 0.6%
Denmark 2.4%
Finland 0.7%
France 9.3%
Germany 10.4%
Hong Kong 3.4%
Italy 3.0%
Japan 17.9%
Netherlands 8.5%
New Zealand 0.4%
Norway 1.1%
Singapore 0.1%
Spain 4.5%
Sweden 3.4%
Switzerland 5.9%
United Kingdom 15.3%
Other 9.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO -
MSCI EAFE INDEX (1) CLASS A
<S> <C> <C>
8/04/89* 500,000 500,000
10/31/1990 417,750 505,380
12/31/1991 446,800 541,635
10/31/1992 387,750 516,940
12/31/1992 393,450 524,830
12/31/1993 521,500 769,000
12/31/1994 562,100 864,150
12/31/1995 625,111 965,860
12/31/1996 662,930 1,155,555
*Commencement of operations
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE
ANNUAL
AVERAGE ANNUAL SINCE
ONE YEAR FIVE YEARS INCEPTION
---------------- -------------- ----------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.................... 19.64% 16.41% 11.96%
PORTFOLIO -- CLASS B(3)................. 18.58 N/A N/A
INDEX................................... 6.05 8.15 3.88
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC 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 investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.
For the year ended December 31, 1996, the Portfolio had a total return of 19.64%
for the Class A shares and 18.58% for the Class B shares as compared to a total
return of 6.05% for the Morgan Stanley Capital International (MSCI) EAFE Index.
The average annual total return for the five year period ended December 31, 1996
and for the period from inception on August 4, 1989 through December 31, 1996
were 16.41% and 11.96%, respectively, for the Class A shares as compared to
8.15% and 3.88%, respectively, for the Index.
For the three month period ended December 31, 1996, the Portfolio had a total
return of 7.31% for the Class A shares and 7.19% for the Class B shares as
compared to 1.59% for the MSCI EAFE Index. The Portfolio's meaningful
outperformance relative to its benchmark in the final quarter of 1996 was driven
by the underweight position in Japan, the overweight position in Spain and
superior returns from Germany, Japan, Italy and Spain. Poor French returns was
the most notable negative factor for the quarter, while currency was broadly
neutral.
The Portfolio's outperformance for the full year was again driven by the
underweight in Japan while overweight positions in Spain, Germany, Netherlands
and Sweden were also positives. Stock returns against local market returns
contributed significantly in Japan, Australia, Germany, Spain and Switzerland.
Notable negatives for the year were French stock selection and the sterling
underweight. Forwards, however, contributed positively after holding back
returns in 1995.
With the notable exception of Japan, global stock markets are extended while the
Portfolio's valuation is arguably extended against the broader indices given the
strong market returns it achieved in 1996. We believe that the best has been
seen from world bond markets with the U.K. and U.S. facing a moderate
intensification of inflationary pressures while the euphoria of convergence is
at a mature stage in Europe. Currency factors, meanwhile, are likely to
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
restrain profit growth in the U.K. and U.S. while macro inefficiencies and
restrictive fiscal policies will hold back Continental European growth and
therefore profits. Factor in a thoroughly lacklustre outlook for Japan as fiscal
policy tightens and one has another year of low global economic growth. If our
forecast of dull to slightly weaker bond markets is correct, current stock
market levels are not consonant with the fundamental backdrop for 1997.
As value investors we are not interested in pursuing the last hurrah in European
banking stocks and the last price leap of European bond convergence
beneficiaries. Equally, we believe restructuring stories, so long the principal
investment theme of our portfolios, are now well developed and well discounted,
as is the two tier market in Japan consisting of globally competitive companies
on the one hand and those companies reliant on crumbling domestic cartels on the
other.
The only clear area of value to us at this stage are cash generative companies
producing short term earnings weakness attributable to one-off problems like the
strength of sterling for U.K. exporters. Though Japan has fallen a long way in
recent months apparent value is not matched by quality except in some very
specific cases. The Portfolio's holdings in Japanese non-life insurance
companies have been battered recently. These very good but poorly managed
businesses have become significantly less attractive businesses with the same
poor management as a result of government deregulation. To add to such stocks on
weakness is not necessarily wise as the non-life insurance market has changed
fundamentally for the worse for its current participants. This is a problem
across a broad range of Japanese industries.
In this environment we expect cash positions to build to allowable levels as
speedy profit taking is not matched by the rapid identification of new
investment opportunities.
GERMANY
The Morgan Stanley Capital International Germany Index increased by 5.23% in
U.S. dollar terms and by 6.32% in local currency terms in the final quarter of
1996. The best performing sector in Germany during the quarter was automobiles,
up over 20% in Deutschemark terms. Other strong performing sectors included
chemicals, an area in which we remain overweight, and food and household
products. The poor performers included beverages and tobacco down over 11%, and
construction and housing down 10%, hurt by the cold winter weather.
The most recent GDP statistics from the third quarter show that the strong
pick-up in growth in the second quarter was not sustained. From July through
September real GDP increased by 0.75%. Domestic demand remained poor, however
export growth increased by over 4% helped by the relative weakness of the
Deutschemark which enhanced the price competitiveness of German products in
international markets. Inflation in Germany remains low and could be down to
1.5% for 1996. Given the low levels of inflation and poor growth dynamics we
could see further cuts in interest rates in the new year. Productivity levels of
German companies continue to improve, however this is resulting in higher levels
of unemployment. Germany continues to offer opportunities to the value investor.
Although pricing power remains poor, company restructuring should continue to
offer earnings and share price appreciation in the coming months.
FRANCE
During the final quarter of 1996, the Morgan Stanley Capital International
France Index increased by 8.59% in U.S. dollar terms and by 9.37% in French
franc terms. Sectors that performed well included electronic components
following a global trend, and pharmaceutical stocks. Retail stocks also finished
the year strongly in what has been a period of slow domestic consumer demand.
Automobile stocks have been weak in the final quarter with demand falling
following the end of government incentives in September.
Over the last year there has been volatility in the French economy. Strong
growth in the first three months was followed by a contraction in the second
quarter and another bounce in the third quarter. Some initial indicators for the
fourth quarter show that GDP growth may be down. This volatility is primarily
due to swings in consumption as consumers follow government tax incentives. The
ending of incentives to car buyers in September led to a rush to beat the
deadline and can be seen as a major reason for GDP growth in the third quarter.
In this environment it is difficult to measure the underlying trend of the
economy. In general, however, growth is being driven by the export markets,
helped by a weaker French franc. In the domestic market, there
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
have been poor levels of investment by industry due to uncertainty over interest
rates and currencies. There are cheap stocks available for investment in France
but it is clear that the investor must be cautious before entering some
industries in this market due to the poor economic environment.
SWITZERLAND
The Morgan Stanley Capital International Switzerland Index fell by 1.45% in U.S.
dollar terms but rose by 5.56% in Swiss franc terms during the fourth quarter of
1996. As these performance numbers show, the Swiss franc has been weak against
the dollar and other major currencies during the quarter. Looking at the Swiss
market for the full year, it was Europe's worst performer in U.S. dollar terms,
up only 2.28%. Sectors that showed good returns during the quarter included
retail and chemicals while poorer performers included real estate and banking.
The Swiss economy has contracted for each of the first three quarters of 1996.
In our last quarterly report we stated that there was positive news of an
increase of private consumption in the second quarter; this however, has not
continued into the second half of the year. In addition, government consumption
has fallen back, as fiscal policy has tightened. The Swiss economy has also
suffered from slow export growth due to the franc's strength, until recently,
and the weakness of export markets. The only real positive news has been the
levels of investment, which remain strong. The sluggish economy has meant that
inflation has stayed well under control despite the introduction of VAT. With no
upward pressure on inflation the SNB should be able to hold the discount rate at
around the 1% level for the foreseeable future.
NETHERLANDS
In the fourth quarter of 1996 the Morgan Stanley Capital International
Netherlands Index increased by 11.47% in U.S. dollar terms and by 12.70% in
Dutch guilder terms. The financial services companies finished the year strongly
with both the banks and insurance sectors performing well in the final quarter.
Other strong returns came from some of the more cyclical industries including
chemicals, machinery and shipping. The poorest performing sectors included
alcoholic beverages and the paper sector.
Consumer spending has been the driving force behind Dutch GDP growth which
continues to outperform the rest of Europe. Third quarter GDP grew at an annual
rate of 3%, a similar level to the second quarter. The main reasons for the
strong consumer spending has been the growth in wages at a time when the picture
for unemployment has been improving. Secondly, the Dutch consumer has been happy
to reduce their saving rates. Not surprisingly, this environment has led to
recent signs that inflation is edging up. Consumer prices have risen to an
annual rate of 2.4% due in part to the higher oil price but also to a rise in
import prices. Unlike the domestic market there has been little pick-up in Dutch
exports despite weakness of the guilder against the dollar. This is due
primarily to the weakness of demand from their main European trade partners.
ITALY
The Morgan Stanley Capital International Italy Index increased by 2.13% in U.S.
dollar terms and by 2.03% in local currency terms during the quarter. The top
performing sectors included metal stocks and telecommunications, an area in
which we are overweight, with exposure to Stet and Telecom Italia. The poor
performers included insurance which continued its poor run throughout the year.
The economy has been greatly influenced by the desire of politicians to move
Italy toward greater European integration. Measures to meet the criteria include
a ITL 62.5 trillion deficit cutting package in the 1997 budget resulting in an
increase in tax revenue of around ITL 10 trillion. This news, and a background
of stagnant employment and a lower capacity to save, has led to a sharp drop in
consumer confidence since the summer. Other changes in the economy over the last
quarter have included Italy rejoining the ERM following a period of relative
currency strength. The lira rejoined at a parity of ITL 990 to the Deutschemark.
We have also seen a meaningful drop in inflation which is now at 2.6%. This has
enabled the Italian authorities to cut rates by 75 basis points. Despite these
significant efforts to reach the Maastricht criteria, the Italian economy will
probably have to see a stronger economic pick-up in 1997 than we are currently
seeing. Although Italy has been a poor relative performer over the last year it
is difficult to find cheap stocks that are of suitable quality to include in the
Portfolio.
SPAIN
During the final quarter of 1996 the Morgan Stanley Capital International Spain
Index appreciated by 23.16% in U.S. dollar terms and by 24.76% in local currency
terms. For the full year the Spanish market
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
was up over 40% in U.S. dollar terms and by over 50% in peseta terms making it
the top performer of the world's developed markets. The electrical utility
sector continued its strong run as the industry continues to restructure.
Another good performer was the telecommunications sector with the sale of the
final stake of Telefonica scheduled for the beginning of 1997.
The Spanish economy continued its steady growth in the third quarter of the
year. Recent data on industrial production and private consumption suggest that
GDP grew at an annual rate of 2% during the quarter. During this period there
was a pick-up in domestic demand with investment particularly strong. The
headline inflation rate fell to 3% in November from 4% at the beginning of the
year. Lower inflation and moderate economic growth has allowed the Bank of Spain
to bring down the repo rate to 6%, down 2% from the end of 1995. The Government
has prepared a budget for 1997 to reduce the public deficit to the convergence
limit for Maastricht of 3% of GDP. To help achieve this target, real government
investment has been cut by 15% and a wage freeze has been introduced for civil
servants. Those companies which depend on government expenditure, particularly
construction, will suffer in this environment. Spain is a country in which we
have, through stock picking, outperformed a strong market. We will continue to
look for new investment ideas while lowering our exposure to some of the better
performers.
UNITED KINGDOM
In the last quarter of 1996, the Morgan Stanley Capital International U.K. Index
rose by 4.64% in local currency terms and by 14.54% in U.S. dollar terms. For
the 1996 year overall, the figures were 15.60% and 27.42%, respectively.
In the first half of 1996, the U.K. economy was generally weaker than expected,
led by poor manufacturing output figures as stocks were run down which fed good
consumer demand. GDP growth downgrades resulted for the year and PSBR concerns
emerged on the back of sluggish tax receipts. These reductions were reversed in
the second half of the year following a pick-up in manufacturing output,
particularly in the last quarter, co-existing with strong retail sales growth.
As a result, consensus estimates for GDP growth for 1996 of 2.3% and for a PSBR
of 21.2 billion for the year to April 1997 ended in line with estimates
originally made at the start of 1996. These conditions are not thought to be a
re-run of the late 1980s, although the market's key concern is the extent to
which current rapid growth results in higher inflation.
The big surprise of the quarter and the year as a whole has been Sterling
strength, with market consensus at the start of 1996 expecting, on balance, a
reasonably dull outlook. This has transformed the performance of the U.K. market
to dollar-based investors from laggard to strong performer. The source of
Sterling strength has been market realization that the U.K. is virtually the
only OECD country to be increasing interest rates on a still reasonable economic
backdrop. Having allowed -- against Bank of England advice -- for interest rates
to go too low at 5.75% for too long, the question for the Government is when
interest rates (currently 6.0%) have to go up, rather than if. With a General
Election looming, this is an obvious sensitivity, although Sterling strength
should aid short term governmental prevarication.
As in 1995, the divergence in performance between high and low quality stocks
has continued, with the market continuing to place a high premium on growth. The
best performing sectors in the U.K. market were oils (particularly E&P),
property, life assurance, retail banks (given the year's low interest rate
environment), and media and support services. In general, cyclicals did very
poorly, with chemicals, building materials and textiles among the worst sectors.
The market starts 1997 with much to chew over. Market consensus suggests a
likely Labour win in the General Election (which must be held by May 1997).
Labour's potential changes to the corporate taxation regime to encourage
investment may significantly alter the relative attraction of equities over
gilts and the fate of utilities for windfall taxes will be decided; and, of
course, EMU. However, a direct effect of Sterling strength has been the re-
emergence, towards the end of the year, of value in the U.K. market. This is
particularly the case for better quality, export-related or international stocks
where earnings have been downgraded often for translational, rather than
transactional, exposure and valuations have consequently weakened in the flight
to the perceived safer havens of domestically oriented stocks.
- --------------------------------------------------------------------------------
International Equity Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
JAPAN
The Japanese stock market weakened significantly in the final quarter, with the
Morgan Stanley Capital International Japan Index declining 7.77% in yen terms
and 11.50% in U.S. dollar terms.
Given the strength of the local bond market this weakness appears all the more
significant because there was no other major catalyst to justify it. The problem
for the Japanese stock market is that economic activity is not finding its way
through to corporate profits due to the gradual opening up of the economy to
internal and external competition. The latest example of this trend was seen in
the December announcement of full scale deregulation of the non-life insurance
industry, currently a cosy oligopoly operated under the protective aegis of the
Ministry of Finance. This move will unquestionably lower the supranormal
underwriting returns enjoyed by the existent cartel who can only react by
cutting costs and improving investment performance. The former is never easy in
Japan but the latter is readily achievable through the sale of low yielding, low
quality Japanese equities which dominate the asset profiles of the non-life
industry. By a sleight of hand the Japanese government has therefore created a
brand new supply of stock out of a historic net buyer of Japanese equities. This
is just one example of how deregulation is weighing on Japanese corporate
profitability and worsening the supply and demand outlook for Japanese stocks.
We believe foreigners are as fully weighted as they wish to be in this market
while Japanese corporates and life assurance companies are sellers on any
strength. The only source of buying is therefore likely to come from
individuals, but though subscriptions to investment trusts have risen
moderately, individual investor appetite appears to be for high yielding
overseas bonds rather than domestic equities.
The outlook for Japan in 1997 is hardly one of robust economic growth. While
consumption should be underpinned by good levels of nominal and real income
growth, it will equally be retarded by ongoing asset deflation in the property
market and to a lesser extent in the stock market, while the pernicious effect
of derisory low interest rates on a household sector replete with cash should
not be underestimated. Final demand is also likely to be constrained by the
April hike in the consumption tax, with a marked fall in housing starts
forecasted for the second half of the year. Though the capital expenditure
recovery is likely to continue for the time being, it is likely to peak in the
second half of the year as the domestic auto cycle matures. Meanwhile, fiscal
policy will be continuously tight as the Ministry of Finance attempts to lower
the current government deficit from its current unacceptable level of 5.8% of
GNP. In addition, public works expenditure will contract as the recent special
budget expenditures tail off and a new austerity sets in. Therefore, we forecast
modest consumption and capex growth but a contraction in public works; but this
will be offset by a forecasted growth in net exports as recent yen weakness
creates an improved trade performance. The recent trade figure for November
heavily implies a rapid growth in Japan's trade surplus after 18 months of
contraction and this leads us to believe that we have seen the bottom in the yen
against the U.S. dollar. This is an important judgment because the recent
massive relative strength of the export blue chips is unlikely to continue if
the yen's recent weakness begins to reverse.
Having made a fairly negative judgment on the supply demand outlook for Japanese
equities and having given a neutral forecast on economic activity, there remains
the issue of the financial sector where outstanding bad debts total between 40
trillion (government estimate) and 100 trillion (pessimistic estimate of foreign
analysts), and where the life insurance industry has a huge if unknown long-term
asset and liability mismatch. It is impossible to quantify the extent of risk in
Japan's financial sector because of the lack of reliable information but it is
still in a chronically weak state after three years of reliquification from the
Bank of Japan. Furthermore, recent deregulation measures from the Government are
putting the system under renewed strain. We believe that there is a meaningful,
if unquantifiable, risk of an uncontrollable reassertion of deflationary forces
in Japan's financial markets. What such an eventuality means for the yen and
government bonds is not clear, but self-feeding weakness in both is a
possibility.
The Japanese stock market now has two tiers: there are the globally competitive
manufacturing and pharmaceutical companies whose futures are tied to Wall Street
and the yen, where stock prices are high. Then there are the domestic sectors
whose prices are depressed by weak pricing power and competitive threats from
within and outside Japan. To add to either category seems unattractive at the
moment given the ratings of quality stocks and the secular
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
profits risk in the latter. Perhaps retrospect will show that the American
government in 1995 cooperated with Japan in weakening the yen only in return for
meaningful deregulation of Japan's domestic economy. This deregulation may only
have exacerbated the deflationary pressure the yen's devaluation temporarily put
in abeyance.
HONG KONG
The Hong Kong stock market continued its remarkable bull run in the final
quarter of 1996, with the Morgan Stanley Capital International Hong Kong Index
appreciating 12.16% in U.S. dollars and 12.19% in local currency.
Bullish sentiment was reinforced during the quarter by a transaction in the
commercial property market made by Hysan Development at levels of 25% above
market expectations. This led analysts to rework their net asset value figures
for all property investment companies which were reflected in share prices in
days rather than weeks. Meanwhile, burgeoning liquidity from the mainland has
led to record levels of speculation in the residential property market which has
received further support from China's conciliatory approach to the handover of
sovereignty and from falling U.S. interest rates. All in all, 1996 came to a
close in as propitious an environment for Hong Kong equities as one could hope
for.
However, as ever, the stock market has been quick to discount good news and it
is important that the market has undergone a significant rerating in 1996 with
corporate profits matching growth accounting for approximately one third of the
market's 33% gain for the year. While we believe corporate profits will continue
in the 10-12% range in 1997, it is unlikely that there will be a further
rerating because there has been no improvement in the relatively poor quality of
Hong Kong's profit structure which is substantially made up of asset sales,
stock market trading profits and non recurring property development earnings.
Given that China's wish for a smoother political transition is taken for
granted, we think that this market will find few new buyers in the second half
of 1997. What happens between then and now depends on U.S. interest rates and
sentiment on Wall Street.
AUSTRALIA
During the fourth quarter of 1996 the Australian stock market appreciated 7.36%
in Australian dollars and 7.77% in U.S. dollars.
The rally was driven by a strong bond market which improved sentiment for
equities generally, and banking stocks specifically. Meanwhile, the resources
sector benefited from a buoyant oil price and a worthwhile rally in the copper
price after the weakness associated with the Sumitomo affair. The economy
itself, however, remained in the doldrums with robust real and nominal income
not finding its way through to consumer spending. The housing industry appears
to be reaching a cyclical low from which we expect a moderate recovery over the
next three years.
At current levels, we believe that the banking sector discounts the positive
fundamentals of the industry and any further progress depends on actual or
supposed takeover activity. The resources sector seems fairly to fully valued
given its capital intensity and requires an unanticipated breakout in metals
prices for further gains. The industrials appear correctly valued and some of
the value in the housing sector has already been recognized ahead of any
recovery in housing starts. The only area of clear overvaluation are those
companies perceived to be capable of generating earnings growth irrespective of
the environments for metals prices and the domestic economy.
Dominic Caldecott
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
International Equity Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
COMMON STOCKS (87.3%)
AUSTRALIA (3.6%)
1,849,500 Brambles Industries Ltd........................... $ 36,068
5,000,347 Coles Myer Ltd.................................... 20,574
7,300,000 CSR Ltd........................................... 25,515
--------------
82,157
--------------
BELGIUM (0.6%)
29,558 Arbed S.A......................................... 3,214
243,350 G.I.B. Holdings Ltd............................... 10,907
2,156 G.I.B. Holdings Ltd. VVPR (New)................... 93
--------------
14,214
--------------
DENMARK (2.4%)
(a)190,000 Den Danske Bank A/S............................... 15,321
111,250 Novo-Nordisk A/S, Class B......................... 20,963
352,500 Unidanmark A/S, Class A (Registered).............. 18,251
--------------
54,535
--------------
FINLAND (0.7%)
350,000 Huhtamaki Oy, Series 1............................ 16,283
(a)168,467 Merita Ltd., Class A.............................. 524
--------------
16,807
--------------
FRANCE (9.3%)
190,140 Assurances Generales de France.................... 6,140
581,295 Banque Nationale de Paris......................... 22,503
15,510 Bongrain S.A...................................... 6,001
174,827 Cie de Saint Gobain............................... 24,740
(a)153,050 Credit Lyonnaise CDI.............................. 3,924
350,000 Elf Aquitaine S.A................................. 31,869
150,000 Groupe Danone..................................... 20,908
400,000 Lafarge S.A....................................... 24,006
108,200 PSA Peugeot Citroen S.A........................... 12,182
151,900 Scor S.A.......................................... 5,345
255,000 Total S.A., Class B............................... 20,746
627,268 Usinor Sacilor.................................... 9,130
387,480 Valeo S.A......................................... 23,905
--------------
211,399
--------------
GERMANY (7.3%)
750,000 BASF AG........................................... 28,757
1,050,000 Bayer AG.......................................... 42,614
500,000 Commerzbank AG.................................... 12,705
287,500 Hoechst AG........................................ 13,322
90,500 Karstadt AG....................................... 30,113
30,135 Mannesmann AG..................................... 12,969
(a)24,900 Varta AG.......................................... 4,450
245,700 VEBA AG........................................... 14,131
15,000 Volkswagen AG..................................... 6,215
--------------
165,276
--------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
HONG KONG (3.3%)
(d)90,600 China Light & Power Co., Ltd...................... $ 410
9,794,242 Hong Kong Land Holdings Ltd....................... 27,228
13,250,000 Jardine Strategic Holdings, Inc................... 47,965
--------------
75,603
--------------
ITALY (3.0%)
(a)12,545,000 Olivetti S.p.A.................................... 4,424
(a)2,560,500 Olivetti Group S.p.A.............................. 979
11,000,000 Stet Di Risp (NCS)................................ 37,162
4,310,000 Telecom Italia S.p.A.............................. 11,194
6,800,000 Telecom Italia S.p.A. Di Risp (NCS)............... 13,269
--------------
67,028
--------------
JAPAN (17.9%)
1,050,000 Aisin Seiki Co., Ltd.............................. 16,683
1,000,000 Canon, Inc........................................ 22,105
123,000 Chudenko Corp..................................... 3,547
1,500,000 Daibiru Corp...................................... 13,859
2,000,000 Daicel Chemical Industries Ltd.................... 9,378
1,100,000 Daikin Industries Ltd............................. 9,783
1,037,000 Dainippon Ink & Chemical, Inc..................... 3,841
4,000 East Japan Railway Co............................. 17,995
2,298,000 Fuji Photo Film Ltd............................... 75,800
2,700,000 Hitachi Ltd....................................... 25,179
2,250,000 Kao Corp.......................................... 26,228
650,000 Kirin Brewery Co., Ltd............................ 6,399
1,352,000 Matsushita Electric Industries Ltd................ 22,064
81,000 Murata Manufacturing Co., Ltd..................... 2,693
3,427,000 Nichido Fire & Marine Insurance Co., Ltd.......... 19,531
2,711 Nippon Telegraph & Telephone Corp................. 20,553
221,000 Ryosan Co......................................... 4,923
350,000 Sony Corp......................................... 22,938
3,000,000 Sumitomo Marine & Fire Insurance Co............... 18,651
2,561,000 Sumitomo Rubber Industries........................ 19,084
350,000 TDK Corp.......................................... 22,818
896,000 Toyo Seikan Kaisha Ltd............................ 21,586
--------------
405,638
--------------
NETHERLANDS (8.5%)
590,647 ABN Amro Holdings N.V............................. 38,428
190,000 Akzo Nobel N.V.................................... 25,955
84,436 Hollandsche Beton Groep N.V....................... 17,492
1,320,000 ING Groep N.V..................................... 47,525
258,500 Koninklijke Bijenkorf Beheer N.V.................. 18,629
1,120,000 Philips Electronics N.V........................... 45,381
--------------
193,410
--------------
NEW ZEALAND (0.4%)
2,236,054 Fisher & Paykel Industries Ltd.................... 8,773
(a,d)392,500 Smith City Group Ltd.............................. --
--------------
8,773
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
NORWAY (1.1%)
3,500,000 Den Norske Bank ASA............................... $ 13,406
(a)743,850 Nycomed ASA, Class B.............................. 11,444
--------------
24,850
--------------
SINGAPORE (0.1%)
3,265,000 Neptune Orient Lines Ltd.......................... 2,823
--------------
SPAIN (4.5%)
(a)89,300 Grupo Duro Felguera S.A........................... 911
3,000,000 Iberdrola S.A..................................... 42,519
590,000 Repsol S.A........................................ 22,632
1,502,500 Telefonica de Espana S.A.......................... 34,893
--------------
100,955
--------------
SWEDEN (3.4%)
198,070 Electrolux AB, Series B........................... 11,507
429,300 Nordbanken AB..................................... 13,006
378,400 Skandia Forsakrings AB............................ 10,714
708,600 S.K.F. AB, Class B................................ 16,789
364,600 Sparbanken Sverige AB, Class A.................... 6,258
879,800 Svenska Cellulosa AB, Class B..................... 17,876
52,400 Svenska Handelsbanken, Class A.................... 1,507
(a)36,460 Tornet Fastighets AB.............................. 556
--------------
78,213
--------------
SWITZERLAND (5.9%)
2,605 Ascom Holdings AG (Bearer)........................ 2,653
20,000 Forbo Holding AG (Registered)..................... 8,069
20,000 Holderbank Financiere Glarus AG (Bearer).......... 14,285
33,000 Nestle S.A. (Registered).......................... 35,428
(a)170 Novartis AG (Bearer).............................. 195
(a)32,000 Novartis AG (Registered).......................... 36,650
13,154 Schindler Holding AG (Participating
Certificates)................................... 14,299
18,250 Sulzer AG (Participating Certificates)............ 9,762
23,250 Sulzer AG (Registered)............................ 13,427
--------------
134,768
--------------
UNITED KINGDOM (15.3%)
1,021,600 Associated British Foods plc...................... 8,479
3,256,556 BAT Industries plc................................ 27,001
1,907,500 British Telecommunications plc.................... 12,891
109,500 Burmah Castrol plc................................ 2,065
4,905,000 Christian Salvesen plc............................ 24,116
2,371,713 English China Clays plc........................... 7,821
5,735,500 Grand Metropolitan plc............................ 45,099
(a)2,221,000 Imperial Tobacco Group plc........................ 14,344
5,004,063 John Mowlem & Co. plc............................. 9,730
2,255,000 Kwik Save Group plc............................... 12,400
843,000 McAlpine (Alfred) plc............................. 1,841
1,140,000 Peninsular & Oriental Steam Navigation Co. plc.... 11,522
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
3,206,094 Reckitt & Colman plc.............................. $ 39,710
1,777,400 Rolls-Royce plc................................... 7,841
2,538,978 Royal & Sun Alliance Insurance Group plc.......... 19,377
1,007,000 Southern Electric plc............................. 13,732
2,546,300 Tate & Lyle plc................................... 20,676
2,252,100 Unilever plc...................................... 54,649
2,975,000 WPP Group plc..................................... 12,945
--------------
346,239
--------------
TOTAL COMMON STOCKS (Cost $1,535,437)............................. 1,982,688
--------------
PREFERRED STOCKS (3.1%)
GERMANY (3.1%)
762,600 RWE AG............................................ 25,523
344,400 Spar Handels AG................................... 4,208
125,000 Volkswagen AG..................................... 39,886
--------------
TOTAL PREFERRED STOCKS (Cost $43,364)............................. 69,617
--------------
CONVERTIBLE PREFERRED STOCKS (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97......................................... 2,245
--------------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............................. 6
2,196 ING Groep N.V..................................... 12
--------------
18
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,923).................. 2,263
--------------
TOTAL FOREIGN SECURITIES (90.5%) (Cost $1,580,724)................ 2,054,568
--------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT (2.4%)
$ 54,935 Chase Securities, Inc., 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $54,953,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $56,423 (Cost $54,935)... 54,935
----------
FOREIGN CURRENCY (6.8%)
AUD 1 Australian Dollar................................. 1
BEF 2 Belgian Franc..................................... --
GBP 31,424 British Pound..................................... 53,833
DEM 101,569 Deutsche Mark..................................... 66,007
FRF 3,010 French Franc...................................... 580
ITL 1,415 Italian Lira...................................... 1
JPY 3,889,747 Japanese Yen...................................... 33,587
SEK 13 Swedish Krona..................................... 2
----------
TOTAL FOREIGN CURRENCY (Cost $153,497)............................ 154,011
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%) (Cost $1,789,156).............. $2,263,514
----------
OTHER ASSETS (30.2%)
Securities at Value, Held as Collateral for
Securities Loaned........................ $ 660,048
Receivable for Portfolio Shares Sold....... 16,055
Dividends Receivable....................... 3,700
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 2,906
Foreign Withholding Tax Reclaim
Receivable............................... 888
Receivable for Security Lending............ 204
Interest Receivable........................ 9
Other...................................... 100 683,910
----------
LIABILITIES (-29.9%)
Collateral on Securities Loaned, at
Value.................................... (660,048)
Payable for Investments Purchased.......... (11,670)
Investment Advisory Fees Payable........... (4,300)
Payable for Portfolio Shares Redeemed...... (847)
Administrative Fees Payable................ (286)
Custodian Fees Payable..................... (188)
Directors' Fees and Expenses Payable....... (53)
Distribution Fees Payable.................. (3)
Dividends Payable.......................... (1)
Other Liabilities.......................... (211) (677,607)
---------- ----------
NET ASSETS (100%)........................................ $2,269,817
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................. $1,773,219
Overdistributed Net Investment Income........... (273)
Accumulated Net Realized Gain................... 19,738
Unrealized Appreciation on Investments and
Foreign Currency Translations................. 477,133
----------
NET ASSETS...................................... $2,269,817
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------
NET ASSETS...................................... $2,264,424
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 133,618,211 outstanding $0.001
par value shares (authorized 500,000,000
shares)....................................... $16.95
----------
----------
CLASS B:
- ------------------------------------------------
NET ASSETS...................................... $5,393
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 318,501 outstanding $0.001 par
value shares (authorized 500,000,000
shares)....................................... $16.93
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -------------- -------- ------------ ------------ -------- -----------
AUD 51,000 $ 40,506 1/10/97 U.S.$40,104 $ 40,104 $ (402)
U.S.$113,982 113,982 6/19/97 DEM165,000 108,455 (5,527)
DEM 165,000 108,455 6/19/97 U.S.$113,392 113,392 4,937
FRF 565,000 110,062 6/19/97 U.S.$112,920 112,920 2,858
FRF 300,000 58,440 6/19/97 U.S.$58,820 58,820 380
SEK 300,000 44,548 9/16/97 U.S.$45,188 45,188 640
ESP5,400,000 41,542 12/02/97 U.S.$41,562 41,562 20
-------- -------- -----------
$517,535 $520,441 $ 2,906
--------
-------- -------- -----------
-------- -----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
CDI -- Certificate of Investment
ESP -- Spanish Peseta
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 377,399 16.6%
Consumer Goods......................... 586,030 25.8
Energy................................. 125,472 5.5
Finance................................ 315,260 13.9
Materials.............................. 308,943 13.6
Multi-Industry......................... 85,171 3.8
Services............................... 256,293 11.3
---------- ---
$2,054,568 90.5%
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.5%
Austria 0.5%
Belgium 1.0%
Denmark 0.9%
Finland 1.2%
France 5.6%
Germany 4.9%
Hong Kong 5.9%
Italy 2.6%
Japan 31.4%
Malaysia 4.0%
Netherlands 4.1%
Norway 1.0%
Singapore 2.3%
Spain 3.7%
Sweden 2.0%
Switzerland 4.8%
United Kingdom 7.9%
Other 13.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL MAGNUM PORTFOLIO -- CLASS
MSCI EAFE INDEX (1) A
<S> <C> <C>
3/15/1996* $500,000 $500,000
12/31/1996 526,300 541,250
*Commencement of operations
**Minimum Investment -- Class A
<CAPTION>
INTERNATIONAL MAGNUM PORTFOLIO -- CLASS
B
<S> <C>
3/15/1996* $100,000
12/31/1996 107,900
*Commencement of operations
**Minimum Investment -- Class A
</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. The MSCI EAFE Index value at December 31, 1996
assumes a minimum initial investment of $500,000; if a minimum initial
investment of $100,000 is assumed the value at December 31, 1996 would be
$105,260.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A(3)....................................................................................... 8.25%
PORTFOLIO -- CLASS B(3)....................................................................................... 7.90
INDEX......................................................................................................... 5.26
</TABLE>
1. The MSCI EAFE Index is an unmanaged Index of common stocks and includes
Europe, Australia and the Far East (assumes dividends are reinvested net of
withholding taxes).
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. The Portfolio commenced operations on March 15, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by the Adviser. The EAFE countries in
which the Portfolio will invest are those comprising the Morgan Stanley Capital
International (MSCI) EAFE Index, which includes Australia, Japan, New Zealand,
most nations located in Western Europe, and certain developed countries in Asia.
For the period from inception on March 15, 1996 through December 31, 1996, the
Portfolio had a total return of 8.25% for the Class A shares and 7.90% for the
Class B shares, as compared to a total return of 5.26% for the MSCI EAFE Index.
The world's developed stock markets were somewhat mixed during 1996. While
several markets tested all-time highs, the Japanese market fell dramatically,
particularly at year-end.
Among the regions, Europe was the best performer in the EAFE universe for the
year with a return of 21.1%. The European markets benefited from falling
interest and inflation rates, depreciating currencies and continued corporate
restructuring, even as many European governments struggled to cut their budget
deficits and inflation rates in order to qualify for the new European Monetary
Union. Spain (+40.1% for the year) was the strongest performer among the
developed markets for the year, followed by Sweden (+37.2%) and Finland
(+33.9%).
Japan, the single largest EAFE market in terms of market capitalization, was the
worst performer in U.S. dollar terms among the developed markets for the year as
a whole (-15.5%). Much of Japan's weak performance in U.S. dollar terms was due
to the continued depreciation of the yen, which fell over 11% versus the U.S.
dollar. In addition, the Japanese market's losses were concentrated during the
second half of the year, erasing gains from early in the year. Investors were
disappointed by the slow rate of growth in the country and uncertain economic
prospects. In addition, proposed deregulation of the financial sector, announced
in November, contributed to a particularly poor performance by banking stocks (a
sector which the Portfolio has carefully avoided).
The Asian markets put in a strong performance during the year, as the MSCI
Pacific Free ex-Japan Index rose 20.9% in U.S. dollar terms. Hong Kong
- --------------------------------------------------------------------------------
International Magnum Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
(+33.1%) put in a robust performance for the year as strong corporate earnings,
recovering property prices and easing fears surrounding the colony's takeover by
China in 1997 contributed to positive investor sentiment. Malaysia (+25.9%) was
the second strongest developed market within Asia for the year as strong
domestic liquidity and an improving economic environment fueled sharp rises
particularly in small and mid-cap stocks. In contrast, Singapore (+0.3% for the
year) was the weakest developed market in the Pacific rim, as the government's
real estate anti-speculation measures implemented during the summer prompted
investors to lose faith in the market, which includes a large number of
real-estate related stocks.
The U.S. dollar began 1996 extremely undervalued relative to the Japanese yen
and the Deutschemark block of currencies. In anticipation of dollar
strengthening, we implemented hedges to protect against losses due to the
depreciation of certain currencies in which we are invested. Through the first
half of 1996, we hedged approximately 75% of our yen exposure and 95% of our
Deutschemark block exposure. By December, our hedges had been reduced to 40% of
our yen exposure and 75% of our Deutschemark block exposure. Our hedging
strategies contributed favorably to results in 1996, and we plan to continue to
hedge these currencies for the foreseeable future.
During the year we maintained approximately a market weight exposure to Japan
and slowly reduced our overweight in Asia and our underweight in Europe. While
our allocation decision to market weight Japan detracted from results, our
hedges and excellent stock selection in Japan helped us to achieve significant
relative outperformance in that market. Our overweight in Asia and in particular
in Hong Kong was a net positive for the Portfolio, especially in the fourth
quarter of the year. Finally, we curtailed our cautious stance in Europe, which
benefited the Portfolio as many European markets rallied strongly during the
latter part of 1996, based on brighter prospects for growth and the long term
benefits of EMU.
Looking ahead, we anticipate that the first quarter of 1997 will be the most
difficult for the Japanese market, as we expect that the Japanese economy will
finally begin to show true signs of a recovery later this year. We believe that
Japanese stocks with strong earnings growth (e.g., international blue chips and
electronics) will significantly outperform the market, and have positioned our
Portfolio accordingly. Our outlook for Europe is positive but cautious;
valuations in many markets are at or near all-time highs, but momentum --
barring any unforeseen cracks in EMU -- continues to be positive. In Asia
ex-Japan, Hong Kong valuations are high but we expect earnings growth and
liquidity to provide support for the market. In Malaysia, the environment for
large cap stocks is improving, while the outlook for Singapore is less rosy.
Given our near-term concerns about the Japanese market, we have reduced our
allocation to a slight underweight versus the EAFE Index, with the money being
deployed to Europe, which will now represent slightly over half of the
Portfolio. We remain optimistic about opportunities in Asia ex-Japan and will
maintain our overweight there.
Francine J. Bovich
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (85.0%)
AUSTRALIA (2.5%)
41,900 Broken Hill Proprietary Co., Ltd.................. $ 596
33,800 Lend Lease Corp., Ltd............................. 655
52,500 National Australia Bank Ltd....................... 617
49,300 News Corp., Ltd................................... 260
96,300 WMC Ltd........................................... 607
----------
2,735
----------
AUSTRIA (0.5%)
8,000 Boehler-Uddeholm AG............................... 573
----------
BELGIUM (1.0%)
3,280 Arbed S.A......................................... 357
3,660 Delhaize Freres et Cie, 'Le Lion' S.A............. 218
11,900 G.I.B. Holdings Ltd............................... 533
----------
1,108
----------
DENMARK (0.9%)
6,000 BG Bank A/S....................................... 281
1,800 Jyske Bank A/S (Registered)....................... 135
10,430 Unidanmark A/S, Class A (Registered).............. 540
----------
956
----------
FINLAND (1.2%)
23,600 Amer-Yhtymae Oy, Class A.......................... 487
10,780 Huhtamaki Oy, Series 1............................ 502
(a)104,000 Merita Ltd., Class A.............................. 323
----------
1,312
----------
FRANCE (5.6%)
9,500 Banque Nationale de Paris......................... 368
1,100 Bongrain S.A...................................... 426
5,750 Cie de Saint Gobain............................... 814
5,200 Elf Aquitaine S.A................................. 473
4,300 Eridania Beghin-Say S.A........................... 692
4,000 Groupe Danone..................................... 558
8,400 Lafarge S.A....................................... 504
16,000 Legris Industries S.A............................. 674
2,320 PSA Peugeot Citroen S.A........................... 261
(a)4,700 SGS-Thompson Microelectronics N.V................. 332
6,170 Total S.A., Class B............................... 502
31,550 Usinor Sacilor.................................... 459
----------
6,063
----------
GERMANY (3.6%)
12,100 BASF AG........................................... 464
15,300 Bayer AG.......................................... 621
275 Buderus AG........................................ 137
9,350 Deutsche Telekom AG ADR........................... 190
22,700 Gerresheimer Glas AG.............................. 495
1,150 Karstadt AG....................................... 383
14,350 Lufthansa AG...................................... 194
550 Mannesmann AG..................................... 237
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
9,300 VEBA AG........................................... $ 535
1,600 Volkswagen AG..................................... 663
----------
3,919
----------
HONG KONG (5.9%)
113,000 Cheung Kong Holdings Ltd.......................... 1,005
472,000 China Resources Enterprise Ltd.................... 1,062
95,000 Citic Pacific Ltd................................. 552
23,400 Hang Seng Bank Ltd................................ 284
16,000 Henderson Land Development Co., Ltd............... 161
27,400 Hong Kong & Shanghai Bank Holdings plc............ 586
158,800 Hong Kong Telecommunications Ltd.................. 256
129,000 Hutchison Whampoa Ltd............................. 1,013
81,000 New World Development Co., Ltd.................... 547
37,000 Sun Hung Kai Properties Ltd....................... 453
32,000 Swire Pacific Ltd., Class A....................... 305
33,000 Wharf Holdings Ltd................................ 165
----------
6,389
----------
ITALY (2.6%)
(a)157,000 Editoriale L'Expresso S.p.A....................... 435
60,250 Marzotto (Gaetano) & Figli S.p.A.................. 389
(a)553,000 Olivetti S.p.A.................................... 195
65,900 Pirelli S.p.A..................................... 122
135,100 Sogefi S.p.A...................................... 300
186,000 Stet Di Risp (NCS)................................ 628
361,000 Telecom Italia S.p.A. Di Risp (NCS)............... 705
----------
2,774
----------
JAPAN (31.4%)
74,000 Amada Co., Ltd.................................... 575
55,000 Asahi Tec Corp.................................... 271
47,000 Canon, Inc........................................ 1,039
41,000 Dai Nippon Printing Co., Ltd...................... 719
34,000 Daibiru Corp...................................... 314
112,000 Daicel Chemical Industry Ltd...................... 525
56,000 Daifuku Co., Ltd.................................. 706
54,000 Daikin Industries Ltd............................. 480
59,000 Daiwa Securities Co., Ltd......................... 525
17,200 FamilyMart........................................ 688
28,000 Fuji Machine Manufacturing Co..................... 742
25,000 Fuji Photo Film Ltd............................... 825
17,000 Hitachi Credit Corp............................... 276
106,000 Hitachi Ltd....................................... 989
58,000 Inabata & Co...................................... 355
106,000 Kaneka Corp....................................... 543
28,000 Kurita Water Industries........................... 566
11,000 Kyocera Ltd....................................... 686
36,000 Kyudenko Co., Ltd................................. 373
30,000 Matsushita Communication Industries............... 777
61,000 Matsushita Electric Industries Ltd................ 996
176,000 Mitsubishi Chemical Corp.......................... 570
58,000 Mitsubishi Estate Co., Ltd........................ 596
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
120,000 Mitsubishi Heavy Industries Ltd................... $ 953
40,000 Mitsumi Electric Co., Ltd......................... 753
17,000 Murata Manufacturing Co., Ltd..................... 565
93,000 NEC Corp.......................................... 1,124
36,000 Nifco, Inc........................................ 376
12,000 Nintendo Corp., Ltd............................... 859
28,000 Nippon Pillar Packing............................. 186
115 NTT............................................... 872
95,000 Nissan Motor Co................................... 551
41,000 Nomura Securities Co., Ltd........................ 616
104,000 Obayashi Corp..................................... 702
21,000 Okura Industrial Co., Ltd......................... 106
74,000 Ricoh Co., Ltd.................................... 850
20,000 Rinnai Corp....................................... 402
12,000 Sangetsu Co., Ltd................................. 251
31,000 Sankyo Co., Ltd................................... 878
58,000 Sanwa Shutter..................................... 433
13,000 Secom Co., Ltd.................................... 787
58,000 Sekisui Chemical Co............................... 586
46,000 Sekisui House Ltd................................. 469
8,000 Shimamura Co., Ltd................................ 275
15,600 Sony Corp......................................... 1,022
6,700 Square Company Ltd................................ 338
61,000 Stanley Electric Co............................... 358
77,000 Sumitomo Marine & Fire Insurance Co............... 479
64,000 Suzuki Motor Co., Ltd............................. 586
134,000 Taisei Corp., Ltd................................. 694
15,000 TDK Corp.......................................... 978
28,000 Tokyo Electron Ltd................................ 858
145,000 Toshiba Corp...................................... 912
102,000 Tsubakimoto Chain................................. 546
28,000 Yamanouchi Pharmaceutical Co...................... 575
----------
34,076
----------
MALAYSIA (4.0%)
47,000 Commerce Asset Holding Bhd........................ 354
29,000 Edaran Otomobil Nasional Bhd...................... 290
65,000 Genting Bhd....................................... 448
69,000 IJM Corp. Bhd..................................... 163
23,000 IOI Corp. Bhd..................................... 35
11,000 Leader Universal Holdings Bhd..................... 23
11,000 Magnum Corp. Bhd.................................. 21
28,000 Malayan Banking Bhd............................... 310
95,000 Malaysian International Shipping Bhd (Foreign).... 282
86,000 Petronas Gas Bhd.................................. 358
89,000 Renong Bhd........................................ 158
62,000 Resorts World Bhd................................. 282
163,000 Sime Darby Bhd.................................... 642
58,000 Tanjong plc....................................... 232
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
55,000 Telekom Malaysia Bhd.............................. $ 490
27,000 United Engineers (Malaysia) Ltd................... 244
----------
4,332
----------
NETHERLANDS (4.1%)
11,393 ABN Amro Holdings N.V............................. 741
4,820 Akzo Nobel N.V.................................... 658
2,000 DSM N.V........................................... 197
2,072 Hollandsche Beton Groep N.V....................... 429
17,350 ING Groep N.V..................................... 625
19,417 KLM Royal Dutch Airlines N.V...................... 546
9,800 Koninklijke Van Ommeren N.V....................... 443
21,000 Philips Electronics N.V........................... 851
----------
4,490
----------
NORWAY (1.0%)
136,800 Den Norske Bank ASA............................... 524
13,600 Saga Petroleum A/S, Class B....................... 214
(a)62,000 Storebrand ASA.................................... 360
----------
1,098
----------
SINGAPORE (2.3%)
18,000 Development Bank of Singapore Ltd. (Foreign)...... 243
29,000 Keppel Corp., Ltd................................. 226
21,700 Oversea-Chinese Banking Corp. (Foreign)........... 270
55,000 Sembawang Corp.................................... 291
24,000 Singapore Press Holdings (Foreign)................ 473
57,000 Straits Steamship Land Ltd........................ 182
28,000 United Overseas Bank Ltd. (Foreign)............... 312
(a)104,000 Want Want Holdings................................ 274
70,000 Wing Tai Holdings Ltd............................. 200
----------
2,471
----------
SPAIN (3.7%)
4,000 Banco Bilbao Vizcaya S.A. (Registered)............ 216
(a)57,000 Grupo Duro Felguera S.A........................... 582
58,400 Iberdrola S.A..................................... 828
18,200 Repsol S.A........................................ 698
16,146 Sevillana de Electricidad S.A..................... 183
37,200 Telefonica de Espana S.A.......................... 864
76,000 Uralita S.A....................................... 594
----------
3,965
----------
SWEDEN (2.0%)
4,100 Electrolux AB, Series B........................... 238
17,390 Nordbanken AB..................................... 527
13,500 Skandia Forsakrings AB............................ 382
21,670 S.K.F. AB, Class B................................ 514
15,400 Sparbanken Sverige AB, Class A.................... 264
7,000 Svenska Handelsbanken, Class A.................... 201
----------
2,126
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND (4.8%)
490 Ascom Holdings AG (Bearer)........................ $ 499
350 Bobst AG (Bearer)................................. 473
1,400 Forbo Holding AG (Registered)..................... 565
900 Holderbank Financiere Glaris AG (Bearer).......... 643
380 Magazine Globus (Participating Certificates)...... 175
155 Magazine Globus (Registered)...................... 81
590 Nestle S.A. (Registered).......................... 633
(a)458 Novartis AG (Registered).......................... 525
(a)4,790 Oerlikon-Buehrle Holding AG (Registered).......... 472
150 Schindler Holding AG (Participating
Certificates)................................... 163
420 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 510
890 Sulzer AG (Registered)............................ 514
----------
5,253
----------
UNITED KINGDOM (7.9%)
61,700 Associated British Foods plc...................... 512
31,100 Bass plc.......................................... 437
93,623 BAT Industries plc................................ 776
85,000 British Telecommunications plc.................... 574
83,000 Calor Group plc................................... 422
140,900 Christian Salvesen plc............................ 693
122,700 Courtaulds Textiles plc........................... 467
31,600 Grand Metropolitan plc............................ 248
68,700 Imperial Tobacco Group plc........................ 444
101,239 John Mowlem & Co. plc............................. 197
48,700 Kwik Save Group plc............................... 268
65,673 Reckitt & Colman plc.............................. 813
83,863 Royal & Sun Alliance Insurance Group plc.......... 640
24,350 Southern Electric plc............................. 332
134,791 Tate & Lyle plc................................... 1,095
28,500 Unilever plc...................................... 692
----------
8,610
----------
TOTAL COMMON STOCKS (Cost $89,642)............................ 92,250
----------
PREFERRED STOCKS (1.3%)
GERMANY (1.3%)
2,006 Dyckerhoff AG..................................... 554
7,400 Hornbach Holding AG............................... 529
10,600 RWE AG............................................ 355
----------
TOTAL PREFERRED STOCKS (Cost $1,261).......................... 1,438
----------
TOTAL FOREIGN SECURITIES (86.3%) (Cost $90,903)............... 93,688
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (11.7%)
REPURCHASE AGREEMENT (11.7%)
$ 12,642 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $12,646,
collateralized by U.S Treasury Notes, 6.625%,
due 7/31/01, valued at $12,987 (Cost $12,642)... $ 12,642
----------
FOREIGN CURRENCY (1.4%)
GBP 2 British Pound..................................... 3
DEM 1,601 Deutsche Mark..................................... 1,041
FIM 628 Finnish Markka.................................... 137
HKD 57 Hong Kong Dollar.................................. 7
JPY 8,934 Japanese Yen...................................... 77
MYR 306 Malaysian Ringgit................................. 121
ESP 68 Spanish Peseta.................................... 1
CHF 142 Swiss Franc....................................... 106
----------
TOTAL FOREIGN CURRENCY (Cost $1,481).......................... 1,493
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.4%) (Cost $105,026)................ 107,823
--------
OTHER ASSETS (1.0%)
Cash....................................... $ 1
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 847
Dividends Receivable....................... 150
Receivable for Portfolio Shares Sold....... 96
Foreign Withholding Tax Reclaim
Receivable............................... 29
Interest Receivable........................ 2
Other...................................... 20 1,145
----------
LIABILITIES (-0.4%)
Payable for Investments Purchased.......... (274)
Investment Advisory Fees Payable........... (111)
Custodian Fees Payable..................... (22)
Administrative Fees Payable................ (13)
Distribution Fees Payable.................. (9)
Payable for Portfolio Shares Redeemed...... (6)
Directors' Fees and Expenses Payable....... (1)
Other Liabilities.......................... (43) (479)
---------- --------
NET ASSETS (100%)........................................ $108,489
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $104,659
Overdistributed Net Investment Income............. (213)
Accumulated Net Realized Gain..................... 400
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 3,643
--------
NET ASSETS........................................ $108,489
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $85,316
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 8,004,070 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.66
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $23,173
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 2,180,447 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.63
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- -----------
U.S.$ 46 $ 46 1/02/97 GBP 27 $ 47 $ 1
U.S.$ 24 24 1/03/97 GBP 14 24 --
BEF 11,209 354 1/24/97 U.S.$ 357 357 3
BEF 6,065 192 1/24/97 U.S.$ 195 195 3
BEF 8,607 272 1/24/97 U.S.$ 280 280 8
DEM 3,135 2,041 1/24/97 U.S.$ 2,060 2,060 19
DEM 2,088 1,359 1/24/97 U.S.$ 1,400 1,400 41
DEM 619 403 1/24/97 U.S.$ 400 400 (3)
JPY225,779 1,958 1/30/97 U.S.$ 2,050 2,050 92
JPY580,650 5,035 1/30/97 U.S.$ 5,250 5,250 215
NLG 914 530 2/10/97 U.S.$ 537 537 7
NLG 2,915 1,692 2/10/97 U.S.$ 1,713 1,713 21
NLG 1,504 873 2/10/97 U.S.$ 900 900 27
NLG 287 166 2/10/97 U.S.$ 165 165 (1)
CHF 2,423 1,818 2/10/97 U.S.$ 1,956 1,956 138
CHF 796 597 2/10/97 U.S.$ 643 643 46
CHF 1,383 1,038 2/10/97 U.S.$ 1,100 1,100 62
CHF 528 396 2/10/97 U.S.$ 397 397 1
FRF 14,616 2,827 2/24/97 U.S.$ 2,900 2,900 73
FRF 8,527 1,649 2/24/97 U.S.$ 1,632 1,632 (17)
JPY765,036 6,677 3/17/97 U.S.$ 6,788 6,788 111
-------- -------- -----
$ 29,947 $ 30,794 $847
-------- -------- -----
-------- -------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
BEF -- Belgian Franc
FRF -- French Franc
NCS -- Non Convertible Shares
NLG -- Netherlands Guilder
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 28,927 26.6%
Consumer Goods......................... 18,608 17.1
Energy................................. 5,022 4.6
Finance................................ 16,810 15.5
Materials.............................. 9,861 9.1
Multi-Industry......................... 1,577 1.5
Services............................... 12,883 11.9
-------- ---
$ 93,688 86.3%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 9.4%
Denmark 1.4%
Finland 5.8%
France 6.2%
Germany 9.2%
Hong Kong 2.8%
Ireland 3.1%
Italy 3.4%
Japan 10.3%
Netherlands 7.8%
New Zealand 1.1%
Norway 2.2%
Spain 4.2%
Sweden 1.6%
Switzerland 8.4%
United Kingdom 17.4%
Other 5.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI EAFE INDEX (1) INTERNATIONAL SMALL CAP
<S> <C> <C>
12/15/92* $500,000 495,000
12/31/92 498,985 504,500
12/31/93 661,450 733,240
12/31/94 712,900 756,343
12/31/95 792,816 776,008
12/31/96 840,781 906,533
* Commencement of operations
** Minimum Investment
</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.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO.......................................................................................... 16.82% 16.42%
INDEX.............................................................................................. 6.05 13.70
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends are reinvested net of
withholding taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE 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 International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in the equity securities of non-U.S. issuers. The Portfolio
applies a disciplined bottom-up value approach to identify and invest in small
capitalization companies which are both attractive businesses and available at
cheap prices. A market capitalization cut-off of U.S. $1 billion is used as our
definition of "small."
For year ended December 31, 1996, the Portfolio had a total return of 16.82% as
compared to a total return of 6.05% for the Morgan Stanley Capital International
(MSCI) EAFE Index. The average annual total return for the period from inception
on December 15, 1992 through December 31, 1996 was 16.42% as compared to 13.70%
for the Index.
The Portfolio's outperformance primarily reflected its underweighting of the
very weak Japanese market and Yen, and overweighting in the Dutch, Spanish and
Finnish markets which enjoyed strong outperformance. Stock selection contributed
positively with Australia, the Netherlands, the U.K. and Finland being notably
strong. Although the Portfolio outperformed in all but the third quarter, small
caps enjoyed a far better relative performance in the first half of the year.
The market volatility of the second half, driven by concern over the likely
impact of a rise in U.S. interest rates, created a two tier market with large
cap \ index stocks rising strongly while the remaining names and particularly
small caps lagged. This was most notable in Japan where the blue chip export
stocks outperformed significantly on the back of Yen weakness, while small caps
saw marked underperformance. Thus while the Portfolio's Japanese stock selection
contributed positively for the year as a whole, this hides significant
underperformance in the final quarter.
Clearly the key feature of the year was the significant weakness of the Japanese
market and currency, particularly in the final quarter. There was no single
catalyst for this decline. The interim results in October were generally
disappointing showing reasonable volume growth but clear signs of poor pricing
and margin erosion, while the Government's clear desire to reduce Japan's budget
deficit highlighted a reduction in special budget expenditure aimed at boosting
the economy. In addition, there was increasing concern that the hike in the
consumption tax next April will constrain demand and that
- --------------------------------------------------------------------------------
International Small Cap Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
deregulation of the non-life insurance industry will force the non-life
companies to sell Japanese equities to boost their performance.
In contrast, the rest of the international markets, with the exception of
Singapore, enjoyed positive returns, driven by expectations of an improving
economic environment with weak inflationary pressures keeping interest rates
low. "Financial exuberance" as Mr. Greenspan recently commented, however,
appears to have been the more recent influence as large cap equity valuations
appear to already discount the relatively modest recovery that we are expecting.
Portfolio activity during the year was relatively high as we took advantage of
significant outperformance in the first half to take profits in many of the
Portfolio's cyclicals. More recently we have been taking profits in a number of
the Portfolio's U.K., French, Dutch and Finnish holdings. The proceeds have been
invested in building new positions in the Spanish IPO Miquel y Costas, Scandic
Hotels in Sweden and Devro in the U.K.
Miquel y Costas has a strong market position in cigarette paper which is high
value added due to its substantial technical content and has an impressive
management team. Brought to the market on very modest multiples of earnings and
cash flow, the stock has already performed strongly.
Scandic Hotels, also an IPO, is the largest hotel chain in Scandinavia with an
excellent reputation for value for money. Free cash flow is strong and with a
shareholder-oriented management team applying strict financial criteria
throughout the chain, its growth outlook is attractive. Bought on 5.5 times cash
flow, we believe the shares are undervalued.
Devro is the world leading manufacturer of food casings with dominant market
positions in this highly technological and thus high margin business. Its recent
acquisition of Teepak in the U.S., an excellent strategic fit, will drive growth
as Devro's management extracts margin improvement. Selling on 9x cash flow the
stock is undervalued given the strength and durability of its franchise and
impressive management.
Looking forward we do not anticipate any major change in the Portfolio's
geographic mix. In Japan, deregulation will continue and thus we remain cautious
on the outlook for many Japanese smaller companies given their all too frequent
domestic blinkers and inability to compete effectively in an increasingly
deregulated, competitive market. We will continue to look for opportunities to
invest in companies that have quality franchises that are either beneficiaries
of the deregulation or at least competitively positioned to prosper in the years
ahead.
Elsewhere, despite our cautious view on the economic environment and valuations
of the major equity markets, we continue to find very attractive value in the
small cap sector especially in Australia, Scandinavia and the U.K.
Margaret Naylor
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (88.9%)
AUSTRALIA (9.4%)
125,371 Arnotts Ltd....................................... $ 842
454,740 Auspine Ltd....................................... 1,156
(a)990,079 Bains Harding Ltd................................. 252
549,582 BRL Hardy Ltd..................................... 1,345
856,800 Burswood Property Trust........................... 1,096
2,407,066 Country Road Ltd.................................. 3,403
4,422,291 E.R.G. Ltd........................................ 5,621
459,750 Morgan & Banks Ltd................................ 2,264
6,210,380 Parbury Ltd....................................... 3,650
1,721,500 Solution 6 Holdings Ltd........................... 1,326
(a)699,748 W.D. & H.O. Wills Holdings Ltd.................... 1,162
----------
22,117
----------
DENMARK (1.4%)
6,750 Jyske Bank A/S (Registered)....................... 508
74,110 SYD-Sonderjylland Holdings........................ 2,881
----------
3,389
----------
FINLAND (5.8%)
38,675 Aamulehti Yhtymae Oy, Series II................... 1,177
125,000 Amer-Yhtymae Oy, Class A.......................... 2,582
(a)93,600 KCI Konecranes International...................... 2,951
42,670 Kone Oy, Class B.................................. 4,712
314,100 Oy Tamro AB....................................... 2,096
----------
13,518
----------
FRANCE (6.2%)
40,876 Dauphin O.T.A..................................... 2,537
74,415 De Dietrich et Compagnie S.A...................... 2,805
58,005 Europeene d'Extincteurs........................... 3,601
92,400 Legris Industries S.A............................. 3,892
91,756 Sediver S.A....................................... 1,725
----------
14,560
----------
GERMANY (4.0%)
75,150 Duerr AG.......................................... 2,418
52,600 Gerresheimer Glas AG.............................. 1,147
9,610 Marseille-Kliniken AG............................. 209
10,688 Sinn AG........................................... 2,035
(a)20,000 Varta AG.......................................... 3,574
----------
9,383
----------
HONG KONG (2.8%)
1,752,000 Chen Hsong Holdings............................... 1,065
1,097,000 Jardine International Motor Holdings Ltd.......... 1,468
5,200,000 Pico Far East Holdings Ltd........................ 1,513
5,808,000 Vitasoy International Holdings Ltd................ 2,534
----------
6,580
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
IRELAND (3.1%)
238,722 Anglo Irish Bank Corp. plc........................ $ 285
1,070,000 Avonmore Foods plc, Class A....................... 3,154
955,274 Green Property plc................................ 3,884
----------
7,323
----------
ITALY (3.2%)
(a)1,172,800 Editoriale L'Expresso S.p.A....................... 3,247
580,000 Sogefi S.p.A...................................... 1,288
787,000 Unicem Di Risp (NCS).............................. 2,023
81,000 Vincenzo Zucchi S.p.A............................. 336
212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 513
----------
7,407
----------
JAPAN (10.3%)
15,000 Exedy Corp........................................ 186
231,000 Foster Electric Co., Ltd.......................... 931
377,000 Hankyu Realty..................................... 2,767
742,000 Japan Oil Transportation.......................... 2,915
213,000 Japan Vilene Co., Ltd............................. 931
134,000 Kansei Corp....................................... 1,045
350,000 Kirin Beverage Corp............................... 4,715
136,000 Nifco, Inc........................................ 1,421
425,000 Nissan Fire & Insurance Co........................ 2,349
45,000 Sangetsu Co., Ltd................................. 940
549,000 Toc Co............................................ 4,883
170,000 Toyoda Gosei Co................................... 1,179
----------
24,262
----------
NETHERLANDS (7.8%)
64,530 Ahrend Groep N.V.................................. 3,597
73,900 Apothekers Cooperatie OPG......................... 2,126
24,140 Atag Holding N.V.................................. 1,308
27,916 Hollandsche Beton Groep N.V....................... 5,783
28,885 Industriemij Welna N.V............................ 806
82,000 Koninklijke Van Ommeren N.V....................... 3,702
8,802 Polynorm N.V...................................... 708
4,122 Samas Groep N.V................................... 177
----------
18,207
----------
NEW ZEALAND (1.1%)
687,853 Fisher & Paykel Industries Ltd.................... 2,699
----------
NORWAY (2.2%)
73,850 Adelsten ASA, Class B............................. 1,646
103,000 Kverneland ASA.................................... 2,846
(a)228,020 Oceanor........................................... 626
----------
5,118
----------
SPAIN (4.2%)
80,000 Bodegas y Bebidas S.A............................. 2,098
92,775 Empresa Nacional Hidroelectrica del Ribagorzana
S.A., Class B................................... 2,301
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
61,500 Gas y Electricidad S.A............................ $ 3,932
(a)48,550 Miquel y Costas & Miquel, S.A..................... 1,601
----------
9,932
----------
SWEDEN (1.6%)
106,000 Marieberg Tidnings AB............................. 2,597
(a)71,100 Scandic Hotels AB................................. 1,132
----------
3,729
----------
SWITZERLAND (8.4%)
2,600 Bobst AG (Bearer)................................. 3,516
4,914 Bucher Holdings AG (Bearer)....................... 3,378
9,800 Edipresse S.A. (Bearer)........................... 1,918
500 Kouni Reisen Holdings, Class B (Registered)....... 1,214
2,750 LEM Holdings AG................................... 557
6,050 Magazine Globus (Participating Certificates)...... 2,793
4,450 Porst Holding AG (Bearer)......................... 598
6,800 Publicitas Holding S.A. (Registered).............. 1,168
2,415 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 2,932
(a)2,550 Zellweger Luwa AG (Bearer)........................ 1,734
----------
19,808
----------
UNITED KINGDOM (17.4%)
4,101,478 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... 4,989
47,700 Blagden Industries plc............................ 179
1,136,300 Bluebird Toys plc................................. 3,825
1,325,800 BSM Group plc..................................... 4,122
776,300 Corporate Services Group plc...................... 2,307
498,700 Devro plc......................................... 2,298
(a,d)2,540,850 Donelon Tyson plc................................. --
63,500 Eurocamp plc...................................... 197
1,238,700 GEI International plc............................. 2,472
378,650 Industrial Control Services Group plc............. 766
389,489 International Business Communications (Holdings)
plc............................................. 2,005
1,584,212 John Mowlem & Co. plc............................. 3,080
(a)33,795,100 Kendell plc....................................... 289
206,335 Mallett plc....................................... 269
2,682,000 Matthews (Bernard) plc............................ 5,766
569,400 Oriflame International S.A........................ 5,219
(a,d)2,659,393 Pentos plc........................................ --
23,774 Perry Group plc................................... 78
667,000 Ricardo Group plc................................. 1,280
(a)1,895,000 Tandem Group plc.................................. 227
251,400 The 600 Group plc................................. 975
541,700 Waterman Partnership Holdings plc................. 385
----------
40,728
----------
TOTAL COMMON STOCKS (Cost $194,891)................................ 208,760
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PREFERRED STOCKS (5.2%)
GERMANY (5.2%)
21,275 Berentzen-Gruppe AG............................... $ 781
10,616 Dyckerhoff AG..................................... 2,932
32,400 Hornbach Holding AG............................... 2,316
4,860 STO AG-Vorzug..................................... 2,290
117,190 Spar Handels AG................................... 1,432
14,990 Wuerttembergische Metallwarenfabrik AG............ 2,523
----------
TOTAL PREFERRED STOCKS (Cost $11,601).............................. 12,274
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
SWITZERLAND (0.0%)
(a)4,600 Zellweger Luwa AG, expiring 5/21/97, (Cost $0).... 3
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
CONVERTIBLE DEBENTURE (0.2%)
ITALY (0.2%)
ITL 518,000 Mediobanca S.p.A 5.50%, 1/01/00, (Cost $328)...... 345
----------
TOTAL FOREIGN SECURITIES (94.3%) (Cost $206,820)................... 221,382
----------
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
$ 5,405 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $5,407,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $5,548, (Cost $5,405).... 5,405
----------
FOREIGN CURRENCY (3.9%)
GBP 797 British Pound..................................... 1,365
DEM 11,117 Deutsche Mark..................................... 7,225
FIM 641 Finnish Markka.................................... 139
FRF 10 French Franc...................................... 2
IEP 66 Irish Punt........................................ 112
JPY 9,118 Japanese Yen...................................... 79
ESP 8 Spanish Peseta.................................... --
CHF 205 Swiss Franc....................................... 153
----------
TOTAL FOREIGN CURRENCY (Cost $9,021)............................... 9,075
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%) (Cost $221,246)............... $235,862
--------
OTHER ASSETS (0.4%)
Cash....................................... $ 27
Receivable for Investments Sold............ 290
Dividends Receivable....................... 260
Foreign Withholding Tax Reclaim
Receivable............................... 181
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 81
Receivable for Portfolio Shares Sold....... 73
Interest Receivable........................ 17
Other...................................... 11 940
----------
LIABILITIES (-0.9%)
Payable for Investments Purchased.......... (1,202)
Investment Advisory Fees Payable........... (500)
Payable for Portfolio Shares Redeemed...... (247)
Custodian Fees Payable..................... (32)
Administrative Fees Payable................ (31)
Directors' Fees and Expenses Payable....... (6)
Other Liabilities.......................... (41) (2,059)
---------- --------
NET ASSETS (100%)........................................ $234,743
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $216,796
Undistributed Net Investment Income............... 323
Accumulated Net Realized Gain..................... 2,935
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 14,689
--------
NET ASSETS........................................ $234,743
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,951,037 outstanding $0.001 par
value shares (authorized 1,000,000,000
shares)......................................... $ 16.83
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- -------- ----------- ------------ -------- ------------
DEM 308 $ 200 1/03/97 CHF 268 $ 200 $ --
AUD 8,600 6,831 1/13/97 U.S. $ 6,792 6,792 (39)
FRF 55,000 10,776 9/12/97 U.S.$ 10,896 10,896 120
-------- -------- -----
$ 17,807 $ 17,888 $ 81
--------
-------- -------- -----
-------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See Note A-1 to financial statements.
AUD -- Australian Dollar
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 50,292 21.4%
Consumer Goods......................... 58,016 24.7
Energy................................. 6,233 2.7
Finance................................ 26,956 11.4
Materials.............................. 24,597 10.5
Multi-Industry......................... 8,874 3.8
Services............................... 46,414 19.8
--------- ---
$ 221,382 94.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Appliances & Household Durables 5.2%
Automobiles 4.0%
Business & Public Services 3.9%
Chemicals 7.9%
Construction & Housing 7.6%
Data Processing & Reproduction 1.7%
Electrical & Electronics 10.3%
Electrical Components & Instruments 7.7%
Financial Services 4.3%
Healh & Personal Care 3.9%
Industrial Components 2.1%
Insurance 1.9%
Machinery & Engineering 15.8%
Merchandising 6.0%
Metals Non-Ferrous 1.6%
Real Estate 2.5%
Recreation, Other Consumer Goods 4.1%
Telecommunications 1.9%
Textiles & Apparel 1.4%
Transportation - Road & Rail 0.1%
Other 6.1%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
JAPANESE EQUITY PORTFOLIO-CLASS
A MSCI JAPAN INDEX (1)
<S> <C> <C>
4/25/94* $500,000 $500,000
12/31/94 $491,500 $512,000
12/31/95 $473,609 $515,533
12/31/96 $466,979 $435,625
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... -1.40% -2.51%
PORTFOLIO -- CLASS B(3)............................................................................ -1.67 N/A
INDEX.............................................................................................. -15.50 -5.00
</TABLE>
1. The MSCI Japan Index is an unmanaged index of common stocks (assumes
dividends are reinvested).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities are defined as common and preferred stocks, debt
securities convertible into common stock and common stock purchase warrants.
For year ended December 31, 1996, the Portfolio had a total return of -1.40% for
the Class A shares and -1.67% for the Class B shares as compared to a total
return of -15.50% for the Morgan Stanley Capital International (MSCI) Japan
Index. The average annual total return for the period from inception on April
25, 1994 through December 31, 1996 was -2.51% for the Class A shares as compared
to -5.00% for the Index.
During 1996 the Japanese equity market was characterized with a steady first
half advance and second a sharp decline for the second half of the year,
resulting in net loss of 7% for the year in local currency terms.
The main reason for the first half's advance was a more favorable macro
environment stemming from the weakness in the yen. This also resulted in a
widening interest rate differential between the U.S. and Japan, with support for
the dollar in the Paris and Wasington G-7 summit meetings. This weakness in the
yen has contributed to the economic recovery together with positive fiscal
policy and easy momentary policy. GDP for the first quarter 1996 announced in
June showed the economy growing on a 12.7% annualized basis. (This number was
revised down to 8.4% after the initial announcement.) Meanwhile, corporate
profits for 1,050 Tokyo Stock Exchange listed companies (ex-financial) for the
year ended March 1996 almost doubled, further improving investor confidence. The
easy monetary policy did not change despite these factors as well as some
implicative comments of a potential interest rate hike by Mr. Matsushita,
Governor of the Bank of Japan (BOJ), and Mr. Kubo, Financial Minister.
Preliminary resolution of the "Jyusen" problem caused by non-performing assets
was an additional positive development during the first half. Both foreign
investors and domestic pension funds encouraged by these factors increased their
allocation to equities, and the market recovered to the highest level in the
last four years by June.
However, from July 1996 investors began to doubt the sustainability of the
recovery and began to assume
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
that positive macro related factors, in particular the weak yen, were already
discounted in the market. While the yen continued a modest decline and interest
rates remained low during the second half, investors became increasingly
concerned that a weak yen was not enough for a sustained recovery and that more
concrete and meaningful structural changes would be necessary. Further
disappointment for the economic outlook emerged as the Government announced an
increase in the consumption tax from 3% to 5% for April 1997 and that they will
terminate the special personal income tax cut at the same time. Therefore, as
investors began looking towards 1997 the improving micro earnings driven market
seemed stalled. The announcement of Japanese "Big-Bang" by the Hashimoto Cabinet
released in October was regarded as lacking in substance and selling of Japanese
equities continued to accelerate towards year-end 1996 with investors becoming
both negative on the economy and on Japan as a whole. Moreover, a robust U.S.
market and global bond rally shifted attention from Japan.
Meanwhile, on a micro basis international blue chips and globally competitive
Japanese companies, through modest corporate restructuring and the weaker yen
continued to improve their earnings momentum. A distinct two-tier market emerged
under such weak market conditions and our stock selection worked positively for
the Portfolio's performance.
We believe that the Japanese market will be weakest during the first quarter
1997. The disappointment due to the increase in consumption tax from 3% to 5%
and the termination of income tax cuts in April 1997 will adversely affect the
economy, severely dampening investor sentiment. However, we also believe that
the market has already begun to discount such negative factors and by year-end
1997 the economy will begin to show signs of growth. Already, private capital
expenditure is improving and disposable income is increasing thanks to the
brighter corporate earnings condition. Structural reforms, such as Japan's "Big
Bang" will become a positive factor for the market as well as overall economy,
in our view, over the medium to the longer term. Furthermore, we believe the
authorities have realized the urgency of concrete action to be taken to root-out
Japanese non-performing loans.
It is critical for the BOJ to keep interest rates low and that the BOJ's policy
remain unchanged during most of 1997. This historically "abnormally" low
interest rate environment, primarily created to help Japanese banks, will most
likely return closer to the "mean" during the later part of 1997 after the BOJ
confirms that economic conditions are steadily on track. We also believe that
corporate earnings (ex-financials), through rationalization of businesses and
improving margins from a weakening yen will show improvement through 1997,
particularly international blue chips in which our portfolio is overweight. This
sector of the market will likely make a further extension of positive earnings
differential from other industries. Sectors such as multimedia, broadcasting and
communications should do well. However, as the market also increasingly becomes
"two-tier", companies with earnings momentum and good stock selection will be
paramount to good investment results in 1997. Thus, the "alarm-bell" rung
earlier in the year for Japan to continue to change and reform to meet the 21st
century will be an important wake-up call for the authorities to heed, which we
believe the Hashimoto Government will implement.
We believe that our Portfolio is well positioned with our current holdings to
meet the earnings driven environment of 1997.
Dominic Caldecott
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (93.9%)
APPLIANCES & HOUSEHOLD DURABLES (5.2%)
167,000 Matsushita Electric Industries Ltd................ $ 2,725
117,400 Rinnai Corp....................................... 2,362
47,000 Sony Corp......................................... 3,080
----------
8,167
----------
AUTOMOBILES (4.0%)
473,000 Nissan Motor Co................................... 2,744
377,000 Suzuki Motor Co., Ltd............................. 3,451
----------
6,195
----------
BUSINESS & PUBLIC SERVICES (3.9%)
163,000 Dai Nippon Printing Co., Ltd...................... 2,857
18,000 Nishio Rent All Co................................ 314
48,000 Secom Co., Ltd.................................... 2,906
----------
6,077
----------
CHEMICALS (7.9%)
491,000 Daicel Chemical Industry Ltd...................... 2,302
600,000 Kaneka Corp....................................... 3,072
833,000 Mitsubishi Chemical Corp.......................... 2,697
195,000 Okura Industrial Co., Ltd......................... 985
322,000 Sekisui Chemical Co............................... 3,253
----------
12,309
----------
CONSTRUCTION & HOUSING (7.6%)
206,000 Kyudenko Co., Ltd................................. 2,135
522,000 Obayashi Corp..................................... 3,525
270,000 Sekisui House Ltd................................. 2,751
660,000 Taisei Corp., Ltd................................. 3,419
----------
11,830
----------
DATA PROCESSING & REPRODUCTION (1.7%)
119,000 Canon, Inc........................................ 2,631
----------
ELECTRICAL & ELECTRONICS (10.3%)
307,000 Hitachi Ltd....................................... 2,863
108,000 Matsushita Communication Industries............... 2,798
135,000 Mitsumi Electric Co., Ltd......................... 2,541
240,000 NEC Corp.......................................... 2,901
261,000 Stanley Electric Co............................... 1,533
528,000 Toshiba Corp...................................... 3,319
----------
15,955
----------
ELECTRONIC COMPONENTS & INSTRUMENTS (7.7%)
49,000 Kyocera Ltd....................................... 3,055
80,000 Murata Manufacturing Co., Ltd..................... 2,660
50,000 TDK Corp.......................................... 3,260
97,000 Tokyo Electron Ltd................................ 2,973
----------
11,948
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL SERVICES (4.3%)
256,000 Daiwa Securities Co., Ltd......................... $ 2,277
107,000 Hitachi Credit Corp............................... 1,737
177,000 Nomura Securities Co., Ltd........................ 2,659
----------
6,673
----------
HEALTH & PERSONAL CARE (3.9%)
109,000 Sankyo Co., Ltd................................... 3,087
144,000 Yamanouchi Pharmaceutical Co...................... 2,959
----------
6,046
----------
INDUSTRIAL COMPONENTS (2.1%)
179,000 Nifco, Inc........................................ 1,870
212,000 Nippon Pillar Packing............................. 1,410
----------
3,280
----------
INSURANCE (1.9%)
476,000 Sumitomo Marine & Fire Insurance Co............... 2,959
----------
MACHINERY & ENGINEERING (15.8%)
485,000 Amada Co., Ltd.................................... 3,769
270,000 Daifuku Co., Ltd.................................. 3,404
290,000 Daikin Industries Ltd............................. 2,579
122,000 Fuji Machine Manufacturing Co..................... 3,234
149,000 Kurita Water Industries........................... 3,011
398,000 Mitsubishi Heavy Industries Ltd................... 3,162
220,000 Ricoh Co., Ltd.................................... 2,526
537,000 Tsubakimoto Chain................................. 2,875
----------
24,560
----------
MERCHANDISING (6.0%)
350,000 Asahi Tec Corp.................................... 1,723
96,200 FamilyMart........................................ 3,846
323,000 Inabata & Co...................................... 1,977
86,000 Sangetsu Co., Ltd................................. 1,797
----------
9,343
----------
METALS-NON-FERROUS (1.6%)
339,000 Sanwa Shutter..................................... 2,532
----------
REAL ESTATE (2.5%)
150,000 Daibiru Corp...................................... 1,386
247,000 Mitsubishi Estate Co., Ltd........................ 2,538
----------
3,924
----------
RECREATION, OTHER CONSUMER GOODS (4.1%)
87,000 Fuji Photo Film Ltd............................... 2,870
39,000 Nintendo Corp., Ltd............................... 2,792
14,200 Square Company Ltd................................ 717
----------
6,379
----------
TELECOMMUNICATIONS (1.9%)
395 Nippon Telegraph & Telephone Corp................. 2,995
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TEXTILES & APPAREL (1.4%)
72,000 Japan Vilene Co., Ltd............................. $ 315
55,000 Shimamura Co., Ltd................................ 1,890
----------
2,205
----------
TRANSPORTATION-ROAD & RAIL (0.1%)
16,000 Nippon Konpo Unyu Soko............................ 101
----------
TOTAL COMMON STOCKS (Cost $167,048)........................... 146,109
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- ----------
FOREIGN CURRENCY (13.6%)
JPY2,456,631 Japanese Yen (Cost $21,169)....................... 21,212
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (107.5%) (Cost $188,217)............... 167,321
--------
OTHER ASSETS (8.0%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 9,434
Receivable for Investments Sold............ 1,518
Receivable for Fund Shares Sold............ 1,492
Dividends Receivable....................... 45
Other...................................... 7 12,496
----------
LIABILITIES (-15.5%)
Bank Overdraft............................. (22,735)
Payable for Fund Shares Redeemed........... (909)
Investment Advisory Fees Payable........... (419)
Administrative Fees Payable................ (27)
Custodian Fees Payable..................... (13)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (46) (24,157)
---------- --------
NET ASSETS (100%)........................................ $155,660
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... 181,591
Overdistributed Net Investment Income............. (9,043)
Accumulated Net Realized Loss..................... (5,402)
Unrealized Depreciation on Investments and Foreign
Currency Translations........................... (11,486)
--------
NET ASSETS........................................ $155,660
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A
- ---------------------------------------
NET ASSETS............................. $152,229
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 19,125,105 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.96
----------
----------
CLASS B
- ---------------------------------------
NET ASSETS............................. $3,431
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 431,823 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.94
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------- --------- ----------- --------------- --------- ------------
*JPY 2,496,504 $ 21,557 1/07/97 U.S.$ 21,499 $ 21,499 $ (58)
JPY 3,668,260 31,716 1/09/97 U.S.$ 34,000 34,000 2,284
U.S.$ 33,109 33,109 1/09/97 JPY 3,668,260 31,717 (1,392)
JPY 2,855,307 24,783 2/06/97 U.S.$ 27,300 27,300 2,517
JPY 2,558,780 22,209 2/06/97 U.S.$ 24,500 24,500 2,291
U.S.$ 17,000 17,000 2/06/97 JPY 1,928,021 16,734 (266)
JPY 2,206,158 19,278 3/25/97 U.S.$ 20,638 20,638 1,360
JPY 2,706,405 23,649 3/25/97 U.S.$ 25,294 25,294 1,645
JPY 1,736,110 15,170 3/25/97 U.S.$ 16,223 16,223 1,053
--------- --------- ------------
$ 208,471 $ 217,905 $ 9,434
---------
--------- --------- ------------
--------- ------------
</TABLE>
- --------------------------------------------------------------------
* Transaction is with Morgan Stanley Trust Co.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 11.4%
Brazil 43.6%
Chile 3.7%
Colombia 4.4%
Mexico 29.6%
Peru 1.3%
Venezuela 5.1%
Other 0.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LATIN AMERICAN PORTFOLIO-CLASS
MSCI EMERGING MARKETS GLOBAL LATIN AMERICAN INDEX (1) A
<S> <C> <C>
1/18/95* 500,000 500,000
12/31/1995 459,800 456,600
12/31/1996 560,726 679,284
*Commencement of operation
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 48.77% 16.98%
PORTFOLIO -- CLASS B(3)............................................................................ 42.44 N/A
INDEX.............................................................................................. 21.95 6.04
</TABLE>
1. The MSCI Emerging Markets Global Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 investment objective of the Latin American Portfolio is long-term capital
appreciation through investment primarily in equity securities of Latin American
issuers. The Portfolio may also invest in debt securities issued or guaranteed
by a Latin American government or governmental entity.
For the year ended December 31, 1996, the Portfolio had a total return of 48.77%
for the Class A shares and 42.44% for the Class B shares, as compared to a total
return of 21.95% for the Morgan Stanley Capital International (MSCI) Emerging
Markets Global Latin America Index. The average annual total return for the
period from inception on January 18, 1995 through December 31, 1996 was 16.98%
for the Class A shares, as compared to 6.04% for the Index.
The table below presents the percentage change in the Morgan Stanley Capital
International indices for each respective country, in U.S. dollar terms, as of
December 31, 1996 and for the periods preceding.
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS
------------ ------------
<S> <C> <C>
Argentina................................................................................... 12.7% 4.8%
Brazil...................................................................................... 7.9% 11.0%
Chile....................................................................................... -12.3% -15.0%
Colombia.................................................................................... 1.5% 7.9%
Mexico...................................................................................... 0.2% 2.0%
Peru........................................................................................ -13.2% -8.5%
Venezuela................................................................................... 19.4% 47.8%
Latin America............................................................................... 2.8% 3.8%
<CAPTION>
12 MONTHS
------------
<S> <C>
Argentina................................................................................... 20.3%
Brazil...................................................................................... 42.5%
Chile....................................................................................... -13.5%
Colombia.................................................................................... 11.1%
Mexico...................................................................................... 18.0%
Peru........................................................................................ -0.5%
Venezuela................................................................................... 131.2%
Latin America............................................................................... 22.0%
</TABLE>
ARGENTINA
The Argentine market's strong performance reflected a strong economic turnaround
after the gut-wrenching recession in 1995 provoked by the Mexican devaluation.
Despite a huge increase in unemployment as a result of the recession, from
roughly 10% to 17%, the Argentine government demonstrated remarkable
determination to keep a steady course of fiscal discipline. The government even
introduced labor reforms late in the year, which should create more flexibility
in the labor markets and thereby, over the long-term, reduce the structural
unemployment problem. Additionally, corporate profits grew at a robust pace
during the year, especially in the second half, and this boosted the stock
market toward year end.
The melodrama in the middle of the year of the departure of respected economic
minister Domingo Cavallo, after five years of superlative stewardship of the
economy, quickly dissipated as his successor Roque Fernandez convinced the
market of his pro-
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
market beliefs. Further, Fernandez' tenure will likely be less politically
turbulent, and this should introduce much needed calm to the political scenario.
Another interesting development in Argentina in 1996 was the emergence of the
local pension funds as an important institutional investor for the equity
market. We welcome this development for a variety of reasons. First, the private
pension fund system should help increase the low domestic savings rate in
Argentina. Second, more companies will likely utilize equity financing as a
means of raising capital for investments, thereby broadening the market. Third,
local trading volumes will increase and reduce the local market's dependency on
foreign portfolio investment, thereby deepening the local market and reducing
volatility.
Overall, we are encouraged by developments in Argentina. The economy is in the
midst of a sometimes painful process of structural transformation as it opens to
the outside world and increases its exposure both to private participants
domestically and to foreign competition. The government has shown its commitment
to steering the free market course despite occasional adverse shocks, and we
think this bodes well both for future economic activity and also for future
stock market performance.
BRAZIL
Interestingly, despite the Brazilian market's strong performance, during the
course of the year there was very little progress made on critical government
reform items -- notably administrative and social security reform, and fiscal
account improvement -- which were originally thought to be vital. Lack of
tangible progress on these key items, which depend on congress for their
improvement, was more than offset by substantial improvement in a number of key
areas. First, inflation and interest rates continued their downward movement,
finishing the year at annualized rates of roughly 9% and 23%, respectively.
Second, two key privatizations -- first Light, and then Cerj -- took place in
the all-important electric utility sector in the state of Rio de Janeiro. Third,
positive tariff reform in both the telecommunications and the electric utility
sector contributed to a remarkable improvement in corporate earnings growth in
those two sectors, which together comprise over a third of the market's
capitalization. Fourth, positive liberalization of the state oil and gas
monopoly provider, Petrobras, was introduced which considerably improved the
prospects for that company. Fifth, tangible progress was made in preparing state
mining giant CVRD for eventual privatization in the first half of 1997. Sixth,
economic activity was robust enough to allow for selected private sector
companies to grow their earnings at a brisk pace.
Taken together, in a political context in which the government's ability to act
independently of congress on reform items is limited, the Cardoso administration
nevertheless demonstrated a genuine commitment to improving shareholder value
via positive reforms in those areas over which it has independent authority.
Coupled with this commitment, the state level governments have in many cases
been forced or motivated to introduce their own reform and privatization
efforts, which has further enhanced shareholder value.
Needless to say, there are many issues which confront the investor in Brazil
when looking out to 1997. In no particular order, the most pivotal issues which
will affect the market during 1997 are as follows: the Cardoso re-election
effort; the CVRD privatization; fiscal reform efforts; trade balance and foreign
exchange concerns; telecommunications and electric utility regulatory reform;
and economic activity.
RE-ELECTION -- the Cardoso administration's effort to amend the constitution to
allow him to run for re-election is probably the most important, and most
proximate, item facing the country and market in 1997. Simply put, if he is able
to run again for president in 1998, the chances are high that he would win.
Owing to Cardoso's huge electoral popularity, the splintered nature of the
opposition parties, and the president's proven ability to "horse trade" behind
closed doors, we are cautiously optimistic that he will secure the necessary
votes for the amendment.
CVRD PRIVATIZATION -- state mining conglomerate CVRD is scheduled to be
privatized sometime in the second quarter of 1997. The successful completion of
the first stage will be of significant psychological importance to the market,
because it will represent the first major privatization of a federal-level
company of national significance, and thereby considerably strengthen the
Cardoso administration's image as a serious, free-market reform oriented
government. We are confident that CVRD will be privatized in the first half of
1997.
FISCAL REFORM -- the fiscal accounts are perhaps one of the most vulnerable
elements of the outlook for 1997. The chief obstacle is congress and, behind
them, state governments. Our general outlook is that fiscal reform
- --------------------------------------------------------------------------------
Latin American Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
will take a back seat to the re-election issue; upon successful resolution of
same, the government will focus its energies on the vital administrative reform.
We are less optimistic on this front than the above two items, as we think that
congress will slow progress on fiscal reform to a snail's pace.
TRADE BALANCE/FOREIGN EXCHANGE -- the trade balance is an item that looms ahead
with the potential to tip the apple cart. At present rates the trade deficit
will be between 1-2% of GDP next year; hardly distressing levels, but with
interest payments the current account deficit will be a couple percentage points
higher. Although the treasury has sufficient international reserves to defend
the currency for the foreseeable future, we are monitoring this item very
closely. For the time being, we expect the rate of devaluation to trend with
relative inflation differentials between Brazil and the U.S.
TELECOMMUNICATIONS/ELECTRIC UTILITY REGULATORY REFORM -- this area is too
complex to fully describe in these pages, but we are closely analyzing the
pending regulatory, tariff, and privatization announcements over the next year
to assess which shape these two respective sectors will take in the years to
come. We are extremely bullish on the long-term outlook for both sectors, and on
the relative value presently obtained in the stock market therein, but need to
monitor events closely so as to identify how much shareholder value will be
enhanced by government action. The government has thus far showed itself to be
very astute at maximizing shareholder value, and we have no reason to believe
they will cease being so going forward.
ECONOMIC ACTIVITY -- the year ahead should not be particularly exciting from an
economic activity standpoint, although inflation should remain subdued. The
fiscal deficit will keep a lid on economic potential via higher-than-
otherwise-necessary interest rates, and the trade balance pressures will
marginally add to those interest rate pressures. Inflation, on the other hand,
will likely continue to be subdued and settle in at a high single digit level.
Private sector corporate profits, as a result of the aforementioned factors,
will be spotty. Thus, stock picking among the private sector companies will be
of paramount importance in 1997.
In short, we are bullish on the market for 1997. In terms of portfolio
positioning, we have an overweight stance on the electric utility and
telecommunications sectors among the government-owned companies, and an
overweight position in the retail sector among the private sector companies.
CHILE
The MSCI Chile Index declined 16% in 1996, reflecting a combination of
lackluster earnings and tight monetary policy. The Chilean market had a number
of things go wrong last year, all of which contributed to the surprisingly large
decline for the year. First, monetary authorities committed themselves to a
hawkish stance on inflation which, coupled with a rapidly growing economy in the
first part of the year, led to a tight monetary policy for the duration of the
year and caused fixed income investments to be tough competition for the equity
market. Second, corporate earnings were, in most cases, fairly ho-hum. Chile is
in many sectors a mature market and companies are increasingly looking outside
their borders for growth opportunities, which take longer to realize. Third, the
all-important electric utility sector suffered from two unrelated events. First,
the price of electricity generation fell markedly in the second half of the year
owing to additional (cheap) supply being factored into the wholesale price
equation. Second, an unprecedented severe drought affected the supply of
reservoir water and, with it, the cost at which electric utilities generate
electricity. As a result, revenues fell and costs increased, causing a severe
deterioration in profits and, consequently, the stock prices of the entire
sector. Fourth, the price of pulp fell dramatically in 1996, and this adversely
affected the profits of a couple of important companies, CMPC and Copec.
For 1997 we are more optimistic on the Chilean market than we have been in the
past given that market sentiment is extremely negative, the above confluence of
events is not likely to be repeated, and the country is underowned by dedicated
Latin American investors. Nevertheless, we find more attractive long-term
opportunities in other markets, and therefore are still relatively underweight
the market overall.
COLOMBIA
Colombia registered a modest rise during the fourth quarter, primarily a
function of the currency, which appreciated noticeably against the dollar. The
market, however, was able to weather a year plagued with political strife, fear
of economic sanctions from the
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
U.S. and a slowing economy, and still extract respectable gains. The Portfolio
remains overweight Colombia, focusing on a few names which offer outstanding
value and exposure to key sectors in the economy.
MEXICO
The Mexican market's weak fourth quarter performance was due to concerns over
changing accounting practices and lower margins in the banking sector, a
continued sluggish recovery of the Mexican consumer and disappointing corporate
earnings reports. Interest rates remained stable throughout the fourth quarter
but there was a good deal of volatility in the stock market. This was partially
caused by the peso's 4.5% nominal devaluation -- the strongest in any quarter of
1996.
For 1996 overall, the peso actually surprised estimates strengthening over 23%
in real terms. GDP growth at 4.5% was also a positive surprise finishing the
year stronger than expectations at the beginning of the year. Unemployment fell
from 6.4% to below 5%, and the annual inflation rate dropped in half. For 1997
inflation should fall again from 28% to 18% and real interest rates are expected
to decline slightly. The trade balance is expected to worsen in 1997 but should
remain in surplus. The current account balance will remain in negative territory
but should be easily financed. The peso should weaken in line with inflation for
1997. GDP growth should be similar to that registered in 1996. Political risk
should increase throughout the year as the PRI may lose control of Congress and
will probably lose the mayoral race in Mexico City. Despite the rising political
risk, macroeconomic policy remains very sound and opposition victories by the
PAN will mean more of the same in economic policy terms.
The market continues to look attractive on a valuation basis after a weak fourth
quarter highlighted by underperformance in some of the large cap names. This
will be balanced by a continued weak consumer recovery and uncertainty about
accounting changes in the banking sector and competition in the
telecommunications sector. Under this scenario the Portfolio is emphasizing the
food and beverage, cement and media sectors.
PERU
Unexpectedly weak economic data exacerbated by a high profile guerrilla incident
led the Peruvian market to experience a sharp correction in the fourth quarter
and to end the year as one of the poorest performing in the region. The
government-induced recession engineered at the end of 1995 to halt a mounting
current account problem extended longer than anticipated and inflation proved
difficult to tackle in 1996, accumulating to a higher figure than in 1995. The
Portfolio reduced its holdings in the country during the third and fourth
quarters, though we anticipate a brighter outlook for the economy and market in
1997.
VENEZUELA
The Venezuelan market was the star performer in Latin America during 1996,
following the country's dramatic shift to free-market economic policies. The
AGENDA VENEZUELA, a plan launched in April, eliminated price and exchange
controls, reactivated the privatization program and vowed to address the
critical inflation and fiscal problems. The strength in the price of oil,
Venezuela's mainstay, along with surprisingly healthy tax collections
contributed to an unexpected primary surplus of roughly 0.9% for 1996. The
fourth quarter saw the successful execution of key asset sales by the public
sector in the telecommunications and banking sectors, though marginally
disappointed on the inflation front, which remained sticky at around the 3% per
month level. The Portfolio maintained an overweight in the country throughout
the quarter, emphasizing utility companies, and looks to a 1997 where recovery
of the domestic economy, further progress on inflation and other reform, and the
real appreciation of the exchange rate should benefit stocks.
Overall, we are positive on 1997. GNP growth should be higher and inflation
should be lower throughout the region. Valuations are among the cheapest in the
world. Finally we expect strong earnings growth and a return of capital to the
region.
Robert L. Meyer
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Latin American Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (75.7%)
ARGENTINA (11.4%)
14,080 Banco de Galicia ADR.............................. $ 341
74,717 Banco del Suquia, Class B......................... 142
10,209 Quilmes........................................... 82
100,346 Siderar, Class A.................................. 289
(e)6,665 Siderar ADR....................................... 157
6,978 Telecom Argentina ADR............................. 282
70,528 Telefonica Argentina ADR.......................... 1,825
19,695 YPF ADR........................................... 497
----------
3,615
----------
BRAZIL (20.7%)
(e)1,855 CELESC GDR........................................ 168
4,874 CEMIG ADR......................................... 166
(e)1,042 CEMIG ADR......................................... 35
3,891,000 Copel............................................. 41
4,704,000 Eletrobras........................................ 1,684
32,075 Eletrobras ADR.................................... 571
296,000 Light............................................. 105
(a)3,203,000 Lightpar.......................................... 777
(a)23,940 Multicanal Participaccoes ADR..................... 307
(e)5,748 Pao de Acucar ADR................................. 100
4,575 Pao de Acucar GDR (Registered).................... 80
17,703,000 Telebras.......................................... 1,269
14,740 Telebras ADR...................................... 1,128
(a)669,663 Telesp............................................ 145
----------
6,576
----------
CHILE (3.7%)
10 Andina ADR........................................ --
36,405 CCU ADR........................................... 587
25,940 Santa Isabel ADR.................................. 587
----------
1,174
----------
COLOMBIA (4.4%)
2,110,817 Banco de Colombia GDR............................. 870
129,505 Bavaria........................................... 528
----------
1,398
----------
MEXICO (29.1%)
(a)213,505 Banacci, Class B.................................. 450
(a)78,246 Banacci, Class L.................................. 148
(a,e)52,067 Bancomer, Class B ADR............................. 423
(a)168,530 Banorte, Class B.................................. 167
118,478 Carso, Class A1................................... 624
510 Carso ADR, Class A1............................... 5
19,970 Casa Autrey ADR................................... 389
163,870 Cemex CPO......................................... 586
34,620 Cemex CPO ADR..................................... 248
42,435 Cemex, Class B.................................... 165
(a)46,420 Cifra, Class B.................................... 57
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)63,800 Cifra, Class C.................................... $ 78
23,680 Coca Cola Femsa ADR............................... 684
(a)9,070 Desc ADR.......................................... 200
326,975 FEMSA, Class B.................................... 1,120
(a)68,270 Gruma, Class B.................................... 416
(a)23,270 ICA ADR........................................... 340
(a)41,350 Industrias Campos Hermanos, Class B............... 128
(a)98,560 Interamericana.................................... 266
292,710 Maseca, Class B................................... 370
(a)21,660 Radio Centro ADR.................................. 149
(a)61,790 Sears de Mexico, Class B.......................... 106
(a)49,720 Tamsa, ADR........................................ 789
(a)44,110 Televisa GDR CPO.................................. 1,130
6,640 Telmex ADR, Class L............................... 218
----------
9,256
----------
PERU (1.3%)
14,790 Telefonica del Peru ADR........................... 279
69,960 Telefonica del Peru, Class B...................... 130
----------
409
----------
VENEZUELA (5.1%)
(a)41,250 CANTV, ADR........................................ 1,160
317,478 Electricidad de Caracas........................... 322
35,140 Sivensa ADR....................................... 132
----------
1,614
----------
TOTAL COMMON STOCKS (Cost $21,783)............................ 24,042
----------
PREFERRED (22.9%)
BRAZIL (NON-VOTING STOCKS) (22.9%)
61,997,006 Banco Bradesco.................................... 449
(a,d)11,847,000 Banco Nacional.................................... 1
(a,e)9,325 Bompreco GDR...................................... 167
(a)3,546,000 Casa Anglo........................................ 107
13,077,010 CEMIG............................................. 446
1,464,000 Coteminas......................................... 467
(a)5,770,000 CPFL.............................................. 527
(a)947,900 CRT............................................... 729
18,101 CVRD.............................................. 348
7,200 Eletrobras, Class B ADR........................... 134
917,000 Eletrobras, Class B............................... 341
(a)1,860 Globex............................................ 30
1,364,400 Itaubanco......................................... 591
2,235,000 Lojas Americanas.................................. 29
8,820,000 Lojas Arapua...................................... 163
21,580,000 Lojas Renner...................................... 997
5,599,000 Petrobras......................................... 892
8,495,000 Telebras.......................................... 654
874,000 Telesp............................................ 189
----------
TOTAL PREFERRED (Cost $6,708)................................. 7,261
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)35,389 CPFL (Cost $0).................................... $ --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.5%)
MEXICO (0.5%)
(a)9,195 Comerci ADR (Cost $170)........................... 164
----------
TOTAL FOREIGN SECURITIES (99.1%) (Cost $28,661)............... 31,467
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (0.6%)
REPURCHASE AGREEMENT (0.6%)
$ 185 Chase Securities Inc. 5.95%, dated 12/31/96, due
01/02/97 to be repurchased at $185,
collateralized by U.S. Treasury Notes, 6.625%,
due 7/31/01, valued at $190 (Cost $185)......... 185
----------
FOREIGN CURRENCY (0.8%)
ARP 4 Argentine Peso.................................... 4
BRL 11 Brazilian Real.................................... 11
COP 10,095 Colombian Peso.................................... 10
MXP 110 Mexican Peso...................................... 14
PSS 4 Peruvian Sol...................................... 2
VEB 94,636 Venezuelan Bolivar................................ 199
----------
TOTAL FOREIGN CURRENCY (Cost $242)............................ 240
----------
TOTAL INVESTMENTS (100.5%) (Cost $29,088)..................... 31,892
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Dividends Receivable......................... $ 88
Receivable for Investments Sold.............. 63
Receivable for Portfolio Shares Sold......... 18
Other........................................ 1 170
-----
LIABILITIES (-1.0%)
Payable for Investments Purchased............ (220)
Custodian Fees Payable....................... (30)
Investment Advisory Fees Payable............. (25)
Administrative Fees Payable.................. (5)
Sub-Administrative Fees Payable.............. (3)
Directors' Fees and Expenses Payable......... (1)
Distribution Fees Payable.................... (1)
Other Liabilities............................ (35) (320)
----- --------
NET ASSETS (100%)........................................ $ 31,742
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 27,833
Overdistributed Net Investment
Income............................... (5 )
Accumulated Net Realized Gain.......... 1,114
Unrealized Appreciation on Investment
and Foreign Currency Translations
(Net of accrual for foreign tax of $3
on unrealized appreciation on
investments.)........................ 2,800
----------
NET ASSETS............................. $ 31,742
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $30,409
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 2,685,234 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $11.32
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,333
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 117,848 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $11.31
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- ------ ----------- ------------ ------ ------------
VEB 94,636 $ 198 1/02/97 U.S.$ 198 $ 198 $ --
------ ------ -----
------ ------ -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is 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
CPO -- Ordinary Participating Certificates (no voting rights)
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 468 1.5%
Consumer Goods......................... 5,536 17.4
Energy................................. 6,705 21.1
Finance................................ 3,583 11.3
Materials.............................. 3,788 11.9
Multi-Industry......................... 1,836 5.8
Services............................... 9,551 30.1
-------- ---
$ 31,467 99.1%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 6.1%
Consumer Cyclical 30.7%
Consumer Staples 34.4%
Diversified 7.7%
Energy 0.5%
Finance 12.7%
Materials 0.7%
Technology 5.7%
Other 1.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY PORTFOLIO-CLASS LIPPER CAPITAL APPRECIATION INDEX
A (1) S&P 500
<S> <C> <C> <C>
03/08/95* 500,000 500,000 500,000
12/31/95 706,250 629,000 650,860
12/31/96 995,106 723,098 800,285
*Commencement of operations
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 40.90% 45.98%
PORTFOLIO -- CLASS B(3)............................................................................ 39.72 N/A
LIPPER CAP. APPRECIATION INDEX..................................................................... 14.96 22.49
S&P 500 INDEX...................................................................................... 22.96 29.51
</TABLE>
1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 Index is an unmanaged Index of common
stocks.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Aggressive Equity Portfolio seeks long-term capital appreciation through a
concentrated, non-diversified portfolio of U.S. equity securities. Short sales
and options can be used to enhance performance. It is anticipated that the
Portfolio will hold thirty names or less, although it may hold more from time to
time.
The Portfolio achieved strong absolute and relative performance for the twelve
month and since inception periods ended December 31, 1996. For the year ended
December 31, 1996, the Portfolio had a total return of 40.90% for the Class A
shares and 39.72% for the Class B shares, as compared to a total return of
14.96% for the Lipper Capital Appreciation Index and 22.96% for the S&P 500
Index. The average annual total return for the period from inception on March 8,
1995 through December 31, 1996 was 45.98% for the Class A shares, as compared to
22.49% for the Lipper Capital Appreciation Index and 29.51% for the S&P 500
Index.
For the latter part of 1996 and going into 1997 the Portfolio has maintained a
barbell approach with exposure to large capitalization stable growth stocks
(mainly tobacco) at the one extreme, and high beta growth issues (generally mid
capitalization consumer cyclical issues) at the other extreme. Our investment
strategy is to take a substantial position (up to 25% in a single name) when we
have very high conviction in the business fundamentals and stock price potential
of a holding.
Throughout 1996 the largest holding in the Portfolio was Philip Morris. By
taking advantage of periodic selling panics caused by ubiquitous news headlines
regarding litigation and political risk, we were able to greatly enhance our
returns in the stock. For example, in April of 1996, with Philip Morris down
about 5% on the year and trading at $85 against a market that was up about 10%,
we took Philip Morris stock to about 22% of the Portfolio. By August, the stock
had hit $107 as litigation concerns had eased and investors focused more on the
company's strong growth fundamentals. We had reduced our Philip Morris holding
to about a 4% position when, in early August, the industry had a setback and
lost the first round of a product liability court case. The stock plunged back
into the $80's, a huge overreaction in our view, and we subsequently went back
to about a 15% weighting.
At year-end 1996, Philip Morris stock at $113 represented about 13% of our
Portfolio and RJR represented about 15%. RJR stock has not bounced back as
strongly as Philip Morris, however, business is strong, estimates are rising and
we believe the company may both raise its dividend and announce a
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
major share repurchase in late February/early March. Our combined positions in
Philip Morris, RJR Nabisco and Consolidated Cigar total about 29%. While the
group will clearly be subject to bouts of selling pressure since the industry is
under attack from a number of directions, we nonetheless believe the tobacco
stocks are in the midst of a multi-year trend of upward revaluation. Combined
with strong underlying growth fundamentals, this creates a powerful investment
opportunity which we feel many growth investors are missing.
As we enter 1997, the S&P 500 Index has outperformed the vast majority of active
managers for three consecutive years. Also, the Index has outpaced the earnings
growth of the companies whose stocks are in it. One could argue that there are
many positive factors driving the United States markets higher and that these
factors could persist: stable interest rates, solid economic growth without
inflationary pressures, the opening up of emerging markets, the acceptance of
shareholder value as the key motivator of corporate managements, and the huge
flow of cash coming into stocks supported by powerful demographic trends.
Still, there is no doubt that many large cap, "blue chip" stocks, while enjoying
tremendous business fundamentals, have outperformed their own businesses. Take
General Electric as an example. In 1996, the stock was up 40%, while EPS grew
about 15%. Another example would be Merck, a stock up 77% in 1995 and 24% in
1996, with EPS in those two years up only 12% and 20%, respectively.
Our guess is that active managers may have an easier time beating the S&P 500
Index this year. This would be more likely to occur if smaller company stocks do
well. While we are large cap managers and continue to feel very comfortable with
many large cap names, at the margin we feel that there are currently many
opportunities in secondary stocks, especially high beta growth issues that have
missed the recent market move, but where fundamentals are intact. Examples
include HFS, Gtech, International Game Technology, Cracker Barrel, Petsmart and
Clear Channel Communications.
HFS is a great example of what we look for in a stock, and it is one of our
largest holdings currently. At $60, the stock has corrected 25% from its
mid-1996 and all-time high. During this period of stock price weakness,
consensus earnings expectations for 1997 have risen about 17% (from $2.20 in EPS
to $2.57). Moreover, we believe strongly that estimates will rise several more
times over the next few months and HFS will earn at least $2.80 per share in
1997. Driven by strong business trends, free cash flow generation and additional
acquisitions, we think HFS will earn $3.50 to $4.00 per share in 1998, up
sharply from 1997 and well above the $3.25 consensus estimate.
HFS is a conglomerate put together by CEO Henry Silverman, following his LBO and
subsequent IPO of several hotel franchises, including Ramada, Howard Johnson and
Days Inn. Since HFS owns management and franchise rights to these brands, as
opposed to bricks and mortar, the company generates significant free cash flow.
Mr. Silverman used this free cash flow to help finance the purchase of other
franchises, beginning two years ago with Century 21 and including Coldwell
Banker, Avis, RCI (the largest timeshare exchange company) and finally PHH, a
company which specializes in corporate relocation. Separately, each business has
solid growth prospects, some great and some only fair. But together, they form a
huge network of customer transactions, access to which the company is selling
back to corporate America. This in turn creates massive additional fee income
for HFS, enhances the market position of its businesses, and gives HFS an
advantage in competing for acquisitions.
At $60, HFS stock trades at 21 times our estimate of 1997 earnings. But free
cash flow is about $0.80 above stated earnings, so the multiple of free cash
flow is only 17 times. In other words, the stock's free cash flow yield is 6%.
Looking out to 1998, the free cash flow yield is 7.6%. We think this is
extremely compelling because HFS's savvy and shareholder driven management team
will look to leverage their big free cash flow ($600 million and $800 million in
1997 and 1998, respectively) through additional acquisitions.
Other large holdings include Campbell Soup, United Technologies, K-III and
Loews. At year end the Portfolio held 40 issues.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.5%)
CAPITAL GOODS-CONSTRUCTION (6.1%)
AEROSPACE & DEFENSE (6.1%)
11,800 McDonnell Douglas Corp............................ $ 755
60,300 United Technologies Corp.......................... 3,980
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 4,735
----------
CONSUMER-CYCLICAL (30.7%)
BROADCAST-RADIO & TELEVISION (3.0%)
(a)56,200 Clear Channel Communications, Inc................. 2,030
(a)10,100 Heftel Broadcasting Corp., Class A................ 318
----------
2,348
----------
ENTERTAINMENT & LEISURE (3.5%)
(a)10,800 Family Golf Centers, Inc.......................... 325
(a)73,800 GTECH Holdings Corp............................... 2,362
----------
2,687
----------
FOOD SERVICE & LODGING (14.5%)
(a)15,300 Boston Chicken, Inc............................... 549
(a)17,600 Brinker International, Inc........................ 282
36,500 Cracker Barrel Old Country Store, Inc............. 926
(a)21,500 Einstein/Noah Bagel Corp.......................... 640
(a)140,000 HFS, Inc.......................................... 8,365
16,700 Hilton Hotels Corp................................ 436
----------
11,198
----------
LEISURE RELATED (3.5%)
123,800 International Game Technology..................... 2,259
(a)22,300 WMS Industries, Inc............................... 446
----------
2,705
----------
PUBLISHING (4.5%)
(a)322,200 K-III Communications Corp......................... 3,464
----------
RETAIL-FOOD (0.8%)
58,400 Food Lion Inc., Class B........................... 591
----------
RETAIL-GENERAL (0.9%)
(a)31,900 PetSmart, Inc..................................... 698
1,400 Stage Stores, Inc................................. 26
----------
724
----------
TOTAL CONSUMER-CYCLICAL..................................... 23,717
----------
CONSUMER-STAPLES (34.4%)
BEVERAGES & TOBACCO (14.8%)
337,100 RJR Nabisco Holdings Corp......................... 11,461
----------
CIGARETTES (14.1%)
(a)40,800 Consolidated Cigar Holdings, Inc.................. 1,010
88,000 Philip Morris Cos., Inc........................... 9,911
----------
10,921
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOOD (5.5%)
52,400 Campbell Soup Co.................................. $ 4,205
----------
TOTAL CONSUMER-STAPLES...................................... 26,587
----------
DIVERSIFIED (7.7%)
(a)66 Berkshire Hathaway, Inc., Class A................. 2,251
31,900 Loews Corp........................................ 3,007
(a)19,500 U.S. Industries, Inc.............................. 670
----------
TOTAL DIVERSIFIED........................................... 5,928
----------
ENERGY (0.5%)
(a)8,300 AES Corp.......................................... 386
----------
FINANCE (12.7%)
BANKING (3.5%)
5,800 Citicorp.......................................... 597
7,900 Wells Fargo & Co.................................. 2,131
----------
2,728
----------
FINANCIAL SERVICES (4.5%)
10,500 American Express Co............................... 593
30,100 Franklin Resources, Inc........................... 2,058
9,100 Student Loan Marketing Association................ 848
----------
3,499
----------
INSURANCE (4.7%)
23,700 Ace Ltd........................................... 1,425
14,800 Aetna, Inc........................................ 1,184
18,100 PMI Group (The), Inc.............................. 1,002
----------
3,611
----------
TOTAL FINANCE............................................... 9,838
----------
MATERIALS (0.7%)
CHEMICALS (0.7%)
14,200 Olin Corp......................................... 534
----------
TECHNOLOGY (5.7%)
AEROSPACE & DEFENSE (1.3%)
18,500 Gulfstream Aerospace Corp......................... 449
(a)30,900 Loral Space & Communications...................... 568
----------
1,017
----------
COMPUTERS (0.8%)
(a)7,800 Microsoft Corp.................................... 644
----------
ELECTRONICS (2.0%)
11,500 Intel Corp........................................ 1,506
----------
OFFICE EQUIPMENT (1.6%)
8,000 International Business Machines Corp.............. 1,208
----------
TOTAL TECHNOLOGY............................................ 4,375
----------
TOTAL COMMON STOCKS (Cost $74,065)............................ 76,100
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 145 Chase Securities Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $145,
collateralized by U.S. Treasury Notes, 6.625%,
due 7/31/01, valued at $151 (Cost $145)......... $ 145
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.7%) (Cost $74,210)................. 76,245
--------
OTHER ASSETS (12.0%)
Receivable for Securities Sold Short....... $ 4,247
Receivable for Investments Sold............ 3,422
Receivable due from Broker................. 1,300
Dividends Receivable....................... 302
Receivable for Portfolio Shares Sold....... 7
Other...................................... 1 9,279
----------
LIABILITIES (-10.7%)
Securities Sold Short, at Value (Proceeds
$4,247).................................. (4,417)
Bank Overdraft............................. (2,450)
Payable for Investments Purchased.......... (735)
Payable for Portfolio Shares Redeemed...... (423)
Investment Advisory Fees Payable........... (91)
Dividends Payable on Securities Sold
Short.................................... (64)
Administrative Fees Payable................ (10)
Custodian Fees Payable..................... (5)
Distribution Fees Payable.................. (5)
Directors' Fees and Expenses Payable....... (1)
Other Liabilities.......................... (38) (8,239)
---------- --------
NET ASSETS (100%)........................................ $77,285
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 70,408
Undistributed Net Investment Income.... 32
Accumulated Net Realized Gain.......... 4,981
Unrealized Appreciation on
Investments.......................... 1,864
----------
NET ASSETS............................. $ 77,285
----------
----------
CLASS A
- ---------------------------------------
NET ASSETS............................. $ 68,480
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 4,746,588 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.43
----------
----------
CLASS B
- ---------------------------------------
NET ASSETS............................. $8,805
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 610,791 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.42
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
33,500 Phillip Morris Cos., Inc......................... $ 3,773
7,800 Microsoft Corp................................... 644
-------
(Total Proceeds $4,247)..................................... $ 4,417
-------
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods Construction 1.3%
Consumer Cyclical 20.1%
Consumer Staples 22.2%
Finance 1.7%
Services 40.7%
Technology 11.1%
Other 2.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING GROWTH PORTFOLIO -- CLASS
A NASDAQ COMPOSITE INDEX (1)
<S> <C> <C>
11/01/89* $500,000 $500,000
10/31/90 $453,500 $362,000
10/31/91 $815,393 $596,214
10/31/92 $754,239 $664,779
12/31/92 $671,046 $767,487
12/31/93 $671,046 $881,075
12/31/94 $666,886 $852,881
12/31/95 $889,025 $1,193,350
12/31/96 $922,097 $1,464,360
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 3.72% 4.10% 11.96%
PORTFOLIO -- CLASS
B(3).................. 3.58 N/A N/A
INDEX................. 22.71 17.10 15.63
</TABLE>
1. The NASDAQ Composite Index is an unmanaged index of common stocks.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Emerging Growth Portfolio invests primarily in growth-oriented equity
securities of small-to-medium sized domestic corporations and, to a limited
extent, foreign corporations. Such companies generally have gross revenues
ranging from $10 million to $750 million.
For the year ended December 31, 1996, the Portfolio had a total return of 3.72%
for the Class A shares and 3.58% for the Class B shares, as compared to a total
return of 22.71% for the NASDAQ Composite Index. The average annual total return
for the five-year period ended December 31, 1996 and for the period from
inception on November 1, 1989 through December 31, 1996 was 4.10% and 11.96%,
respectively, for the Class A shares, as compared to 17.10% and 15.63%,
respectively, for the Index.
The three months ended December 31, 1996, was the first quarterly decline in the
net asset value of the Portfolio since the June 1994 quarter. The previous nine
consecutive quarters of positive returns were a record for the Portfolio but,
markets being what they are, a break in the string of gains was inevitable at
some point in time. We do not detect any overriding issues as the cause of the
December quarter decline, rather it appears to be a normal correction following
a long rise. There were a couple of stocks in the Portfolio that experienced
negative fundamental changes during the quarter, the most notable being Health
Management Systems, Inc., which has been eliminated from our holdings. However,
much of the decline was caused by stock price erosion in companies with strong
underlying fundamentals. Since we expect the market to rotate back to these well
positioned small growth companies, we believe the December quarter decline is a
correction in an uptrend, not the beginning of a prolonged decline.
The most notable phenomenon for small capitalization investors in 1996 was the
continued outperformance of large capitalization stocks for the third year in a
row. The widely used Frank Russell Co. indexes showed the large capitalization
Russell 1000 Growth Index increased 23.1% in 1996, more than twice the 11.3%
gain of the small capitalization Russell 2000 Growth Index. The disparity was
particularly wide in the second half of the year when the large capitalization
indices surged to record highs while the small capitalization indexes failed to
get back to their May 1996 peaks.
- --------------------------------------------------------------------------------
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78
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OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
The continued underperformance of small capitalization stocks is a bit puzzling
considering their generally good earnings prospects and historically reasonable
relative valuation levels. Some causes of the underperformance may be that the
trend toward internationally diversified portfolios is diverting fund flows away
from the domestic small company sector or, the extremely high level of initial
public offerings (IPO's) may be absorbing, at the margin, the supply of small
capitalization investment dollars. Also, as long as the large capitalization
stocks are outperforming, there is little incentive to invest in higher risk
small companies. Markets often take these trends to excess and then the pattern
reverses without anyone ringing a bell. We believe that the inflection point is
near and that after three years of lagging relative performance, smaller
capitalization should begin a period of outperformance, which would be normal in
the later stages of a long bull market.
The Portfolio is well balanced in the smaller company sector with a 11%
weighting in technology, 12% in health care, 20% in consumer-related stocks, and
40% in a wide range of business and financial services companies. During the
fourth quarter, the Portfolio acquired new positions in six companies and
eliminated holdings in 12 stocks. Some of the new investments include:
CATALINA MARKETING CORP. -- is a provider of in-store electronic marketing
services to consumer products manufacturers and supermarket retailers. Revenues
are $152 million for the past twelve months.
COHR INC. -- is a national outsourcing service organization providing equipment
servicing and group purchasing to hospitals, integrated health systems and
alternative site providers. Revenues are $77 million for the past twelve months.
CORRECTIONS CORP. OF AMERICA -- provides prison, detention, and corrections
services to governmental agencies in over 50 facilities in more than a dozen
states. Revenues are $268 million for the past twelve months.
COST PLUS INC. -- is a specialty retailer of casual home living and entertaining
products through 58 stores in ten states. Revenues are $106 million for the past
twelve months.
ON TRACK DATA INTERNATIONAL -- is a leading provider of recovery services to a
broad range of customers experiencing a loss of valuable computer data. Revenues
are $24 million for the past twelve months.
VANTIVE CORP. -- provides customer interaction applications software that
enables businesses to enhance customer satisfaction by automating customer
support, defect tracking, sales, and internal help desk functions. Revenues are
$52 million for the past twelve months.
At the end of December, the Portfolio was diversified among 58 stocks with the
top ten holdings representing 31.6% of net assets.
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF NET ASSETS
-----------------------
<S> <C>
G&K Services........................... 4.5%
SunGuard Data Systems.................. 4.1
Cintas Corp............................ 3.5
First Data Corp........................ 3.3
Sonic Corp............................. 2.9
Viking Office Products................. 2.8
BISYS Group............................ 2.8
Concord EFS............................ 2.7
Bed, Bath & Beyond..................... 2.5
Vivra Inc.............................. 2.5
---
Total.............................. 31.6%
---
---
</TABLE>
On December 27, 1996, the Portfolio made a capital gains distribution of $8.6242
per share, following a capital gains distribution of $0.0682 on July 15, 1996.
All of the capital gains distributions were long term, which reflects the
generally low portfolio turnover and consequent relatively tax-efficient
investment process.
Dennis G. Sherva
PORTFOLIO MANAGER
January 1997
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Emerging Growth Portfolio
79
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (97.1%)
CAPITAL GOODS-CONSTRUCTION (1.3%)
ENVIRONMENTAL CONTROLS (1.3%)
(a)25,400 United Waste Systems, Inc......................... $ 873
----------
CONSUMER-CYCLICAL (20.1%)
FOOD SERVICE & LODGING (10.2%)
(a)30,000 Boston Chicken, Inc............................... 1,076
(a)20,000 HFS, Inc.......................................... 1,195
60,000 La Quinta Inns, Inc............................... 1,148
(a)50,000 Promus Hotel Corp................................. 1,481
(a)75,000 Sonic Corp........................................ 1,913
----------
6,813
----------
PRINTING & PUBLISHING (1.0%)
(a)10,000 Scholastic Corp................................... 672
----------
RETAIL-GENERAL (8.9%)
(a)70,000 Bed, Bath & Beyond, Inc........................... 1,697
(a)27,500 Cost Plus, Inc.................................... 526
(a)35,000 General Nutrition Cos., Inc....................... 591
(a)35,000 Kohl's Corp....................................... 1,374
(a)25,200 Petco Animal Supplies, Inc........................ 523
(a)55,000 PetSmart, Inc..................................... 1,203
----------
5,914
----------
TOTAL CONSUMER-CYCLICAL..................................... 13,399
----------
CONSUMER-STAPLES (22.2%)
DRUGS (2.8%)
(a)30,000 Forest Laboratories, Inc.......................... 983
(a)40,000 Genzyme Corp.-General Division.................... 870
----------
1,853
----------
HEALTH CARE SUPPLIES & SERVICES (12.4%)
(a)75,000 American Oncology Resources, Inc.................. 769
50,000 Ballard Medical Products.......................... 931
(a)25,000 Boston Scientific Corp............................ 1,500
(a)31,000 Cohr, Inc......................................... 837
(a)30,000 HEALTHSOUTH Rehabilitation Corp................... 1,159
(a)39,200 OccuSystems, Inc.................................. 1,058
(a)8,900 Target Therapeutics, Inc.......................... 374
(a)60,000 Vivra, Inc........................................ 1,657
----------
8,285
----------
MISCELLANEOUS (7.0%)
(a)20,100 Catalina Marketing Corp........................... 1,108
(a)25,000 IDEXX Laboratories, Inc........................... 900
(a)36,500 Mail Boxes Etc.................................... 821
(a)70,000 Viking Office Products, Inc....................... 1,868
----------
4,697
----------
TOTAL CONSUMER STAPLES...................................... 14,835
----------
FINANCE (1.7%)
INSURANCE (1.7%)
30,000 Mutual Risk Management Ltd........................ 1,110
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SERVICES (40.7%)
BUSINESS SERVICES (20.8%)
(a)20,000 Acxiom Corp....................................... $ 480
(a)50,000 BISYS Group, Inc.................................. 1,853
(a)26,300 Black Box Corp.................................... 1,085
(a)65,000 Concord EFS, Inc.................................. 1,836
60,000 First Data Corp................................... 2,190
16,400 First USA Paymentech, Inc......................... 556
81,000 May & Speh, Inc................................... 992
22,450 Paychex, Inc...................................... 1,155
(a)70,000 SunGuard Data Systems, Inc........................ 2,765
(a)38,000 Whittman-Hart, Inc................................ 974
----------
13,886
----------
PROFESSIONAL SERVICES (19.9%)
(a)25,000 American Medical Response, Inc.................... 812
40,000 Cintas Corp....................................... 2,350
(a)18,500 Corrections Corp. of America...................... 567
(a)35,000 CRA Managed Care, Inc............................. 1,575
(a)50,000 CUC International, Inc............................ 1,187
80,000 G & K Services, Inc., Class A..................... 3,020
(a)17,000 NFO Research, Inc................................. 374
(a)40,000 Robert Half International, Inc.................... 1,375
(a)50,000 Sitel Corp........................................ 706
49,500 Wilmar Industries, Inc............................ 1,374
----------
13,340
----------
TOTAL SERVICES.............................................. 27,226
----------
TECHNOLOGY (11.1%)
ELECTRONICS (2.5%)
21,800 Linear Technology, Corp........................... 956
20,000 Molex, Inc., Class A.............................. 713
----------
1,669
----------
OFFICE EQUIPMENT (0.3%)
(a)15,400 ONTRACK Data International, Inc................... 231
----------
SOFTWARE SERVICES (5.8%)
(a)3,200 HCIA, Inc......................................... 111
(a)30,000 Informix Corp..................................... 611
45,000 Sterling Commerce, Inc............................ 1,586
(a)58,800 USCS International, Inc........................... 992
(a)17,500 Vantive Corp...................................... 547
----------
3,847
----------
TELECOMMUNICATIONS (2.5%)
(a)45,000 ADC Telecommunications, Inc....................... 1,401
(a)7,600 Tellabs, Inc...................................... 286
----------
1,687
----------
TOTAL TECHNOLOGY............................................ 7,434
----------
TOTAL COMMON STOCKS (Cost $43,080)............................ 64,877
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Emerging Growth Portfolio
80
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 2,109 Chase Securities, Inc. 5.95%, 12/31/96, due
1/2/97, to be repurchased at $2,110,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $2,153 (Cost $2,109)..... $ 2,109
----------
TOTAL INVESTMENTS (100.3%) (Cost $45,189)..................... 66,986
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.1%)
Cash....................................... $ 1
Receivable for Portfolio Shares Sold....... 57
Dividends Receivable....................... 6
Other...................................... 7 71
-----
LIABILITIES (-0.4%)
Investment Advisory Fees Payable........... (220)
Administrative Fees Payable................ (11)
Custodian Fees Payable..................... (5)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (25) (267)
----- --------
NET ASSETS (100%)........................................ $66,790
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 34,724
Accumulated Net Investment Loss........ (3 )
Accumulated Net Realized Gain.......... 10,272
Unrealized Appreciation on
Investments.......................... 21,797
----------
NET ASSETS............................. $ 66,790
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $62,793
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 4,649,905 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.50
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $3,997
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 297,201 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.45
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
81
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 8.2%
Consumer Cyclical 28.2%
Consumer Staples 24.1%
Diversified 5.9%
Energy 0.5%
Finance 11.8%
Materials 1.7%
Services 1.9%
Technology 8.7%
Other 9.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EQUITY GROWTH PORTFOLIO-CLASS
S&P STOCK INDEX (1) A
<S> <C> <C>
4/2/91* $500,000 $500,000
10/31/1991 $533,090 $533,000
10/31/1992 $585,450 $582,330
12/31/1992 $612,760 $604,725
12/31/1993 $674,400 $630,900
12/31/1994 $683,250 $651,465
12/31/1995 $939,742 $944,733
12/31/1996 $1,155,507 $1,237,317
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 30.97% 16.99% 17.06%
PORTFOLIO -- CLASS
B(3).................. 29.92% N/A N/A
INDEX................. 22.96% 15.20% 15.86%
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting sustainable earnings growth.
The Portfolio achieved strong absolute and relative performance for the twelve
month and since inception periods ended December 31, 1996. For the year ended
December 31, 1996, the Portfolio had a total return of 30.97% for the Class A
shares and 29.92% for the Class B shares, as compared to a total return of
22.96% for the S&P 500 Index. The average annual total return for the five year
period ended December 31, 1996 and for the period from inception on April 2,
1991 through December 31, 1996 was 16.99% and 17.06%, respectively, for the
Class A shares, as compared to 15.20% and 15.86%, respectively, for the Index.
For the third consecutive year, our substantial overweighting in the tobacco
sector contributed positively to relative performance. After a market-smashing
total return of 62% in 1995 (including dividends), Philip Morris stock surged
late in 1996 for a full-year total return of 25%. The S&P 500 total return in
1995 and 1996 was 37.6% and 23.0%, respectively.
Philip Morris was our largest single holding throughout most of 1995 and 1996.
By taking advantage of periodic selling panics caused by ubiquitous news
headlines regarding litigation and political risk, we were able to greatly
enhance our returns in the stock. For example, in April of 1996, with Philip
Morris down about 5% on the year and trading at $85 against a market that was up
about 10%, we took Philip Morris stock to about 10% of the Portfolio. By August,
the stock had hit $107 as litigation concerns had eased and investors focused
more on the company's strong growth fundamentals. We had reduced our Philip
Morris holding to about a 4% position when, in early August, the industry had a
setback and lost the first round of a product liability court case. The stock
plunged back into the $80's, a huge overreaction in our view, and we
subsequently went back to a 10% weighting.
At year-end 1996, with Philip Morris stock at $113, it represented about 6% of
our Portfolio. Combined with positions in RJR Nabisco, Loews and Consolidated
Cigar, our total tobacco exposure is
- --------------------------------------------------------------------------------
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
about 16%. While the group will clearly be subject to bouts of selling pressure
since the industry is under attack from a number of directions, we nonetheless
believe the tobacco stocks are in the midst of a multi-year trend of upward
revaluation. Combined with strong underlying growth fundamentals, this creates a
powerful investment opportunity which we feel many growth investors are missing.
The next time you read an article about a state attorney general that is suing
the cigarette industry, or a senator that backs FDA control of cigarettes, or a
plaintiff attorney that claims the litigation dam is about to break open,
consider some of the following points:
1. Philip Morris is the largest taxpayer in the United States. In other words,
it could be argued that a compensation system is already in place for the
industry to repay society for the ills created by smoking.
2. Despite news headlines declaring the imminent demise of the industry, the law
in this country is generally on the side of the cigarette manufacturers because
the product is legal and a warning label has been mandated by Congress for over
30 years. Anything can happen in a jury-decided case, and two such cases have
now gone against the industry, but as cases move higher up in the court system
the principles of tort law are much tougher for plaintiffs to battle.
3. Since plaintiffs have never won a dime in over 30 years of suing the
industry, a legislated global settlement would clearly be attractive in their
eyes and in the eyes of their attorneys. The industry is in the position of
strength here, since its pockets are so much bigger, but news reports and
company statements over the past year indicate that they may finally agree to
such a settlement. This would be enormously bullish since it would put the
uncertainty of litigation behind the industry at a likely nominal cost. For
example, slapping a $0.20 per pack surcharge on cigarettes for a 20-year period
would generate approximately $100 billion and would have a negligible impact on
cigarette demand.
4. Like it or not, business is good. This is especially true for Philip Morris,
but is also the case for the other tobacco companies in our Portfolio. Domestic
consumption trends are improving and are actually as strong as they have been in
many years. And global growth is substantial while surplus cash flow generation
is huge. Despite paying out over half of earnings in dividends (a rare quality
for a growth company), Philip Morris grew earnings per share 19% in 1995, an
estimated 18% in 1996 and should grow 17%+ annually over the next 3-5 years.
5. Company managements are now much more committed to returning cash to
shareholders and enhancing shareholder value than ever before. In the 1980's,
Philip Morris spent over $20 billion on food acquisitions. This strategy
backfired because the acquisitions were dilutive and slowed growth while
lowering returns. Under new CEO, Geoff Bible, who in our view is an investor's
dream, the company has actually been divesting low-return food assets at
attractive prices, while buying back stock aggressively.
6. Valuation is extremely compelling in a market in which large cap stable
growth stocks like Coca Cola, Proctor and Gamble, Disney and GE have surged and
look expensive. At $113, Philip Morris trades at 12.6 times projected 1997
earnings, or 74% of its sustainable growth rate of 17%.
As we enter 1997, the S&P 500 Index has out-performed the vast majority of
active managers for three consecutive years. Also, the Index has outpaced the
earnings growth of the companies whose stocks are in it. One could argue that
there are many positive factors driving the United States markets higher and
that these factors could persist: stable interest rates, solid economic growth
without inflationary pressures, the opening up of emerging markets, the
acceptance of shareholder value as the key motivator of corporate managements,
and the huge flow of cash coming into stocks supported by powerful demographic
trends.
Still, there is no doubt that many large cap, "blue chip" stocks, while enjoying
tremendous business fundamentals, have outperformed their own businesses. Take
General Electric as an example. In 1996, the stock was up 40%, while EPS grew
about 15%. Another example would be Merck, a stock up 77% in 1995 and 24% in
1996, with EPS in those two years up only 12% and 20%.
Our guess is that active managers will have an easier time beating the S&P 500
this year. This would be more likely to occur if smaller company stocks do well.
While we are large cap managers and continue to feel very comfortable with many
large cap names, at the margin we feel that there are currently many
opportunities in secondary stocks, especially high beta
- --------------------------------------------------------------------------------
Equity Growth Portfolio
83
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
growth issues that have missed the recent market move, but where fundamentals
are intact. Examples include HFS, Gtech, International Game Technology, Cracker
Barrel, Petsmart and Clear Channel Communications.
HFS is a great example of what we look for in a stock, and it is one of our
largest holdings currently. At $60, the stock has corrected 25% from its
mid-1996 and all-time high. During this period of stock price weakness,
consensus earnings expectations for 1997 have risen about 17% (from $2.20 in EPS
to $2.57). Moreover, we believe strongly that estimates will rise several more
times over the next few months and HFS will earn at least $2.80 per share in
1997. Driven by strong business trends, free cash flow generation and additional
acquisitions, we think HFS will earn $3.50 to $4.00 per share in 1998, up
sharply from 1997 and well above the $3.25 consensus estimate.
But perhaps HFS stock is too expensive, having quadrupled in less than two years
since the company started a buying binge by acquiring Century 21. We find it
very difficult to get the question of valuation right. But it is comforting that
the HFS price correction occurred at a time when high P/E, high quality growth
stocks went up. For example, as HFS fell 18% in the second half, Gillette rose
25%, Merck rose 21.3%, General Electric climbed 15% and Microsoft rallied 35%.
In a market that places a high value on stable and rapid growth, we believe
investors will gravitate back into HFS stock.
What is HFS and why are we so excited about this stock? At over $10 billion in
market cap (pro forma for the acquisition of PHH, which should close in March),
HFS is a large capitalization company with a unique and compelling growth
strategy. Yet many large cap investors either do not know the company or have
shied away from the stock due to its rapid ascent over the past few years. This
in itself is very bullish if we are right on the company's growth prospects,
because large investors will be forced to look at and buy the stock.
HFS is a conglomerate put together by CEO Henry Silverman, following his LBO and
subsequent IPO of several hotel franchises, including Ramada, Howard Johnson and
Days Inn. Since HFS owns management and franchise rights to these brands, as
opposed to bricks and mortar, the company generates significant free cash flow.
Mr. Silverman used this free cash flow to help finance the purchase of other
franchises, beginning two years ago with Century 21 and including Coldwell
Banker, Avis, RCI (the largest timeshare exchange company) and finally PHH, a
company which specializes in corporate relocation. Separately, each business has
solid growth prospects, some great and some only fair. But together, they form a
huge network of customer transactions, access to which the company is selling
back to corporate America. This in turn creates massive additional fee income
for HFS, enhances the market position of its businesses, and gives HFS an
advantage in competing for acquisitions.
At $60, HFS stock trades at 21 times our estimate of 1997 earnings. But free
cash flow is about $0.80 above stated earnings, so the multiple of free cash
flow is only 17 times. In other words, the stock's free cash flow yield is 6%.
Looking out to 1998, the free cash flow yield is 7.6%. We think this is
extremely compelling because HFS's savvy and shareholder driven management team
will look to leverage their big free cash flow ($600 million and $800 million in
1997 and 1998, respectively) through additional acquisitions.
We see virtually no risk to consensus earnings estimates and believe HFS could
even earn more than the high end of our $3.50-4.00 earnings per share range for
next year. This would imply free cash flow approaching $5 per share. With little
or no help from the market, we could see HFS stock at $80-100 in a year.
At year end the Portfolio was invested in a mix of "low-flying" growth, such as
Philip Morris, and higher beta growth, such as HFS. The fund held 98 issues at
December 31, 1996, and 9% in cash.
Kurt Feuerman
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (91.0%)
CAPITAL GOODS-CONSTRUCTION (8.2%)
AEROSPACE & DEFENSE (7.1%)
33,787 Boeing Co......................................... $ 3,594
30,900 General Dynamics Corp............................. 2,179
(a)40,600 Gulfstream Aerospace Corp......................... 985
(a)116,900 Loral Space & Communications...................... 2,148
48,300 McDonnell Douglas Corp............................ 3,091
37,600 Rockwell International Corp....................... 2,289
10,600 Sundstrand Corp................................... 451
164,200 United Technologies Corp.......................... 10,837
----------
25,574
----------
ELECTRICAL EQUIPMENT (0.5%)
(a)100 American Standard Cos............................. 4
18,900 Emerson Electric Co............................... 1,829
----------
1,833
----------
ENVIRONMENTAL CONTROLS (0.6%)
58,700 WMX Technologies, Inc............................. 1,915
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 29,322
----------
CONSUMER-CYCLICAL (28.2%)
AUTOMOTIVE (1.2%)
54,700 Ford Motor Co..................................... 1,744
52,400 Goodyear Tire & Rubber Co......................... 2,692
----------
4,436
----------
BROADCAST-RADIO & TELEVISION (3.0%)
(a)176,000 Clear Channel Communications, Inc................. 6,358
(a)33,400 Film Roman, Inc................................... 255
(a)33,450 Heftel Broadcasting Corp., Class A................ 1,053
(a)50,200 Infinity Broadcasting, Class A.................... 1,688
(a)34,400 Viacom, Inc., Class B............................. 1,200
----------
10,554
----------
ENTERTAINMENT & LEISURE (3.7%)
(a)35,000 Family Golf Centers, Inc.......................... 1,054
(a)243,600 GTECH Holdings Corp............................... 7,795
32,600 Walt Disney Co.................................... 2,270
(a)102,600 WMS Industries, Inc............................... 2,052
----------
13,171
----------
FOOD SERVICE (3.1%)
(a)102,800 Boston Chicken, Inc............................... 3,688
(a)70,500 Brinker International, Inc........................ 1,128
139,300 Cracker Barrel Old Country Store, Inc............. 3,535
(a)88,600 Einstein/Noah Bagel Corp.......................... 2,636
(a)28,900 Foodmaker, Inc.................................... 256
----------
11,243
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
GAMING & LODGING (9.4%)
(a)346,600 HFS, Inc.......................................... $ 20,709
104,700 Hilton Hotels Corp................................ 2,735
559,900 International Game Technology..................... 10,218
----------
33,662
----------
PHOTOGRAPHY & OPTICAL (1.0%)
42,600 Eastman Kodak Co.................................. 3,419
----------
PUBLISHING (3.3%)
23,800 Gannett Co., Inc.................................. 1,782
47,200 Hollinger International, Inc., Class A............ 543
(a)770,600 K-III Communications Corp......................... 8,284
31,900 New York Times Co., Class A....................... 1,212
----------
11,821
----------
RETAIL-FOODS (1.3%)
(a)83,200 Dominick's Supermarkets, Inc...................... 1,810
288,500 Food Lion Inc., Class B........................... 2,921
----------
4,731
----------
RETAIL-GENERAL (2.2%)
35,400 CVS Corp.......................................... 1,465
59,800 Home Depot, Inc................................... 2,997
(a)153,400 PetSmart, Inc..................................... 3,356
----------
7,818
----------
TOTAL CONSUMER-CYCLICAL..................................... 100,855
----------
CONSUMER-STAPLES (24.1%)
BEVERAGES AND TOBACCO (8.5%)
32,200 Coca Cola Enterprises, Inc........................ 1,562
850,300 RJR Nabisco Holdings Corp......................... 28,910
----------
30,472
----------
DRUGS (1.4%)
33,900 American Home Products Corp....................... 1,987
24,900 Pfizer, Inc....................................... 2,064
12,200 Schering-Plough Corp.............................. 790
----------
4,841
----------
FOOD (3.6%)
113,700 Campbell Soup Co.................................. 9,124
46,100 Interstate Bakeries Corp.......................... 2,265
25,700 McCormick & Co., Inc.............................. 606
12,600 Ralston Purina Group.............................. 924
----------
12,919
----------
HEALTH CARE SUPPLIES & SERVICES (1.0%)
58,550 Columbia/HCA Healthcare Corp...................... 2,386
30,200 U.S. Surgical Corp................................ 1,189
----------
3,575
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (CONT.)
HOSPITAL SUPPLIES & SERVICES (2.5%)
(a)37,300 Acuson Corp....................................... $ 909
65,200 Aetna, Inc........................................ 5,216
63,400 Becton Dickinson & Co............................. 2,750
----------
8,875
----------
PERSONAL CARE PRODUCTS (0.7%)
34,100 Gillette Co....................................... 2,651
----------
TEXTILES & APPAREL (0.2%)
(a)55,100 Designer Holdings Ltd............................. 889
----------
CIGARETTES (6.2%)
(a)98,400 Consolidated Cigar Holdings Inc................... 2,435
174,300 Philip Morris Cos., Inc........................... 19,631
----------
22,066
----------
TOTAL CONSUMER-STAPLES...................................... 86,288
----------
DIVERSIFIED (5.9%)
56,100 Allied Signal, Inc................................ 3,759
(a)183 Berkshire Hathaway, Inc., Class A................. 6,240
85,200 Loews Corp........................................ 8,030
(a)65,900 U.S. Industries, Inc.............................. 2,265
50,600 Viad Corp......................................... 835
----------
TOTAL DIVERSIFIED........................................... 21,129
----------
ENERGY (0.5%)
(a)38,900 AES Corp.......................................... 1,809
----------
FINANCE (11.8%)
BANKING (3.8%)
30,368 Chase Manhattan Corp.............................. 2,710
9,300 Citicorp.......................................... 958
37,433 Wells Fargo & Co.................................. 10,098
----------
13,766
----------
FINANCIAL SERVICES (5.3%)
93,700 American Express Co............................... 5,294
11,700 CIGNA Corp........................................ 1,599
35,100 Dean Witter Discover & Co......................... 2,325
84,200 Franklin Resources, Inc........................... 5,757
42,300 Student Loan Marketing Association................ 3,939
----------
18,914
----------
INSURANCE (2.4%)
61,900 Ace Ltd........................................... 3,722
52,500 Exel Ltd.......................................... 1,988
50,700 PMI Group (The), Inc.............................. 2,807
----------
8,517
----------
REAL ESTATE (0.3%)
(a)45,000 Insignia Financial Group, Inc., Class A........... 1,013
----------
TOTAL FINANCE............................................... 42,210
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
MATERIALS (1.7%)
CHEMICALS (1.7%)
30,700 Hercules, Inc..................................... $ 1,328
58,700 Monsanto Co....................................... 2,282
66,700 Olin Corp......................................... 2,509
----------
TOTAL MATERIALS............................................. 6,119
----------
SERVICES (1.9%)
PROFESSIONAL SERVICES (1.2%)
(a)3,000 Catalina Marketing Corp........................... 165
(a)85,375 CUC International, Inc............................ 2,028
57,100 First Data Corp................................... 2,084
----------
4,277
----------
TRANSPORTATION (0.7%)
(a)28,700 AMR Corp.......................................... 2,529
----------
TOTAL SERVICES.............................................. 6,806
----------
TECHNOLOGY (8.7%)
COMPUTERS (0.1%)
(a)46,700 Larscom Inc., Class A............................. 531
----------
ELECTRONICS (3.1%)
(a)28,700 Applied Materials, Inc............................ 1,032
(a)43,900 Cisco Systems, Inc................................ 2,793
48,400 Intel Corp........................................ 6,337
16,100 Motorola, Inc..................................... 988
----------
11,150
----------
OFFICE EQUIPMENT (1.6%)
26,400 International Business Machines Corp.............. 3,986
23,900 U.S. Robotics Corp................................ 1,721
----------
5,707
----------
SOFTWARE SERVICES (3.1%)
39,600 Adobe Systems, Inc................................ 1,480
(a)51,600 Microsoft Corp.................................... 4,263
(a)28,000 Netscape Communications Corp...................... 1,593
(a)46,400 Oracle System, Corp............................... 1,937
(a)49,100 Sterling Commerce, Inc............................ 1,731
----------
11,004
----------
TELECOMMUNICATIONS (0.8%)
(a)48,300 AirTouch Communications, Inc...................... 1,220
(a)67,700 WorldCom, Inc..................................... 1,764
----------
2,984
----------
TOTAL TECHNOLOGY............................................ 31,376
----------
TOTAL COMMON STOCKS (Cost $298,740)......................... 325,914
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (29.2%)
REPURCHASE AGREEMENT (29.2%)
$ 104,658 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $104,693,
collateralized by various U.S. Treasury Bonds,
due 8/15/17-8/15/22, valued at $106,598 (Cost
$104,658)....................................... $ 104,658
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (120.2%) (Cost $403,398)............... 430,572
--------
OTHER ASSETS (3.3%)
Cash....................................... $ 8,912
Receivable for Portfolio Shares Sold....... 1,802
Receivable for Investments Sold............ 614
Dividends Receivable....................... 480
Interest Receivable........................ 17
Other...................................... 8 11,833
----------
LIABILITIES (-23.5%)
Payable for Investments Purchased.......... (83,615)
Investment Advisory Fees Payable........... (341)
Payable for Portfolio Shares Redeemed...... (142)
Administrative Fees Payable................ (32)
Custodian Fees Payable..................... (11)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (4)
Other Liabilities.......................... (54) (84,204)
---------- --------
NET ASSETS (100%)........................................ $358,201
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 324,250
Undistributed Net Investment Income.... 2
Accumulated Net Realized Gain.......... 6,775
Unrealized Appreciation on
Investments.......................... 27,174
----------
NET ASSETS............................. $ 358,201
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $352,703
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 23,608,569 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.94
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $5,498
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 368,438 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.92
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.8%
Banking 8.4%
Building 3.0%
Capital Goods 5.5%
Chemicals 5.2%
Computers 1.9%
Consumer - Durables 3.2%
Consumer - Retail 5.6%
Consumer - Staples 3.8%
Energy 3.9%
Entertainment 1.2%
Financial -
Diversified 6.2%
Health Care 5.8%
Industrial 2.6%
Insurance 5.7%
Metals 3.2%
Paper & Packaging 2.0%
Services 8.1%
Technology 7.9%
Transportation 1.8%
Utilities 7.9%
Other 5.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RUSSELL 2500 INDEX SMALL CAP VALUE EQUITY PORTFOLIO-CLASS
(1) A
<S> <C> <C>
12/17/92* $500,000 500000
12/31/1992 515665 507000
12/31/1993 601000 564420
12/31/1994 595350 578700
12/31/1995 784076 698086
12/31/1996 933,443 858,576
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE RUSSELL 2500
AND S&P 500 INDICES(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 22.99% 14.32%
PORTFOLIO -- CLASS B(3)............................................................................ 22.33 N/A
RUSSELL 2500....................................................................................... 19.05 16.71
S&P 500............................................................................................ 22.96 17.08
</TABLE>
1. The Russell 2500 Index and the S&P 500 Index are unmanaged indices of common
stock.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Small Cap Value Equity Portfolio invests in small companies that our
research indicates are undervalued, of high quality, and will reward the
shareholder through high current dividend income. The Portfolio's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies will help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
For the year ended December 31, 1996, the Portfolio had a total return of 22.99%
for the Class A shares and 22.33% for the Class B shares, as compared to a total
return of 19.05% and 22.96% for the Russell 2500 Index and S&P 500 Index,
respectively. The average annual total return for the period from inception on
December 17, 1992 through December 31, 1996 was 14.32% for the Class A shares,
as compared to 16.71% for the Russell 2500 Index and 17.08% for the S&P 500
Index.
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
FOURTH QUARTER PERFORMANCE REVIEW
The fourth quarter was especially strong for the market and the Portfolio. The
positive results stemmed from both stock and sector selection. In particular,
our overweighing in the energy sector provided strong returns. For the three
month period ended December 31, 1996, the Portfolio had a total return of 11.52%
for the Class A shares and 11.42% for the Class B shares, as compared to a total
return of 5.57% for the Russell 2500 and 8.35% for the S&P 500.
In the quarter we added to our weightings in energy, basic resources and
technology, while reducing weightings in financial services, health care and
utilities.
Looking forward, we are concerned that the effects of sustained wage and job
growth and rising food and energy prices will push inflation higher in 1997.
Real GDP growth in excess of 3% in the first half of 1997, will likely cause the
Federal Reserve to raise interest rates. While the strength of the dollar will
allow for the importation of lower cost goods and historically high interest
rates will serve to dampen economic growth, we are concerned that inflationary
pressures are building and will continue to carefully monitor the growth of the
economy.
In any case, we remain committed to our strategy of remaining fully-invested at
all times. In the event of higher inflation we would reduce our holdings of
financial service stocks and buy shares of companies in less interest sensitive
groups.
INVESTMENT STRATEGY
While our investment process is driven chiefly by bottom-up considerations, we
also take into account broad macroeconomic trends that influence the outlook for
certain industries. As long as we are not required to pay a premium price in the
stock market, we prefer to invest in industries which are beneficiaries of
favorable secular economic trends or positive changes in competitive conditions.
The two areas we have found most interesting recently are financial services and
aerospace manufacturing.
Though we have reduced our overall weight in financial stocks, we are still
adding to positions of selected asset management and brokerage stocks. Recent
purchases in this sector include Franklin Resources, a mutual fund company, and
additional purchases of United Asset Management, a skilled consolidator of
investment management companies, and Everen Capital, a well-run regional
brokerage concern. Our investment in Everen should benefit from future
regulatory changes making it easier for banks to acquire brokerage companies.
We continue to be interested in aerospace manufacturing. After several years of
little growth, new plane orders are rebounding strongly. We are focusing on
suppliers of parts and services to Boeing. As in many other industries, major
aerospace companies, such as Boeing, are reducing the number of suppliers they
use and are also relying more heavily on outside suppliers for value-added
services such as engineering design and just-in-time delivery of parts and
supplies. In addition to the upswing in the aerospace cycle, this concentration
of suppliers and extra services should create a boom in new business for
well-positioned aerospace supply companies. Our most recent purchase in this
sector is Crane Co.
CONCLUSION
The Portfolio is designed to outperform small cap indices over the long-term,
and to do so with lower volatility. In times of strong market advances such as
the ebullient bull market of 1996, the Portfolio should provide good absolute
returns but may not participate fully in speculative rallies. In times of
difficult market environments, we expect the Portfolio to perform very well, and
for the total long-term result to be measurably better than that of the Russell
2500 Index.
The Small Cap Value Equity Portfolio offers the consistent application of a
disciplined value-oriented investment process to its shareholders. As such, we
will diligently search for small companies that our research indicates are
undervalued, have strong balance sheets and possess reasonably good growth
prospects. We believe that selective investments in companies such as this
should provide superior long-term returns for our shareholders.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William B. Gerlach
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (94.7%)
AEROSPACE (1.8%)
6,400 AAR Corp.......................................... $ 193
1,200 Penn Engineering & Manufacturing Corp............. 25
5,500 Thiokol Corp...................................... 246
----------
464
----------
BANKING (8.4%)
7,800 Astoria Financial Corp............................ 288
6,475 First Security Corp. (Delaware)................... 219
7,400 Onbancorp, Inc.................................... 275
3,337 Peoples Heritage Financial Group, Inc............. 93
8,500 Susquehanna Bancshares, Inc....................... 294
15,100 Trustmark Corp.................................... 385
8,500 Union Planters Corp............................... 332
6,400 Washington Mutual, Inc............................ 277
----------
2,163
----------
BUILDING (3.0%)
5,600 Ameron International Corp. (Delaware)............. 289
22,900 Gilbert Associates, Inc., Class A................. 315
12,300 Ryland Group, Inc................................. 169
----------
773
----------
CAPITAL GOODS (5.5%)
11,503 Binks Manufacturing Co............................ 462
17,300 Cascade Corp...................................... 279
13,400 Starret (L.S.) Co., Class A....................... 380
5,200 Tecumseh Products Co., Class A.................... 298
----------
1,419
----------
CHEMICALS (5.2%)
26,192 Aceto Corp........................................ 365
12,000 Crompton & Knowles, Corp.......................... 231
8,200 Dexter Corp....................................... 261
4,300 Learonal, Inc..................................... 99
1,100 Mississippi Chemical Corp......................... 27
10,400 Quaker Chemical Corp.............................. 170
6,300 Witco Corp........................................ 192
----------
1,345
----------
COMPUTERS (1.9%)
(a)15,900 Cirrus Logic, Inc................................. 246
10,000 Watts Industries, Inc., Class A................... 239
----------
485
----------
CONSUMER-DURABLES (3.2%)
9,700 Arvin Industries, Inc............................. 240
10,498 Knape & Vogt Manufacturing Co..................... 173
13,400 Oneida Ltd........................................ 241
5,400 Smith (A.O.) Corp., Class B....................... 162
----------
816
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
CONSUMER-RETAIL (5.6%)
5,000 American Greetings Corp., Class A................. $ 142
8,800 Guilford Mills, Inc............................... 234
6,700 Interface, Inc.................................... 135
21,400 Lillian Vernon Corp............................... 262
5,200 Springs Industries, Inc., Class A................. 224
8,400 Stanhome, Inc..................................... 223
(a)11,000 Zale Corp......................................... 210
----------
1,430
----------
CONSUMER-STAPLES (3.8%)
5,918 Block Drug Co., Inc., Class A..................... 272
10,600 Coors (Adolph), Inc., Class B..................... 201
6,600 International Multifoods Corp..................... 120
17,600 Nash Finch Co..................................... 374
----------
967
----------
ENERGY (3.9%)
7,700 Ashland Coal, Inc................................. 214
4,600 National Fuel Gas Co.............................. 190
5,500 Parker & Parsley Petroleum Co..................... 202
8,302 Ultramar Diamond Shamrock Corp.................... 262
5,800 Union Texas Petro Holdings, Inc................... 130
----------
998
----------
ENTERTAINMENT (1.2%)
3,000 First Hawaiian, Inc............................... 105
6,100 Universal Corp.................................... 196
----------
301
----------
FINANCIAL-DIVERSIFIED (6.2%)
26,800 EVEREN Capital Corp............................... 600
5,200 GATX Corp......................................... 252
11,500 Manufactured Home Communities, Inc. REIT.......... 267
10,000 United Asset Management, Inc...................... 266
8,800 Wellsford Residential Property Trust REIT......... 214
----------
1,599
----------
HEALTH CARE (5.8%)
10,400 Analogic Corp..................................... 348
6,100 Beckman Instruments, Inc.......................... 234
8,200 Bergen Brunswig Corp., Class A.................... 234
14,900 Bindley Western Industries, Inc................... 289
15,100 Kinetic Concepts, Inc............................. 185
8,000 United Wisconsin Services, Inc.................... 210
----------
1,500
----------
INDUSTRIAL (2.6%)
4,200 Barnes Group, Inc................................. 252
2,000 Franklin Resources, Inc........................... 137
16,000 Kaman Corp., Class A.............................. 208
(a)5,000 Renters Choice, Inc............................... 72
----------
669
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
INSURANCE (5.7%)
11,000 Argonaut Group, Inc............................... $ 338
6,200 Enhance Financial Services Group, Inc............. 226
5,600 Provident Companies, Inc.......................... 271
9,400 Selective Insurance Group, Inc.................... 357
8,350 USLife Corp....................................... 278
----------
1,470
----------
METALS (3.2%)
13,800 Birmingham Steel Corp............................. 262
5,800 Cleveland-Cliffs, Inc............................. 263
5,900 Precision Castparts Corp.......................... 293
----------
818
----------
PAPER & PACKAGING (2.0%)
6,700 Ball Corp......................................... 174
5,000 P.H. Glatfelter Co................................ 90
5,800 Potlatch Corp..................................... 250
----------
514
----------
SERVICES (8.1%)
11,600 Angelica Corp..................................... 222
12,200 Bowne & Co........................................ 300
10,900 Cross (A.T.) Co., Class A......................... 127
16,600 Jackpot Enterprises, Inc.......................... 162
10,900 New England Business Services, Inc................ 234
10,200 Ogden Corp........................................ 191
25,500 Piccadilly Cafeterias, Inc........................ 236
12,400 Russ Berrie & Co., Inc............................ 223
8,600 Sbarro, Inc....................................... 219
7,700 True North Communications, Inc.................... 169
----------
2,083
----------
TECHNOLOGY (7.9%)
14,900 Core Industries, Inc.............................. 246
11,900 Cubic Corp........................................ 275
12,100 Dallas Semiconductor Corp......................... 278
16,900 Gerber Scientific, Inc............................ 252
17,500 MTS Systems Corp.................................. 350
9,500 National Computer Systems, Inc.................... 242
6,600 Park Electrochemical Corp......................... 150
12,200 Scitex Ltd........................................ 116
(a)5,300 Tracor, Inc....................................... 113
----------
2,022
----------
TRANSPORTATION (1.8%)
8,800 Airborne Freight Corp............................. 206
1,600 Overseas Shipholding Group, Inc................... 27
15,600 SkyWest, Inc...................................... 216
----------
449
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
UTILITIES (7.9%)
8,200 Central Hudson Gas & Electric..................... $ 257
8,100 Commonwealth Energy Systems Cos................... 190
5,200 Eastern Enterprises............................... 184
7,800 Oneok, Inc........................................ 234
5,800 Orange & Rockland Utilities, Inc.................. 208
(a)5,000 Reading & Bates Corp.............................. 133
7,300 SJW Corp.......................................... 342
10,000 Washington Gas Light Co........................... 226
13,300 Washington Water Power Co......................... 248
----------
2,022
----------
TOTAL COMMON STOCKS (Cost $20,255)............................ 24,307
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 519 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $519,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $533 (Cost $519)......... 519
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.7%) (Cost $20,774)................. 24,826
--------
OTHER ASSETS (3.4%)
Receivable for Portfolio Shares Sold....... $ 531
Receivable for Investments Sold............ 283
Dividends Receivable....................... 55
Other...................................... 5 874
----------
LIABILITIES (-0.1%)
Investment Advisory Fees Payable........... (6)
Custodian Fees Payable..................... (6)
Administrative Fees Payable................ (4)
Directors' Fees and Expenses Payable....... (1)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (23) (41)
---------- --------
NET ASSETS (100%)........................................ $25,659
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 20,592
Undistributed Net Investment Income................ 3
Accumulated Net Realized Gain...................... 1,012
Unrealized Appreciation on Investments............. 4,052
--------
NET ASSETS......................................... $ 25,659
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $23,970
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 2,201,662 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.89
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,689
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 155,279 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.88
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Communication Equipment 27.5%
Communication Services 7.1%
Business Services 7.6%
Electronic Computers 5.4%
Motion Picture & Video Tape Production 1.1%
Personal Services 0.7%
Semiconductors & Related Services 25.7%
Surgical & Medical Instruments & Apparatus 0.5%
Software 17.1%
Other 7.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $250,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO -- CLASS TECHNOLOGY PORTFOLIO -- CLASS
S&P 500 INDEX (1) A B
<S> <C> <C> <C>
9/16/1996* $250,000 $250,000 $50,000
12/31/96 272,200 267,750 53,550
*Commencement of operations
**Minimum Investment -- Class A
</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. The S&P 500 Index value at December 31, 1996
assumes a minimum initial investment of $250,000; if a minimum initial
investment of $50,000 is assumed the value at December 31, 1996 would be
$54,440.
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
SINCE INCEPTION
-----------------
<S> <C>
PORTFOLIO -- CLASS A(3)....................................................................................... 7.10%
PORTFOLIO -- CLASS B(3)....................................................................................... 7.10
S&P 500....................................................................................................... 8.88
LIPPER SCIENCE & TECHNOLOGY................................................................................... 8.45
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks. The Lipper Science
and Technology Funds Index is a composite index of mutual funds that invest
at least 65% of their assets in science and technology stocks.
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. The Portfolio commenced operations on September 16, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 investment objective of the Technology Portfolio is to achieve long term
capital appreciation by investing primarily in equity securities of companies
expected to benefit from their involvement in technology and technology-related
industries. The focus of the Portfolio is to identify significant long term
technology trends and to invest in those premier companies we believe are
positioned to materially gain from these trends. Stocks selected for the
Portfolio are also expected to meet comprehensive selection criteria. The
Portfolio may invest up to 35% of its total investments in securities of foreign
companies to participate sufficiently in the global technology market.
For the period from inception on September 16, 1996 through December 31, 1996
the Portfolio had a total return of 7.10% for the Class A shares and 7.10% for
the Class B shares, as compared to a total return of 8.88% for the S&P 500 Index
and 8.45% for the Lipper Science & Technology Funds Index. For the three-month
period ended December 31, 1996 the Portfolio had a total return of 3.18% for the
Class A shares and 3.08% for the Class B shares, as compared to a total return
of 8.35% for the S&P 500 Index and 4.51% for the Lipper Science & Technology
Funds Index for the same period.
The best performing stocks for the December quarter were large capitalization
stocks such as Microsoft, IBM and Intel and semiconductor and related companies,
while smaller cap stocks tended to lag the market. Fortunately, our largest
positions are Microsoft and Intel and we had over 25% of the Portfolio in
semiconductor and related stocks. Intel's momentum, led by its core product the
Pentium, lent credibility to the semiconductor turnaround story and most
secondary semiconductor stocks rallied as a result.
Networking stocks had a difficult quarter as some of the higher profile
companies encountered sooner than expected revenue deceleration and as a result
suffered valuation compression. Technology services stocks were negatively
effected when EDS, the stalwart of the group, commented on their cautious
outlook for the December quarter. The company attributed some of its concerns to
firm specific issues, but this indirectly pressured other related stocks.
Enterprise software stocks performed moderately as Oracle and Computer
Associates, two high profile companies, encountered difficulties in the European
market, thereby pressuring related stocks. The storage and
- --------------------------------------------------------------------------------
Technology Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO (CONT.)
computing categories performed well on the back of strong corporate PC demand
and effective execution among the respective industry leaders. Telecom equipment
companies performed well for most of the quarter but sold off near quarter-end
as the telecom/cable service war (and its implications for heightened levels of
competition) appeared to be entering a less aggressive phase and investors
became concerned about the level of future equipment purchases. We will continue
to selectively invest in telco service providers who have the most market share
to gain and the least to lose while maintaining profitability. The consumer
software sector performed poorly as the retail distribution channel encountered
structural difficulties and consumer PC sales were moderate for Christmas, 1996.
We are looking forward to 1997. The economy continues to grow at a moderate
pace, a positive for technology spending. Many of the industry leaders such as
Intel, Microsoft, and Cisco continue to execute well and are experiencing
healthy fundamental growth. As always with technology investing, we expect
significant volatility will continue. Our job will be to identify the premier
sectors and companies and avoid the losers while holding steadfast to the
principles which have provided us with a strong start and are expected to reward
us long term.
Christopher R. Blair
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCK (92.7%)
COMMUNICATION EQUIPMENT (27.5%)
COMPUTER INTEGRATED SYSTEMS DESIGN (10.7%)
(a)3,900 Cisco Systems, Inc................................ $ 248
(a)4,900 Retix, Inc........................................ 33
(a)2,800 3Com Corp......................................... 205
(a)1,400 VideoServer, Inc.................................. 59
----------
545
----------
COMPUTER PERIPHERAL EQUIPMENT (4.4%)
(a)2,700 Adaptec, Inc...................................... 108
(a)1,100 Black Box Corp.................................... 45
(a)2,400 Quantum Corp...................................... 69
----------
222
----------
ELECTRONIC COMPONENTS & ACCESSORIES (0.9%)
1,313 Molex, Inc., Class A.............................. 47
----------
ELECTRONIC PARTS & EQUIPMENT (3.3%)
2,700 Motorola, Inc..................................... 166
----------
TELEPHONE & TELEGRAPH APPARATUS (8.2%)
(a)3,300 ADC Telecommunications, Inc....................... 103
1,200 Advanced Fibre Communications..................... 67
600 Northern Telecommunications Ltd................... 37
(a)2,300 Telco Systems, Inc................................ 44
3,100 Telefonaktiebolaget LM Ericsson ADR............... 94
(a)1,900 Tellabs, Inc...................................... 72
----------
417
----------
TOTAL COMMUNICATION EQUIPMENT............................... 1,397
----------
COMMUNICATION SERVICES (7.1%)
COMPUTER PROGRAMMING (4.0%)
1,000 ECsoft Group plc ADR.............................. 10
2,000 Electronic Data Systems Corp...................... 87
600 International Network Services.................... 18
700 XLConnect Solutions, Inc.......................... 20
2,600 Whittman-Hart, Inc................................ 67
----------
202
----------
DIRECT MAIL ADVERTISING SERVICE (0.2%)
1,000 May & Speh, Inc................................... 12
----------
RADIO/TELEPHONE COMMUNICATIONS (1.4%)
800 LCC International, Inc., Class A.................. 15
(a)3,800 Mobile Telecommunications Technologies Corp....... 32
1,100 Orion Network Systems, Inc........................ 14
(a)600 WinStar Communications, Inc....................... 13
----------
74
----------
TELEPHONE COMMUNICATIONS (1.5%)
1,000 MCI Communications Corp........................... 33
1,400 Teleport Communications Group, Inc., Class A...... 43
----------
76
----------
TOTAL COMMUNICATION SERVICES................................ 364
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
OTHER TECHNOLOGY (41.0%)
BUSINESS SERVICES (7.6%)
1,000 Automatic Data Processing, Inc.................... $ 43
500 BA Merchant Services, Inc., Class A............... 9
(a)800 BISYS Group, Inc.................................. 30
(a)500 CBT Group plc ADR................................. 27
(a)1,400 Gartner Group, Inc., Class A...................... 55
1,300 ONTRACK Data International, Inc................... 19
1,200 Paychex, Inc...................................... 62
1,800 Sterling Commerce, Inc............................ 56
(a)1,300 SunGuard Data Systems, Inc........................ 51
2,000 USCS International, Inc........................... 34
----------
386
----------
ELECTRONIC COMPUTERS (5.4%)
(a)1,400 Compaq Computer Corp.............................. 104
(a)1,400 Dell Computer Corp................................ 74
500 International Business Machines Corp.............. 76
(a)2,100 Network Computing Devices, Inc.................... 21
----------
275
----------
MOTION PICTURE & VIDEO TAPE PRODUCTION (1.1%)
700 News Corp. Ltd., ADR.............................. 14
(a)700 Tele-Communcations, Inc., Class A................. 20
300 The Walt Disney Co................................ 21
----------
55
----------
PERSONAL SERVICES (0.7%)
(a)1,550 CUC International, Inc............................ 37
----------
SEMICONDUCTORS & RELATED SERVICES (25.7%)
(a)1,900 Altera Corp....................................... 138
(a)1,500 ANADIGICS, Inc.................................... 59
(a)2,000 Applied Materials, Inc............................ 72
(a)1,900 ESS Technology, Inc............................... 53
(a)1,400 Fusion Systems Corp............................... 30
2,000 Intel Corp........................................ 262
(a)1,300 KLA Instruments Corp.............................. 46
(a)1,000 Lattice Semiconductor Corp........................ 46
(a)1,000 Level One Communications, Inc..................... 36
3,100 Linear Technology Corp............................ 136
(a)2,500 Maxim Integrated Products, Inc.................... 108
(a)2,700 Microchip Technology, Inc......................... 137
2,000 Micron Technology, Inc............................ 58
(a)1,100 Semtech Corp...................................... 19
(a)2,900 Xilinx, Inc....................................... 107
----------
1,307
----------
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS (0.5%)
(a)400 Boston Scientific Corp............................ 24
----------
TOTAL OTHER TECHNOLOGY...................................... 2,084
----------
SOFTWARE (17.1%)
COMMUNICATIONS SOFTWARE (0.4%)
(a)900 Objective Systems Integrators, Inc................ 21
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SOFTWARE (CONT.)
<TABLE>
<C> <S> <C>
PREPACKAGED SOFTWARE (16.7%)
(a)1,100 Avant! Corp....................................... $ 35
(a)1,000 BMC Software, Inc................................. 41
(a)1,000 Broderbund Software, Inc.......................... 30
(a)500 Clarify, Inc...................................... 24
(a)1,300 Compuware Corp.................................... 65
100 CyberMedia, Inc................................... 2
(a)3,400 Microsoft Corp.................................... 281
(a)200 Netscape Communications Corp...................... 11
(a)2,400 Oracle Corp....................................... 100
(a)2,200 Peoplesoft, Inc................................... 105
(a)5,000 Proginet Corp..................................... 18
(a)600 Remedy Corp....................................... 32
600 Siebel Systems, Inc............................... 16
(a)1,700 Transaction Systems Architects, Inc., Class A..... 57
(a)1,000 Vantive Corp...................................... 31
----------
848
----------
TOTAL SOFTWARE.............................................. 869
----------
TOTAL COMMON STOCK (Cost $4,418).............................. 4,714
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (2.0%)
U.S. TREASURY BILL (2.0%)
$ 100 U.S. Treasury Bill, 5.00%, 1/16/97 (Cost $99)..... 99
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (94.7%) (Cost $4,517).................. $4,813
--------
OTHER ASSETS (9.4%)
Receivable for Investments Sold.......... $ 269
Receivable due from Broker............... 92
Receivable for Investment Advisory
Fees..................................... 82
Other.................................... 33 476
-----
LIABILITIES (-4.1%)
Payable for Investments Purchased........ (143)
Bank Overdraft........................... (48)
Custodian Fees Payable................... (2)
Adminstrative Fees Payable............... (1)
Distribution Fees Payable................ (1)
Other Liabilities........................ (12) (207)
----- --------
NET ASSETS (100%)........................................ $5,082
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital..................................... $ 4,798
Accumulated Net Realized Loss....................... (12)
Unrealized Appreciation on Investments.............. 296
--------
NET ASSETS.......................................... $ 5,082
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ----------------------------------------------------
NET ASSETS.......................................... $3,595
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 335,562 outstanding $0.001 par value
shares (authorized 500,000,000 shares)............ $10.71
--------
--------
CLASS B:
- ----------------------------------------------------
NET ASSETS.......................................... $1,487
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 138,936 outstanding $0.001 par value
shares (authorized 500,000,000 shares)............ $10.71
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 15.7%
Healthcare 6.7%
Land 2.3%
Lodging/Leisure 13.8%
Manufactured Home 5.4%
Office and
Industrial 33.6%
Retail 10.2%
Self Storage 2.5%
Other 9.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. REAL ESTATE
NAREIT INDEX (1) PORTFOLIO-CLASS A
<S> <C> <C>
02/24/95* $500,000 $500,000
12/31/1995 $572,300 $605,350
12/31/1996 780,617 844,826
*Commencement of operations
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION
OF REAL ESTATE INVESTMENT TRUSTS (NAREIT) INDEX(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 39.56% 32.73%
PORTFOLIO -- CLASS B(3)............................................................................ 38.23 N/A
INDEX.............................................................................................. 36.40 27.19
</TABLE>
1. The NAREIT Index is an unmanaged market weighted index of tax qualified REITs
listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ
National Market System, including 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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The U.S. Real Estate Portfolio seeks to provide 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.
For the year ended December 31, 1996, the Portfolio had a total return of 39.56%
for the Class A shares and 38.23% for the Class B shares, as compared to a total
return of 36.40% for the National Association of Real Estate Investment Trusts
(NAREIT) Index. The average annual total return for the period from inception on
February 24, 1995 through December 31, 1996 was 32.73% for the Class A shares as
compared to 27.19% for the Index.
The U.S. real estate securities markets exceeded the expectations of even the
most optimistic analysts during 1996 in terms of total performance, growth in
assets and other relevant benchmarks. The NAREIT Equity Index (the "Index")
registered a total return of 35.3%, of which approximately 18.9% came in the
fourth quarter (and a full 10.4% in the final month alone). In this report we
would like to examine a number of the major themes that defined this
record-breaking year, to review important developments in each of the major
industry sectors that together comprise the real estate business, and lastly to
review the Portfolio's position and strategy as we enter the new year 1997.
INVESTMENT THEMES: 1996
The most important theme of 1996 and the one which certainly dominated the
market during the second half of the year was the extraordinary growth of the
real estate sector. Driven by rapid appreciation in share prices and a
record-setting $9.5 billion in securities offerings, the equity market
capitalization of the U.S. REIT industry rose by 53% during 1996 to a year-end
total of $87 billion. Total assets of REITs rose 35% to $125 billion. Some
analysts now estimate that REITs may comprise as much as 20% of the total
commercial real estate owned by institutions in the United States, up from a
fraction just a few years ago. Virtually every major real estate investor
constituency participated in the market in 1996. Pension funds, which had stuck
their toes into the REIT waters for the first time in 1994, came back to REITs
in force during the second half of the year. As we write this letter,
consultants speak of a record number of pending proposals for pension funds
seeking to initiate or expand existing commitments to the REIT industry. Other
institutions, such as insurance companies, came to see REITs as a viable
alternative during 1996. Perhaps the most noteworthy convert was
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
The Prudential Insurance Company, which during September 1996 announced the
appointment of a senior REIT executive to restructure their $5.5 billion real
estate portfolio, in part through an exchange of direct property into REIT
shares. And last, and perhaps of greatest import, individuals in 1996
discovered, or, we should say, rediscovered REITs. During the 1970's and 1980's,
of course, individual investors were the dominant owners of REIT shares, but
with the growth of the industry during the 1990's, institutions led by dedicated
REIT funds, came to set trends and pricing in the market. That seemed to change
during the second half of 1996, when, following the market turbulence of July,
analysts discovered that REITs had provided a measure of downside protection
while the broader market indices were falling. The rush was on, and during the
following five months investors, including dedicated REIT mutual funds (who
received an estimated $2.7 billion) and non-dedicated mutual funds who
re-allocated their portfolios to include exposure to the sector, invested
heavily in the sector. While it is impossible to tell at this juncture whether
this trend will prove to be long-lasting or short-lived, it has made REITs at
least temporarily a momentum sector, with funds flows into larger capitalization
stocks setting valuation levels for the industry.
The second major theme during 1996 was consolidation. With the proliferation
during the past three years in the number of REITs, a certain natural attrition
was to be expected. During 1996 this process of consolidation finally began to
unfold in a significant way, with 7 completed and 3 announced mergers between
public REITs for a total consideration of $6.1 billion. While the long-term
results of these transactions will not be known for some time, it does appear at
least during the short run that such transactions have had benefits for the
acquiring company and, as expected, for shareholders of the acquired company.
With much less fanfare, 1996 also witnessed a continuation of the sea change in
the consolidation of private real estate companies into public ones through cash
offers or property for share exchanges. The net result of both activities, the
public and the private M&A, is to begin what will undoubtedly be a multi-year
process of consolidating a heretofore highly fragmented industry.
The third theme, and one of at least technical interest to real estate portfolio
managers, was a significant shift in the composition of the various REIT indices
during 1996. Prior to the most recent year it could be argued with some
conviction that the property type or sector weights within the REIT sector did
not reflect well the composition of the U.S. real estate industry. At the
beginning of 1996, for example, the apartment and retail sectors accounted for
roughly 59.2% of the weight of the NAREIT Equity Index, while the NCREIF Index,
an index of private real estate gave those same sectors roughly a 49.5%
weighting. Rapid price appreciation in the share prices of office and hotel
companies coupled with a heavy slate of securities offerings in those two
sectors substantially changed that balance, however. As of year-end, apartment
and retail weightings had dropped by 11% (or 6.5 actual percentage points) in
the NAREIT Equity Index while the weights of hotel and office combined had risen
65% to 19% (or almost 8 percentage points) of the Index. A preliminary look at
expected share offerings for 1997 suggests that we should see more of the same
in the year to come.
The final theme was an intensification of the debate among industry analysts
between "value" and "growth" styles of investing. Value investors, as the name
implies, focus primarily on underlying property values or cash flow in selecting
securities for investment. Growth investors, by contrast, are more likely to
focus on momentum in earnings or investor sentiment in stock selection. As
alluded to above, 1996 gave reason for optimism to both camps, with the first
half of the year favoring "value" and the second half of the year clearly
favoring the "growth" camp. As dedicated proponents of value investing, we are
clearly biased observers in this ongoing debate, given our approach of selecting
securities that offer the best value relative to their underlying net property
assets. While we believe fervently in the thesis that efficient markets will, in
the long run drive values in the public and private markets to equilibrium, we
acknowledge the powerful nature of the recent funds flow momentum that maintains
prices of some securities at 30% to 50% premiums to net assets. In the coming
year we will strive to maintain our value discipline, while at the same time not
overlooking "growth" companies that are able to create incremental underlying
share value through superior property skills.
SECTOR REVIEW
A year ago, many real estate analysts proclaimed that 1996 would be a year for
stock picking after a year (1995) in which sector selection appeared to have
been dominant. The prevalence of sector selection again in 1996 no doubt came as
a surprise to many in the industry, as sector bets on the office and hotel
sectors again contributed significantly to excess
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
performance. The chart below outlines the total return performance of the
various sectors in the real estate industry for 1995 and 1996:
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
------------------------
SECTOR 1995 1996
- --------------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Apartments............................................................................................... 12.3% 28.4%
Manufactured Homes....................................................................................... 10.7% 34.9%
Strip Centers............................................................................................ 7.4% 32.8%
Regional Malls........................................................................................... 3.0% 44.6%
Outlet Centers........................................................................................... -2.8% 3.5%
Industrial............................................................................................... 15.9% 37.0%
Office................................................................................................... 38.8% 51.8%
Self Storage............................................................................................. 34.9% 42.0%
Triple Net Lease......................................................................................... 31.6% 30.8%
Hotel.................................................................................................... 30.8% 49.2%
</TABLE>
As we have written in the past, the securities performance of a sector must
reflect in some fashion the performance differentials in the underlying real
estate markets. This was no doubt the case again in 1996, as those sectors that
generated superior returns generally were those that exhibited on balance the
following benign underlying property trends:
- - Strengthening tenant demand
- - Modest levels of new construction (particularly speculative building)
- - Asset values below replacement cost
- - High but declining property yields
Certainly this was the case with the full service hotel market and the office
sector, two groups that clearly outperformed during 1996. The outperformance of
the regional mall sector is frankly a bit more difficult to explain insofar as
underlying tenant demand remains spotty at best, competitive retail construction
levels remain robust and property values are in fact declining rather than
firming. It would appear in this case that some of the improvement in regional
mall retail relates to the fact that as bad as conditions are in this market,
they have failed to worsen in 1996, and some of the stronger players now have an
opportunity for the first time to purchase assets on an opportunistic basis.
Self storage, manufactured housing and industrial sectors produced returns that
approximately matched the overall industry. All three markets are generally in
equilibrium today, with a modest upward bias in underlying property values in
the face of continuing steady tenant growth and a resumption of selective new
development. While the fundamentals for these sectors are unlikely to improve
during the next twelve months and may, in certain circumstances, deteriorate, we
expect these groups to be market performers overall. Lastly, the strip shopping
center, apartment and factory outlet sectors clearly underperformed the REIT
market generally, with the outlet REITs bringing up the bottom of industry
performance for the second year in a row. While the circumstances of each sector
differ in important respects, all three suffer from a pace of new construction
that is accelerating and that in most cases match or exceed the level of tenant
demand. All three also suffer from a flattening or in some cases a softening of
private market investor demand, leading to mediocre valuation trends.
INVESTMENT STRATEGY
Against this backdrop, we continue to pursue a strategy of over-weighting those
sectors that offer the best underlying real estate fundamentals. Based on our
analysis we categorize the sectors as follows:
<TABLE>
<CAPTION>
UNDERPERFORM
- ------------------------------------------------------
<S> <C>
Class A Apartments Factory Outlets
Strip Shopping Centers Class B Regional Malls
Economy Lodging Sunbelt
<CAPTION>
MARKET PERFORMER
- ------------------------------------------------------
<S> <C>
Class B Apartments Industrial
Self Storage Class A Regional Malls
Suburban Office Midwest
<CAPTION>
OUTPERFORM
- ------------------------------------------------------
<S> <C>
CBD Office Manufactured Housing
Full-service Hotels Northeast/Pacific Coast
</TABLE>
Within this framework, we will, as discussed above, continue to select those
securities that we believe offer the best value relative to our estimate of
their intrinsic asset value.
Finally, on an administrative note, we had been using the NAREIT Equity Index
(excluding healthcare REITs) as our primary benchmark. During 1996, NAREIT (the
REIT industry association) decided that it would provide calculations for the
NAREIT Equity Index and discontinue providing information for the NAREIT Equity
Index excluding healthcare. As a result we will alter our primary benchmark to
be the NAREIT Equity Index. The following are the total return numbers for each
index for the full year 1996 and fourth quarter of 1996: for the NAREIT Equity
Index: 35.3% and 18.9%, for the NAREIT Equity Index excluding healthcare: 36.4%
and 19.4%.
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (90.2%)
APARTMENT (15.7%)
99,300 Avalon Properties, Inc. REIT...................... $ 2,855
207,600 Essex Property Trust, Inc. REIT................... 6,098
40,100 Evans Withycombe Residential, Inc. REIT........... 842
278,600 Irvine Apartment Communities, Inc. REIT........... 6,965
143,400 Merry Land & Investment Company, Inc. REIT........ 3,083
243,100 Oasis Residential, Inc. REIT...................... 5,531
306,200 Paragon Group, Inc. REIT.......................... 5,435
215,200 South West Property Trust REIT.................... 3,631
----------
34,440
----------
HEALTHCARE (6.7%)
11,900 Assisted Living Concepts, Inc..................... 181
7,200 Healthcare Realty Trust, Inc...................... 191
92,000 LTC Properties, Inc. REIT......................... 1,702
302,800 Nationwide Health Properties, Inc. REIT........... 7,343
154,600 Omega Healthcare Investors, Inc. REIT............. 5,140
----------
14,557
----------
LAND (2.3%)
449,400 Atlantic Gulf Communities Corp.................... 1,938
271,500 Catellus Development Corp......................... 3,088
----------
5,026
----------
LODGING/LEISURE (13.8%)
356,400 American General Hospitality Corp. REIT........... 8,465
57,100 Bristol Hotel Company............................. 1,813
68,800 Capstar Hotel Co.................................. 1,350
319,200 Host Marriott Corp................................ 5,107
473,000 John Q Hammons Hotels, Inc........................ 4,020
333,500 Servico, Inc...................................... 5,378
262,600 Suburban Lodges of America, Inc................... 4,202
----------
30,335
----------
MANUFACTURED HOME (5.4%)
179,200 Chateau Properties, Inc. REIT..................... 4,749
257,250 ROC Communities, Inc. REIT........................ 7,139
----------
11,888
----------
OFFICE AND INDUSTRIAL (33.6%)
INDUSTRIAL (9.3%)
193,600 East Group Properties REIT........................ 5,300
386,072 Meridian Industrial Trust, Inc. REIT.............. 8,107
(a)184,843 Meridian Industrial Trust, Inc., REIT
(Warrants)...................................... 1,155
11,100 Meridian Point Realty Trust '83 REIT.............. 32
296,900 Pacific Gulf Properties, Inc. REIT................ 5,790
150 Security Capital Industrial Trust REIT............ 3
----------
20,387
----------
OFFICE (18.4%)
263,200 Arden Realty Group, Inc........................... 7,304
538,354 Brandywine Realty Trust REIT...................... 10,498
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(d,e)610,000 Great Lakes, Inc. REIT............................ $ 7,930
39,500 Koger Equity, Inc. REIT........................... 741
244,000 Parkway Properties, Inc........................... 6,344
342,818 Trizec Hahn Corp. REIT............................ 7,542
----------
40,359
----------
OFFICE AND INDUSTRIAL (5.9%)
279,900 Bedford Property Investors, Inc. REIT............. 4,898
317,000 Prentiss Properties Trust REIT.................... 7,925
----------
12,823
----------
TOTAL OFFICE AND INDUSTRIAL................................. 73,569
----------
RETAIL (10.2%)
FACTORY OUTLET CENTER (0.4%)
118,400 Fac Realty, Inc. REIT............................. 784
----------
REGIONAL MALL (4.0%)
58,100 Taubman Centers, Inc. REIT........................ 748
273,000 Urban Shopping Centers, Inc. REIT................. 7,917
----------
8,665
----------
SHOPPING CENTER (0.1%)
22,000 IRT Property Co. REIT............................. 253
----------
STRIP CENTER (5.7%)
311,100 Alexander Haagen Properties, Inc. REIT............ 4,589
532,600 Burnham Pacific Property Trust REIT............... 7,989
----------
12,578
----------
TOTAL RETAIL................................................ 22,280
----------
SELF STORAGE (2.5%)
184,300 Shurgard Storage Centers, Inc., Series A, REIT.... 5,460
----------
TOTAL COMMON STOCKS (Cost $165,201)........................... 197,555
----------
PREFERRED STOCKS (0.0%)
OFFICE (0.0%)
(d,e)33,150 Great Lakes, Inc. REIT (Cost $0).................. --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (9.4%)
REPURCHASE AGREEMENT (9.4%)
$ 20,579 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $20,586,
collateralized by U.S. Treasury Bonds, 6.625%,
due 7/31/01, valued at $21,140 (Cost $20,579)... 20,579
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%) (Cost $185,780)................ $218,134
--------
OTHER ASSETS (2.5%)
Cash....................................... $ 559
Receivable for Portfolio Shares Sold....... 2,179
Receivable for Investments Sold............ 1,486
Dividends Receivable....................... 1,204
Interest Receivable........................ 3
Other...................................... 3 5,434
----------
LIABILITIES (-2.1%)
Payable for Investments Purchased.......... (3,256)
Payable for Portfolio Shares Redeemed...... (825)
Investment Advisory Fees Payable........... (285)
Administrative Fees Payable................ (25)
Custodian Fees Payable..................... (10)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (5)
Other Liabilities.......................... (57) (4,466)
---------- --------
NET ASSETS (100%)........................................ $219,102
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSISTS OF:
Paid in Capital................................... $181,156
Overdistributed Net Investment Income............. (2)
Accumulated Net Realized Gain..................... 5,594
Unrealized Appreciation on Investments............ 32,354
--------
NET ASSETS........................................ $219,102
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $210,368
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,597,483 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $14.41
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $8,734
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 606,905 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $14.39
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see Note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 2.5%
Banking 14.5%
Capital Goods 2.0%
Chemicals 1.8%
Communications 4.8%
Consumer-Durables 3.2%
Consumer-Retail 4.9%
Consumer-Service & Growth 4.0%
Consumer-Staples 9.7%
Energy 9.8%
Financial-Diversified 2.2%
Health Care 4.2%
Industrial 3.3%
Insurance 6.4%
Metals 0.6%
Paper & Packaging 4.0%
Services 1.1%
Technology 5.3%
Transportation 3.5%
Utilities 10.4%
Other 1.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO-CLASS
S&P 500 STOCK INDEX (1) A
<S> <C> <C>
1/31/90* $500,000 500000
10/31/1991 633500 557460
10/31/1992 695700 604880
12/31/1992 728150 638765
12/31/1993 801400 735485
12/31/1994 811900 726000
12/31/1995 1116687 970589
12/31/1996 1,373,078 1,162,086
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE S&P 500
AND THE INDATA EQUITY-MEDIAN INDICES(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 19.73% 14.92% 12.95%
PORTFOLIO -- CLASS
B(3)................. 18.57 N/A N/A
S&P 500............... 22.96 15.20 15.72
INDATA
EQUITY-MEDIAN........ 21.32 10.05 14.89
</TABLE>
1. The Indata Equity-Median Index and the S&P 500 Index are unmanaged indices of
common stocks. The Indata Equity-Median Index includes an average asset
allocation of 7.4% cash and 92.6% equity based on $464.9 billion in assets
among 1,277 portfolios for the year ended December 31, 1996.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
Our value investment philosophy for the Value Equity Portfolio is based on the
premise that a diversified portfolio of undervalued securities will outperform
the market over the long-term, and can be expected to preserve principal in a
difficult market environment.
Key aspects of our philosophy are as follows:
Reversion to mean valuation levels (return to the long term average) is the
most consistent and powerful force in investing.
We buy companies selling at less than our research measures to be their true
worth.
Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.
We limit our universe of investments to larger, liquid stocks. This is a
list similar to the S&P 500.
Investment decisions are based on research undertaken by the Morgan Stanley
Asset Management/Chicago investment team.
For the year ended December 31, 1996, the Portfolio had a total return of 19.73%
for the Class A shares and 18.57% for the Class B shares, as compared to a total
return of 22.96% for the S&P 500 Index and 21.32% for the Indata Equity-Median
Index. The average annual total return for the five-year period ended December
31, 1996 and for the period from inception on January 31, 1990 through December
31, 1996 was 14.92% and 12.95%, respectively, for the Class A shares as compared
to 15.20% and 15.72%, respectively, for the S&P 500 Index and 10.05% and 14.89%,
respectively for the Indata Equity-Median Index. According to LIPPER MUTUAL
FUNDS QUARTERLY, the average Equity Income mutual fund (value-style fund) had a
return of 18.83% for the year ended December 31, 1996.
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
P/E P/B
--------- ---
<S> <C> <C>
Value Equity Portfolio......................... 15.1x 2.4x
S&P 500........................................ 18.7x 4.3x
</TABLE>
Performance in 1996 was driven primarily by investment style and market
capitalization size. Growth stocks outperformed value stocks within the large
cap universe, and large cap stocks outperformed smaller cap stocks. For the
year, the S&P/Barra Growth Index
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
102
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
returned 23.97% and the S&P/Barra Value Index returned 22.99%. The larger cap
Russell 1000 returned 22.45% while the small cap Russell 2000 returned 16.49%.
Equity markets were very volatile during the year, although they continued the
strong advance from 1995 to set record highs. Moderate economic growth, low core
inflation trends, strong employment growth, slightly rising treasury rates, and
record stock mutual fund inflows characterized the first half of 1996. Mid-year,
however, the market deteriorated on fears of an overheating economy, rising
inflation and interest rate increases as the job market marched upward. When
clear signs of inflation failed to materialize and economic indicators became
mixed, the markets resumed the advance later in the second half. Large,
blue-chip stocks led the rally as investors sought safety and earnings certainty
in these names. Markets received a big boost from post-election optimism in
November, only to be spooked in December by comments from the Federal Reserve
Chairman.
Our bottom up value driven stock selection process resulted in certain industry
over/under weightings relative to the S&P 500. On a relative basis, an
overweighting in consumer durables and retail enhanced the performance of the
Portfolio, while underweightings in health care and consumer non-durables
detracted from performance. On an absolute basis, the best performing sectors in
the Portfolio for the year were retail, aerospace and defense, financial
services, energy, and consumer durables. Underperforming sectors included
industrials, health care, and business equipment and services.
The biggest contributor to performance was our overweighting in the retail
sector and the specific stocks held. Woolworth, the leading stock of the Dow
Jones Industrial Average this year, returned 69%. New management has been
successful in improving the company's financial position, paying down debt and
cutting costs. TJ Maxx was another strong performer, up 92% through the third
quarter, as it realized the benefits from acquiring Marshalls, and consolidated
its leading position in the off-price apparel segment. We pared back gradually
on the stock throughout the year as it moved toward our estimate of fair
valuation, and sold the remaining position in November. We also sold Kmart early
in the year, concerned over the increasing cash flow pressures and continued
management turnover at the company, and reinvested the proceeds in Woolworth.
Our aerospace and defense holding, United Technologies, returned 42% for the
year. The company has leading positions in its markets worldwide and is
benefiting from the current commercial airline cycle upturn.
Financial services holdings delivered extremely strong performance in 1996. The
banking industry continued to benefit from consolidation and a low interest rate
environment. BankAmerica returned 58%; Chase Manhattan 57%; Banker's Trust 44%;
Sallie Mae 44%; First of America 41%; Mellon Bank 38%. We continue to overweight
the sector as additional gains from consolidation and deregulation are possible.
During the year, we established a position in Bank of Boston.
A big surprise of the year was the continuing strength of oil prices. We
benefited from the strong fundamentals of the energy sector by maintaining a
market weight position in the sector throughout the year. We sold Royal Dutch
Petroleum and Texaco in the second quarter, while adding Mobil in the third
quarter. Mobil continues to benefit from cost cutting, yet lags somewhat in
performance compared to other major international oil companies. We also added
to our existing holdings of Atlantic Richfield and Exxon during the year.
The consumer durable sector had a good year due to the auto industry. Solid
personal income growth, low unemployment levels and high consumer confidence
drove consumer spending on items such as cars and appliances. We sold the
position in Ford after a strong run in the stock, and reinvested the proceeds in
Chrysler, after it dropped to the $26-27 range. Chrysler subsequently rebounded,
ending the year at $33, returning 25% for the year.
With the market up strong in the past two years, and valuations becoming
extended, we have focused more on stocks with above-market dividend yields. We
added to our existing high-yielding utility holdings and, in December,
established a new position in Northeast Utilities, yielding 7.5%. In the
telecommunications sector, the uncertainty from deregulation and a changing
competitive environment has resulted in attractive valuations in certain
companies. We sold Nynex and added US West Communications, which offers a higher
yield and potentially better price appreciation. We sold SBC Communications, a
relatively expensive regional phone company, and added AT&T. During the year,
AT&T spun-off both the
- --------------------------------------------------------------------------------
Value Equity Portfolio
103
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
communications equipment manufacturing unit, Lucent Technologies, and the
computer unit, NCR, and has begun re-focusing on the core communications
business. The company appears undervalued compared to its peers and offers an
above-market yield.
The tobacco companies were excellent buying opportunities this year, although
they were very volatile. We added RJR Nabisco to the Portfolio in the first
quarter, and Philip Morris in the second quarter. The fear of tobacco litigation
and settlements against the industry caused both stocks to drop significantly in
the third quarter, which we saw as a buying opportunity. Subsequently, both
rebounded strongly in the fourth quarter. Philip Morris ended the year up 31%,
while RJR still lags somewhat, up only 17% for the year. Both continue to offer
attractive yields and are the two biggest holdings in the Portfolio. In other
consumer staple holdings, we sold Heinz early in the year and continue to pare
back American Brands. One of the Portfolio's weakest performers included
Fleming, down 15% for the year. The company faces legal problems that included a
large settlement awarded against them which was later reversed.
In the services and growth sector, in which the Portfolio is underweight versus
the S&P 500, we added McGraw-Hill in the fourth quarter. As the economic cycle
has lengthened, concern has grown in the market about the possible slowing of
future corporate earnings. We felt McGraw-Hill addressed this concern as it
offers good earnings growth prospects at reasonable valuation levels.
The technology sector included the weakest performer in the Portfolio, Apple
Computer. Apple was down 35% for the year, as the company continues to
restructure its business. Harris Corporation was a strong contributor to the
sector, returning 28%. Early in the year, we added Texas Instruments when the
semiconductor industry and valuations were depressed. Texas Instruments has
since recovered, returning approximately 25% for the year.
The commodity industry sectors contained several weak performers in the
Portfolio. Eastman Chemical was down 9%, and Louisiana-Pacific, a forest
products company, was down 11% for the year, as overcapacity in key products of
both companies builds. Monsanto, another chemical holding, was a strong
performer, returning approximately 60% for the full year. We sold the position
in the fourth quarter as it reached what we believe was full valuation. We
reduced the exposure to the paper industry, by selling Weyerhauser, as the
industry struggles with a lack of pricing power and overcapacity. However,
Willamette Industries, another paper concern, returned 26% for the year.
We maintain a cautious view going into 1997 as valuation levels have become
somewhat extended. We continue to overweight financial services and utilities,
and underweight technology and health care.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.2%)
AEROSPACE (2.5%)
40,900 United Technologies Corp.......................... $ 2,699
----------
BANKING (14.5%)
17,750 BankAmerica Corp.................................. 1,771
26,400 Bank of Boston Corp............................... 1,696
25,700 Bankers Trust (New York) Corp..................... 2,217
27,400 Chase Manhattan Corp.............................. 2,445
47,400 First of America Bank Corp........................ 2,850
35,350 Mellon Bank Corp.................................. 2,510
59,600 PNC Bank Corp..................................... 2,242
----------
15,731
----------
CAPITAL GOODS (2.0%)
52,100 Deere & Co........................................ 2,117
----------
CHEMICALS (1.8%)
34,575 Eastman Chemical Co............................... 1,910
----------
COMMUNICATIONS (4.8%)
44,900 AT&T Corp......................................... 1,953
46,700 Sprint Corp....................................... 1,862
44,700 U.S. West, Inc.................................... 1,442
----------
5,257
----------
CONSUMER-DURABLES (3.2%)
52,100 Chrysler Corp..................................... 1,719
32,500 General Motors Corp............................... 1,812
----------
3,531
----------
CONSUMER-RETAIL (4.9%)
53,000 J.C. Penney Co., Inc.............................. 2,584
(a)126,800 Woolworth Corp.................................... 2,774
----------
5,358
----------
CONSUMER-SERVICE & GROWTH (4.0%)
20,400 Eastman Kodak Co.................................. 1,637
144,700 Ogden Corp........................................ 2,713
----------
4,350
----------
CONSUMER-STAPLES (9.7%)
20,600 American Brands, Inc.............................. 1,022
145,700 Fleming Cos., Inc................................. 2,514
32,000 Philip Morris Cos., Inc........................... 3,604
101,300 RJR Nabisco Holdings Corp......................... 3,444
----------
10,584
----------
ENERGY (9.8%)
54,800 Ashland, Inc...................................... 2,404
24,200 Atlantic Richfield Co............................. 3,207
29,000 Exxon Corp........................................ 2,842
17,500 Mobil Corp........................................ 2,139
----------
10,592
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL-DIVERSIFIED (2.2%)
25,850 Student Loan Marketing Association................ $ 2,407
----------
HEALTH CARE (4.2%)
66,400 Bausch & Lomb, Inc................................ 2,324
55,700 Baxter International, Inc......................... 2,284
----------
4,608
----------
INDUSTRIAL (3.3%)
112,100 Hanson plc ADR.................................... 757
47,100 Rockwell International Corp....................... 2,867
----------
3,624
----------
INSURANCE (6.4%)
59,000 American General Corp............................. 2,412
43,300 Lincoln National Corp............................. 2,273
38,600 St. Paul Cos., Inc................................ 2,263
----------
6,948
----------
METALS (0.6%)
10,000 Phelps Dodge Corp................................. 675
----------
PAPER & PACKAGING (4.0%)
107,900 Louisiana-Pacific Corp............................ 2,279
29,400 Willamette Industries, Inc........................ 2,047
----------
4,326
----------
SERVICES (1.1%)
25,700 McGraw-Hill Cos., Inc............................. 1,185
----------
TECHNOLOGY (5.3%)
(a)35,500 Apple Computer, Inc............................... 737
41,800 Harris Corp....................................... 2,868
33,689 Texas Instruments, Inc............................ 2,148
----------
5,753
----------
TRANSPORTATION (3.5%)
(a)18,300 AMR Corp.......................................... 1,613
75,900 Ryder System, Inc................................. 2,135
----------
3,748
----------
UTILITIES (10.4%)
80,100 GPU, Inc.......................................... 2,693
72,600 NIPSCO Industries, Inc............................ 2,877
37,900 Northeast Utilities System........................ 502
83,600 Pinnacle West Capital Corp........................ 2,654
62,400 Texas Utilities Co................................ 2,543
----------
11,269
----------
TOTAL COMMON STOCKS (Cost $89,447)............................ 106,672
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT (2.4%)
$ 2,623 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $2,623,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $2,670 (Cost $2,623)..... $ 2,623
----------
TOTAL INVESTMENTS (100.6%) (Cost $92,070)..................... 109,295
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.3%)
Dividends Receivable....................... $ 339
Receivable for Portfolio Shares Sold....... 32
Interest Receivable........................ 1
Other...................................... 6 378
-----
LIABILITIES (-0.9%)
Payable for Investments Purchased.......... (801)
Investment Advisory Fees Payable........... (122)
Administrative Fees Payable................ (16)
Payable for Portfolio Shares Redeemed...... (13)
Custodian Fees Payable..................... (6)
Directors' Fees and Expenses Payable....... (4)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (26) (990)
----- --------
NET ASSETS (100%)........................................ $108,683
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSISTS OF:
Paid in Capital........................ $ 87,025
Undistributed Net Investment Income.... 7
Accumulated Net Realized Gain.......... 4,426
Unrealized Appreciation on
Investments.......................... 17,225
----------
NET ASSETS............................. $ 108,683
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $106,128
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 7,638,343 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.89
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,555
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 184,013 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.89
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.2%
Banking 7.6%
Capital Goods 0.9%
Chemicals 0.8%
Communications 2.5%
Consumer - Durables 1.7%
Consumer - Retail 2.2%
Consumer - Service & Growth 1.8%
Consumer - Staples 4.7%
Energy 4.8%
Financial -Diversified 1.2%
Health Care 1.8%
Industrial 1.8%
Insurance 2.8%
Metals 1.3%
Paper & Packaging 1.6%
Services 0.6%
Technology 2.7%
Transportation 1.4%
Utilities 5.3%
U.S. Treasury Notes 42.0%
Other 9.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- --------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED PORTFOLIO-CLASS
INDATA BALANCED MEDIAN INDEX(1) A
<S> <C> <C>
2/20/90* $500,000 500000
10/31/1991 601750 582845
10/31/1992 659000 638635
12/31/1992 680250 656635
12/31/1993 747350 736015
12/31/1994 743800 718950
12/31/1995 929081 888838
12/31/1996 1,062,776 985,988
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO INDATA BALANCED-MEDIAN INDEX(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 10.93% 10.15% 10.39%
PORTFOLIO -- CLASS
B(3).................. 10.24 N/A N/A
INDEX................. 14.39 11.01 11.61
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 2.5% cash, 38.2% bonds and 59.3% equity based on $52.6 billion
in assets among 579 portfolios for the year ended December 31, 1996 (assumes
dividends reinvested). The index returns are gross of management fees; the
Portfolio returns are net of management fees and expenses.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Balanced Portfolio's value investment philosophy is based on the premise
that a diversified portfolio of undervalued equity securities and fixed income
securities will outperform the market over the long-term and can be expected to
preserve principal in a difficult market environment.
The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.
For the year ended December 31, 1996, the Portfolio had a total return of 10.93%
for the Class A shares and 10.24% for the Class B shares, as compared to a total
return of 14.39% for the Indata Balanced-Median Index. The average annual total
return for the five-year period ended December 31, 1996, and for the period from
inception on February 20, 1990 through December 31, 1996 for the Class A shares
was 10.15% and 10.39%, respectively, as compared to 11.01% and 11.61%,
respectively, for the Index.
Our asset allocation, based on market value at December 31, 1996, is as follows:
<TABLE>
<S> <C>
Equities............................................. 48.7%
Fixed Income......................................... 42.0
Cash................................................. 9.3
---------
100%
---------
---------
</TABLE>
EQUITIES
For the year ended December 31, 1996, the equity component of the Portfolio had
a gross return of 22.80%, compared to the S&P 500 return of 22.96%.
Performance in 1996 was driven primarily by investment style and market
capitalization size. Growth stocks outperformed value stocks within the large
cap universe, and large cap stocks outperformed smaller cap stocks. For the
year, the S&P/Barra Growth Index returned 23.97% and the S&P/Barra Value Index
returned 22.99%. The larger cap Russell 1000 returned 22.45% while the small cap
Russell 2000 returned 16.49%.
Equity markets were very volatile during the year, although they continued the
strong advance from 1995 to set record highs. Moderate economic growth, low core
inflation trends, strong employment growth,
- --------------------------------------------------------------------------------
Balanced Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
slightly rising treasury rates, and record stock mutual fund inflows
characterized the first half of 1996. Mid-year, however, the market deteriorated
on fears of an overheating economy, rising inflation and interest rate increases
as the job market marched upward. When clear signs of inflation failed to
materialize and economic indicators became mixed, the markets resumed the
advance later in the second half. Large, blue-chip stocks led the rally as
investors sought safety and earnings certainty in these names. Markets received
a big boost from post-election optimism in November, only to be spooked in
December by comments from the Federal Reserve Chairman.
The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the Value Equity Portfolio. The equity portion of the
Portfolio has a wide valuation gap as compared to the characteristics of the S&P
500.
<TABLE>
<CAPTION>
P/E P/B
--------- ---
<S> <C> <C>
Portfolio-equity portion....................... 15.1x 2.4x
S&P 500........................................ 18.7x 4.3x
</TABLE>
Our bottom up value driven stock selection process resulted in certain industry
over/under weightings relative to the S&P 500. On a relative basis, an
overweighting in consumer durables and retail enhanced the performance of the
Portfolio, while underweightings in health care and consumer non-durables
detracted from performance. On an absolute basis, the best performing sectors in
the Portfolio for the year were retail, aerospace and defense, financial
services, energy, and consumer durables. Underperforming sectors included
industrials, health care, and business equipment and services.
The biggest contributor to performance was our overweighting in the retail
sector and the specific stocks held. Woolworth, the leading stock of the Dow
Jones Industrial Average this year, returned 69%. New management has been
successful in improving the company's financial position, paying down debt and
cutting costs. TJ Maxx was another strong performer, up 92% through the third
quarter, as it realized the benefits from acquiring Marshalls, and consolidated
its leading position in the off-price apparel segment. We pared back gradually
on the stock throughout the year as it moved toward our estimate of fair
valuation, and sold the remaining position in November. We also sold Kmart early
in the year, concerned over the increasing cash flow pressures and continued
management turnover at the company, and reinvested the proceeds in Woolworth.
Our aerospace and defense holding, United Technologies, returned 42% for the
year. The company has leading positions in its markets worldwide and is
benefiting from the current commercial airline cycle upturn.
Financial services holdings delivered extremely strong performance in 1996. The
banking industry continued to benefit from consolidation and a low interest rate
environment. BankAmerica returned 58%; Chase Manhattan 57%; Banker's Trust 44%;
Sallie Mae 44%; First of America 41%; Mellon Bank 38%. We continue to overweight
the sector as additional gains from consolidation and deregulation are possible.
During the year, we established a position in Bank of Boston.
A big surprise of the year was the continuing strength of oil prices. We
benefited from the strong fundamentals of the energy sector by maintaining a
market weight position in the sector throughout the year. We sold Royal Dutch
Petroleum and Texaco in the second quarter, while adding Mobil in the third
quarter. Mobil continues to benefit from cost cutting, yet lags somewhat in
performance compared to other major international oil companies. We also added
to our existing holdings of Atlantic Richfield and Exxon during the year.
The consumer durable sector had a good year due to the auto industry. Solid
personal income growth, low unemployment levels and high consumer confidence
drove consumer spending on items such as cars and appliances. We sold the
position in Ford after a strong run in the stock, and reinvested the proceeds in
Chrysler, after it dropped to the $26-27 range. Chrysler subsequently rebounded,
ending the year at $33, returning 25% for the year.
With the market up strong in the past two years, and valuations becoming
extended, we have focused more on stocks with above-market dividend yields. We
added to our existing high-yielding utility holdings, and in December,
established a new position in Northeast Utilities, yielding 7.5%. In the
telecommunications sector, the uncertainty from deregulation and a changing
competitive environment has resulted in attractive valuations in certain
companies. We sold Nynex and added US West Communications, which offers a higher
yield and potentially better price
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
appreciation. We sold SBC Communications, a relatively expensive regional phone
company, and added AT&T. During the year, AT&T spun-off both the communications
equipment manufacturing unit, Lucent Technologies, and the computer unit, NCR,
and has begun re-focusing on the core communications business. The company
appears undervalued compared to its peers and offers an above-market yield.
The tobacco companies were excellent buying opportunities this year, although
they were very volatile. We added RJR Nabisco to the Portfolio in the first
quarter, and Philip Morris in the second quarter. The fear of tobacco litigation
and settlements against the industry caused both stocks to drop significantly in
the third quarter, which we saw as a buying opportunity. Subsequently, both
rebounded strongly in the fourth quarter. Philip Morris ended the year up 31%,
while RJR still lags somewhat, up only 17% for the year. Both continue to offer
attractive yields and are the two biggest holdings in the Portfolio. In other
consumer staple holdings, we sold Heinz early in the year and continue to pare
back American Brands. One of the Portfolio's weakest performers included
Fleming, down 15% for the year. The company faces legal problems that included a
large settlement awarded against them which was later reversed.
In the services and growth sector, in which the Portfolio is underweight versus
the S&P 500, we added McGraw-Hill in the fourth quarter. As the economic cycle
has lengthened, concern has grown in the market about the possible slowing of
future corporate earnings. We felt McGraw-Hill addressed this concern as it
offers good earnings growth prospects at reasonable valuation levels.
The technology sector included the weakest performer in the Portfolio, Apple
Computer. Apple was down 35% for the year, as the company continues to
restructure its business. Harris Corporation was a strong contributor to the
sector, returning 28%. Early in the year, we added Texas Instruments when the
semiconductor industry and valuations were depressed. Texas Instruments has
since recovered, returning approximately 25% for the year.
The commodity industry sectors contained several weak performers in the
Portfolio. Eastman Chemical was down 9%, and Louisiana-Pacific, a forest
products company, was down 11% for the year, as overcapacity in key products of
both companies builds. Monsanto, another chemical holding, was a strong
performer, returning approximately 60% for the full year. We sold the position
in the fourth quarter as it reached what we believe was full valuation. We
reduced the exposure to the paper industry, by selling Weyerhauser, as the
industry struggles with a lack of pricing power and overcapacity. However,
Willamette Industries, another paper concern, returned 26% for the year.
We maintain a cautious view going into 1997 as valuation levels have become
somewhat extended. We continue to overweight financial services and utilities,
and underweight technology and health care.
FIXED INCOME
The fixed income component of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the year ended
December 31, 1996, the fixed income portion of the Portfolio had a total return
of 4.21% compared to a return of 4.05% for the Lehman Intermediate-
Government/Corporate Index (MSAM/Chicago's fixed-income benchmark).
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.1 years. During the year, interest rates rose across all maturity
spectrums, with the largest increase occurring in the five and ten-year
maturities. This upward shift in the yield curve has depressed the performance
of the Portfolio. With inflation at approximately the 3% level, and intermediate
yields (5 year maturity) at the 6.2% level, we are comfortable with our current
position at a weighted average maturity of 3.3 years and an average duration of
3.0.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Balanced Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (48.7%)
AEROSPACE (1.2%)
1,550 United Technologies Corp.......................... $ 102
----------
BANKING (7.6%)
850 BankAmerica Corp.................................. 85
1,200 Bank of Boston Corp............................... 77
950 Bankers Trust (New York) Corp..................... 82
950 Chase Manhattan Corp.............................. 85
1,800 First of America Bank Corp........................ 108
1,300 Mellon Bank Corp.................................. 92
2,450 PNC Bank Corp..................................... 92
----------
621
----------
CAPITAL GOODS (0.9%)
1,900 Deere & Co........................................ 77
----------
CHEMICALS (0.8%)
1,225 Eastman Chemical Co............................... 68
----------
COMMUNICATIONS (2.5%)
2,000 AT&T Corp......................................... 87
1,450 Sprint Corp....................................... 58
1,800 U.S. West, Inc.................................... 58
----------
203
----------
CONSUMER-DURABLES (1.7%)
2,050 Chrysler Corp..................................... 68
1,350 General Motors Corp............................... 75
----------
143
----------
CONSUMER-RETAIL (2.2%)
1,950 J.C. Penney Co., Inc.............................. 95
3,800 Woolworth Corp.................................... 83
----------
178
----------
CONSUMER-SERVICE & GROWTH (1.8%)
700 Eastman Kodak Co.................................. 56
4,700 Ogden Corp........................................ 88
----------
144
----------
CONSUMER-STAPLES (4.7%)
850 American Brands, Inc.............................. 42
4,900 Fleming Cos., Inc................................. 85
1,175 Philip Morris Cos., Inc........................... 132
3,800 RJR Nabisco Holdings Corp......................... 129
----------
388
----------
ENERGY (4.8%)
2,000 Ashland, Inc...................................... 88
950 Atlantic Richfield Co............................. 126
1,075 Exxon Corp........................................ 105
600 Mobil Corp........................................ 73
----------
392
----------
FINANCIAL-DIVERSIFIED (1.2%)
1,050 Student Loan Marketing Association................ 98
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
HEALTH CARE (1.8%)
2,450 Bausch & Lomb, Inc................................ $ 86
1,500 Baxter International, Inc......................... 61
----------
147
----------
INDUSTRIAL (1.8%)
4,450 Hanson plc ADR.................................... 30
1,950 Rockwell International Corp....................... 119
----------
149
----------
INSURANCE (2.8%)
1,650 American General Corp............................. 67
1,650 Lincoln National Corp............................. 87
1,300 St. Paul Cos., Inc................................ 76
----------
230
----------
METALS (1.3%)
1,550 Phelps Dodge Corp................................. 105
----------
PAPER & PACKAGING (1.6%)
2,400 Louisiana-Pacific Corp............................ 51
1,100 Willamette Industries, Inc........................ 76
----------
127
----------
SERVICES (0.6%)
1,000 McGraw-Hill Companies, Inc........................ 46
----------
TECHNOLOGY (2.7%)
900 Apple Computer, Inc............................... 19
1,625 Harris Corp....................................... 112
1,400 Texas Instruments, Inc............................ 89
----------
220
----------
TRANSPORTATION (1.4%)
(a)700 AMR Corp.......................................... 62
1,950 Ryder System, Inc................................. 55
----------
117
----------
UTILITIES (5.3%)
3,350 GPU, Inc.......................................... 113
2,900 NIPSCO Industries, Inc............................ 115
1,400 Northeast Utilities System........................ 18
3,000 Pinnacle West Capital Corp........................ 95
2,350 Texas Utilities Co................................ 96
----------
437
----------
TOTAL COMMON STOCKS (Cost $3,191)............................. 3,992
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITY (42.0%)
US TREASURY NOTE (42.0%)
$ 3,503 U.S. Treasury Note, 5.50%, 4/15/00 (Cost $3,408).. 3,441
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT (4.2%)
$ 342 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $342,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $348 (Cost $342)......... $ 342
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (94.9%) (Cost $6,941).................. 7,775
--------
OTHER ASSETS (5.8%)
Cash....................................... $ 1
Receivable for Investments Sold............ 403
Interest Receivable........................ 41
Dividends Receivable....................... 12
Receivable from Investment Adviser......... 9
Receivable for Fund Shares Sold............ 6 472
-----
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (28)
Custodian Fees Payable..................... (4)
Administrative Fees Payable................ (2)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (23) (58)
----- --------
NET ASSETS(100%)......................................... $8,189
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 7,141
Overdistributed Net Investment
Income............................... (1 )
Accumulated Net Realized Gain.......... 215
Unrealized Appreciation on
Investments.......................... 834
----------
NET ASSETS............................. $ 8,189
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $5,992
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 731,464 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $8.19
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,197
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 268,688 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $8.18
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Algeria 2.2%
Argentina 14.4%
Brazil 20.3%
Bulgaria 9.2%
Croatia 1.5%
Ecuador 7.4%
Ivory Coast 0.7%
Jamaica 2.6%
Mexico 14.8%
Morocco 3.3%
Panama 2.9%
Peru 5.5%
Philippines 1.8%
Russia 11.2%
Venezuela 7.6%
Other -5.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- --------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO-CLASS
JP MORGAN EMERGING MARKETS BOND INDEX (1) A
<S> <C> <C>
2/1/94* $500,000 $500,000
12/31/1994 $406,550 $429,500
12/31/1995 $518,514 $550,748
12/31/1996 $694,653 $828,986
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE J.P. MORGAN
EMERGING MARKETS BOND INDEX(1)
- -------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 50.52% 18.94%
PORTFOLIO -- CLASS B............. 48.52 N/A
INDEX............................ 33.97 11.94
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government,
government-related and corporate issuers located in emerging countries.
For the year ended December 31, 1996, the Portfolio had a total return of 50.52%
for the Class A shares and 48.52% for the Class B shares as compared to a total
return of 33.97% for the J.P. Morgan Emerging Markets Bond Index. The average
annual total return for the period from inception on February 1, 1994 through
December 31, 1996 was 18.94% for the Class A shares as compared to 11.94%,
respectively, for the Index. As of December 31, 1996, the Portfolio had a 30-day
yield of 10.46% for the Class A shares and 10.16% for the Class B shares. This
yield has been computed using the SEC formula modified to exclude the effect of
the Portfolio's per share amount of realized gains distributed during December
1996. Including this amount, the 30-day yield would be 16.37% for the Class A
shares and 15.89% for the Class B shares.
For the three months ended December 31, 1996 the Portfolio had a total return of
8.96% for the Class A shares and 8.82% for the Class B shares as compared to a
total return of 7.05% for the Index.
1996 was a stellar year for emerging markets debt. The market experienced a
dramatic re-pricing of credit risk despite a volatile year for U.S. bonds. The
underlying improvement in credit fundamentals finally was recognized by
investors. The inflow of liquidity into this market resulted in a credit spread
tightening of about 400 basis points on average. The average masks a wide
dispersion in performance of various individual countries. Argentina, Mexico and
Brazil lagged the market during the first half of the year and made up some
relative performance during the second. The high-yielding, oil exporting
countries such as Algeria, Venezuela, Ecuador and Nigeria steadily outperformed
for most of the year and the smaller Brady countries like Peru and Panama
benefited from lower liquidity as their economic performance improved during
1996.
Greater institutional participation in the market gradually led to a decline in
volatility as long-term investors replaced the trading oriented accounts as the
dominant players in the market. Volatility in the
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
options markets declined steadily throughout the year to end the year at roughly
50% of the levels seen at the beginning of the period.
The market also became more efficient in terms of relative pricing of securities
both within one country as well as across countries. Arbitrage activity made
sure that relative spreads were more closely aligned to levels dictated by bond
fundamentals.
As we look into 1997, we expect the market to benefit from some of the positive
undercurrents that we have experienced in 1996. Emerging markets debt has
finally been accepted as a part of the mainstream global fixed income markets.
Equity-type returns earned in the first few years of its development will
obviously be a thing of the past. Lower and more stable expected returns will be
the norm for the years to come. Lower volatility and falling correlations with
other major asset classes will provide the fundamental underpinnings of
increased allocations to this sector. Continued spread tightening to "fair
value" will result in outperformance relative to other fixed income markets in
the world.
By our estimates "fair value" on average is another 100 basis points away in
terms of credit spreads. The improvement in individual economic environments
justifies further tightening in credit spreads. Emerging countries are not
vulnerable, to the same extent as in 1994, to a financial shock. We do not
currently see the usual warning signs such as overvalued currencies, excessive
concentration of funding in the short end of the market, vulnerable banking
systems and excessive speculative activity. Potential areas of concern remain
those linked to domestic politics, as some countries face important elections
during second half of 1997. The political landscape at the beginning of the year
does not signal any major reverses to the climate of a continued commitment to
economic reform. Voter displeasure over the severity of the 1995 recessions and
only slight relief from the recovery so far for the beleaguered consumer should
not result in any reversal in the nature of orthodox economic policies.
To summarize, we believe the emerging debt markets can look forward to a year of
12-18% total return, an outcome fixed income investors should be extremely
comfortable with. Any major corrections, not driven by changes in credit risk
perceptions, should be viewed as opportunities to increase commitments to the
asset class.
The major risk to the story remains a possible tightening of monetary policy by
the Federal Reserve Bank, which could temporarily derail the trend for continued
spread tightening. In that environment, we believe there will be few places to
hide barring cash and emerging markets fixed income could end up in the
outperforming camp even in a down year. Currently, we do not have sufficient
data to be able to offer reasonable estimates of the probability of such an
event, but it does not seem likely of being more than 20%.
During 1996 we were successful in terms of picking up the major currents in the
markets and employed investment strategies that helped us outperform. We were,
for the most part of the year overweight the oil rich, high-yielding sector of
Venezuela, Algeria, Ecuador and Nigeria as we expected these countries to
endeavor to make some progress in stabilization and structural reform as well as
benefit from strong revenues from their oil exporting sectors. Exposures to Peru
and Panama remained at a steady 3-4% of the Portfolio as we believed that their
improving economic prospects, closure of their Brady restructuring and low
floating stock should buoy asset prices. Argentina and Mexico were underweighted
during the first half of the year as the market remained skeptical about the
strength of the economic recoveries and overweighted during the second half as
evidence of their strong rebounds surfaced.
Brazil remains a solid economic story but was buffeted by political headwinds as
the reform process lost momentum during the year. The long-term viability of the
Real plan in the absence of fiscal reform remains in doubt and questions emerged
within the investment community of the similarities of Brazil's position with
that of Mexico in 1994/1995. An appreciating currency, emerging trade deficits,
a loose fiscal and tight monetary policy were not healthy signs. In our opinion,
the political process is key to long-term sustainable growth and progress on
reducing the fiscal deficit is vital during 1997. Any delays in tackling this
key issue is bound to result in instability in the foreign exchange, interest
rates and other financial markets of Brazil later during the year.
Russia was one of our success stories in 1996. Cheap assets because of a murky
political situation during the pre-election period prompted us to build a
substantial overweight in the non-performing loans of the sovereign. Our
analysis indicated that whatever the complexion of the new government the
economic
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
situation and future policies could not justify credit spreads in excess of 2000
basis points. The elections subsequently turned out in favor of the reformers
and market oriented parties and continued official and IMF assistance resulted
in a dramatic rally in the prices of Russian assets for most of the year.
Our non-hard currency exposure was limited for the most part to those situations
where we were receiving high real interest rates and buying undervalued
currencies. Mexico and Turkey's local markets were two profitable investments. A
foray into the South African Rand market did not prove to be profitable as we
misjudged the lack of political will to defend the currency from speculative
attack.
During the first few weeks of 1997, allocations are relatively unchanged barring
an increase in Bulgaria. A lack of alternatives to a currency board and
continued IMF assistance seems to make these assets cheap. Political turbulence
and civil unrest should only strengthen the case of the reformers as the
incumbent Socialist party has allowed the situation to drift to the point of
economic collapse. Fresh elections could improve the caliber of the governing
elites. Delays in the adoption of the IMF program will bring up the issue of a
potential default if no changes to economic policies are made. We believe that
it is in nobody's interest in Bulgaria and outside to precipitate the first
Brady default.
Paul Ghaffari
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
DEBT INSTRUMENTS (105.3%)
ALGERIA (2.2%)
LOAN AGREEMENT (2.2%)
U.S.$ (r)4,400 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 7.00%, 12/31/00................ $ 3,399
----------
ARGENTINA (14.4%)
BONDS (14.4%)
3,800 Republic of Argentina BOCON, Series 2, (Floating
Rate), PIK, 5.375%, 9/01/02..................... 4,068
5,000 Republic of Argentina Discount Bonds, (Floating
Rate), 6.375%, 3/31/23.......................... 3,856
(s)16,856 Republic of Argentina, Series L, "Euro", (Floating
Rate), 6.625%, 3/31/05.......................... 14,649
----------
22,573
----------
BRAZIL (20.3%)
BONDS (20.3%)
11,000 Brazil MYDFA Trust Certificates, (Floating Rate),
6.688%, 9/15/07................................. 9,432
(e)3,000 Comtel Brasileira Ltd., (Yankee), 10.75%,
9/26/04......................................... 3,096
2,750 Federative Republic of Brazil Debt Conversion
Bond, Series Z-L, (Floating Rate) 6.563%,
4/15/12......................................... 2,087
(s)17,550 Federative Republic of Brazil, Series C, "Euro,"
(Floating Rate), PIK, 8.00%, 4/15/14............ 12,938
3,225 Federative Republic of Brazil Par Bonds, Series
Z-L, (Floating Rate), 5.00%, 4/15/24............ 2,026
2,100 TV Filme Inc., 12.875%, 12/15/04.................. 2,110
----------
31,689
----------
BULGARIA (9.1%)
BONDS (9.1%)
(s)5,100 Bulgaria Discount Bond, Series A, "Euro,"
(Floating Rate) 6.688%, 7/28/24................. 2,897
(n)14,600 Bulgaria Front Loaded Interest Reduction Bond,
Series A, 2.25%, 7/28/12........................ 5,612
11,000 Bulgaria Interest Arrears PDI Bond, (Floating
Rate), 6.688%, 7/28/11.......................... 5,665
----------
14,174
----------
CROATIA (1.5%)
BOND (1.5%)
2,500 Government of Croatia, Series B, (Floating Rate),
6.688%, 7/31/06................................. 2,428
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ECUADOR (7.4%)
BOND (7.4%)
U.S.$(s)18,769 Republic of Ecuador PDI Bond, (Floating Rate),
PIK, 6.50%, 2/27/15............................. $ 11,537
----------
IVORY COAST (0.7%)
LOAN AGREEMENT (0.7%)
FRF (b)15,000 Ivory Coast Loan Agreement........................ 1,019
----------
JAMAICA (2.6%)
BOND (2.6%)
U.S.$(e)4,000 Mechala Group, Jamaica, 12.75%, 12/30/99.......... 4,013
----------
MEXICO (14.8%)
BONDS (14.8%)
MXP 19,092 Banamex Pagare Discount Bond, 4/03/97............. 2,255
32,143 Banamex Pagare Discount Bond, 10/09/97............ 3,346
ZAR 8,000 Nacional Financiera SNC, 17.00%, 2/26/99.......... 1,646
U.S.$ 1,500 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.453%, 12/31/19 (Value
Recovery Rights Attached)....................... 1,290
2,000 United Mexican States Discount Bond, Series C,
(Floating Rate) 6.375%, 12/31/19 (Value Recovery
Rights Attached)................................ 1,720
12,300 United Mexican States Global Bond, 11.375%,
9/15/16......................................... 12,900
----------
23,157
----------
MOROCCO (3.3%)
LOAN AGREEMENT (3.3%)
(l)6,300 Kingdom of Morocco Restructuring and Consolidating
Agreement, Tranche A, (Floating Rate), 6.375%,
1/01/09 (Participation: J.P. Morgan)............ 5,201
----------
PANAMA (2.9%)
BONDS (2.9%)
(e,r)2,962 Republic of Panama Interest Reduction Bond,
(Floating Rate), 3.50%, 7/17/14................. 2,062
(r)3,200 Republic of Panama PDI Bond, (Floating Rate), PIK,
6.75%, 7/17/16.................................. 2,505
----------
4,567
----------
PERU (5.5%)
NOTE (5.5%)
(b,k)9,699 Peru Working Capital Lines........................ 8,535
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (1.8%)
BOND (1.8%)
U.S.$ 2,600 Philippine Long Distance Telephone Global Bond,
9.25%, 6/30/06.................................. $ 2,815
----------
RUSSIA (11.2%)
BONDS (3.6%)
(e)9,050 Ministry of Finance Tranche IV, GDR, 3.00%,
5/14/03......................................... 5,537
112 Ministry of Finance Tranche IV, (Letter of
Entitlement), 3.00%, 5/14/03.................... 69
----------
5,606
----------
LOAN AGREEMENT (4.8%)
(b,k)9,450 Bank for Foreign Economic Affairs................. 7,542
----------
NOTE (2.8%)
(e,v) Russia Principal Notes, 12/29/49.................. 2,705
4,600
(e,v) Russian Interest Arrears Note, 12/29/49........... 1,736
2,500
----------
4,441
----------
17,589
----------
VENEZUELA (7.6%)
BONDS (7.6%)
750 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series A, (Floating Rate),
6.625%, 3/31/07................................. 670
(s)10,000 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series B, (Floating Rate),
6.438%, 3/31/07................................. 8,937
2,750 Republic of Venezula Discount Bonds, Series A,
(Floating Rate), 6.438%, 3/31/20................ 2,283
----------
11,890
----------
TOTAL DEBT INSTRUMENTS (Cost $157,730)........................ 164,586
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
VENEZUELA (0.0%)
(a)19,635 Republic of Venezuela Oil, expiring 3/31/20 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
<C> <S> <C>
- ----------
PURCHASED OPTIONS (0.1%)
BULGARIA (0.1%)
(a)75,000 Bulgaria Front Loaded Interest Reduction Bond,
expiring 3/24/97, strike price U.S.$40.57....... 169
(a)90,000 Bulgaria Interest Arrears Bond, expiring 1/06/97,
strike price U.S.$51.50......................... 38
----------
TOTAL PURCHASED OPTIONS (Cost $443)........................... 207
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (11.6%)
REPURCHASE AGREEMENT (11.6%)
U.S.$18,194 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at 18,200,
collateralized by U.S. Treasury Bonds, 7.25%,
due 5/15/16, valued at $18,361 (Cost $18,194)... $ 18,194
----------
FOREIGN CURRENCY (0.0%)
DEM 1 Deutsche Mark (Cost $1)........................... 1
----------
TOTAL INVESTMENTS (117.0%) (Cost $176,368).................... 182,988
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (28.7%)
Cash....................................... $ 374
Receivable for Investments Sold............ 29,482
Receivable due from Broker................. 11,226
Interest Receivable........................ 3,789
Receivable for Portfolio Shares Sold....... 18
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 11
Other...................................... 10 44,910
----------
LIABILITIES (-45.7%)
Payable for Reverse Repurchase Agreement... (34,545)
Payable for Investments Purchased.......... (26,715)
Securities Sold Short, at Value (Proceeds
$8,832).................................. (9,172)
Investment Advisory Fees Payable........... (457)
Interest Payable on Securities Sold Short.. (173)
Custodian Fees Payable..................... (47)
Administrative Fees Payable................ (22)
Payable for Portfolio Shares Redeemed...... (21)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (343) (71,503)
---------- --------
NET ASSETS (100%)........................................ $156,395
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $139,098
Overdistributed Net Investment Income............. (76)
Accumulated Net Realized Gain..................... 11,231
Unrealized Appreciation on Investments, Foreign
Currency Translations and Securities Sold
Short........................................... 6,142
--------
NET ASSETS........................................ $156,395
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $152,142
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 20,192,678 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.54
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $4,253
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 564,768 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.53
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing -- in default.
(e) -- 144A Security -- certain conditions for public sale may exist.
(k) -- Under restructuring at December 31, 1996 -- See Note A-7 to financial
statements
(l) -- Participation interests were acquired through the financial
institutions listed parenthetically.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity.
(r) -- Issuer is making partial interest payments
(s) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1996 -- See Note A-4
to financial statements.
(v) -- When-issued security -- see Note A-7 to financial statements.
FRF -- French Franc
GDR -- Global Depositary Receipt
MXP -- Mexican Peso
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
ZAR -- South African Rand
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect at
December 31, 1996.
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
ECUADOR
BONDS
$ 5,287 Republic of Ecuador PDI Bond, (Floating Rate),
PIK , 6.50%, 2/27/15........................... $ 3,250
--------
MEXICO
BOND
5,600 United Mexican States 11.50%, 5/15/26............ 5,922
--------
TOTAL SECURITIES SOLD SHORT (Proceeds $8,832)............... $ 9,172
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- ------ ----------- ------------ ------ ------------
U.S.$ 958 $ 958 1/02/97 FRF 5,025 $ 969 $ 11
------
------ ------ ---
------ ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Securities 5.6%
Corporate Bonds & Notes 24.5%
Foreign Government & Agency Obligations 11.2%
U.S. Government & Agency Obligations 54.9%
Other 3.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED PORTFOLIO-CLASS
LEHMAN AGGREGATE BOND INDEX (1) A
<S> <C> <C>
5/15/91* 500000 500000
10/31/91 537100 535590
10/31/92 589900 592415
12/31/92 599400 598440
12/31/93 657800 652710
12/31/94 638650 632500
12/31/95 756673 751157
12/31/96 784,140 785,785
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE LEHMAN AGGREGATE
BOND INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------
AVERAGE ANNUAL
ONE YEAR FIVE YEARS
------------- ------------------
<S> <C> <C>
PORTFOLIO - CLASS A..................................................................... 4.61% 7.00%
PORTFOLIO - CLASS B(3).................................................................. 4.35 N/A
INDEX................................................................................... 3.63 7.04
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO - CLASS A..................................................................... 8.35%
PORTFOLIO - CLASS B(3).................................................................. N/A
INDEX................................................................................... 8.31
</TABLE>
1. The Lehman Aggregate Bond Index is an unmanaged index made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Fixed Income Portfolio invests primarily in a diversified portfolio of U.S.
Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.
For the year ended December 31, 1996, the Portfolio had a total return of 4.61%
for the Class A shares and 4.35% for the Class B shares as compared to a total
return of 3.63% for the Lehman Aggregate Bond Index. The average annual total
return for the five years ended December 31, 1996 and for the period from
inception on May 15, 1991 through December 31, 1996 was 7.00%, and 8.35%,
respectively, for the Class A shares as compared to 7.04% and 8.31%,
respectively, for the Index. As of December 31, 1996, the Portfolio had an SEC
30-day yield of 6.39% for the Class A shares and 6.27% for the Class B shares.
After excellent performance in 1995, the fixed income markets provided rather
disappointing results in 1996. In fact, the 3.63% total return of the Lehman
Aggregate Index and the 2.90% return for the Lehman Government/ Corporate Index
were their third lowest returns over the past fifteen years.
Investors began 1996 in a very optimistic, upbeat mood. The shift in psychology
was gradual. Winter storms, producing one of the snowiest winters on record, led
to declines in most economic indicators. On January 31, 1996 the Federal Reserve
lowered both the discount rate and Federal Funds rate by 1/4%. This would be the
only change in monetary policy for 1996.
Concerns began to rise that there may be a change coming on the political
landscape particularly if control of Congress were to shift back to the
Democrats. This, along with significant gains in employment growth and other
better than expected economic comparisons sent bond prices lower. During the
first half of 1996 long Treasury prices declined almost fourteen points.
Unlike the first half of the year, in which a consensus developed that the
economy was growing rapidly, the second half of 1996 was characterized by
considerable debate over the strength of the economy. Even though there were few
signs of inflationary pressures, market participants generally agreed that
without a slowdown in growth, the Federal Reserve would need to tighten to
prevent such pressures from emerging.
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
In contrast to the third quarter when interest rates fluctuated within a narrow
trading range, rates moved much more sharply during the fourth quarter. Over the
course of October and November, yields fell between 50 and 60 basis points
across the yield curve as the market responded to signals of a slowing economy
and subdued inflation. During much of the third quarter, market participants had
feared that without a slowdown in economic growth, the Federal Reserve would
tighten to prevent the emergence of inflationary pressures. As such, they sought
confirmation that the economy was slowing sufficiently to eliminate the risk of
a Fed tightening. The economic data that emerged early in the quarter did indeed
provide the necessary confirmation that growth had slowed, inflation remained
well under control and the Fed was unlikely to tighten. With no need to price in
the risk of a Fed tightening, interest rates rallied substantially.
During December, however, rates backed up almost 30 basis points. Cautionary
comments concerning the level of equity valuations by Fed Chairman Greenspan
started the backup in yields. A view that interest rates may have fallen too
quickly and some signs of a return to a stronger growth path late in the month
contributed to further increases.
Overall, although the level of rates was lower at the end of the fourth quarter
than at the start, market uncertainty remains high. With growth picking up again
following its earlier slowdown, market participants will continue to seek more
information to discern whether the faster growth pace is representative of the
fundamental trend and the earlier slowdown merely a temporary deviation from
that trend or whether the reverse is true. The uncertainty again leaves market
participants questioning the future course of Fed policy.
From a sector standpoint, non-Treasury sectors continued to exhibit the strong
performance that they have all year as investor demand for yield spread product
remained exceptionally strong. While corporate spreads have frequently shown a
tendency to widen during the fourth quarter, they did not do so in 1996. Despite
heavy issuance, spreads generally ended the year at their tightest levels of the
year, supported by continued credit strength and excellent market technicals.
Mortgage-backed securities continued to outperform comparable duration
Treasuries despite the increased market volatility. Likewise, asset-backed
securities continued to provide incremental return over the quarter.
Helped by the backup in U.S. rates in December, foreign bond markets continued
to outperform the U.S. market. German bond yields fell slightly more than U.S.
bond yields during the quarter. Higher yielding European bond markets were again
standout performers, with interest rate declines approximating 100 basis points
over the quarter.
FOURTH QUARTER STRATEGY REVIEW
While our strategy emphasis during the fourth quarter continued to focus on
sector allocation, we also felt that a slight extension in duration was
appropriate for our portfolio. We viewed such an extension as providing some
protection against a potential lag in the performance of our non-Treasury
holdings in an ongoing market rally. In terms of sectors, we maintained our
overweight in discount mortgage-backed securities, simply fine tuning our
security selection as opportunities arose. We found a number of opportunities to
increase our corporate holdings during the quarter. In particular, Yankee issues
and bank capital notes (a new structure with over $15 billion of issuance during
the quarter) represented attractive relative value. Finally, we maintained a
weighting in hedged foreign bonds.
FIRST QUARTER 1997 OUTLOOK
Our focus in the first quarter of 1997 should remain one of identifying
attractive sector and security specific opportunities. We recognize that in a
compressed yield spread environment such as we have currently, this may be
particularly challenging. The outlook for yield spread product remains
favorable, however, and we expect to continue overweighting spread advantaged
sectors. In terms of interest rate risk, we reduced our portfolio duration to
slightly short of our benchmark at the start of the quarter, viewing the market
somewhat less favorably in a risk/reward context. Finally, we expect to continue
our use of hedged foreign bonds. Although the prospective return advantages
relative to U.S. bonds are less than in 1996, total return opportunities are
still favorable relative to the U.S. markets.
Warren Ackerman, III
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Fixed Income Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FIXED INCOME SECURITIES (96.2%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (54.9%)
U.S. TREASURY BOND (1.8%)
$ 2,500 6.25%, 8/15/23.................................... $ 2,344
----------
U.S. TREASURY NOTES (15.6%)
10,000 6.25%, 5/31/00.................................... 10,041
10,000 7.25%, 8/15/04.................................... 10,525
----------
20,566
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
11 13.00%, 9/01/10................................... 13
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (19.8%)
4,613 6.00%, 9/01/10.................................... 4,455
5,591 6.00%, 2/01/11.................................... 5,400
3,818 7.00%, 3/01/11.................................... 3,821
1,642 6.00%, 5/01/11.................................... 1,579
2,239 6.00%, 5/01/11.................................... 2,152
9,166 6.50%, 4/01/24.................................... 8,802
----------
26,209
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (17.7%)
7,524 6.00%, 2/15/24.................................... 7,013
8,883 7.00%, 5/15/24.................................... 8,728
7,890 7.00%, 3/15/26.................................... 7,718
----------
23,459
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................ 72,591
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATION (11.2%)
2,500 Republic of Colombia (Yankee) 7.25%, 2/23/04...... 2,444
DEM 13,500 Treuhandanstalt 6.75%, 5/13/04.................... 9,402
$ (e)3,000 United Mexican States 7.563%, (Floating Rate),
8/06/01......................................... 3,007
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATION.............. 14,853
----------
CORPORATE BONDS AND NOTES (24.5%)
BROADCAST -- RADIO & TELEVISION (1.8%)
2,500 News America Holdings 7.75%, 12/01/45............. 2,328
----------
FINANCE (22.7%)
2,000 Capital One Bank 6.47%, 7/31/98................... 2,003
4,000 Ford Motor Credit Co. 6.25%, 11/08/00............. 3,962
5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,135
(e)4,000 Goldman Sachs Group 6.25%, 2/01/03................ 3,894
(e)2,500 First Chicago NBD Corp., Series B, 7.75%,
12/01/26........................................ 2,417
3,000 Lehman Brothers Holdings, Inc. 7.25%, 4/15/03..... 3,019
(e)2,500 Liberty Mutual 7.875%, 10/15/26................... 2,509
(e)2,500 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26......................................... 2,714
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
$ 3,000 Travelers Capital, Series III, 7.625%, 12/01/36... $ 2,911
(e)1,500 USF&G Capital Corp., Series 1, 8.50%, 12/15/45.... 1,516
----------
30,080
----------
TOTAL CORPORATE BONDS AND NOTES............................. 32,408
----------
ASSET BACKED SECURITIES (5.6%)
12 Federal National Mortgage Association, REMIC
92-59F, (Floating Rate), 6.112%, 8/25/06........ 12
3,220 Resolution Trust Corp., Series 1991-M5, Class A,
9.00%, 3/25/17.................................. 3,296
4,000 Standard Credit Card Trust 6.75%, 6/07/00......... 4,040
----------
TOTAL ASSET BACKED SECURITIES............................... 7,348
----------
TOTAL FIXED INCOME SECURITIES (Cost $125,360)................. 127,200
----------
SHORT-TERM INVESTMENT (2.6%)
REPURCHASE AGREEMENT (2.6%)
3,367 Chase Securities, Inc., 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $3,368,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $3,458 (Cost $3,367)..... 3,367
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.8%) (Cost $128,727)................ 130,567
--------
OTHER ASSETS (1.4%)
Interest Receivable........................ $ 1,723
Net Unrealized Gain on Forward Foreign
Currency Exchange Contracts.............. 108
Other...................................... 12 1,843
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable........... (85)
Payable for Portfolio Shares Redeemed...... (73)
Adminstrative Fees Payable................. (20)
Custodian Fees Payable..................... (5)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (26) (215)
---------- --------
NET ASSETS (100%)........................................ $132,195
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $135,919
Overdistributed Net Investment Income............. (14)
Accumulated Net Realized Loss..................... (5,652)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 1,942
--------
NET ASSETS........................................ $132,195
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $ 130,733
NET ASSET VALUE, OFFERING REDEMPTION
PRICE PER SHARE
Applicable to 12,361,468 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.58
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,462
NET ASSET VALUE, OFFER AND REDEMPTION
PRICE PER SHARE
Applicable to 138,201 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.58
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1996, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ---------- ------- ----------- ------------ ------- ------------
DEM 3,550 $ 2,309 1/15/97 U.S.$ 2,336 $ 2,336 $ 27
DEM 940 612 1/15/97 U.S.$ 618 618 6
DEM10,318 6,712 1/15/97 U.S.$ 6,787 6,787 75
DEM 155 100 1/15/97 U.S.$ 100 100 --
------- ------- -----
$ 9,733 $ 9,841 $ 108
------- ------- -----
------- ------- -----
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- certain conditions for public sale may exist
DEM -- Deutsche Mark
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect
on December 31, 1996.
REMIC -- Real Estate Mortgage Investment Conduit
Yankee -- Bond issued in the USA by a foreign borrower in U.S. dollars and
registered with the Securities and Exchange Commission.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 0.9%
British Pound 10.3%
Canadian Dollar 6.8%
Danish Krone 4.2%
Deutsche Mark 14.8%
French Franc 2.8%
Irish Punt 2.1%
Italian Lira 5.7%
Japanese Yen 9.7%
Spanish Peseta 2.4%
Swedish Krona 6.1%
United States Dollar 24.2%
Other 10.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
J.P. MORGAN TRADED GLOBAL BOND INDEX GLOBAL FIXED INCOME PORTFOLIO-CLASS
(1) A
<S> <C> <C>
5/1/91* 500,000 500,000
10/31/1991 538,720 530,500
10/31/1992 606,455 585,090
12/31/1992 601,365 577,395
12/31/1993 675,100 665,985
12/31/1994 683,750 625,500
12/31/1995 815,782 746,347
12/31/1996 851,676 794,412
*Commencement of operations
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED
GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------
AVERAGE ANNUAL
ONE YEAR FIVE YEARS
------------- ------------------
<S> <C> <C>
PORTFOLIO -- CLASS A.................................................................... 6.44% 7.17%
PORTFOLIO -- CLASS B(3)................................................................. 6.12 N/A
INDEX................................................................................... 4.40 8.17
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A.................................................................... 8.50%
PORTFOLIO -- CLASS B(3)................................................................. N/A
INDEX................................................................................... 9.84
</TABLE>
1. The J.P. Morgan Traded Global Bond Index is an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, the United Kingdom 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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE 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. YIELDS WILL
FLUCTUATE AS MARKET CONDITIONS CHANGE.
The Global Fixed Income Portfolio aims to produce an attractive rate of return
by investing in fixed income securities issued by governments, agencies,
supranational entities and corporations with varying maturities in various
currencies.
For the year ended December 31, 1996, the Portfolio had a total return of 6.44%
for the Class A shares and 6.12% for the Class B shares as compared to a total
return of 4.40% for the J.P. Morgan Traded Global Bond Index (the "Index"). The
average annual total return for the five-year period ended December 31, 1996 and
for the period from inception on May 1, 1991 through December 31, 1996 was 7.17%
and 8.50%, respectively, for the Class A shares as compared to 8.17% and 9.84%,
respectively, for the Index. As of December 31, 1996, the Portfolio had an SEC
30-day yield of 4.91% for the Class A shares and 4.76% for the Class B shares.
Global bond markets turned in mixed performances in 1996. Early in the year
returns were quite poor across the globe as U.S. 10-year yields rose over 100
basis points on the back of much stronger than expected economic activity. The
second half of the year was a different story with all markets generating good
returns as fears of a Fed tightening receded. The benchmark U.S. market provided
a solid backdrop for the rest of the world as 10-year yields fell 40 basis
points, partially retracing their first half rise. Most of the world was not
immune to the U.S. market's volatility and only the high-yielding European bond
markets -- Italy, Spain, Sweden -- were able to produce consistently high
returns throughout the year. Measured in local currency terms, 1996 returns
ranged from 3% in the U.S. to 24% in Italy. In U.S. dollar terms the dispersion
was even greater as Japan returned -6% while Italy returned almost 30%. Country
and currency selection were richly rewarded.
There were three truly dominant themes in 1996: a stronger U.S. dollar, superior
European bond performance and a dramatic convergence of intra-European bond
yield spreads as optimism regarding the possibility and breadth of European
Monetary Union (EMU) grew. The strength of the dollar detracted over 3% from
returns as the JP Morgan Global Government Bond Index returned 7.6% in local
currency terms but only 4.4% in U.S. dollar terms. Despite the strength of the
dollar, only the Japanese and German bond markets had negative returns in U.S.
dollar terms. The difference between unhedged and hedged returns was even more
dramatic
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
as the currency hedged JP Morgan Traded Global Bond Index returned 8.6%, a
whopping 4.2% more than unhedged returns.
The rise in the U.S. dollar over the course of the year was steady and
undramatic. Indeed, one of the characteristics of much of 1996 was the low level
of foreign exchange market volatility with much of the volatility occurring in
the cross exchange rates, e.g., Italian lira/Deutschemark. British
pound/Deutschemark. Faster economic growth in the U.S. and low and falling
interest rates abroad contributed to the dollar's strength. In terms of numbers,
the U.S. dollar moved from 1.43 Deutschemark to 1.54 (7.7%) and from 103
Japanese yen to 116 (12.6%) during the year. The U.S. dollar did weaken versus
the Australian dollar (6.8%), Irish pound (5.6%), Italian lira (4.3%), and
British pound (10.2%), significantly contributing to returns from those
countries. The rise of the British pound was notable as it had been very stable
until the fourth quarter when it suddenly appreciated over 9% against both the
U.S. dollar and Deutschemark as U.K. economic activity surged.
European bonds far outperformed their U.S. and Japanese counterparts over the
course of the year. The European component of the Index returned 12% while the
U.S. and Japanese markets returned 3% and 6% respectively, in local currency
terms. This outperformance was driven by falling inflation expectations
(Italian, Spanish and Swedish inflation are at decades lows), central bank
easing, fiscal tightening, and most importantly, positive expectations about
EMU.
EMU optimism grew steadily over the course of 1996, but it was not until late in
the third quarter that it became apparent that the Spanish and Italian
governments were moving aggressively to meet the monetary union convergence
criteria. This triggered a major re-rating of these markets and Italian bond
yields subsequently fell 200 basis points, narrowing in yield spread to Germany
by 140 basis points. While Sweden has not stated a desire to participate in
monetary union in 1999, excellent macroeconomic fundamentals allowed its bond
market to generally keep pace with the southern European countries. Italian,
Spanish and Swedish bond markets returned 24%, 22% and 18%, respectively, in
local currency terms in 1996.
The Portfolio benefited from many of these themes during the year. On the
currency front, a substantial portfolio of European and Japanese bond holdings
were hedged while an above Index weighting was maintained in the U.S. dollar,
British and Irish pounds for much of the time that they were appreciating. On
the bond side, above Index weightings were maintained in European bonds with the
majority of the overweight concentrated in the higher-yielding Italian, Spanish
and Swedish markets. During the course of the year, we rotated among these
countries to take advantage of the best relative values, but overall the
Portfolio kept an above Index exposure to these markets at all times. The
Portfolio also benefited from a below Index weighting of the U.S. and Japanese
markets (to the advantage of European bond holdings). The duration of the
Portfolio was kept fairly close to the Index much of the year as country
selection rather than duration management was viewed as the more important
decision.
Our overall global fixed income strategy remained broadly unchanged over the
course of the year as the themes that were dominant continued to dominate later
in the year. During the fourth quarter we did reduce our Irish and Japanese bond
holdings to fund modest increases in Canadian and U.K. bonds. Holdings of Irish
pounds were also reduced in response to the outperformance of the U.K. and Irish
currencies. Similarly, exposure to dollar bloc currencies was cut back
approximately 4% and European currency holdings were increased commensurately as
the dollar rose. The Portfolio, however, still remains slightly overweight the
dollar bloc currencies. The duration of the Portfolio at the end of 1996 was
slightly shorter than its benchmark, primarily due to the underweighting of the
Japanese bond market. However, the overall interest-rate sensitivity -- after
adjusting for the yield curve, country and currency exposure -- remained about
10% longer than the Index.
Going forward, we regard global fixed income markets as offering reasonable but
not great value. Although real interest rates (the key driver to our relative
value driven approach) are below their averages of the 1980s and 1990s, they are
still above 3% and inflation continues to be well contained. Importantly,
governments are focused on reducing budget deficits. This process should help
reduce required real interest rates and, while we expect European and Japanese
economies to strengthen over the course of 1997, should allow their governments
to continue following the tight fiscal, easy monetary policy for a while
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
longer. In addition, EMU should put additional pressure on European governments
to reduce bloated public sectors especially with the stability pact agreed to.
Thus, we see no reason to change our current strategy of overweighting the high
real interest rate markets -- British, Swedish and German bond markets -- and
underweighting the Japanese and U.S. bond markets where real interest rates are
relatively low.
On the foreign exchange front, the U.S. dollar remains well supported by above
average growth (by global standards), quiescent inflation and the Fed's
asymmetric policy stance. However, the Japanese yen has depreciated over 40%
from its 1995 lows and no longer looks overvalued. While current economic and
financial problems will continue to plague Japan, a repeat of 1996 is unlikely.
Therefore, absent the likelihood of dramatic currency moves, we expect to keep
the Portfolio's current long dollar bloc currency position modest.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FIXED INCOME SECURITIES (90.0%)
AUSTRALIAN DOLLAR (0.9%)
GOVERNMENT BONDS (0.9%)
AUD 1,200 Government of Australia 9.50%, 8/15/03........... $ 1,067
---------
BRITISH POUND (10.3%)
GOVERNMENT BONDS (10.3%)
GBP 2,550 United Kingdom Treasury Gilt 7.00%, 11/06/01..... 4,322
1,850 United Kingdom Treasury Gilt 10.00%, 9/08/03..... 3,595
2,250 United Kingdom Treasury Gilt 7.75%, 9/08/06...... 3,912
---------
11,829
---------
CANADIAN DOLLAR (6.8%)
GOVERNMENT BONDS (6.8%)
CAD 3,600 Government of Canada 7.50%, 3/01/01.............. 2,836
5,000 Government of Canada 6.50%, 6/01/04.............. 3,726
1,300 Government of Canada 9.75%, 6/01/21.............. 1,244
---------
7,806
---------
DANISH KRONE (4.2%)
GOVERNMENT BONDS (4.2%)
DKK 9,600 Kingdom of Denmark 8.00%, 5/15/03................ 1,805
16,300 Kingdom of Denmark 8.00%, 3/15/06................ 3,044
---------
4,849
---------
DEUTSCHE MARK (14.8%)
EUROBOND (4.5%)
DEM 7,500 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 5,167
---------
GOVERNMENT BONDS (10.3%)
2,000 Deutschland Republic 6.25%, 1/04/24.............. 1,234
8,350 German Unity Bond 8.00%, 1/21/02................. 6,178
1,800 Treuhandanstalt 6.75%, 5/13/04................... 1,255
4,300 Treuhandanstalt 7.50%, 9/09/04................... 3,122
---------
11,789
---------
16,956
---------
FRENCH FRANC (2.8%)
GOVERNMENT BONDS (2.8%)
FRF 14,700 French Treasury Bill 7.75%, 4/12/00.............. 3,151
---------
IRISH PUNT (2.1%)
GOVERNMENT BONDS (2.1%)
IEP 1,400 Irish Government 6.25%, 4/01/99.................. 2,385
---------
ITALIAN LIRA (5.7%)
GOVERNMENT BONDS (5.7%)
ITL 4,640,000 BTPS 10.50%, 7/15/00............................. 3,427
800,000 BTPS 10.00%, 8/01/03............................. 604
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
ITL 1,700,000 BTPS 9.50%, 1/01/05.............................. $ 1,261
1,600,000 BTPS 9.50%, 2/01/06.............................. 1,202
---------
6,494
---------
JAPANESE YEN (9.7%)
EUROBONDS (9.7%)
JPY 240,000 European Investment Bank 6.625%, 3/15/00......... 2,427
120,000 Export Import Bank of Japan 4.375%, 10/01/03..... 1,171
130,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 1,308
290,000 International Bank for Reconstruction &
Development 4.50%, 6/20/00..................... 2,781
145,000 Republic of Austria 6.25%, 10/16/03.............. 1,563
200,000 Japan Development Bank 5.00%, 10/01/99........... 1,914
---------
11,164
---------
SPANISH PESETA (2.4%)
GOVERNMENT BOND (2.4%)
ESP 290,000 Spanish Government 10.50%, 10/30/03.............. 2,716
---------
SWEDISH KRONA (6.1%)
GOVERNMENT BONDS (6.1%)
SEK 19,300 Swedish Government 13.00%, 6/15/01............... 3,651
13,000 Swedish Government 10.25%, 5/05/03............... 2,321
6,700 Swedish Government 6.00%, 2/09/05................ 953
---------
6,925
---------
UNITED STATES DOLLAR (24.2%)
CORPORATE BONDS AND NOTES (5.2%)
U.S.$ (e)750 Asset Securitization Corp., CMO, 7.21%,
10/13/26....................................... 766
985 Asset Securitization Corp., CMO, 7.10%,
8/13/29........................................ 996
(e)150 First Chicago, 7.75%, 12/01/26,.................. 146
(e)385 Goldman Sachs Group 6.25%, 2/01/03............... 375
(e)400 Liberty Mutual 7.875%, 10/15/26.................. 401
881 LB Commercial Conduit Mortgage Trust (Floating
Rate), CMO, 7.14%, 8/25/04..................... 894
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26........................................ 327
2,000 UCFC, CMO, Series 1995-C1, Class A3, 6.775%,
9/10/17........................................ 2,001
---------
5,906
---------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (18.3%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (9.1%)
491 6.00%, 5/01/03................................... 479
7,540 6.00%, 9/01/03................................... 7,351
2,710 6.50%, 1/01/26................................... 2,585
---------
10,415
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (CONT.)
U.S. TREASURY BONDS (3.4%)
U.S.$ 2,000 8.125%, 8/15/19.................................. $ 2,311
750 8.75%, 5/15/20................................... 922
650 7.625%, 2/15/25.................................. 722
---------
3,955
---------
U.S. TREASURY NOTES (5.8%)
2,300 5.125%, 11/30/98................................. 2,268
1,800 5.75%, 8/15/03................................... 1,746
2,500 7.25%, 5/15/04................................... 2,631
---------
6,645
---------
21,015
---------
YANKEE BOND (0.7%)
U.S.$ 765 Hydro-Quebec 7.50%, 4/01/16...................... 772
---------
27,693
---------
TOTAL FIXED INCOME SECURITIES (90.0%) (Cost $100,812).............. 103,035
---------
SHORT-TERM INVESTMENTS (3.8%)
REPURCHASE AGREEMENT (1.2%)
1,435 Chase Securities, Inc. 5.95% dated 12/31/96, due
1/02/97, to be repurchased at $1,435,
collaterlized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $1,464 (Cost $1,435).... 1,435
---------
FEDERAL HOME LOAN DISCOUNT NOTE (2.6%)
2,935 4.92%, 1/09/97................................... 2,926
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,361)......................... 4,361
---------
FOREIGN CURRENCY (3.5%)
DEM 2 Deutsche Mark.................................... 1
JPY 282,082 Japanese Yen..................................... 2,436
ESP 208,002 Spanish Peseta................................... 1,602
---------
TOTAL FOREIGN CURRENCY (Cost $4,071)............................... 4,039
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (97.3%) (Cost $109,244)................ $111,435
--------
OTHER ASSETS (2.9%)
Cash....................................... $ 640
Interest Receivable........................ 2,682
Foreign Withholding Tax Reclaim
Receivable............................... 2
Other...................................... 8 3,332
----------
LIABILITIES (-0.2%)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (192)
Investment Advisory Fees Payable........... (67)
Administrative Fees Payable................ (15)
Custodian Fees Payable..................... (12)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (30) (320)
---------- --------
NET ASSETS (100%)........................................ $114,447
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $116,590
Undistributed Net Investment Income............... 612
Accumulated Net Realized Loss..................... (4,738)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 1,983
--------
NET ASSETS........................................ $114,447
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $112,888
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,986,975 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.30
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $1,559
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 138,082 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.29
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- --------
*DEM 2 $ 1 1/02/97 U.S.$ 1 $ 1 $ --
U.S.$ 1 1 1/02/97 DEM 2 2 1
CAD 1,200 877 1/17/97 U.S.$ 896 896 19
DKK 9,000 1,529 1/17/97 U.S.$ 1,541 1,541 12
DEM 450 293 1/17/97 U.S.$ 290 290 (3)
DEM 1,250 814 1/17/97 U.S.$ 805 805 (9)
GBP 2,000 3,425 1/17/97 U.S.$ 3,281 3,281 (144)
U.S.$ 1,522 1,522 1/17/97 DKK 9,000 1,529 7
U.S.$ 1,315 1,315 1/17/97 DEM 2,000 1,301 (14)
U.S.$ 4,936 4,936 1/17/97 DEM 7,600 4,945 9
CAD 850 622 1/24/97 U.S.$ 624 624 2
DEM 12,200 7,941 1/24/97 U.S.$ 7,874 7,874 (67)
SEK 11,000 1,616 1/24/97 DEM 2,493 1,623 7
SEK 19,450 2,857 1/24/97 U.S.$ 2,845 2,845 (12)
-------- -------- --------
$ 27,749 $ 27,557 $ (192)
--------
-------- -------- --------
-------- --------
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security - certain conditions for public sale may exist
CMO -- Collateralized Mortgage Obligation
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates
shown are those in effect on December 31, 1996.
* -- Transaction is with Morgan Stanley Trust Co.
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Finance................................ $ 24,372 21.3%
Foreign Government & Agency
Obligations.......................... 57,648 50.4
U.S. Government and Agency
Obligations.......................... 21,015 18.3
--------- ---
$ 103,035 90.0%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 2.0%
Banking 2.3%
Broadcast - Radio & Television 14.7%
Chemicals 1.2%
Computers 2.3%
Construction 1.9%
Consumer Staples 0.6%
Electrical Equipment 0.2%
Energy 1.0%
Entertainment & Leisure 3.6%
Environmental Controls 2.5%
Financial Services 6.6%
Food Services & Lodging 1.6%
Gaming & Lodging 4.1%
Health Care Supplies &
Services 1.3%
Machinery 1.3%
Materials 2.5%
Metals 1.9%
Multi-Industry 5.0%
Packaging & Container 5.1%
Publishing 0.1%
Real Estate 1.2%
Retail - General 5.6%
Technology 1.3%
Telecommunications 16.2%
Utilities 3.2%
Foreign Government Bonds 5.3%
Other 5.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO-CLASS CS FIRST BOSTON HIGH YIELD INDEX
A (1)
<S> <C> <C>
9/28/92* 500,000 500,000
10/31/1992 490,500 494,800
12/31/1992 503,435 507,897
12/31/1993 593,400 603,940
12/31/1994 598,050 591,250
12/31/1995 729,122 701,991
12/31/1996 838,563 789,038
* Commencement of operations
** Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON
HIGH YIELD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 15.01% 12.91%
PORTFOLIO -- CLASS B(3)............................................................................ 14.37 N/A
INDEX.............................................................................................. 12.40 11.30
</TABLE>
1. The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of fixed income securities that offer a higher yield than
that offered by debt securities in the three highest rating categories.
For the year ended December 31, 1996, the Portfolio had a total return of 15.01%
for the Class A shares and 14.37% for the Class B shares, as compared to a total
return of 12.40% for the CS First Boston High Yield Index (the "Index"). The
average annual total return for the period from inception on September 28, 1992
through December 31, 1996 was 12.91% for the Class A shares, as compared to
11.30% for the Index. As of December 31, 1996, the Portfolio had an SEC 30-day
yield of 9.31% for the Class A shares and 9.05% for the Class B shares.
The High Yield market performed well in 1996 far outpacing high quality bonds
for the year. This performance occurred in the face of ten-year Treasury yields
rising nearly eighty-five basis points over the course of the year. This infers
that the spread to Treasuries narrowed about one hundred basis points. The
strong performance in the high yield market can be traced to the sound economy
as was reflected in the outstanding performance of the stock market in 1996.
Several factors helped our Portfolio outperform the Index for the year. The
communications sector performed very well for the Portfolio. The entire sector
responded favorably when MFS and Worldcom announced they would merge. We were
favorably positioned when this announcement was made and continued to add to our
positions subsequent to the announcement. This sector also performed well
because the securities in it tend to have bullish characteristics. Many of the
securities in the sector are zero coupon or deferred pay bonds. Thus, in a
rallying high yield market, they tend to outperform.
The cable television sector had a mixed year, performing poorly in the first
half of the year and well in the second half. We added to our positions at wide
spreads and reaped the benefits as spreads narrowed in the second half. Our
exposure to emerging markets also continued to add to performance.
As spreads narrowed over the year, we continually upgraded the quality of the
Portfolio. We believe this will protect the Portfolio if either the economy
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
weakens or spreads widen generally. We still believe this is the prudent
position to take in the current market environment.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
High Yield Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (75.5%)
BANKING (2.0%)
$ 775 Bank United Corp., (Floating Rate), 8.05%,
5/15/98........................................ $ 781
(e)450 First Nationwide Escrow, 10.625%, 10/01/03....... 484
735 First Nationwide Holdings, 9.125%, 1/15/03....... 745
---------
2,010
---------
BROADCAST-RADIO & TELEVISION (14.7%)
650 Cablevision Systems Corp., 9.25%, 11/01/05....... 640
1,770 Cablevision Systems Corp., 9.875%, 5/15/06....... 1,814
500 Comcast Cellular Corp., Series A,
Zero Coupon, 3/05/00........................... 359
1,350 Comcast Cellular Corp., Series B,
Zero Coupon, 3/05/00........................... 972
430 Comcast Corp., 9.125%, 10/15/06.................. 440
1,925 Comcast Corp., 9.375%, 5/15/05................... 1,997
1,965 Lenfest Communications, 8.375%, 11/01/05......... 1,878
(n)2,400 Marcus Cable Co., 0.00%, 12/15/05................ 1,716
1,100 Rogers Cablesystems Ltd., Series B, 10.00%,
3/15/05........................................ 1,172
3,715 Viacom, Inc., 8.00%, 7/07/06..................... 3,585
(e)350 Tevecap S.A., 12.625%, 11/26/04.................. 358
---------
14,931
---------
CHEMICALS (1.2%)
(e)1,210 ISP Holdings Inc., 9.00%, 10/15/03............... 1,225
---------
COMPUTERS (2.3%)
1,600 Advanced Micro Devices, Inc.,
11.00%, 8/01/03................................ 1,732
650 Digital Equipment Corp., 8.625%, 11/01/12........ 631
---------
2,363
---------
CONSTRUCTION (1.9%)
1,090 Flores & Rucks, 9.75%, 10/01/06.................. 1,147
(e)710 Parker Drilling Corp., 9.75%, 11/15/06........... 739
---------
1,886
---------
CONSUMER-STAPLES (0.6%)
(e)575 International Home Foods,
10.375%, 11/01/06.............................. 595
---------
ENERGY (1.0%)
1,000 Nuevo Energy Co., 9.50%, 4/15/06................. 1,053
---------
ENVIRONMENTAL CONTROLS (2.5%)
(n)2,300 Norcal Waste Systems, 13.00%, 11/15/05........... 2,553
---------
FINANCIAL SERVICES (0.9%)
1,985 Home Holdings, Inc., 8.625%, 12/15/03............ 437
400 Homeside, Inc., 11.25%, 5/15/03.................. 446
---------
883
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOOD SERVICE & LODGING (1.5%)
$ 1,475 Courtyard by Marriott, Series B, 10.75%,
2/01/08........................................ $ 1,560
---------
GAMING & LODGING (4.1%)
1,185 Boyd Gaming Corp., 9.25%, 10/01/03............... 1,158
2,090 Grand Casinos, Inc., 10.125%, 12/01/03........... 2,098
496 Louisiana Casino Cruises, 11.50%, 12/01/98....... 501
375 Station Casinos, Inc., 9.625%, 6/01/03........... 371
---------
4,128
---------
HEALTH CARE SUPPLIES & SERVICES (0.5%)
430 Quest Diagnostic Inc., 10.75%, 12/15/06.......... 451
---------
MACHINERY (1.3%)
1,245 SD Warren Co., 12.00%, 12/15/04.................. 1,338
---------
MATERIALS (2.5%)
(n)3,000 Brooks Fiber Properties, Inc.,
0.00%, 3/01/06................................. 1,999
(e,n)755 Brooks Fiber Properties, Inc.,
0.00%, 11/01/06................................ 481
---------
2,480
---------
METALS (1.9%)
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14....................................... 623
1,050 Jet Equipment Trust, Series C1,
11.79%, 6/15/13................................ 1,249
---------
1,872
---------
MULTI-INDUSTRY (5.0%)
430 Ivaco, Inc., 11.50%, 9/15/05..................... 429
(e)615 Maxxam Group Holdings, Inc.,
12.00%, 8/01/03................................ 625
(n)4,025 MFS Communications Co., Inc.,
0.00%, 1/15/06................................. 2,938
1,050 TLC Beatrice International Holdings, 11.50%,
10/01/05....................................... 1,112
---------
5,104
---------
PACKAGING & CONTAINER (5.1%)
1,800 Gaylord Container Corp., 11.50%, 5/15/01......... 1,917
425 Gaylord Container Corp., 12.75%, 5/15/05......... 469
1,710 Owens-Illinois, Inc., 11.00%, 12/01/03........... 1,902
(e)510 Stone Container Corp., 11.50%, 8/15/06........... 526
(e)280 U.S. Can Corp., 10.125%, 10/15/06................ 294
---------
5,108
---------
PUBLISHING (0.1%)
(u)500 Marvel Parent Holdings,
Zero Coupon, 4/15/98........................... 70
---------
REAL ESTATE (1.2%)
1,250 HMC Acquisition Properties,
9.00%, 12/15/07................................ 1,250
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
RETAIL-GENERAL (5.6%)
$ 1,400 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ $ 1,459
2,321 Revlon Worldwide, Series B, Zero Coupon,
3/15/98........................................ 2,002
2,710 Southland Corp., 5.00%, 12/15/03................. 2,236
---------
5,697
---------
TECHNOLOGY (1.3%)
(e)1,295 Cole National Group, 9.875%, 12/31/06............ 1,327
---------
TELECOMMUNICATIONS (15.1%)
(n)3,225 Dial Call Communications, 0.00%, 4/15/04......... 2,286
(n)3,010 Echostar Satellite Broadcasting, 0.00%,
3/15/04........................................ 2,269
(e)350 Globo Communicacoes e Participacoes Ltda.,
10.50%, 12/20/06............................... 351
890 IXC Communications Inc., 12.50%, 10/01/05........ 979
(e)850 Net Sat Servicos Ltda., 12.75%, 8/05/04.......... 887
(n)2,425 Nextel Communications, Inc., 0.00%, 8/15/04...... 1,649
(e,n)1,075 Occidente y Caribe, 0.00%, 3/15/04............... 632
(e)1,125 Paging Network, 10.00%, 10/15/08................. 1,135
380 Paging Network, 10.125%, 8/01/07................. 384
475 Philippines Long Distance Telephone, 9.25%,
6/30/06........................................ 514
690 Rogers Communications, 9.125%, 1/15/06........... 681
(n)1,295 Teleport Communications, 0.00%, 7/01/07.......... 892
(n)1,900 Telewest plc, 0.00%, 10/01/07.................... 1,318
1,475 TCI Communications, Inc., 7.875%, 2/15/26........ 1,323
---------
15,300
---------
TRANSPORTATION (0.0%)
42 America West Airlines, 6.00%, 3/31/97............ 39
---------
UTILITIES (3.2%)
60 Cleveland Electric Illuminating Co., 8.375%,
12/01/11....................................... 59
1,650 Cleveland Electric Illuminating Co., 9.50%,
5/15/05........................................ 1,768
198 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 211
465 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 495
650 Midland Funding II, Series A, 11.75%, 7/23/05.... 717
---------
3,250
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $74,917).................... 76,473
---------
ASSET BACKED SECURITIES (8.0%)
AEROSPACE & DEFENSE (2.0%)
(e)1,949 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06..... 2,022
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
BANKING (0.3%)
$ 346 PNC Mortgage Securities Corp., Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................ $ 289
---------
FINANCIAL SERVICES (5.7%)
952 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 792
2,702 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 2,486
(e)900 FMAC Series 1996-B, Class C, 7.929%, 11/01/18.... 762
(e)309 GE Capital Mortgage Services, Inc., Series
1995-12, Class B3, REMIC, 7.86%, 8/25/25....... 256
(e)1,359 Prudential Home Mortgage Securities Inc., Series
1995-F, Class 2B, REMIC, 6.62%, 4/28/24........ 939
(e)875 Prudential Home Mortgage Securities, Inc., Series
1996-A, Class B1, REMIC, 7.96%, 5/28/26........ 594
---------
5,829
---------
TOTAL ASSET BACKED SECURITIES (Cost $7,831)....................... 8,140
---------
FOREIGN GOVERNMENT BONDS (5.3%)
BONDS (5.3%)
1,225 Federative Republic of Brazil, Series L, 4.50%,
4/15/09........................................ 882
(n)1,250 Republic of Argentina Par, Series L, "Euro",
(Floating Rate), 5.25%, 3/31/23................ 790
1,470 Republic of Argentina, Series L, "Euro",
(Floating Rate), 6.625%, 3/31/05............... 1,278
400 Republic of Columbia, 8.70%, 2/15/16............. 399
(n)1,250 Republic of Venezuela Front Loaded Interest
Reduction Bond, Series A, (Floating Rate),
6.625%, 3/31/07................................ 1,117
1,225 United Mexican States, Series A, 6.25%,
12/31/19....................................... 899
---------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $4,703)...................... 5,365
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- -------------
COMMON STOCKS (0.1%)
FINANCIAL SERVICES (0.0%)
(a)1,268 WestFed Holdings, Inc., Class B.................. --
---------
FOODSERVICE & LODGING (0.1%)
(a,e)1,300 Motels of America, Inc........................... 71
---------
TOTAL COMMON STOCKS (Cost $85).................................... 71
---------
PREFERRED STOCKS (4.4%)
ENTERTAINMENT & LEISURE (3.6%)
3,389 Time Warner Inc., Series M, 10.25%, 7/01/16...... 3,677
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A, PIK............ $ --
---------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
800 Fresensius Medical Care, 9.00%, 12/01/06......... 814
---------
TOTAL PREFERRED STOCKS (Cost $4,260).............................. 4,491
---------
CONVERTIBLE PREFERRED STOCKS (1.1%)
TELECOMMUNICATIONS (1.1%)
12,815 TCI Pacific Communications, 5.00%, 7/31/06....... 1,182
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,156).................. 1,182
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -------------
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
(a)35,000 SpectraVision, Inc., expiring 10/08/97........... --
---------
FOREIGN GOVERNMENT (0.0%)
(a)1,225,000 United Mexican States, 6.25%, 12/31/19........... --
---------
TOTAL RIGHTS (Cost $133).......................................... --
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -------------
WARRANTS (0.2%)
AEROSPACE & DEFENSE (0.0%)
(a)500 Sabreliner Corp., expiring 4/15/03............... --
---------
ELECTRICAL EQUIPMENT (0.2%)
(a,e)28,000 Protection One Alarm, Inc., expiring 4/03/03..... 168
---------
GAMING & LODGING (0.0%)
(a)1,725 Louisiana Casino Cruises, expiring 12/01/98...... 11
---------
INSURANCE (0.0%)
(a,d)500 Horace Mann Educators Corp., expiring 4/03/99.... 7
---------
PACKAGING & CONTAINER (0.0%)
(a,e)1,000 Crown Packaging Holdings, expiring 11/01/03...... --
---------
TELECOMMUNICATIONS (0.0%)
(a)3,000 Nextel Communications, Inc. expiring 4/25/99..... --
(a)7,300 Occidente y Caribe, expiring 3/15/04............. --
---------
--
---------
TOTAL WARRANTS (Cost $154)........................................ 186
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 4,004 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/02/97, to be repurchased at $4,005,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $4,110 (Cost $4,004).... $ 4,004
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.6%) (Cost $97,243)................. 99,912
--------
OTHER ASSETS (2.1%)
Interest Receivable........................ $ 1,596
Receivable for Investments Sold............ 480
Other...................................... 7 2,083
----------
LIABILITIES (-0.7%)
Bank Overdraft............................. (439)
Investment Advisory Fees Payable........... (122)
Payable for Portfolio Shares Redeemed...... (39)
Administrative Fees Payable................ (14)
Custodian Fees Payable..................... (4)
Distribution Fees Payable.................. (3)
Dividends Payable.......................... (2)
Directors' Fees and Expenses Payable....... (2)
Other Liabilities.......................... (42) (667)
---------- --------
NET ASSETS (100%)........................................ $101,328
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $102,703
Overdistributed Net Investment Income............. (4)
Accumulated Net Realized Loss..................... (4,040)
Unrealized Appreciation on Investments............ 2,669
--------
NET ASSETS........................................ $101,328
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A
- ---------------------------------------
NET ASSETS............................. $95,663
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 8,765,159 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.91
----------
----------
CLASS B
- ---------------------------------------
NET ASSETS............................. $5,665
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 519,838 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.90
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity date.
(u) -- Issuer in Default -- filed for bankruptcy
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in effect
on December 31, 1996.
At December 31, 1996, approximately 95% of the Portfolio's net assets consisted
of high yield securities rated below investment grade. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Daily Variable Rate Bonds 7.9%
Fixed Rate Instruments 90.3%
Other 1.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL BOND PORTFOLIO-CLASS
LEHMAN 7 YR MUNICIPAL BOND INDEX (1) A
<S> <C> <C>
1/18/95* 500,000 500,000
12/31/1995 560,150 544,000
12/31/1996 584,629 563,965
*Commencement of operations
**Minimum Investment
</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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE LEHMAN
7 YR. MUNICIPAL BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------
ONE YEAR
----------------
<S> <C>
PORTFOLIO -- CLASS A............................................................................... 3.67%
PORTFOLIO -- CLASS B(3)............................................................................ 3.55
INDEX.............................................................................................. 4.37
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
-----------------
<S> <C>
PORTFOLIO -- CLASS A............................................................................... 6.36%
PORTFOLIO -- CLASS B(3)............................................................................ N/A
INDEX.............................................................................................. 8.34
</TABLE>
1. The Lehman 7-Year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better.All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.
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. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Bond Portfolio seeks high current income consistent with
preservation of principal through investment in a portfolio consisting primarily
of intermediate and long-term investment grade municipal obligations, the
interest on which is exempt from Federal income tax.
For the year ended December 31, 1996, the Portfolio had a total return of 3.67%
for the Class A shares and 3.55% for the Class B shares as compared to a total
return of 4.37% for the Lehman 7-Year Municipal Bond Index. The average annual
total return for the period from inception on January 18, 1995 through December
31, 1996 was 6.36% for the Class A shares as compared to 8.34% for the Index. As
of December 31, 1996, the Portfolio had an SEC 30-day yield of 4.35% for the
Class A shares and 4.11% for the Class B shares.
The year 1996 was a year of uncertainty and volatility in the U.S. fixed income
markets. The year started off with a positive tone when on January 31 the
Federal Reserve lowered by 25 basis points both the Federal Funds Rate and
Discount Rate. Soon after that Fed easing, economic releases for the first
quarter of 1996 dispelled the notion of a slowing economy, and instead pointed
in the direction of an expanding economy. The U.S. bond markets spent the
remainder of the year reacting to the inflationary threat usually associated
with a strong growth period. All thoughts of further Federal Reserve easings
were put on hold, and instead the focus became if and when the Fed would tighten
monetary policy to keep inflation at bay. During the year, economic releases
showing signs of growth in the economy, including continued strength in new and
existing home sales, a robust employment picture and hints of inflationary
pressure beginning to creep into the labor market, all combined to put upward
pressure on interest rates. The markets were subjected to day-to-day volatility
caused by sharp movements in commodity prices and a keen interest in the value
of the U.S. dollar compared to the Japanese yen and the German mark. There was
much speculation and anticipation leading up to each Federal Open Market
Committee meeting. The Federal Reserve, not viewing inflation as enough of a
threat, was content during the remainder of 1996 to leave the Federal Funds Rate
and Discount Rate unchanged. The 30-year U.S. Treasury bond, which had started
off the year at a yield of 5.95% and closed at a high yield of 7.20% during mid
June, ended the year at a yield of 6.64%. Indications of a
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
strengthening economy during the 4th quarter cast a cautious tone on the bond
market as the year came to a close.
During 1996, the municipal bond market outperformed the U.S. Treasury market.
The elimination of the threat of major tax reform, including the potential for a
consumption-based or flat tax structure, lifted a heavy weight off of the
municipal market; this caused yield ratios versus U.S. Treasuries to decline
dramatically from January through August. A decline in interest rates and
increased supply caused the ratios to creep slightly higher from September
through the end of the year. New issue supply topped $180 billion in 1996, the
highest volume level since the peak refunding years of 1992 and 1993. Issuers
sold more new money issues than in any year since 1985. On the demand side,
insurance company interest remained strong and individual investors continued to
support the one to ten year maturity range. Demand from long term municipal bond
funds continued to wane, never quite recovering from a combination of the poor
bond market performance of 1994, the flat tax scare of 1995 and the competition
coming from the roaring U.S. equity market.
The Portfolio is invested in high quality premium coupon securities with an
average maturity of 6.78 years. At December 31, 1996, the Portfolio composition
included 29% state general obligation bonds, 15% state agency bonds, 15% city
and county general obligation bonds, 12% city and county revenue bonds, 21%
prerefunded bonds escrowed in U.S. Treasury securities and an 8% cash position.
Bond positions we added to the Portfolio during the year included an
overweighting in premium coupon noncallable securities with maturities out
longer than ten years. The noncallable structure is difficult to find in the
municipal market and the scarcity value of this type of bond makes it a good
trading vehicle. The entire Portfolio is invested in securities rated in the two
highest rating categories (AAA and AA); with quality spreads at very tight
levels, there is much better value in owning the highest rated securities.
We believe the bond markets will tread slowly during the 1st quarter of 1997, as
investors continue to wrestle with whether recent signs of strength in the
economy are a temporary aberration or a trend that has some momentum. The focus
will be on how much of an inflationary threat the Federal Reserve perceives at
current growth levels and what the implications are for Fed policy over the next
few months. If the economy does show above trend growth, a correction in the
bond markets would probably ensue that could push yields up to levels last seen
during the summer of 1996.
Lori A. Cohane
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (98.2%)
DAILY VARIABLE RATE BONDS (7.9%)
$ 600 Hapeville, Georgia, Industrial Development
Authority, Revenue Bonds, Hapeville Hotel LP,
Series 85, 5.00%, 11/01/15..................... $ 600
600 Monroe County, Georgia, Pollution Control,
Revenue Bonds, Georgia Power Co., Series 2,
4.65%, 7/01/25................................. 600
100 New York City, New York, City Municipal Water
Finance Authority, Water & Sewer Systems,
Revenue Bonds, Series A, 4.70%, 6/15/25........ 100
200 New York City, New York, General Obligation
Bonds, Series A-8, 5.00%, 8/01/17.............. 200
500 New York City, New York, General Obligation
Bonds, Series B, 4.50%, 10/01/20............... 500
700 New York City, New York, General Obligation
Bonds, Series C, 4.50%, 10/01/23............... 700
500 Sabine River Authority, Texas, Pollution Control,
Revenue Bonds, Texas Utilities Electric Co.,
Series B, 4.70%, 6/01/30....................... 500
--------
TOTAL DAILY VARIABLE RATE INSTRUMENTS (Cost $3,200)......... 3,200
--------
FIXED RATE INSTRUMENTS (90.3%)
825 Albuquerque, New Mexico, General Obligation
Bonds, Series B, 4.70%, 7/01/98................ 835
1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05........................................ 1,619
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12....................... 1,612
1,000 Connecticut State, Special Obligation, Tax
Revenue Bonds, Transportation, 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102..................... 1,074
1,000 De Kalb County, Georgia, Water & Sewer Revenue
Bonds, 7.00%, 10/01/06......................... 1,039
1,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102..................... 1,100
1,000 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 1,030
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,596
1,000 Georgia State, General Obligation Bonds, Series
A, 5.80%, 3/01/02.............................. 1,063
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 567
500 Hawaii State, General Obligation Bonds, Series
BS, 6.70%, 9/01/97............................. 511
1,000 Hawaii State, General Obligation Bonds, Series
CJ, 6.20%, 1/01/12............................. 1,055
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
$ 1,500 Intermountain Power Agency, Utah, Power Supply
Revenue Bonds, Series D, 8.375%, 7/01/12....... $ 1,562
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,026
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded 11/01/99 at 102... 1,257
1,000 Massachusetts State Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded 3/01/00 at 102..... 1,111
500 Massachusetts State Consolidated Loan, Series A,
7.625%, 6/01/08, Prerefunded 6/01/08 at 102.... 572
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,709
1,590 Minnesota State Infrastructure Development,
General Obligation Bonds, 6.80%, 8/01/03,
Prerefunded 8/01/00 at 100..................... 1,720
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09................................. 1,520
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13........................................ 1,544
1,000 New Castle County, Delaware, General Obligation
Bonds, 6.25%, 10/15/01......................... 1,079
1,000 New Jersey State, General Obligation Bonds,
Series E, 5.50%, 7/15/02....................... 1,053
1,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14........................................ 1,032
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds, Series D, 6.75%,
10/01/17....................................... 1,164
1,000 Reedy Creek Improvement District, Florida,
Utility, Revenue Bonds, Series 91-1, 6.50%,
10/01/16, Prerefunded 10/01/01 at 101.......... 1,097
1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14................................. 1,506
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10.......................... 1,059
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 531
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,066
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... $ 1,107
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102.................... 553
--------
TOTAL FIXED RATE INSTRUMENTS (Cost $35,420)................. 36,369
--------
TOTAL TAX--EXEMPT INSTRUMENTS (98.2%) (Cost $38,620)........ 39,569
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.2%) (Cost $38,620)................. 39,569
--------
OTHER ASSETS (1.9%)
Cash....................................... $ 25
Interest Receivable........................ 739
Other...................................... 1 765
-----
LIABILITIES (-0.1%)
Investment Advisory Fees Payable........... (7)
Adminstrative Fees Payable................. (6)
Custodian Fees Payable..................... (1)
Director's Fees and Expenses Payable....... (1)
Other Liabilities.......................... (23) (38)
----- --------
NET ASSETS (100%)........................................ $40,296
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 39,369
Overdistributed Net Investment Income.............. (16)
Accumulated Net Realized Loss...................... (6)
Unrealized Appreciation on Investments............. 949
--------
NET ASSETS......................................... $ 40,296
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $ 40,227
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,925,419 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $10.25
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $69
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,738 outstanding $0.001 par value
shares (authorized 500,000,000 shares)........... $10.24
--------
--------
</TABLE>
- ------------------------------------------------------------
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the Treasury escrow.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Connecticut............................ $ 2,686 6.7%
Delaware............................... 2,179 5.4
Florida................................ 3,857 9.6
Georgia................................ 3,869 9.6
Hawaii................................. 1,566 3.9
Kentucky............................... 1,026 2.5
Maryland............................... 2,876 7.1
Massachusetts.......................... 1,683 4.2
Michigan............................... 1,709 4.2
Minnesota.............................. 1,720 4.3
Mississippi............................ 1,520 3.8
Montana................................ 1,544 3.8
New Jersey............................. 1,053 2.6
New Mexico............................. 835 2.1
New York............................... 1,500 3.7
Ohio................................... 1,032 2.6
Texas.................................. 2,006 5.0
Utah................................... 1,562 3.9
Virginia............................... 3,686 9.1
Washington............................. 1,660 4.1
-------- ---
$ 39,569 98.2%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 41.0%
Certificates of Deposit 35.4%
U.S. Government Agency Discount Notes 2.7%
U.S. Government Agency Floating Rate
Notes 13.1%
Other 7.8%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 30-DAY YIELDS DONOGHUE'S SEC 30-DAY YIELDS
<S> <C> <C>
Jan. 5.21 5.18
Feb. 5.51 5.35
Mar. 5.58 5.47
Apr. 5.58 5.49
May 5.58 5.47
June 5.52 5.43
July 5.38 5.29
August 5.3 5.22
Sept 5.23 5.18
Oct 5.2 5.18
Nov 5.21 5.17
Dec 4.97 4.85
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Money Market Portfolio's investment objectives are to maximize current
income and preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments which have effective
maturities of one year or less. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only
securities having a remaining maturity of one year or less. The Portfolio is
expected to maintain a net asset value of $1.00 per share. There can be no
assurance, however, that the Portfolio will be successful in maintaining a net
asset value of $1.00 per share.
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of December 31, 1996 were 4.99% and 5.11%, respectively. As with
all money market portfolios, the seven day yields are not necessarily indicative
of future performance.
The Fed began 1996 by cutting interest rates (from 5.50% to 5.25% on the 31st of
January). After that, short term interest rates moved higher throughout most of
the spring. This came as a big surprise to most money market participants
because when the year began they believed that the economy was very weak. In
January leading economists had predicted that the Fed would be required to ease
interest rates dramatically to stimulate the economy. Instead, the U.S. economy
showed surprising strength, particularly in the housing and job creation
categories. These key components proved that an earlier series of Fed easings,
which had begun in July of 1995, had had the desired effect.
At the beginning of each spring month the non-farm payroll report presented the
money market with a new shock that sent interest rates higher. Jobs were being
created at an alarmingly rapid rate, and most bondholders sold in furious
fashion. We chose to use many of these setbacks as buying opportunities and took
advantage of the higher yields available. We bought longer dated money market
securities for the portfolio to extend its weighted average maturity.
By the middle of the summer the market turned again. Just when it seemed that
investors were beginning to get comfortable with the idea that the strength
promised in the spring's employment reports had been real, new data revealed a
rather severe slowdown. After a robust second quarter GDP fell to
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO (CONT.)
a rather anemic 2.2% in the third quarter. By the time the data had been sorted
out the market had rallied so much that opportunities to extend at attractive
levels had been virtually exhausted.
In addition to the extending we did earlier in the year, we also increased the
percentage of the Portfolio that is devoted to highly-rated commercial paper.
This came as we decreased our holdings of agency discount notes and treasury
bills. We did this to take advantage of the higher yields available on
commercial paper.
As the year drew to a close and the Fed retired with no action imminent, the
economy showed renewed signs of strength and the markets began to contemplate
the possibility of rate hikes in the early part of calendar '97. This led to a
slight backup in rates at the very end of the year.
We are pleased to report that the Portfolio continues to meet its goal of
providing as high a level of interest income as is consistent with maintaining
liquidity and stability of principal, and that the Portfolio still holds only
high quality securities with over 90% of assets invested in securities rated
A1+/P1.
Abigail Jones Feder
PORTFOLIO MANAGER
Kenneth R. Holley
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Money Market Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (92.2%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (15.8%)
AGENCY DISCOUNT NOTE (2.7%)
$35,000 Federal National Mortgage Association 5.33%,
3/20/97........................................ $ 34,596
-----------
AGENCY FLOATING RATE NOTES (13.1%)
20,000 FCC National Bank 5.51%, 5/05/97................. 20,000
Federal National Mortgage Association
25,000 5.25%, 4/11/97................................. 24,997
65,000 5.41%, 9/02/97................................. 65,000
13,000 5.32%, 7/26/99................................. 12,964
46,000 Student Loan Marketing Association 5.57%,
10/30/97....................................... 46,034
-----------
168,995
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost
$203,591)................................................. 203,591
-----------
COMMERCIAL PAPER (41.0%)
FINANCE (41.0%)
30,000 Abbey National North America 5.32%, 3/11/97...... 29,694
27,000 ABN-AMRO North America Finance, Inc. 5.58%,
3/6/97......................................... 26,732
9,000 ABN-AMRO North America Finance, Inc. 5.275%,
5/15/97........................................ 8,823
25,000 American General Finance 5.31%, 1/28/97.......... 24,901
15,000 Ameritech Capital Funding Corp. 5.28%, 3/14/97... 14,842
30,000 Deutsche Bank 5.47%, 1/23/97..................... 29,900
20,000 Deutsche Bank 5.34%, 2/10/97..................... 19,881
25,000 Ford Motor Credit Corp. 5.33%, 2/05/97........... 24,871
15,000 General Electric Capital Corp. 5.31%, 1/24/97.... 14,949
25,000 General Electric Capital Corp. 5.27%, 4/18/97.... 24,608
25,000 Harvard University 5.35%, 1/21/97................ 24,926
25,000 IBM Credit Corp. 5.31%, 3/03/97.................. 24,775
25,000 J.C. Penney Corp. 5.31%, 2/20/97................. 24,816
20,000 John Deere Capital Corp. 5.37%, 1/13/97.......... 19,964
22,728 MetLife Funding, Inc. 5.36%, 1/21/97............. 22,660
3,000 MetLife Funding, Inc. 5.43%, 1/21/97............. 2,991
25,000 Monsanto Co. 5.43%, 2/19/97...................... 24,815
25,000 Private Export Funding Corp. 5.30%, 2/10/97...... 24,853
28,900 Private Export Funding Corp. 5.31%, 2/18/97...... 28,695
25,000 Raytheon Corp. 5.29%, 1/10/97.................... 24,967
15,000 Societe Generale Bank 5.32%, 2/20/97............. 14,889
8,000 Suntrust Banks, Inc. 5.30%, 1/06/97.............. 7,994
10,000 Suntrust Banks, Inc. 5.37%, 2/10/97.............. 9,940
10,000 Transamerica Financial Corp. 5.29%, 1/22/97...... 9,969
18,000 Transamerica Financial Corp. 5.28%, 3/31/97...... 17,765
17,000 Transamerica Financial Corp. 5.27%, 5/27/97...... 16,637
7,000 Xerox Corp. 5.32%, 2/05/97....................... 6,964
-----------
TOTAL COMMERCIAL PAPER (Cost $526,821).................... 526,821
-----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (35.4%)
$23,000 ABN-AMRO Bank, New York (Yankee) 6.12%,
7/14/97........................................ $ 22,999
25,000 ANZ Inc. 5.38%, 2/12/97.......................... 25,002
35,000 Bank of Austria 5.38%, 1/21/97................... 34,997
40,000 Barclay's Bank (Yankee) 5.38%, 2/05/97........... 40,001
30,000 Bayer Landesbank 5.41%, 5/07/97.................. 30,001
30,000 Canadian Imperial Bank 5.49%, 1/15/97............ 30,000
7,670 Canadian Imperial Bank (Yankee) 5.41%, 1/17/97... 7,670
25,000 Commerzbank (Yankee) 5.39%, 3/04/97.............. 25,000
20,000 Credit Agricole (Yankee) 5.49%, 4/28/97.......... 20,001
40,000 National Westminster Bank plc 5.51%, 1/06/97..... 40,000
30,000 Rabobank 5.50%, 4/18/97.......................... 30,001
50,000 Royal Bank of Canada (Yankee) 6.05%, 6/11/97..... 50,000
32,000 Societe Generale Bank (Yankee) 6.16%, 9/08/97.... 31,996
31,840 Swiss Bank 5.35%, 2/07/97........................ 31,840
35,000 UBS Finance Inc. 5.50%, 1/17/97.................. 35,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $454,508)............... 454,508
-----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $1,184,920)............ 1,184,920
-----------
SHORT TERM INVESTMENT (7.5%)
REPURCHASE AGREEMENT (7.5%)
96,292 Goldman Sachs & Co. 6.52%, dated 12/31/96, due
1/02/97, to be repurchased at $96,327,
collateralized by U.S. Treasury Notes, 5.50%,
due 12/31/00, valued at $98,338 (Cost
$96,292)....................................... 96,292
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.7%) (Cost $1,281,212).............. 1,281,212
--------
OTHER ASSETS (0.6%)
Interest Receivable........................ $ 7,275
Other...................................... 66 7,341
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (2,503)
Investment Advisory Fees Payable........... (898)
Adminstrative Fees Payable................. (167)
Directors' Fees and Expenses Payable....... (37)
Custodian Fees Payable..................... (28)
Other Liabilities.......................... (287) (3,920)
---------- --------
NET ASSETS (100%)........................................ $1,284,633
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $1,285,115
Accumulated Net Realized Loss.......... (482)
----------
NET ASSETS............................. $1,284,633
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 1,285,119,350 outstanding
$0.001 par value shares (authorized
4,000,000,000 shares).................. $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
Floating Rate -- The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at
December 31, 1996.
Maturity dates disclosed for Floating Rate Instruments are the ultimate maturity
dates. The effective maturity dates for such securities are the next interest
reset dates.
Interest rates disclosed for Commercial Paper, and Agency Discount Notes
represent effective yields at December 31, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 39.6%
U.S. Government & Agency Obligations 4.0%
Variable/Floating Rate Instruments 56.1%
Other 0.3%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL MONEY
<S> <C> <C>
Market Portfolio Donoghue's SEC
30-Day Yields 30-Day Yields
Jan. 2.97 3.26
Feb. 3.38 3.19
Mar. 3.42 3.35
Apr. 3.62 3.53
May 3.72 3.81
June 3.48 3.31
July 3.28 3.19
Aug 3.29 3.21
Sept 3.3 3.41
Oct 3.27 3.32
Nov 3.34 3.33
Dec 3.03 3.06
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Money Market Portfolio's investment objectives are to maximize
current income that is exempt from Federal income tax and preserve capital while
maintaining high levels of liquidity through investing in high
quality municipal money market instruments which earn interest exempt from
Federal income tax in the opinion of bond counsel for the issuer. The Portfolio
will purchase only securities having a remaining maturity of one year or less.
Under normal circumstances, the Portfolio will invest at least 80% of its assets
in tax-exempt municipal securities. Additionally, the Portfolio will not
purchase private activity bonds, the interest from which is subject to
alternative minimum tax. Interest on tax-exempt municipal securities may be
subject to state and local taxes. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio is expected to
maintain a net asset value of $1.00 per share. There can be no assurance,
however, that the Portfolio will be successful in maintaining a net asset value
of $1.00 per share.
The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Municipal Money Market
Portfolio as of December 31, 1996 were 3.38% and 3.43%, respectively. The seven
day taxable equivalent yield and the seven day taxable equivalent effective
yield for Municipal Money Market Portfolio at December 31, 1996, assuming
Federal income tax rate of 39.6% (maximum rate) were 5.60% and 5.68%,
respectively. The seven day yields are not necessarily indicative of future
performance.
Throughout 1996, taxable investors spent considerable energy focused on the
relative strength of the U.S. economy and how the Federal Reserve might respond
either by raising or lowering short term interest rates. Despite this theme that
dominated the taxable sectors, it had little or no impact on the short term
tax-exempt sector. Instead, as is so often typical in the tax-exempt sector,
changes in the market and the shape of the yield curve were driven primarily by
supply and demand. Except for the latter half of the second quarter, the yield
curve remained very flat or inverted for the majority of 1996 which was in
contrast to the taxable market's positively sloped curve. As the Federal tax
deadline approached in mid April, the
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
142
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
market sold off as bond funds were forced to sell short securities to meet
redemptions. This increase in supply caused the curve to shift to a positive
slope which persisted for the balance of the second quarter only to revert back
to a flat shape as the third quarter unfolded.
The Portfolio experienced tremendous growth during 1996 with the asset size
increasing 61%. The Portfolio finished 1996 with assets of $721 million. Much of
the asset growth occurred during April, which was fortuitous as April
represented a buying opportunity.
Overall the asset allocation throughout the year remained consistent with
commercial paper ranging from 30-40%, tax-exempt notes ranged from 3-5%, and
daily and weekly variable rate puttable issues fluctuated between 50% and 60% of
the Portfolio. Because of the relatively flat shape of the curve, the Portfolio
maintained a relatively short weighted average maturity throughout the year
ranging from 15 to 40 days. December ended with a weighted average maturity of
22 days.
Gerald P. Barth
PORTFOLIO MANAGER
Abigail Jones Feder
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (95.7%)
FIXED RATE INSTRUMENTS (39.6%)
NOTES (6.8%)
$ 1,000 City of San Antonio, Texas, Revenue Bonds, 7.90%,
5/01/14, Prerefunded 5/01/97 at 101.5.......... $ 1,028
3,000 Colorado State, Series A, 4.50%, 6/27/97,
TRANS.......................................... 3,008
1,500 Delaware State, General Obligation Bonds, Series
A, 4.25%, 3/01/97.............................. 1,501
2,445 Hawaii State, General Obligation Bonds, Series
BK, 6.60%, 4/01/99, Prerefunded 4/01/97 at
101.5.......................................... 2,498
6,225 Idaho State, 4.50%, 6/30/97, TANS................ 6,243
2,000 Indianapolis, Indiana, Local Public Improvements
Board, Series A, 4.25%, 1/09/97................ 2,000
1,500 Los Angeles, California, Unified School District,
4.50%, 6/30/97, TRANS.......................... 1,505
2,500 Maine State, General Obligation Bonds, 4.50%,
6/27/97, TANS.................................. 2,507
4,130 Massachusetts State, General Obligation Bonds,
Series A, 4.25%, 6/10/97....................... 4,138
9,100 New York State, General Obligation Bonds, 3.55%,
2/06/97, BANS.................................. 9,100
1,000 South Carolina State, General Obligation Bonds,
Series A, 5.00%, 7/01/97....................... 1,005
9,000 Texas State, 4.75%, 8/29/97, TRANS............... 9,046
3,575 Wisconsin State, Series B, 7.25%, 5/01/08,
Prerefunded 5/01/97 at 101..................... 3,650
2,000 York County, South Carolina, Pollution Control
Revenue Bonds, Saluda River, Series E2, 3.65%,
2/15/97........................................ 2,000
----------
49,229
----------
COMMERCIAL PAPER (32.8%)
10,000 Baltimore County, Maryland, 3.50%, 2/12/97....... 10,000
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light, Series
90C, 3.55%, 2/26/97............................ 3,000
5,025 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.55%, 2/06/97......... 5,025
6,000 Burlington, Kansas, Pollution Control Revenue
Bonds, Kansas City Power & Light Project,
Series B, 3.55%, 2/18/97....................... 6,000
4,530 City of Dallas, Texas, Series A, 3.70%, 2/25/97.. 4,530
6,000 City of Honolulu, Hawaii, 3.45%, 1/14/97......... 6,000
2,500 City of Lincoln, Nebraska, Series 95, 3.50%,
2/10/97........................................ 2,500
City of Mount Vernon, Indiana, General Electric,
Series 89A,
4,000 3.55%, 1/29/97................................. 4,000
4,000 3.50%, 2/26/97................................. 4,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 2,500 Commonwealth of Virginia, 3.50%, 2/19/97......... $ 2,500
1,200 Converse County, Wyoming, Series 88, 3.50%,
2/10/97........................................ 1,200
Gainesville, Florida, Series C,
1,128 3.45%, 1/30/97................................. 1,128
2,525 3.45%, 2/21/97................................. 2,525
Houston, Texas,
6,000 3.65%, 1/21/97, Series A....................... 6,000
10,100 3.50%, 1/31/97, Series A....................... 10,100
4,000 3.15%, 2/06/97, Series B....................... 4,000
2,000 Illinois Development Finance Authority, Series
93A, 3.70%, 1/07/97............................ 2,000
2,100 Illinois Health & Educational Facilities, Series
89A, 3.60%, 2/24/97............................ 2,100
4,000 Independence, Missouri, Water Utility Revenue,
Series 86, 3.60%, 1/13/97...................... 4,000
Jacksonville, Florida, Electric Authority,
7,700 3.70%, 1/06/97................................. 7,700
3,100 3.45%, 1/14/97................................. 3,100
Jasper County, Indiana,
3,600 3.55%, 2/07/97, Series 88B..................... 3,600
2,000 3.55%, 2/07/97, Series 88C..................... 2,000
1,100 Lehigh County, Pennsylvania, Series A, 3.65%,
1/15/97........................................ 1,100
5,750 Louisiana State, General Obligation Bonds, 3.65%,
1/22/97........................................ 5,750
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.55%,
2/27/97........................................ 6,600
3,000 Massachusetts State Water Resource Authority,
3.65%, 1/08/97................................. 3,000
3,000 Montgomery County, Maryland, Series 95, 3.50%,
2/07/97........................................ 3,000
3,000 Montgomery County, Pennsylvania, 3.60%,
2/13/97........................................ 3,000
6,380 Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
3.65%, 1/08/97................................. 6,380
5,000 Municipal Assistance Corp. for the City of New
York, New York, Series F, 3.45%, 1/16/97....... 5,000
3,000 Municipal Electric Authority of Georgia, 3.60%,
3/10/97........................................ 3,000
7,300 Nashville & Davidson County, Tennessee, 3.55%,
1/30/97........................................ 7,300
1,700 New York City, New York, Water Finance Authority,
3.45%, 1/17/97................................. 1,700
4,025 North Carolina Eastern Municipal Power, 3.55%,
2/18/97........................................ 4,025
300 Northeastern Pennsylvania Hospital Authority,
Series B, 3.60%, 1/29/97....................... 300
2,990 Omaha, Nebraska, Public Power District, 3.60%,
1/28/97........................................ 2,990
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
144
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Peninsula Ports Authority, Virginia, Series 92,
3.45%, 1/14/97................................. $ 1,000
3,000 Petersburg, Indiana, Indiana Power & Light,
Series 91, 3.60%, 1/28/97...................... 3,000
Platte River Authority, Colorado,
2,200 3.60%, 2/11/97................................. 2,200
5,500 3.45%, 2/12/97................................. 5,500
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
1,000 3.60%, 2/11/97, Series B....................... 1,000
1,500 3.60%, 2/11/97, Series C....................... 1,500
1,065 3.60%, 2/11/97, Series E....................... 1,065
1,500 3.65%, 1/22/97, Series F....................... 1,500
2,800 Salt Lake City, Utah, Series 90, 3.65%, 1/06/97.. 2,800
6,000 Salt River, Arizona, 3.60%, 1/23/97.............. 6,000
Salt River, Arizona, Agricultural and Power,
District Revenue Bonds,
6,600 3.50%, 1/27/97................................. 6,600
7,006 3.45%, 1/30/97................................. 7,006
San Antonio, Texas, Water Systems Revenue Bonds,
4,500 3.70%, 1/07/97................................. 4,500
1,900 3.55%, 2/07/97................................. 1,900
Sunshine State, Florida, Government Finance
Authority,
9,850 3.50%, 2/10/97, Series 86...................... 9,850
4,470 3.60%, 2/13/97................................. 4,470
2,000 3.45%, 2/21/97................................. 2,000
3,750 3.60%, 2/24/97................................. 3,750
5,000 Sweetwater County, Wyoming, Series 88A, 3.50%,
2/10/97........................................ 5,000
2,000 Texas Municipal Power Agency, 3.60%, 2/26/97..... 2,000
Trimble County, Kentucky, Louisville Gas &
Electric Series,
5,000 3.50%, 1/29/97................................. 5,000
1,000 3.60%, 1/29/97................................. 1,000
5,500 University of Minnesota, Series A, 3.60%,
2/14/97........................................ 5,500
2,500 Vanderbilt University, Tennessee, Series 89A,
3.60%, 2/25/97................................. 2,500
----------
236,794
----------
TOTAL FIXED RATE INSTRUMENTS.............................. 286,023
----------
VARIABLE/FLOATING RATE INSTRUMENTS (56.1%)
DAILY VARIABLE RATE BONDS (32.1%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 5.00%,
9/01/23........................................ 1,500
2,400 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds, University of Alabama Hospital Services
Fund, Series 91, 5.10%, 12/01/26............... 2,400
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Burke County, Georgia, Development Authority,
$ 5,500 4.95%, 7/01/24................................. $ 5,500
4,300 5.00%, 9/01/26................................. 4,300
5,200 California Pollution Control Financing Authority,
Southern California Edison, Series 86A, 4.70%,
2/28/08........................................ 5,200
1,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center, 5.10%, 10/01/17........................ 1,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Inc., Project,
4,200 5.00%, 12/01/17, Series A...................... 4,200
4,200 5.00%, 12/01/17, Series B...................... 4,200
700 5.00%, 12/01/17, Series C...................... 700
4,200 5.00%, 12/01/17, Series D...................... 4,200
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 5.00%,
12/01/09....................................... 2,800
1,700 Delta County, Michigan, Environmental Improvement
Revenue Bonds, Mead Corp., 5.00%, 12/01/23..... 1,700
4,200 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 4.15%,
3/01/22........................................ 4,200
4,500 East Baton Rouge Parish, Louisianna, Pollution
Control Revenue Bonds, Exxon Corp. Project,
5.00%, 11/01/19................................ 4,500
6,400 Emery County, Utah, Pollution Control Revenue
Bonds, Pacificorp., 4.95%, 11/01/24............ 6,400
2,100 Geisinger Authority, Pennsylvania Health System,
Series B, 4.25%, 7/01/22....................... 2,100
1,400 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
4.90%, 6/01/20................................. 1,400
5,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 5.00%, 11/01/15.......... 5,000
6,600 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, Series
94, 5.00%, 12/01/25............................ 6,600
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
2,600 5.00%, 3/01/24, Series 84A..................... 2,600
2,200 5.00%, 3/01/24, Series 84B..................... 2,200
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85, 4.95%, 12/01/15.............. 5,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 7,000 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 4.90%, 6/01/23..... $ 7,000
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 5.05%,
8/01/15........................................ 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 4.95%,
11/01/11....................................... 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project
2,400 5.00%, 11/01/14, Series 84A.................... 2,400
4,400 4.90%, 8/01/15, Series 84A..................... 4,400
2,500 5.00%, 11/01/14, Series 84B.................... 2,500
2,500 5.00%, 11/01/14, Series 84C.................... 2,500
2,500 5.00%, 11/01/14, Series 84D.................... 2,500
2,920 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 5.00%,
12/01/15....................................... 2,920
Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
4,500 4.95%, 5/01/29, Series B....................... 4,500
4,600 5.00%, 5/01/29, Series C....................... 4,600
3,500 4.95%, 5/01/29, Series E....................... 3,500
3,600 5.00%, 5/01/29, Series F....................... 3,600
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 5.00%,
12/01/20....................................... 1,000
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
2,000 4.95%, 9/01/30, Series A....................... 2,000
3,500 4.95%, 9/01/30, Series B....................... 3,500
1,700 Monroe County, Georgia, Pollution Control Revenue
Bonds, Gulf Power Co., Series 2, 4.65%,
9/01/24........................................ 1,700
3,900 New York City, New York, Cultural Resources,
Revenue Bonds, Series B, 4.80%, 12/01/15....... 3,900
New York City, New York, General Obligation
Bonds,
2,500 5.00%, 8/15/03, Series B, Subseries B2......... 2,500
2,000 5.00%, 8/15/04, Series B, Subseries B3......... 2,000
5,000 5.00%, 8/15/23, Series B, Subseries B4......... 5,000
1,500 5.00%, 8/15/18, Series B, Subseries B7......... 1,500
400 5.00%, 8/01/98, Series C, Subseries C4......... 400
1,800 5.00%, 8/01/22, Subseries A4................... 1,800
1,100 5.00%, 8/01/23, Subseries A4................... 1,100
1,500 5.00%, 8/01/15, Subseries A5................... 1,500
1,400 4.50%, 8/15/21, Subseries B4................... 1,400
1,500 4.50%, 8/15/23, Subseries B4................... 1,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 7,450 New York City, New York, Water Finance Authority,
Water and Sewer System Revenue Bonds, Series C,
5.00%, 6/15/23................................. $ 7,450
2,000 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 4.80%,
7/01/25........................................ 2,000
2,500 New York State, Thruway Authority Revenue Bonds,
4.90%, 1/01/24................................. 2,500
1,000 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 5.05%, 12/01/99...... 1,000
Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas and Electric,
1,300 4.70%, 12/01/15, Series 85A.................... 1,300
2,000 4.70%, 12/01/15, Series 85B.................... 2,000
4,100 4.90%, 9/01/30, Series 95B..................... 4,100
2,800 Parrish, Alabama, Industrial Development Board,
Pollution Control Revenue Bonds, Alabama Power
Co. Project, 5.00%, 6/01/15.................... 2,800
2,400 Peninsula Ports Authority, Virginia, Coal Revenue
Bonds, 4.95%, 7/01/16.......................... 2,400
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
5,000 4.25%, 11/01/25, Series 95A.................... 5,000
1,700 5.00%, 11/01/27, Series 95B.................... 1,700
1,500 5.00%, 11/01/29, Series 95C.................... 1,500
2,600 5.00%, 11/01/30, Series 95D.................... 2,600
5,000 Philadelphia, Pennsylvania, Childrens Hospital,
Series 92B, 5.00%, 3/01/27..................... 5,000
4,100 Philadelphia, Pennsylvania, Hospitals & Higher
Educational Facilities Authority Revenue Bonds,
Childrens Hospital Project, Series 96A, 5.00%,
3/01/27........................................ 4,100
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,800 5.05%, 7/01/14, Series A....................... 3,800
1,000 5.05%, 7/01/14, Series B....................... 1,000
2,000 Port Authority of New York & New Jersey, Revenue
Bonds, 4.85%, 6/01/20.......................... 2,000
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.
2,000 5.25%, 4/01/10, Series A....................... 2,000
1,600 4.95%, 6/01/10, Series B....................... 1,600
2,300 Raleigh-Durham, North Carolina, Airport
Authority, Series A, 4.95%, 11/01/15........... 2,300
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil Project,
Series 92B, 4.90%, 10/01/22.................... 1,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 3,000 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
4.00%, 1/01/26................................. $ 3,000
5,000 Salt Lake County, Utah, Pollution Control Revenue
Bonds, British Petroleum Co., Series 94, 4.95%,
2/01/08........................................ 5,000
4,900 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
Series 85, 4.95%, 7/01/15...................... 4,900
1,200 Sublette County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 4.90%,
11/01/14....................................... 1,200
1,300 Texas State, Water Development Board Revenue
Bonds, Series A, 5.10%, 3/01/15................ 1,300
1,400 Valdez, Alaska, Marine Terminal Authority, Exxon
Project, Series 85, 4.90%, 10/01/25............ 1,400
3,000 West Side Calhoun County, Texas, Pollution
Control Revenue Bonds, 5.00%, 12/01/15......... 3,000
----------
231,870
----------
MONTHLY VARIABLE RATE BONDS (0.4%)
2,500 California State, Series B, 4.47%, 6/30/97,
RANS........................................... 2,500
----------
WEEKLY VARIABLE RATE BONDS (23.6%)
1,000 Albuquerque, New Mexico, Revenue Bonds, Series
91A, 4.10%, 7/01/22............................ 1,000
2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 4.05%,
9/01/20........................................ 2,700
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc. Project, 4.15%,
12/01/09....................................... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 4.10%, 8/01/20, Series A....................... 1,000
1,000 4.10%, 8/01/09, Series B....................... 1,000
9,200 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 4.00%, 1/01/16......... 9,200
400 California Health Facilities Authority, Series A,
4.25%, 1/01/16................................. 400
2,500 California State, Series C3, 4.05%, 6/30/97,
RANS........................................... 2,500
2,700 California Statewide Communities, Revenue Bonds,
Series A1, 3.90%, 5/15/25...................... 2,700
5,700 Charlotte, North Carolina, Airport, Series 93A,
4.00%, 7/01/16................................. 5,700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 4.10%,
2/01/00........................................ $ 1,000
2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A, 4.10%, 6/01/08.............. 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 4.10%, 12/01/15..... 1,500
City of Forsyth, Montana, Pollution Control
Revenue Bonds,
300 4.15%, 6/01/13, Series B....................... 300
700 4.15%, 6/01/13, Series D....................... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds,
Box-Crow Cement Co., 4.50%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale, 4.20%, 9/15/25............... 1,000
1,600 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 4.10%,
4/01/04........................................ 1,600
Clark County, Nevada, Airport Revenue Bonds,
16,700 4.00%, 7/01/12, Series 93A..................... 16,700
2,600 4.00%, 7/01/25, Series 95-A1................... 2,600
4,000 Clark County, Nevada, Industrial Development
Revenue Bond, Nevada Power Co., Series C,
4.15%, 10/01/30................................ 4,000
3,900 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds, 4.00%, 12/01/00...... 3,900
130 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, Series 88,
4.05%, 6/01/98................................. 130
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
4.00%, 8/01/00................................. 600
5,500 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1, 4.00%, 12/01/10............... 5,500
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital
Project, 4.00%, 9/01/25........................ 1,800
16,700 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94, 4.00%, 10/05/22.............. 16,700
3,000 Foothill/Eastern California Toll Road Revenue
Bonds, Series 95C, 3.90%, 1/02/35.............. 3,000
2,000 Franklin County, Ohio, Series 95, 4.10%,
6/01/16........................................ 2,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 4.00%, 8/01/16...................... $ 2,500
Harris County, Texas, Toll Road Revenue Bonds,
5,000 4.00%, 8/01/20, Series 94G..................... 5,000
5,000 4.00%, 8/01/20, Series 94H..................... 5,000
2,200 Huntsville, Alabama, Healthcare Facilities
Authority, Series B, 4.00%, 6/01/24............ 2,200
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 2.80%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 4.10%, 3/01/09............................ 5,000
3,000 Illinois State Toll Highway Authority, Series B,
4.00%, 1/01/10................................. 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center, 4.10%, 1/01/26................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 4.60%, 12/01/15................... 900
1,200 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 4.10%, 12/01/00...... 1,200
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 3.80%, 1/01/19.......... 1,000
2,600 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington University
Project, 4.10%, 9/01/09........................ 2,600
3,000 New York State Local Government Assistance Corp.,
Series D, 4.00%, 4/01/25....................... 3,000
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 4.15%, 7/01/15.......... 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 4.25%, 11/01/19......................... 1,500
Pinellas County, Florida, Health Facilities,
Bayfront Medical Center,
235 3.80%, 6/01/98................................. 235
1,000 3.80%, 6/01/09................................. 1,000
350 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 4.10%, 12/01/05......... 350
800 Port Development Corporation Marine Terminal,
Texas, Series 89, 4.00%, 1/15/14............... 800
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 4.60%, 9/01/14.... 1,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 600 Putnam County, Florida, Development Authority,
Seminole Electric, Series 84-H1, 4.15%,
3/15/14........................................ $ 600
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
4.05%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 4.60%, 8/01/14............................ 700
Tennessee State, General Obligation Bonds, BANS
6,000 3.95%, 7/02/01, Series 96A..................... 6,000
4,500 3.95%, 7/02/01, Series C....................... 4,500
4,430 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 4.00%, 12/01/16..... 4,430
1,100 University of North Carolina, Chapel Hill Fund,
Inc., Certificates of Participation, 4.05%,
10/01/09....................................... 1,100
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 4.00%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds
2,000 4.15%, 7/01/17, Series 93-1A3.................. 2,000
3,300 4.10%, 7/01/17, Series 1A-2.................... 3,300
----------
170,245
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................. 404,615
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $690,638)................ 690,638
----------
TAXABLE INSTRUMENTS (4.0%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (4.0%)
28,625 Federal Home Loan Bank Discount Notes 5.55%,
1/02/97 (Cost $28,621)......................... 28,621
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.7%) (Cost $719,259)................ 719,259
--------
OTHER ASSETS (0.5%)
Cash......................................... $ 3
Interest Receivable.......................... 3,747
Other........................................ 42 3,792
----------
LIABILITIES (-0.2%)
Dividends Payable............................ (818)
Investment Advisory Fees Payable............. (507)
Adminstrative Fees Payable................... (96)
Directors' Fees and Expenses Payable......... (23)
Custodian Fees Payable....................... (18)
Other Liabilities............................ (179) (1,641 )
---------- --------
NET ASSETS (100%)........................................ $721,410
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 721,441
Accumulated Net Realized Loss.......... (31)
----------
NET ASSETS............................. $ 721,410
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 721,415,763 outstanding
$0.001 par value shares (authorized
4,000,000,000 shares).................. $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
BANS -- Bond Anticipation Notes
RANS -- Revenue Anticipation Notes
TANS -- Tax Anticipation Notes
TRANS -- Tax & Revenue Anticipation Notes
Variable/Floating Rate Instruments: The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand.
Prerefunded Bonds. Outstanding bonds have been refeunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the Treasury escrow.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are thirty days or less.
Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at December 31, 1996.
At December 31, 1996, approximately 13% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of its
public bodies and municipalities may effect the ability of issuers to pay the
required principal and interest payments of the municipal securities.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
AMORTIZED
COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Alabama................................ $ 13,780 1.9%
Alaska................................. 1,400 0.2
Arizona................................ 35,806 5.0
California............................. 17,805 2.5
Colorado............................... 11,438 1.6
Connecticut............................ 5,500 0.8
Delaware............................... 1,501 0.2
Florida................................ 57,858 8.0
Georgia................................ 33,225 4.6
Hawaii................................. 8,498 1.2
Idaho.................................. 6,243 0.9
Illinois............................... 25,700 3.6
Indiana................................ 18,600 2.6
Iowa................................... 350 0.1
Kansas................................. 6,900 1.0
Kentucky............................... 6,000 0.8
Louisiana.............................. 30,770 4.3
Maine.................................. 2,507 0.3
Maryland............................... 14,000 1.9
Massachusetts.......................... 14,738 2.0
Michigan............................... 1,700 0.2
Minnesota.............................. 11,565 1.6
Mississippi............................ 7,000 1.0
Missouri............................... 16,100 2.2
Montana................................ 1,000 0.1
Nebraska............................... 5,490 0.8
Nevada................................. 23,300 3.2
New Mexico............................. 6,700 0.9
New York............................... 58,350 8.1
North Carolina......................... 14,625 2.0
Ohio................................... 9,400 1.3
Oregon................................. 3,600 0.5
Pennsylvania........................... 37,800 5.2
South Carolina......................... 3,005 0.4
Tennessee.............................. 25,200 3.5
Texas.................................. 90,934 12.6
Utah................................... 14,200 2.0
Virginia............................... 5,900 0.8
Washington............................. 10,300 1.4
West Virginia.......................... 1,000 0.1
Wisconsin.............................. 4,350 0.6
Wyoming................................ 26,500 3.7
---------- ---
$ 690,638 95.7%
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN
ALLOCATION EQUITY MARKETS EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 3,716 $ 7,323 $ 28,748 $ 3,664
Interest 342 970 4,086 465
Less: Foreign Taxes Withheld (413) (724) (2,468) (471)
-------- -------- -------- -------
Total Income 3,645 7,569 30,366 3,658
-------- -------- -------- -------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,169 3,378 15,368 1,035
Less: Fees Waived (501) (848) -- (203)
-------- -------- -------- -------
Investment Advisory Fees -- Net 668 2,530 15,368 832
Administrative Fees 357 663 1,910 218
Sub-Administrative Fees 5 -- 175 --
Custodian Fees 246 836 3,430 112
Filing and Registration Fees 45 89 198 66
Insurance 5 9 31 2
Directors' Fees and Expenses 9 19 76 5
Professional Fees 45 61 114 37
Shareholder Reports 58 37 112 15
Foreign Tax Expense -- 172 320 --
Distribution Fees on Class B Shares 1 27 28 4
Other Expenses 11 19 109 7
-------- -------- -------- -------
Total Expenses 1,450 4,462 21,871 1,298
-------- -------- -------- -------
NET INVESTMENT INCOME 2,195 3,107 8,495 2,360
-------- -------- -------- -------
NET REALIZED GAIN (LOSS):
Investments Sold 8,704 27,882 21,315 1,678
Foreign Currency Transactions 17,506 (286) (1,717) 82
-------- -------- -------- -------
Total Net Realized Gain 26,210 27,596 19,598 1,760
-------- -------- -------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (3,318)* (23,998)** 79,800*** 22,284
Foreign Currency Translations (8,185) -- 554 (7)
-------- -------- -------- -------
Total Net Change in Unrealized
Appreciation (Depreciation) (11,503) (23,998) 80,354 22,277
-------- -------- -------- -------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 14,707 3,598 99,952 24,037
-------- -------- -------- -------
Net Increase in Net Assets Resulting
from Operations $ 16,902 $ 6,705 $ 108,447 $ 26,397
-------- -------- -------- -------
-------- -------- -------- -------
<CAPTION>
GLOBAL
EQUITY
PORTFOLIO
YEAR
ENDED
DECEMBER 31,
1996
(000)
<S> <C>
- ------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,813
Interest 214
Less: Foreign Taxes Withheld (149)
-------
Total Income 1,878
-------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 630
Less: Fees Waived (118)
-------
Investment Advisory Fees -- Net 512
Administrative Fees 134
Sub-Administrative Fees --
Custodian Fees 34
Filing and Registration Fees 37
Insurance 3
Directors' Fees and Expenses 4
Professional Fees 43
Shareholder Reports 13
Foreign Tax Expense --
Distribution Fees on Class B Shares 5
Other Expenses 7
-------
Total Expenses 792
-------
NET INVESTMENT INCOME 1,086
-------
NET REALIZED GAIN (LOSS):
Investments Sold 7,259
Foreign Currency Transactions 54
-------
Total Net Realized Gain 7,313
-------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 7,472
Foreign Currency Translations 356
-------
Total Net Change in Unrealized
Appreciation (Depreciation) 7,828
-------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 15,141
-------
Net Increase in Net Assets Resulting
from Operations $ 16,227
-------
-------
</TABLE>
- ---------------
* Net of foreign tax of $4,000 on unrealized appreciation.
** Net of foreign tax of $115,000 on unrealized appreciation.
*** Net of foreign tax of $219,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE
GOLD EQUITY MAGNUM SMALL CAP EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR MARCH 15, YEAR YEAR
ENDED ENDED 1996* TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 348 $ 52,178 $ 779 $ 5,719 $ 1,534
Interest 157 6,307 263 324 662
Less: Foreign Taxes Withheld (6) (6,263) (96) (681) (231)
------- --------------- ------ ------- ---------------
Total Income 499 52,222 946 5,362 1,965
------- --------------- ------ ------- ---------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 164 15,861 382 2,092 1,642
Basic Fees -- Sub Adviser 110 -- -- -- --
Less: Fees Waived -- Adviser (129) (474) (257) (178) (129)
------- --------------- ------ ------- ---------------
Investment Advisory Fees -- Net 145 15,387 125 1,914 1,513
Administrative Fees 48 3,077 79 355 331
Sub-Administrative Fees -- -- -- -- --
Custodian Fees 30 637 80 134 55
Filing and Registration Fees 45 233 71 24 76
Insurance -- 45 -- 6 1
Directors' Fees and Expenses 2 82 2 11 9
Professional Fees 32 120 82 52 39
Shareholder Reports 36 156 38 24 20
Distribution Fees on Class B Shares 2 10 11 -- 10
Other Expenses 6 70 3 12 9
------- --------------- ------ ------- ---------------
Total Expenses 346 19,817 491 2,532 2,063
------- --------------- ------ ------- ---------------
NET INVESTMENT INCOME (LOSS) 153 32,405 455 2,830 (98)
------- --------------- ------ ------- ---------------
NET REALIZED GAIN (LOSS):
Investments Sold 474 104,727 510 7,039 (2,403)
Foreign Currency Transactions 19 18,389 855 (220) 14,264
------- --------------- ------ ------- ---------------
Total Net Realized Gain 493 123,116 1,365 6,819 11,861
------- --------------- ------ ------- ---------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (4,491) 200,500 2,785 22,028 (23,087)
Foreign Currency Translations (7) (183) 858 1,013 5,882
------- --------------- ------ ------- ---------------
Total Net Change in Unrealized
Appreciation (Depreciation) (4,498) 200,317 3,643 23,041 (17,205)
------- --------------- ------ ------- ---------------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (4,005) 323,433 5,008 29,860 (5,344)
------- --------------- ------ ------- ---------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ (3,852) $ 355,838 $ 5,463 $ 32,690 $ (5,442)
------- --------------- ------ ------- ---------------
------- --------------- ------ ------- ---------------
<CAPTION>
LATIN
AMERICAN
PORTFOLIO
YEAR
ENDED
DECEMBER 31,
1996
(000)
<S> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 642
Interest 139
Less: Foreign Taxes Withheld (20)
------
Total Income 761
------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 287
Basic Fees -- Sub Adviser --
Less: Fees Waived -- Adviser (121)
------
Investment Advisory Fees -- Net 166
Administrative Fees 49
Sub-Administrative Fees 10
Custodian Fees 100
Filing and Registration Fees 60
Insurance 1
Directors' Fees and Expenses 2
Professional Fees 46
Shareholder Reports 8
Distribution Fees on Class B Shares 2
Other Expenses 4
------
Total Expenses 448
------
NET INVESTMENT INCOME (LOSS) 313
------
NET REALIZED GAIN (LOSS):
Investments Sold 6,290
Foreign Currency Transactions (33)
------
Total Net Realized Gain 6,257
------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 2,595**
Foreign Currency Translations (3)
------
Total Net Change in Unrealized
Appreciation (Depreciation) 2,592
------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 8,849
------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 9,162
------
------
</TABLE>
- ---------------
* Commencement of Operations.
** Net of foreign taxes of $3,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING EQUITY SMALL CAP
EQUITY GROWTH GROWTH VALUE EQUITY TECHNOLOGY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR SEPTEMBER 16,
ENDED ENDED ENDED ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,012 $ 97 $ 3,090 $ 1,229 $ 1
Interest 114 287 722 72 6
--------------- --------------- --------------- ------ -----
Total Income 1,126 384 3,812 1,301 7
--------------- --------------- --------------- ------ -----
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 400 1,025 1,193 345 13
Less: Fees Waived (120) (47) (150) (126) (13)
--------------- --------------- --------------- ------ -----
Investment Advisory Fees -- Net 280 978 1,043 219 --
Administrative Fees 81 166 314 72 3
Custodian Fees 30 30 75 39 4
Filing and Registration Fees 63 37 71 35 14
Insurance 1 4 4 2 --
Directors' Fees and Expenses 2 6 9 3 --
Professional Fees 26 25 31 22 55
Shareholder Reports 11 24 33 12 27
Distribution Fees on Class B Shares 13 10 10 3 1
Other Expenses 5 8 10 6 --
Expenses Reimbursed by Adviser -- -- -- -- (86)
--------------- --------------- --------------- ------ -----
Total Expenses 512 1,288 1,600 413 18
--------------- --------------- --------------- ------ -----
NET INVESTMENT INCOME (LOSS) 614 (904) 2,212 888 (11)
--------------- --------------- --------------- ------ -----
NET REALIZED GAIN (LOSS):
Investments Sold 15,649 36,369 40,528 6,620 (11)
Securities Sold Short 81 -- -- -- --
--------------- --------------- --------------- ------ -----
Total Net Realized Gain (Loss) 15,730 36,369 40,528 6,620 (11)
--------------- --------------- --------------- ------ -----
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 4 (31,141) 10,734 (902) 296
--------------- --------------- --------------- ------ -----
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 15,734 5,228 51,262 5,718 285
--------------- --------------- --------------- ------ -----
Net Increase in Net Assets Resulting from
Operations $ 16,348 $ 4,324 $ 53,474 $ 6,606 $ 274
--------------- --------------- --------------- ------ -----
--------------- --------------- --------------- ------ -----
<CAPTION>
U.S. REAL VALUE
ESTATE EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
(000) (000) (000)
<S> <C> <C> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 4,760 $ 4,156 $ 247
Interest 439 205 447
--------------- --------------- -------
Total Income 5,199 4,361 694
--------------- --------------- -------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,018 656 75
Less: Fees Waived (184) (94) (75)
--------------- --------------- -------
Investment Advisory Fees -- Net 834 562 --
Administrative Fees 199 210 32
Custodian Fees 63 41 21
Filing and Registration Fees 91 42 35
Insurance 1 4 1
Directors' Fees and Expenses 5 7 1
Professional Fees 28 26 21
Shareholder Reports 43 25 9
Distribution Fees on Class B Shares 12 4 5
Other Expenses 7 9 5
Expenses Reimbursed by Adviser -- -- (20)
--------------- --------------- -------
Total Expenses 1,283 930 110
--------------- --------------- -------
NET INVESTMENT INCOME (LOSS) 3,916 3,431 584
--------------- --------------- -------
NET REALIZED GAIN (LOSS):
Investments Sold 17,097 15,759 1,846
Securities Sold Short -- -- --
--------------- --------------- -------
Total Net Realized Gain (Loss) 17,097 15,759 1,846
--------------- --------------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 28,458 2,404 (1,083)
--------------- --------------- -------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 45,555 18,163 763
--------------- --------------- -------
Net Increase in Net Assets Resulting from
Operations $ 49,471 $ 21,594 $ 1,347
--------------- --------------- -------
--------------- --------------- -------
</TABLE>
- -----------------
* Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL
EMERGING FIXED FIXED HIGH MUNICIPAL
MARKETS INCOME INCOME YIELD BOND
DEBT PORTFOLIO PORTFOLIO PORFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 226 $ --
Interest 26,992 10,785 6,686 8,962 2,015
Less: Foreign Taxes Withheld -- -- (120) -- --
------- ------- ------- ------- ------
Total Income 26,992 10,785 6,566 9,188 2,015
------- ------- ------- ------- ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,887 559 437 439 135
Less: Fees Waived -- (236) (227) (57) (105)
------- ------- ------- ------- ------
Investment Advisory Fees -- Net 1,887 323 210 382 30
Administrative Fees 300 260 177 146 66
Custodian Fees 419 32 64 26 7
Filing and Registration Fees 50 38 41 49 32
Insurance 5 5 3 2 1
Interest Expense 2,164 -- -- -- --
Directors' Fees and Expenses 30 8 6 4 3
Professional Fees 57 24 34 29 24
Shareholder Reports 23 18 14 13 7
Distribution Fees on Class B Shares 7 2 2 8 --
Other Expenses 140 14 8 7 5
------- ------- ------- ------- ------
Total Expenses 5,082 724 559 666 175
------- ------- ------- ------- ------
NET INVESTMENT INCOME 21,910 10,061 6,007 8,522 1,840
------- ------- ------- ------- ------
NET REALIZED GAIN (LOSS):
Investments Sold 70,698 1,726 1,953 687 (6)
Foreign Currency Transactions (7,643) 1,321 789 -- --
Securities Sold Short (6,282) -- -- -- --
Written Options 392 -- -- -- --
------- ------- ------- ------- ------
Total Net Realized Gain (Loss) 57,165 3,047 2,742 687 (6)
------- ------- ------- ------- ------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (1,153) (6,222) (1,162) 3,436 (686)
Foreign Currency Translations 45 (121) (384) -- --
Short Sales 1,417 -- -- -- --
------- ------- ------- ------- ------
Total Net Change in Unrealized
Appreciation (Depreciation) 309 (6,343) (1,546) 3,436 (686)
------- ------- ------- ------- ------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 57,474 (3,296) 1,196 4,123 (692)
------- ------- ------- ------- ------
Net Increase in Net Assets Resulting from
Operations $ 79,384 $ 6,765 $ 7,203 $ 12,645 $ 1,148
------- ------- ------- ------- ------
------- ------- ------- ------- ------
<CAPTION>
MUNICIPAL
MONEY MONEY
MARKET MARKET
PORTFOLIO PORTFOLIO
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1996
(000) (000)
<S> <C> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ -- $ --
Interest 60,654 22,694
Less: Foreign Taxes Withheld -- --
------- -------
Total Income 60,654 22,694
------- -------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 3,343 1,932
Less: Fees Waived -- --
------- -------
Investment Advisory Fees -- Net 3,343 1,932
Administrative Fees 1,731 1,029
Custodian Fees 134 103
Filing and Registration Fees 296 193
Insurance 27 15
Interest Expense -- --
Directors' Fees and Expenses 52 32
Professional Fees 56 38
Shareholder Reports 104 67
Distribution Fees on Class B Shares -- --
Other Expenses 28 24
------- -------
Total Expenses 5,771 3,433
------- -------
NET INVESTMENT INCOME 54,883 19,261
------- -------
NET REALIZED GAIN (LOSS):
Investments Sold (469) (22)
Foreign Currency Transactions -- --
Securities Sold Short -- --
Written Options -- --
------- -------
Total Net Realized Gain (Loss) (469) (22)
------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments -- --
Foreign Currency Translations -- --
Short Sales -- --
------- -------
Total Net Change in Unrealized
Appreciation (Depreciation) -- --
------- -------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (469) (22)
------- -------
Net Increase in Net Assets Resulting from
Operations $ 54,414 $ 19,239
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN
ALLOCATION EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,195 $ 2,074 $ 3,107
Net Realized Gain (Loss) 26,210 (1,123) 27,596
Change in Unrealized Appreciation (Depreciation) (11,503) 15,675 (23,998)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 16,902 16,626 6,705
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (11,942) (3,492) (2,757)
In Excess of Net Investment Income (307) (1,308) (5)
Net Realized Gain (6,994) (12,502) (23,408)
CLASS B+:
Net Investment Income (46) -- (59)
In Excess of Net Investment Income (1) -- --
Net Realized Gain (28) -- (735)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (19,318) (17,302) (26,964)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 63,687 88,081 319,487
Distributions Reinvested 15,163 15,283 22,963
Redeemed (63,918) (115,002) (274,658)
CLASS B+:
Subscribed 1,042 -- 19,937
Distributions Reinvested 76 -- 728
Redeemed (471) -- (8,582)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 15,579 (11,638) 79,875
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 13,163 (12,314) 59,616
NET ASSETS:
Beginning of Period 170,663 182,977 314,884
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 183,826 $ 170,663 $ 374,500
- --------------------------------------------------------------------------------------------------------------------
Overdistributed net investment income included in end of
period net assets $ (308) $ (7,782) $ (4)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 5,277 7,883 15,774
Shares Issued on Distributions Reinvested 1,321 1,346 1,221
Shares Redeemed (5,262) (10,268) (13,753)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 1,336 (1,039) 3,242
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 87 -- 979
Shares Issued on Distributions Reinvested 7 -- 39
Shares Redeemed (39) -- (431)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 55 -- 587
<CAPTION>
<S> <C>
- ------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1995
(000)
<S> <C>
- ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,796
Net Realized Gain (Loss) 12,459
Change in Unrealized Appreciation (Depreciation) 7,852
- ------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 23,107
- ------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (4,866)
In Excess of Net Investment Income (3)
Net Realized Gain (40,469)
CLASS B+:
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
- ------------------------------------------------------------
Total Distributions (45,338)
- ------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 472,587
Distributions Reinvested 41,003
Redeemed (453,381)
CLASS B+:
Subscribed --
Distributions Reinvested --
Redeemed --
- ------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 60,209
- ------------------------------------------------------------
Total Increase (Decrease) in Net Assets 37,978
NET ASSETS:
Beginning of Period 276,906
- ------------------------------------------------------------
End of Period $ 314,884
- ------------------------------------------------------------
Overdistributed net investment income included in end of
period net assets $ (3)
- ------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 24,613
Shares Issued on Distributions Reinvested 2,138
Shares Redeemed (23,439)
- ------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 3,312
- ------------------------------------------------------------
CLASS B+:
Shares Subscribed --
Shares Issued on Distributions Reinvested --
Shares Redeemed --
- ------------------------------------------------------------
Net Increase in Class B Shares Outstanding --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EUROPEAN
MARKETS EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,495 $ 5,513 $ 2,360
Realized Net Gain (Loss) 19,598 (34,234) 1,760
Change in Unrealized Appreciation (Depreciation) 80,354 (97,017) 22,277
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 108,447 (125,738) 26,397
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (7,165) (3,978) (2,463)
In Excess of Net Investment Income (197) -- (220)
Net Realized Gain -- (66,711) (364)
CLASS B+:
Net Investment Income (51) -- (36)
In Excess of Net Investment Income (1) -- (3)
Net Realized Gain -- -- (6)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (7,414) (70,689) (3,092)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 550,412 379,789 128,948
Distributions Reinvested 5,513 67,401 2,886
Redeemed (229,242) (303,810) (46,075)
CLASS B+:
Subscribed 18,152 -- 3,819
Distributions Reinvested 43 -- 39
Redeemed (4,283) -- (1,495)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 340,595 143,380 88,122
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 441,628 (53,047) 111,427
NET ASSETS:
Beginning of Period 876,591 929,638 69,583
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 1,318,219 $ 876,591 $ 181,010
- --------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment income
included in end of period net assets $ (198) $ 167 $ (223)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 37,330 27,709 8,473
Shares Issued on Distributions Reinvested 367 4,586 177
Shares Redeemed (15,483) (22,595) (2,969)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 22,214 9,700 5,681
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 1,254 -- 254
Shares Issued on Distributions Reinvested 3 -- 2
Shares Redeemed (288) -- (97)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 969 -- 159
<CAPTION>
<S> <C>
- ------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1995
(000)
<S> <C>
- ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 714
Realized Net Gain (Loss) 643
Change in Unrealized Appreciation (Depreciation) 3,042
- ------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 4,399
- ------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (738)
In Excess of Net Investment Income --
Net Realized Gain (3,017)
CLASS B+:
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
- ------------------------------------------------------------
Total Distributions (3,755)
- ------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 56,209
Distributions Reinvested 3,468
Redeemed (18,372)
CLASS B+:
Subscribed --
Distributions Reinvested --
Redeemed --
- ------------------------------------------------------------
Net Increase in Capital Share Transactions 41,305
- ------------------------------------------------------------
Total Increase (Decrease) in Net Assets 41,949
NET ASSETS:
Beginning of Period 27,634
- ------------------------------------------------------------
End of Period $ 69,583
- ------------------------------------------------------------
Undistributed (overdistributed) net investment income
included in end of period net assets $ 24
- ------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,104
Shares Issued on Distributions Reinvested 264
Shares Redeemed (1,350)
- ------------------------------------------------------------
Net Increase in Class A Shares Outstanding 3,018
- ------------------------------------------------------------
CLASS B+:
Shares Subscribed --
Shares Issued on Distributions Reinvested --
Shares Redeemed --
- ------------------------------------------------------------
Net Increase in Class B Shares Outstanding --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL
EQUITY GOLD
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 1,086 $ 960 $ 153 $ (57)
Net Realized Gain 7,313 5,807 493 876
Change in Unrealized Appreciation (Depreciation) 7,828 7,195 (4,498) 2,423
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 16,227 13,962 (3,852) 3,242
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (1,075) (1,202) (135) (37)
In Excess of Net Investment Income -- -- (29) --
Net Realized Gain (5,024) (7,032) -- (2,066)
In Excess of Net Realized Gain -- -- (1,681) --
CLASS B+:
Net Investment Income (45) -- (4) --
In Excess of Net Investment Income -- -- (1) --
Net Realized Gain (223) -- -- --
In Excess of Net Realized Gain -- -- (89) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (6,367) (8,234) (1,939) (2,103)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 15,476 30,429 52,836 21,820
Distributions Reinvested 5,960 8,198 1,522 1,913
Redeemed (42,500) (31,615) (28,491) (47,706)
CLASS B+:
Subscribed 3,900 -- 2,457 --
Distributions Reinvested 268 -- 38 --
Redeemed (414) -- (800) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (17,310) 7,012 27,562 (23,973)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (7,450) 12,740 21,771 (22,834)
NET ASSETS:
Beginning of Period 91,675 78,935 7,409 30,243
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 84,225 $ 91,675 $ 29,180 $ 7,409
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ 19 $ -- $ (30) $ --
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 974 2,175 4,551 2,403
Shares Issued on Distributions Reinvested 370 583 162 222
Shares Redeemed (2,808) (2,239) (2,591) (5,071)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (1,464) 519 2,122 (2,446)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 252 -- 216 --
Shares Issued on Distributions Reinvested 17 -- 4 --
Shares Redeemed (27) -- (72) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 242 -- 148 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY MAGNUM
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
MARCH 15,
YEAR ENDED YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 32,405 $ 19,813 $ 455
Net Realized Gain 123,116 88,470 1,365
Change in Unrealized Appreciation 200,317 50,978 3,643
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 355,838 159,261 5,463
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (45,368) (5,969) (1,037)
In Excess of Net Investment Income -- -- (169)
Net Realized Gain (101,435) (168,582) (87)
CLASS B+:
Net Investment Income (97) -- (273)
In Excess of Net Investment Income -- -- (44)
Net Realized Gain (239) -- (23)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (147,139) (174,551) (1,633)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 508,163 276,622 82,326
Distributions Reinvested 131,405 167,795 1,117
Redeemed (181,971) (135,367) (1,247)
CLASS B+:
Subscribed 5,025 -- 22,789
Distributions Reinvested 305 -- 311
Redeemed (339) -- (637)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 462,588 309,050 104,659
- ---------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 671,287 293,760 108,489
NET ASSETS:
Beginning of Period 1,598,530 1,304,770 --
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 2,269,817 $ 1,598,530 $ 108,489
- ---------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment income
included in end of period net assets $ (273) $ 13,219 $ (213)
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 31,209 18,165 8,015
Shares Issued on Distributions Reinvested 7,837 11,272 106
Shares Redeemed (10,975) (8,961) (117)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 28,071 20,476 8,004
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 321 -- 2,211
Shares Issued on Distributions Reinvested 18 -- 29
Shares Redeemed (20) -- (60)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 319 -- 2,180
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ The International Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL JAPANESE
SMALL CAP EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 2,830 $ 3,256 $ (98) $ 90
Net Realized Gain (Loss) 6,819 7,677 11,861 (2,999)
Change in Unrealized Appreciation (Depreciation) 23,041 (6,811) (17,205) 5,934
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 32,690 4,122 (5,442) 3,025
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,001) (2,947) (11,178) --
In Excess of Net Investment Income -- -- (8,826) (2,539)
Net Realized Gain (5,327) (4,763) -- --
CLASS B+:
Net Investment Income -- -- (277) --
In Excess of Net Investment Income -- -- (218) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,328) (7,710) (20,499) (2,539)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 40,108 59,699 154,108 132,973
Distributions Reinvested 7,416 6,777 16,337 2,277
Redeemed (35,812) (24,320) (112,210) (66,790)
CLASS B+:
Subscribed -- -- 7,701 --
Distributions Reinvested -- -- 435 --
Redeemed -- -- (4,048) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 11,712 42,156 62,323 68,460
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 36,074 38,568 36,382 68,946
NET ASSETS:
Beginning of Period 198,669 160,101 119,278 50,332
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 234,743 $ 198,669 $ 155,660 $ 119,278
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income
included in end of period net assets $ 323 $ 715 $ (9,043) $ (2,710)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,406 3,865 16,432 15,121
Shares Issued on Distributions Reinvested 444 453 2,042 245
Shares Redeemed (2,199) (1,584) (12,218) (7,618)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 651 2,734 6,256 7,748
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- -- 812 --
Shares Issued on Distributions Reinvested -- -- 55 --
Shares Redeemed -- -- (435) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding -- -- 432 --
</TABLE>
- --------------------------------------------------------------------------------
+ The Japanese Equity Portfolio began offering Class B shares on January
2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AGGRESSIVE
AMERICAN EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 18, MARCH 8,
YEAR ENDED 1995* TO YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 313 $ 82 $ 614 $ 266
Net Realized Gain (Loss) 6,257 (543) 15,730 4,041
Change in Unrealized Appreciation 2,592 208 4 1,860
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,162 (253) 16,348 6,167
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (273) (74) (549) (268)
In Excess of Net Investment Income (5) -- -- --
Net Realized Gain (4,475) -- (9,877) (3,617)
Return of Capital -- (49) -- --
CLASS B+:
Net Investment Income (8) -- (62) --
Net Realized Gain (164) -- (1,265) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (4,925) (123) (11,753) (3,885)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 18,267 21,860 40,946 26,611
Distributions Reinvested 4,324 108 9,531 3,556
Redeemed (11,766) (6,216) (14,822) (3,901)
CLASS B+:
Subscribed 1,308 -- 9,581 --
Distributions Reinvested 147 -- 1,315 --
Redeemed (151) -- (2,409) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 12,129 15,752 44,142 26,266
- ------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 16,366 15,376 48,737 28,548
NET ASSETS:
Beginning of Period 15,376 -- 28,548 --
- ------------------------------------------------------------------------------------------------------------------
End of Period $ 31,742 $ 15,376 $ 77,285 $ 28,548
- ------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net
investment income included in end
of period net assets $ (5) $ -- $ 32 $ --
- ------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,557 2,375 2,748 2,360
Shares Issued on Distributions
Reinvested 384 12 665 293
Shares Redeemed (953) (690) (1,012) (308)
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 988 1,697 2,401 2,345
- ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 118 -- 672 --
Shares Issued on Distributions
Reinvested 13 -- 92 --
Shares Redeemed (13) -- (153) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 118 -- 611 --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EQUITY
GROWTH GROWTH
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (904) $ (1,009) $ 2,212 $ 2,169
Net Realized Gain 36,369 11,225 40,528 32,477
Change in Unrealized Appreciation
(Depreciation) (31,141) 27,942 10,734 15,685
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 4,324 38,158 53,474 50,331
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- (2,164) (2,636)
Net Realized Gain (24,810) -- (42,560) (26,092)
CLASS B+:
Net Investment Income -- -- (46) --
Net Realized Gain (1,588) -- (1,031) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (26,398) -- (45,801) (28,728)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 26,575 100,167 223,237 78,470
Distributions Reinvested 24,750 -- 41,770 26,785
Redeemed (87,418) (136,616) (78,208) (66,005)
CLASS B+:
Subscribed 5,462 -- 6,515 --
Distributions Reinvested 1,540 -- 993 --
Redeemed (1,423) -- (1,891) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (30,514) (36,449) 192,416 39,250
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (52,588) 1,709 200,089 60,853
NET ASSETS:
Beginning of Period 119,378 117,669 158,112 97,259
- ------------------------------------------------------------------------------------------------------------------
End of Period $ 66,790 $ 119,378 $ 358,201 $ 158,112
- ------------------------------------------------------------------------------------------------------------------
Undistributed net investment
income/accumulated net investment
loss included in end of period net
assets $ (3) $ -- $ 2 $ --
- ------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,202 5,737 14,718 5,794
Shares Issued on Distributions
Reinvested 1,845 -- 2,776 1,955
Shares Redeemed (3,952) (7,483) (5,067) (4,657)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (905) (1,746) 12,427 3,092
- ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 246 -- 418 --
Shares Issued on Distributions
Reinvested 115 -- 66 --
Shares Redeemed (64) -- (116) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 297 -- 368 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY TECHNOLOGY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
SEPTEMBER 16,
YEAR ENDED YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 888 $ 1,223 $ (11)
Net Realized Gain (Loss) 6,620 1,546 (11)
Change in Unrealized Appreciation (Depreciation) (902) 5,880 296
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 6,606 8,649 274
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (851) (1,519) --
Net Realized Gain (5,696) (2,511) --
CLASS B+:
Net Investment Income (34) -- --
Net Realized Gain (413) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (6,994) (4,030) --
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 14,319 18,293 3,375
Distributions Reinvested 5,982 3,611 --
Redeemed (48,028) (14,637) --
CLASS B+:
Subscribed 1,899 -- 1,485
Distributions Reinvested 376 -- --
Redeemed (420) -- (52)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (25,872) 7,267 4,808
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (26,260) 11,886 5,082
NET ASSETS:
Beginning of Period 51,919 40,033 --
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 25,659 $ 51,919 $ 5,082
- ---------------------------------------------------------------------------------------------------------------------
Undistributed net investment income included in end of
period net assets $ 3 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,157 1,631 336
Shares Issued on Distributions Reinvested 537 324 --
Shares Redeemed (3,850) (1,304) --
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (2,156) 651 336
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 153 -- 144
Shares Issued on Distributions Reinvested 34 -- --
Shares Redeemed (32) -- (5)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 155 -- 139
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ The Small Cap Value Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. VALUE
REAL ESTATE EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
FEBRUARY 24,
YEAR ENDED 1995* TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,916 $ 1,526 $ 3,431 $ 3,434
Net Realized Gain 17,097 3,495 15,759 10,276
Change in Unrealized Appreciation 28,458 3,896 2,404 17,116
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 49,471 8,917 21,594 30,826
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,888) (1,405) (3,374) (4,042)
In Excess of Net Investment Income (2) -- -- --
Net Realized Gain (12,504) (2,504) (17,256) (6,330)
CLASS B+:
Net Investment Income (148) -- (58) --
Net Realized Gain (559) -- (357) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (17,101) (3,909) (21,045) (10,372)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 119,585 67,651 38,132 70,393
Distributions Reinvested 14,340 3,148 19,004 9,289
Redeemed (24,190) (6,298) (99,013) (26,177)
CLASS B+:
Subscribed 8,149 -- 2,992 --
Distributions Reinvested 514 -- 401 --
Redeemed (1,175) -- (747) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 117,223 64,501 (39,231) 53,505
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 149,593 69,509 (38,682) 73,959
NET ASSETS:
Beginning of Period 69,509 -- 147,365 73,406
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 219,102 $ 69,509 $ 108,683 $ 147,365
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (2) $ 121 $ 7 $ 8
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 9,313 6,381 2,649 5,522
Shares Issued on Distributions Reinvested 1,047 279 1,340 731
Shares Redeemed (1,849) (573) (6,919) (2,068)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 8,511 6,087 (2,930) 4,185
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 662 -- 207 --
Shares Issued on Distributions Reinvested 37 -- 28 --
Shares Redeemed (92) -- (51) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 607 -- 184 --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
BALANCED MARKETS DEBT
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 584 $ 868 $ 21,910 $ 25,020
Net Realized Gain 1,846 1,158 57,165 9,187
Change in Unrealized Appreciation (Depreciation) (1,083) 2,413 309 15,290
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 1,347 4,439 79,384 49,497
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (477) (1,080) (14,104) (33,418)
In Excess of Net Investment Income (1) -- (74) --
Net Realized Gain (1,690) (1,047) (51,244) (7,508)
CLASS B+:
Net Investment Income (108) -- (381) --
In Excess of Net Investment Income -- -- (2) --
Net Realized Gain (548) -- (1,391)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2,824) (2,127) (67,196) (40,926)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 1,205 3,530 79,712 147,278
Distributions Reinvested 1,898 1,695 51,784 29,155
Redeemed (18,709) (3,387) (173,915) (148,075)
CLASS B+:
Subscribed 3,269 -- 4,437 --
Distributions Reinvested 607 -- 1,522 --
Redeemed (1,246) -- (1,211) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (12,976) 1,838 (37,671) 28,358
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (14,453) 4,150 (25,483) 36,929
NET ASSETS:
Beginning of Period 22,642 18,492 181,878 144,949
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 8,189 $ 22,642 $ 156,395 $ 181,878
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (1) $ 2 $ (76) $ (1,501)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 121 380 8,356 18,475
Shares Issued on Distributions Reinvested 215 182 6,805 3,468
Shares Redeemed (1,872) (358) (16,141) (17,651)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (1,536) 204 (980) 4,292
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 327 -- 467 --
Shares Issued on Distributions Reinvested 71 -- 201 --
Shares Redeemed (129) -- (103) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 269 -- 565 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED GLOBAL
INCOME FIXED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 10,061 $ 12,208 $ 6,007 $ 6,508
Net Realized Gain 3,047 5,921 2,742 15
Change in Unrealized Appreciation (Depreciation) (6,343) 13,125 (1,546) 10,191
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 6,765 31,254 7,203 16,714
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (10,366) (13,570) (5,986) (9,003)
In Excess of Net Investment Income (14) -- -- --
CLASS B+:
Net Investment Income (73) -- (88) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (10,453) (13,570) (6,074) (9,003)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 43,737 67,883 53,391 36,622
Distributions Reinvested 8,559 10,529 5,288 7,887
Redeemed (83,396) (139,900) (49,742) (80,043)
CLASS B+:
Subscribed 2,038 -- 2,353 --
Distributions Reinvested 64 -- 78 --
Redeemed (646) -- (902) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (29,644) (61,488) 10,466 (35,534)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (33,332) (43,804) 11,595 (27,823)
NET ASSETS:
Beginning of Period 165,527 209,331 102,852 130,675
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 132,195 $ 165,527 $ 114,447 $ 102,852
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (14) $ 10 $ 612 $ 309
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,156 6,668 4,846 3,346
Shares Issued on Distributions Reinvested 812 1,022 480 737
Shares Redeemed (7,913) (13,696) (4,503) (7,623)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (2,945) (6,006) 823 (3,540)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 194 -- 213 --
Shares Issued on Distributions Reinvested 6 -- 7 --
Shares Redeemed (62) -- (82) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 138 -- 138 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH MUNICIPAL
YIELD BOND
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
JANUARY 18,
YEAR ENDED YEAR ENDED YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,522 $ 7,477 $ 1,840 $ 1,963
Net Realized Gain (Loss) 687 (3,145) (6) 193
Change in Unrealized Appreciation (Depreciation) 3,436 9,886 (686) 1,635
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 12,645 14,218 1,148 3,791
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (8,340) (8,122) (1,821) (1,963)
In Excess of Net Investment Income (4) -- (16) (15)
Net Realized Gain -- -- -- (193)
CLASS B+:
Net Investment Income (333) -- (4) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,677) (8,122) (1,841) (2,171)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 48,672 59,247 18,758 61,800
Distributions Reinvested 6,490 6,088 1,724 2,060
Redeemed (25,529) (106,409) (25,432) (19,611)
CLASS B+:
Subscribed 6,981 -- 171 --
Distributions Reinvested 244 -- 4 --
Redeemed (1,743) -- (105) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 35,115 (41,074) (4,880) 44,249
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 39,083 (34,978) (5,573) 45,869
NET ASSETS:
Beginning of Period 62,245 97,223 45,869 --
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 101,328 $ 62,245 $ 40,296 $ 45,869
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (4) $ 86 $ (16) $ (15)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,604 5,865 1,830 6,134
Shares Issued on Distributions Reinvested 610 609 169 200
Shares Redeemed (2,400) (10,704) (2,496) (1,912)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 2,814 (4,230) (497) 4,422
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 662 -- 17 --
Shares Issued on Distributions Reinvested 23 -- -- --
Shares Redeemed (165) -- (10) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 520 -- 7 --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ Each Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MUNICIPAL
MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 54,883 $ 44,657 $ 19,261 $ 13,579
Net Realized Gain (Loss) (469) 79 (22) (1)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 54,414 44,736 19,239 13,578
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (54,883) (44,657) (19,261) (13,579)
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 13,167,615 8,093,985 5,869,663 3,169,110
Distributions Reinvested 51,181 41,765 18,242 13,182
Redeemed (12,770,387) (7,989,639) (5,617,992) (3,090,216)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 448,409 146,111 269,913 92,076
- ----------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 447,940 146,190 269,891 92,075
NET ASSETS:
Beginning of Period 836,693 690,503 451,519 359,444
- ----------------------------------------------------------------------------------------------------------------------
End of Period $ 1,284,633 $ 836,693 $ 721,410 $ 451,519
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Shares Subscribed 13,167,615 8,093,987 5,869,663 3,169,110
Shares Issued on Distributions Reinvested 51,181 41,765 18,242 13,182
Shares Redeemed (12,770,387) (7,989,639) (5,617,992) (3,090,216)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 448,409 146,113 269,913 92,076
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
(000)
<S> <C>
- -----------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING
ACTIVITIES:
Proceeds from Sales of Investments $ 1,065,592
Purchases of Investments (983,851)
Net Decrease in Short Term Investments 2,236
Net Cash Used for Foreign Currency Transactions (7,654)
Interest Income 14,598
Interest Expense Paid (1,794)
Operating Expenses Paid (3,281)
- -----------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities 85,846
- -----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received from Reverse Repurchase Agreements 22,105
Net Portfolio Share transactions (90,932)
Cash Distributions Paid (net of reinvestments of
$53,306) (13,890)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (82,717)
- -----------------------------------------------------------------
Net Increase in Cash 3,129
CASH AT BEGINNING OF YEAR (2,755)
- -----------------------------------------------------------------
CASH AT END OF YEAR $ 374
- -----------------------------------------------------------------
- -----------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO
NET CASH PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
Net Investment Income $ 21,910
Proceeds from Sale of Investments 1,065,592
Purchases of Investments (983,851)
Net Decrease in Short Term Investments 2,236
Net Cash Used for Foreign Currency Transactions (7,654)
Net Decrease in Receivables Pertaining to
Investing and Operating Activities (968)
Net Increase in Payables Pertaining to Investing
and Operating Activities (229)
(Accretion)/Amortization of Premium/Discount (11,190)
- -----------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities $ 85,846
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JANUARY 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.24 0.17 0.19 0.13 0.02 0.11
Net Realized and Unrealized Gain
(Loss) on Investments 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.12 1.17 (0.06) 2.88 0.22 (0.63)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.81) (0.25) (0.14) (0.09) -- --
In Excess of Net Investment Income (0.02) (0.10) -- (0.08) -- --
Net Realized Gain (0.48) (0.84) (0.36) -- -- --
In Excess of Net Realized Gain -- -- -- (0.09) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.31) (1.19) (0.50) (0.26) -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $183,193 $170,663 $182,977 $150,854 $50,234 $47,534
Ratio of Expenses to Average Net Assets
(1) 0.80% 0.80% 0.80% 0.80% 0.80%** 0.88%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio Turnover Rate 65% 72% 51% 53% 2% 62%
Average Commission Rate# $0.0028 N/A N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net Investment Income to Average
Net Assets 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.66
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.06
Net Realized and Unrealized Gain on
Investments 1.00
------
Total from Investment Operations 1.06
------
DISTRIBUTIONS
Net Investment Income (0.78)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.48)
------
Total Distributions (1.28)
------
NET ASSET VALUE, END OF PERIOD $ 11.44
------
------
TOTAL RETURN 9.22%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 633
Ratio of Expenses to Average Net Assets
(2) 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.09%**
Portfolio Turnover Rate 65%
Average Commission Rate# $0.0028
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.33%**
Net Investment Income to Average
Net Assets 0.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.11% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
168
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 9.67
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.17 0.18 0.11 0.10 0.01 0.14
Net Realized and Unrealized Gain
(Loss) on Investments 0.50 1.11 (4.15) 13.38 (0.53) 3.86
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.67 1.29 (4.04) 13.48 (0.52) 4.00
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.15) (0.34) (0.09) (0.01) -- (0.04)
In Excess of Net Investment Income (0.00))+ (0.00)+ -- (0.13) -- --
Net Realized Gain (1.27) (3.01) (0.53) (0.12) -- --
In Excess of Net Realized Gain -- -- -- (0.13) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.42) (3.35) (0.62) (0.39) -- (0.04)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.49% 6.87% (15.81)% 105.71% (3.82)% 41.50%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $363,498 $314,884 $276,906 $287,136 $41,978 $41,017
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 0.74% 0.97% 0.52% 0.83% 0.61%** 1.53%
Portfolio Turnover Rate 69% 42% 47% 18% 10% 33%
Average Commission Rate# $0.0111 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.05 $0.03 $0.04 $0.05 $0.02 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.25% 1.18% 1.20% 1.38% 2.02%** 1.63%
Net Investment Income (Loss) to
Average Net Assets 0.54% 0.79% 0.32% 0.45% (0.41 %** 0.90%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.55
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.11
Net Realized and Unrealized Gain on
Investments 0.46
------
Total from Investment Operations 0.57
------
DISTRIBUTIONS
Net Investment Income (0.11)
Net Realized Gain (1.27)
------
Total Distributions (1.38)
------
NET ASSET VALUE, END OF PERIOD $ 18.74
------
------
TOTAL RETURN 2.92%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $11,002
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.58%**
Portfolio Turnover Rate 69%
Average Commission Rate# $0.0111
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.52%**
Net Investment Income (Loss) to
Average Net Assets 0.37%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.52% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 25, 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized Gain
(Loss) on Investments 1.51 (2.05) (1.69) 8.79 0.11 0.11
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.60 (1.97) (1.73) 8.78 0.11 0.11
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.06) -- -- -- --
Net Realized Gain -- (1.13) (0.97) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.08) (1.19) (0.97) -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average Net Assets
(1) 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.69% 0.60% (0.26)% (0.06)% (0.33 %** (0.53)%**
Portfolio Turnover Rate 55% 54% 32% 52% 2% 0%
Average Commission Rate# $0.0006 N/A N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A $0.01 $0.00 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 1.79% 2.48%** 4.82%**
Net Investment Loss to Average Net
Assets N/A N/A N/A (0.10)% (1.06 %** (3.60)%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04
Net Realized and Unrealized Gain on
Investments 1.42
------
Total from Investment Operations 1.46
------
DISTRIBUTIONS
Net Investment Income (0.05)
------
Total Distributions (0.05)
------
NET ASSET VALUE, END OF PERIOD $ 14.66
------
------
TOTAL RETURN 11.04%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,213
Ratio of Expenses to Average Net Assets 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.33%**
Portfolio Turnover Rate 55%
Average Commission Rate# $0.0006
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.42% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 25, 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized Gain
(Loss) on Investments 1.51 (2.05) (1.69) 8.79 0.11 0.11
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.60 (1.97) (1.73) 8.78 0.11 0.11
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.06) -- -- -- --
Net Realized Gain -- (1.13) (0.97) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.08) (1.19) (0.97) -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average Net Assets
(1) 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.69% 0.60% (0.26)% (0.06)% (0.33 %** (0.53)%**
Portfolio Turnover Rate 55% 54% 32% 52% 2% 0%
Average Commission Rate# $0.0006 N/A N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A $0.01 $0.00 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 1.79% 2.48%** 4.82%**
Net Investment Loss to Average Net
Assets N/A N/A N/A (0.10)% (1.06 %** (3.60)%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04
Net Realized and Unrealized Gain on
Investments 1.42
------
Total from Investment Operations 1.46
------
DISTRIBUTIONS
Net Investment Income (0.05)
------
Total Distributions (0.05)
------
NET ASSET VALUE, END OF PERIOD $ 14.66
------
------
TOTAL RETURN 11.04%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,213
Ratio of Expenses to Average Net Assets 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.33%**
Portfolio Turnover Rate 55%
Average Commission Rate# $0.0006
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.42% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
PERIOD FROM
APRIL 2,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.92 $ 13.94 $ 12.91 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.24 0.14 0.08 0.08
Net Realized and Unrealized Gain on
Investments 2.85 1.37 1.29 2.83
------ ------ ------ ------
Total from Investment Operations 3.09 1.51 1.37 2.91
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.25) (0.15) (0.09) --
In Excess of Net Investment Income (0.02) -- -- --
Net Realized Gain (0.04) (1.38) (0.25) --
------ ------ ------ ------
Total Distributions (0.31) (1.53) (0.34) --
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.70 $ 13.92 $ 13.94 $ 12.91
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 22.29% 11.85% 10.88% 29.10%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $178,356 $69,583 $27,634 $12,681
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 24% 13% 79% 15%
Average Commission Rate# $0.0212 N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.03 $0.06 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 1.16% 1.25% 1.62% 2.43%**
Net Investment Income (Loss) to
Average Net Assets 1.67% 1.12% 0.25% (0.21)%**
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.05
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.18
Net Realized and Unrealized Gain on
Investments 2.73
------
Total from Investment Operations 2.91
------
DISTRIBUTIONS
Net Investment Income (0.23)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.04)
------
Total Distributions (0.29)
------
NET ASSET VALUE, END OF PERIOD $ 16.67
------
------
TOTAL RETURN 20.76%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,654
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.67%**
Portfolio Turnover Rate 24%
Average Commission Rate# $0.0212
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.40%**
Net Investment Income (Loss) to
Average Net Assets 1.52%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.23% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JULY 15,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.23 0.18 0.08 0.08 0.01 0.02
Net Realized and Unrealized Gain
(Loss) on Investments 3.02 2.26 0.79 4.18 0.39 (0.67)
------ ------ ------ ------ ------ ------
Total from Investment Operations 3.25 2.44 0.87 4.26 0.40 (0.65)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.23) (0.22) (0.12) (0.02) -- --
In Excess of Net Investment Income -- -- -- (0.03) -- --
Net Realized Gain (1.09) (1.31) (1.22) (0.09) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.32) (1.53) (1.34) (0.14) -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 22.83% 18.66% 6.95% 44.24% 4.28% (6.50)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $80,297 $91,675 $78,935 $19,918 $11,739 $11,257
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.38% 1.17% 0.87% 0.84% 0.69%** 1.00%**
Portfolio Turnover Rate 26% 28% 12% 42% 5% 10%
Average Commission Rate# $0.0299 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.02 $0.02 $0.01 $0.02 $0.08
Ratios before expense limitation:
Expenses to Average Net Assets 1.15% 1.13% 1.24% 1.66% 2.49%** 5.22%**
Net Investment Income (Loss) to
Average Net Assets 1.23% 1.04% 0.63% 0.18% (0.80 %** (3.22)%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.36
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.13
Net Realized and Unrealized Gain on
Investments 3.02
------
Total from Investment Operations 3.15
------
DISTRIBUTIONS
Net Investment Income (0.21)
Net Realized Gain (1.09)
------
Total Distributions (1.30)
------
NET ASSET VALUE, END OF PERIOD $ 16.21
------
------
TOTAL RETURN 22.04%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,928
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.29%**
Portfolio Turnover Rate 26%
Average Commission Rate# $0.0299
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.39%**
Net Investment Income to Average
Net Assets 1.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.25% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
PERIOD FROM
FEBRUARY 1,
YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.55 $ 9.13 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.05 (0.07) 0.03
Net Realized and Unrealized Gain
(Loss) on Investments++ 1.41 1.22 (0.88)
------ ------ ------
Total from Investment Operations 1.46 1.15 (0.85)
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.01) (0.02)
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain -- (1.72) --
In Excess of Net Realized Gain (0.65) -- --
------ ------ ------
Total Distributions (0.71) (1.73) (0.02)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.30 $ 8.55 $ 9.13
------ ------ ------
------ ------ ------
TOTAL RETURN 16.94% 13.21% (8.49)%
------ ------ ------
------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $27,810 $7,409 $30,243
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25% 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate 94% 47% 56%
Average Commission Rate# $0.0246 N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.04 $0.11 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.73% 1.76% 1.72%**
Net Investment Loss to Average Net
Assets 0.10% (0.82)% (0.06)%**
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.81
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.03
Net Realized and Unrealized Gain on
Investments++ 1.14
------
Total from Investment Operations 1.17
------
DISTRIBUTIONS
Net Investment Income (0.04)
In Excess of Net Investment Income (0.01)
In Excess of Net Realized Gain (0.65)
------
Total Distributions (0.70)
------
NET ASSET VALUE, END OF PERIOD $ 9.28
------
------
TOTAL RETURN 13.21%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,370
Ratio of Expenses to Average Net Assets
(2) 1.50%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.30%**
Portfolio Turnover Rate 94%
Average Commission Rate# $0.0246
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.94%**
Net Investment Loss to Average Net
Assets (0.13)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.47% of the trade amount.
++ The amounts shown for the year ended December 31, 1996 for a share
outstanding throughout the year does not accord with aggregate net
losses on investments for the year because of the timing of sales and
repurchases of the portfolio shares in relation to fluctuating market
value of the investments in the Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 10.52
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.25 0.16 0.16 0.15 0.01 0.12
Net Realized and Unrealized Gain
(Loss) on Investments 2.71 1.55 1.54 4.36 0.14 (0.59)
------ ------ ------ ------ ------ ------
Total from Investment Operations 2.96 1.71 1.70 4.51 0.15 (0.47)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.36) (0.06) (0.18) (0.01) -- (0.17)
In Excess of Net Investment Income -- -- -- (0.13) -- --
Net Realized Gain (0.80) (1.84) (0.27) (0.26) -- (0.05)
------ ------ ------ ------ ------ ------
Total Distributions (1.16) (1.90) (0.45) (0.40) -- (0.22)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 19.64% 11.77% 12.39% 46.50% 1.53% (4.56)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,264,424 $1,598,530 $1,304,770 $947,045 $510,727 $486,836
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.64% 1.38% 1.12% 1.25% 0.68%** 1.46%
Portfolio Turnover Rate 18% 27% 16% 23% 5% 12%
Average Commission Rate# $0.0238 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00 $0.003 $0.004 $0.01 $0.00 $0.00
Ratios before expense limitation:
Expenses to Average Net Assets 1.02% 1.03% 1.03% 1.06% 1.14%** 1.02%
Net Investment Income to Average
Net Assets 1.61% 1.35% 1.09% 1.19% 0.54%** 1.44%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.24
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.23
Net Realized and Unrealized Gain on
Investments 2.59
------
Total from Investment Operations 2.82
------
DISTRIBUTIONS
Net Investment Income (0.33)
Net Realized Gain (0.80)
------
Total Distributions (1.13)
------
NET ASSET VALUE, END OF PERIOD $ 16.93
------
------
TOTAL RETURN 18.58%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 5,393
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.68%**
Portfolio Turnover Rate 18%
Average Commission Rate# $0.0238
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.00
Ratios before expense limitation:
Expenses to Average Net Assets 1.27%**
Net Investment Income to Average
Net Assets 1.66%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.26% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------
PERIOD FROM
MARCH 15,
1996* TO
DECEMBER 31,
1996
<S> <C>
- ----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.06
Net Realized and Unrealized Gain on
Investments 0.76
-------
Total from Investment Operations 0.82
-------
DISTRIBUTIONS
Net Investment Income (0.13)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.01)
-------
Total Distributions (0.16)
-------
NET ASSET VALUE, END OF PERIOD $ 10.66
-------
-------
TOTAL RETURN 8.25%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $85,316
Ratio of Expenses to Average Net Assets
(1) 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.99%**
Portfolio Turnover Rate 18%
Average Commission Rate# $0.0211
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.54%**
Net Investment Income to Average
Net Assets 0.44%**
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------
PERIOD FROM
MARCH 15, 1996*
TO
DECEMBER 31, 1996
<S> <C>
- ----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.01
Net Realized and Unrealized Gain on
Investments 0.78
-------
Total from Investment Operations 0.79
-------
DISTRIBUTIONS
Net Investment Income (0.13)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.01)
-------
Total Distributions (0.16)
-------
NET ASSET VALUE, END OF PERIOD $ 10.63
-------
-------
TOTAL RETURN 7.90%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $23,173
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.60%**
Portfolio Turnover Rate 18%
Average Commission Rate# $ 0.0211
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.69%**
Net Investment Income to Average
Net Assets 0.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
# For the period ended December 31, 1996, the average commission rate
paid in trades on which commissions were charged was 0.25% of the
trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993++ 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.94 $ 15.15 $ 14.64 $ 10.09 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.21 0.24 0.14 0.09 0.01
Net Realized and Unrealized Gain on
Investments (2) 2.29 0.15 0.62 4.48 0.08
------ ------ ------ ------ ------
Total from Investment Operations 2.50 0.39 0.76 4.57 0.09
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.22) (0.23) (0.03) 0.00 --
In Excess of Net Investment Income -- -- -- (0.02) --
Net Realized Gain (0.39) (0.37) (0.22) -- --
------ ------ ------ ------ ------
Total Distributions (0.61) (0.60) (0.25) (0.02) --
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 16.82% 2.60% 5.25% 45.34% 0.90%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $234,743 $198,669 $160,101 $52,834 $3,824
Ratio of Expenses to Average Net Assets
(1) 1.15% 1.15% 1.15% 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.29% 1.72% 1.18% 0.66% 1.37%**
Portfolio Turnover Rate 35% 24% 8% 14% 0%
Average Commission Rate# $0.0159 N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.02 $0.10 $0.16
Ratios before expense limitation:
Expenses to Average Net Assets 1.23% 1.24% 1.29% 1.86% 21.67%**
Net Investment Income (Loss) to
Average Net Assets 1.20% 1.63% 1.04% (0.05)% (19.15)%**
(2) Reflects a 1% transaction fee on purchases and
redemptions of capital shares.
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
++ Per share amounts for the year ended December 31, 1993 are based on
average outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.30% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------
PERIOD FROM
APRIL 25,
YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996++ 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.27 $ 9.83 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) -- 0.04 (0.01)
Net Realized and Unrealized Loss on
Investments+ (0.13) (0.40) (0.16)
------ ------ ------
Total from Investment Operations (0.13) (0.36) (0.17)
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.66) -- --
In Excess of Net Investment Income (0.52) (0.20) --
------ ------ ------
Total Distributions (1.18) (0.20) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 7.96 $ 9.27 $ 9.83
------ ------ ------
------ ------ ------
TOTAL RETURN (1.40)% (3.64)% (1.70)%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $152,229 $119,278 $50,332
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 38% 52% 1%
Average Commission Rate# $0.0561 N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income (loss) $0.01 $0.06 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.07% 1.20% 1.27%**
Net Investment Income (Loss) to
Average Net Assets (0.11)% (0.05)% (0.37)%**
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996++
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (2) (0.02)
Net Realized and Unrealized Loss on
Investments (0.14)
------
Total from Investment Operations (0.16)
------
DISTRIBUTIONS
Net Investment Income (0.64)
In Excess of Net Investment Income (0.51)
------
Total Distributions (1.15)
------
NET ASSET VALUE, END OF PERIOD $ 7.94
------
------
TOTAL RETURN (1.67)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,431
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Loss to Average
Net Assets (2) (0.26)%**
Portfolio Turnover Rate 38%
Average Commission Rate# $0.0561
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.31%**
Net Investment Loss to Average Net
Assets (0.32)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ The amount shown for the year ended December 31, 1995 for a share
outstanding throughout the year does not agree with the amount of
aggregate net gains on investments for the year because of the timing
of sales and repurchases of the Portfolio shares in relation to
fluctuating market value of the investments in the Portfolio.
++ Per share amounts for the year ended December 31, 1996 are based on
average outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.43% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
177
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
JANUARY 18,
YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.06 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 4.27 (0.92)
------ ------
Total from Investment Operations 4.41 (0.87)
------ ------
DISTRIBUTIONS
Net Investment Income (0.13) (0.04)
Net Realized Gain (2.02) --
Return of Capital -- (0.03)
------ ------
Total Distributions (2.15) (0.07)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.32 $ 9.06
------ ------
------ ------
TOTAL RETURN 48.77% (8.68)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.70% 1.70%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.21% 0.62%**
Portfolio Turnover Rate 192% 137%
Average Commission Rate# $0.0004 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.05 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 2.18% 3.13%**
Net Investment Income to Average
Net Assets 0.75% (0.48)%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.44
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.09
Net Realized and Unrealized Gain on
Investments 3.90
------
Total from Investment Operations 3.99
------
DISTRIBUTIONS
Net Investment Income (0.10)
Net Realized Gain (2.02)
------
Total Distributions (2.12)
------
NET ASSET VALUE, END OF PERIOD $ 11.31
------
------
TOTAL RETURN 42.44%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,333
Ratio of Expenses to Average Net Assets
(2) 1.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.89%**
Portfolio Turnover Rate 192%
Average Commission Rate# $0.0004
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 2.43%**
Net Investment Income to Average
Net Assets 0.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.30% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
YEAR ENDED MARCH 8, 1995*
DECEMBER 31, TO DECEMBER 31,
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.17 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.18 0.15
Net Realized and Unrealized Gain on
Investments 4.73 3.95
------ ------
Total from Investment Operations 4.91 4.10
------ ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.15)
Net Realized Gain (2.48) (1.78)
------ ------
Total Distributions (2.65) (1.93)
------ ------
NET ASSET VALUE, END OF PERIOD $ 14.43 $ 12.17
------ ------
------ ------
TOTAL RETURN 40.90% 41.25%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.26% 1.64%**
Portfolio Turnover Rate 380% 309%
Average Commission Rate # $0.0484 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.24% 1.59%**
Net Investment Income to Average
Net Assets 1.02% 1.05%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.13
Net Realized and Unrealized Gain on
Investments 4.67
------
Total from Investment Operations 4.80
------
DISTRIBUTIONS
Net Investment Income (0.15)
Net Realized Gain (2.48)
------
Total Distributions (2.63)
------
NET ASSET VALUE, END OF PERIOD $ 14.42
------
------
TOTAL RETURN 39.72%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 8,805
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.95%**
Portfolio Turnover Rate 380%
Average Commission Rate $0.0484
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.47%**
Net Investment Income to Average
Net Assets 0.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97 $ 16.18
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.19) (0.18) (0.09) (0.11) (0.01) (0.09)
Net Realized and Unrealized Gain
(Loss) on Investments 0.89 5.55 (0.01) 0.11 1.26 (1.12)
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.70 5.37 (0.10) 0.00 1.25 (1.21)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Realized Gain (8.69) -- -- -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.72% 33.31% (0.62)% 0.00% 8.35% (7.48)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $62,793 $119,378 $117,669 $103,621 $94,161 $80,156
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25% 1.25% 1.25% 1.25%** 1.25%
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.88)% (0.76)% (0.61)% (0.77)% (0.68)%** (0.66)%
Portfolio Turnover Rate % 33 % 25 % 24 % 25 % 1 % 17
Average Commission Rate# $0.0507 N/A N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss $0.01 $0.003 $0.002 $0.01 $0.00 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.30% 1.26% 1.26% 1.31% 1.36%** 1.29%
Net Investment Loss to Average Net
Assets (0.92)% (0.77)% (0.62)% (0.83)% (0.79)%** (0.71)%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- ------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.47
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (2) (0.15)
Net Realized and Unrealized Gain on
Investments 0.82
------
Total From Operations 0.67
------
DISTRIBUTIONS
Net Realized Gain (8.69)
------
NET ASSET VALUE, END OF PERIOD $ 13.45
------
------
TOTAL RETURN 3.58%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,997
Ratio of Expenses to Average Net Assets
(2) 1.50%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (1.09)%**
Portfolio Turnover Rate 33%
Average Commission Rate $0.0507
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.54%**
Net Investment Income to Average
Net Assets (1.14)%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
180
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.17 0.22 0.17 0.22 0.03 0.16
Net Realized and Unrealized Gain on
Investments 4.07 4.93 0.21 0.28 0.41 0.82
------ ------ ------ ------ ------ ------
Total from Investment Operations 4.24 5.15 0.38 0.50 0.44 0.98
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.28) (0.13) (0.23) -- (0.20)
In Excess of Net Investment Income -- -- -- (0.01) -- --
Net Realized Gain (3.27) (2.75) (0.37) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (3.44) (3.03) (0.50) (0.24) -- (0.20)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 30.97% 45.02% 3.26% 4.33% 3.85% 9.26%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $352,703 $158,112 $97,259 $73,789 $45,985 $36,558
Ratio of Expenses to Average Net Assets
(1) 0.80% 0.80% 0.80% 0.80% 0.80%** 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 1.12% 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate 186% 186% 146% 172% 1% 38%
Average Commission Rate# $0.0535 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.88% 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income to Average
Net Assets 1.04% 1.49% 1.35% 1.46% 1.62%** 1.52%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 2,
1991* TO
OCTOBER 31,
1991
<S> <C>
- ---------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05
Net Realized and Unrealized Gain on
Investments 0.61
------
Total from Investment Operations 0.66
------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 10.66
------
------
TOTAL RETURN 6.60%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,139
Ratio of Expenses to Average Net Assets
(1) 0.80%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.34%**
Portfolio Turnover Rate 3%
Average Commission Rate# N/A
- -----------------
(1) Effect of voluntary expense limitat
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%**
Net Investment Income to Average
Net Assets 1.77%**
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.22
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.13
Net Realized and Unrealized Gain on
Investments 3.99
------
Total from Investment Operations 4.12
------
DISTRIBUTIONS
Net Investment Income (0.15)
Net Realized Gain (3.27)
------
Total Distributions (3.42)
------
NET ASSET VALUE, END OF PERIOD $ 14.92
------
------
TOTAL RETURN 29.92%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,498
Ratio of Expenses to Average Net Assets
(2) 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.91%**
Portfolio Turnover Rate 186%
Average Commission Rate $0.0535
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.12%**
Net Investment Income to Average
Net Assets 0.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
181
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------
PERIOD FROM
DECEMBER 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.32 0.30 0.28 0.24 0.01
Net Realized and Unrealized Gain
(Loss) on Investments 2.36 1.82 (0.01) 0.90 0.13
------------ ------------ ------------ ------------ ------------
Total from Investment Operations 2.68 2.12 0.27 1.14 0.14
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.32) (0.38) (0.27) (0.18) --
Net Realized Gain (3.38) (0.63) (0.30) -- --
------------ ------------ ------------ ------------ ------------
Total Distributions (3.70) (1.01) (0.57) (0.18) --
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL RETURN 22.99% 20.63% 2.53% 11.33% 1.40%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $23,970 $51,919 $40,033 $26,775 $5,974
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.20% 2.60% 2.67% 2.56% 1.64%**
Portfolio Turnover Rate 32% 36% 22% 29% 0%
Average Commission Rate# $0.0402 N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.04 $0.02 $0.03 $0.06 $0.13
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.21% 1.26% 1.68% 23.14%**
Net Investment Income (Loss) to
Average Net Assets 1.89% 2.39% 2.41% 1.88% (20.50)%**
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.95
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.23
Net Realized and Unrealized Gain on
Investments 2.38
------------
Total from Investment Operations 2.61
------------
DISTRIBUTIONS
Net Investment Income (0.30)
Net Realized Gain (3.38)
------------
Total Distributions (3.68)
------------
NET ASSET VALUE, END OF PERIOD $ 10.88
------------
------------
TOTAL RETURN 22.33%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,689
Ratio of Expenses to Average Net Assets
(2) 1.24%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.93%**
Portfolio Turnover Rate 32%
Average Commission Rate $0.0402
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.69%**
Net Investment Income to Average
Net Assets 1.50%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------
PERIOD FROM
SEPTEMBER
16,
1996* TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) (0.02)
Net Realized and Unrealized Gain on
Investments 0.73
------
Total from Investment Operations 0.71
------
NET ASSET VALUE, END OF PERIOD $ 10.71
------
------
TOTAL RETURN 7.10%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,595
Ratio of Expenses to Average Net Assets
(1) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (1) (0.70)%**
Portfolio Turnover Rate 77%
Average Commission Rate $0.0374
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.22
Ratios before expense limitation:
Expenses to Average Net Assets 8.51%**
Net Investment Income to Average
Net Assets (7.96)%**
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
SEPTEMBER
16,
1996* TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) (0.02)
Net Realized and Unrealized Gain on
Investments 0.73
------
Total from Investment Operations 0.71
------
NET ASSET VALUE, END OF PERIOD $ 10.71
------
------
TOTAL RETURN 7.10%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,487
Ratio of Expenses to Average Net Assets
(2) 1.50%**
Ratio of Net Investment Income to
Average Net Assets (2) (1.00)%**
Portfolio Turnover Rate 77%
Average Commission Rate $0.0374
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.19
Ratios before expense limitation:
Expenses to Average Net Assets 9.14%**
Net Investment Income to Average
Net Assets (8.65)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
183
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------
PERIOD FROM
FEBRUARY 24,
YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.42 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.37 0.26
Net Realized and Unrealized Gain on
Investments 4.02 1.84
------ ------
Total from Investment Operations 4.39 2.10
------ ------
DISTRIBUTIONS
Net Investment Income (0.39) (0.24)
Net Realized Gain (1.01) (0.44)
------ ------
Total Distributions (1.40) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $ 14.41 $ 11.42
------ ------
------ ------
TOTAL RETURN 39.56% 21.07%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $210,368 $69,509
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 3.08% 4.04%**
Portfolio Turnover Rate 171% 158%
Average Commission Rate# $0.0568 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.93% 3.71%**
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.50
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.35
Net Realized and Unrealized Gain on
Investments 3.92
------
Total from Investment Operations 4.27
------
DISTRIBUTIONS
Net Investment Income (0.37)
Net Realized Gain (1.01)
------
Total Distributions (1.38)
------
NET ASSET VALUE, END OF PERIOD $ 14.39
------
------
TOTAL RETURN 38.23%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 8,734
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.91%**
Portfolio Turnover Rate 171%
Average Commission Rate $0.0568
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%**
Net Investment Income to Average
Net Assets 2.79%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commisions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
184
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71 $ 10.24
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.41 0.38 0.40 0.37 0.08 0.38
Net Realized and Unrealized Gain
(Loss) on Investments 2.27 3.30 (0.55) 1.31 0.52 0.48
------ ------ ------ ------ ------ ------
Total from Investment Operations 2.68 3.68 (0.15) 1.68 0.60 0.86
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.41) (0.47) (0.40) (0.36) -- (0.39)
Net Realized Gain (2.32) (0.77) (0.58) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (2.73) (1.24) (0.98) (0.36) -- (0.39)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 19.73% 33.69% (1.29)% 15.14% 5.60% 8.51%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $106,128 $147,365 $73,406 $54,598 $27,541 $25,013
Ratio of Expenses to Average Net Assets
(1) 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment Income to
Average Net Assets (1) 2.62% 3.01% 3.37% 3.23% 4.41%** 3.72%
Portfolio Turnover Rate 42% 43% 33% 51% 9% 56%
Average Commission Rate# $0.0434 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.01 $0.03 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.78% 0.77% 0.80% 0.95% 1.20%** 0.84%
Net Investment Income to Average
Net Assets 2.55% 2.94% 3.27% 2.98% 3.91%** 3.58%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.06
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.29
Net Realized and Unrealized Gain on
Investments 2.25
------
Total from Investment Operations 2.54
------
DISTRIBUTIONS
Net Investment Income (0.39)
Net Realized Gain (2.32)
------
Total Distributions (2.71)
------
NET ASSET VALUE, END OF PERIOD $ 13.89
------
------
TOTAL RETURN 18.57%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,555
Ratio of Expenses to Average Net Assets
(2) 0.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.33%**
Portfolio Turnover Rate 42%
Average Commission Rate $0.0434
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.03%**
Net Investment Income to Average
Net Assets 2.26%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were paid, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
185
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.52 0.39 0.42 0.44 0.10 0.58
Net Realized and Unrealized Gain
(Loss) on Investments 0.54 1.62 (0.64) 0.79 0.21 0.42
------------ ------------ ------------ ------------ ------------ ------------
Total from Investment Operations 1.06 2.01 (0.22) 1.23 0.31 1.00
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.48) (0.50) (0.49) (0.41) -- (0.58)
In Excess of Net Investment Income 0.00+ -- -- (0.08) -- --
Net Realized Gain (2.37) (0.49) (1.46) (0.06) -- (0.03)
In Excess of Net Realized Gain -- -- -- (0.86) -- --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (2.85) (0.99) (1.95) (1.41) -- (0.61)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,992 $22,642 $18,492 $29,684 $39,984 $40,332
Ratio of Expenses to Average Net Assets
(1) 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment Income to
Average Net Assets (1) 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21%
Portfolio Turnover Rate 22% 26% 44% 136% 4% 40%
Average Commission Rate# $0.0397 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.08 $0.03 $0.03 $0.04 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.02% 0.95% 1.02% 1.00%** 0.79%
Net Investment Income to Average
Net Assets 3.31% 3.78% 3.88% 3.56% 4.99%** 5.12%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.34
Net Realized and Unrealized Gain on
Investments 0.65
------------
Total from Investment Operations 0.99
------------
DISTRIBUTIONS
Net Investment Income (0.46)
Net Realized Gain (2.37)
------------
Total Distributions (2.83)
------------
NET ASSET VALUE, END OF PERIOD $ 8.18
------------
------------
TOTAL RETURN 10.24%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,197
Ratio of Expenses to Average Net Assets
(2) 0.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.73%**
Portfolio Turnover Rate 22%
Average Commission Rate $0.0397
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.07
Ratios before expense limitation:
Expenses to Average Net Assets 1.68%**
Net Investment Income to Average
Net Assets 3.00%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
186
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
PERIOD FROM
FEBRUARY 1,
YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.59 $ 8.59 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.54 1.36 0.50
Net Realized and Unrealized Gain
(Loss) on Investments 2.79 0.91 (1.91)
------ ------ ------
Total from Investment Operations 4.33 2.27 (1.41)
------ ------ ------
DISTRIBUTIONS
Net Investment Income (1.17) (1.86) --
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain (4.20) (0.41) --
------ ------ ------
Total Distributions (5.38) (2.27) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 7.54 $ 8.59 $ 8.59
------ ------ ------
------ ------ ------
TOTAL RETURN 50.52% 28.23% (14.10)%
------ ------ ------
------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $152,142 $181,878 $144,949
Ratio of Expenses to Average Net Assets 2.70% 1.75% 1.49%**
Ratio of Expenses to Average Net Assets
(Excluding Dividend and Interest
Expense) 1.42% N/A N/A
Ratio of Net Investment Income to
Average Net Assets 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 560% 406% 273%
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.68
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.01
Net Realized and Unrealized Gain on
Investments 3.20
------
Total from Investment Operations 4.21
------
DISTRIBUTIONS
Net Investment Income (1.15)
In Excess of Net Investment Income (0.01)
Net Realized Gain (4.20)
------
Total Distributions (5.36)
------
NET ASSET VALUE, END OF PERIOD $ 7.53
------
------
TOTAL RETURN 48.52%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 4,253
Ratio of Expenses to Average Net Assets 2.81%**
Ratio of Expenses to Average Net Assets
(Excluding Dividend and Interest
Expense) 1.65%**
Ratio of Net Investment Income to
Average Net Assets 11.09%**
Portfolio Turnover Rate 560%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
187
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.81 $9.82 $11.05 $10.93 $10.92 $10.55
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.67 0.72 0.59 0.54 0.10 0.69
Net Realized and Unrealized Gain
(Loss) on Investments (0.20) 1.06 (0.92) 0.41 0.01 0.39
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.47 1.78 (0.33) 0.95 0.11 1.08
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.70) (0.79) (0.53) (0.56) (0.10) (0.69)
In Excess of Net Investment Income (0.00)+ -- -- (0.01) -- --
Net Realized Gain -- -- (0.37) (0.26) -- (0.02)
In Excess of Net Realized Gain -- -- (0.00)+ -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.70) (0.79) (0.90) (0.83) (0.10) (0.71)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $130,733 $165,527 $209,331 $240,668 $154,210 $146,546
Ratio of Expenses to Average Net Assets
(1) 0.45% 0.45% 0.45% 0.45% 0.45%** 0.45%
Ratio of Net Investment Income to
Average Net Assets (1) 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59%
Portfolio Turnover Rate 183% 172% 388% 240% 15% 105%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59%
Net Investment Income to Average
Net Assets 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.64
Net Realized and Unrealized Loss on
Investments (0.19)
------
Total from Investment Operations 0.45
------
DISTRIBUTIONS
Net Investment Income (0.68)
------
NET ASSET VALUE, END OF PERIOD $ 10.58
------
------
TOTAL RETURN 4.35%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,462
Ratio of Expenses to Average Net Assets
(2) 0.60%**
Ratio of Net Investment Income to
Average Net Assets (2) 6.15%**
Portfolio Turnover Rate 183%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.74%**
Net Investment Income to Average
Net Assets 6.01%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
188
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.61 0.76 0.70 0.69 0.14 0.53
Net Realized and Unrealized Gain
(Loss) on Investments 0.08 1.15 (1.38) 0.90 (0.29) 0.55
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.69 1.91 (0.68) 1.59 (0.15) 1.08
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.61) (0.98) (0.40) (0.79) -- (0.27)
In Excess of Net Investment Income -- -- -- (0.22) -- --
Net Realized Gain -- -- (0.31) (0.16) -- (0.01)
------ ------ ------ ------ ------ ------
Total Distributions (0.61) (0.98) (0.71) (1.17) -- (0.28)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $112,888 $102,852 $130,675 $172,468 $92,897 $94,847
Ratio of Expenses to Average Net Assets
(1) 0.50% 0.50% 0.50% 0.50% 0.50%** 0.50%
Ratio of Net Investment Income to
Average Net Assets (1) 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92%
Portfolio Turnover Rate 258% 207% 171% 108% 9% 144%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.02 $0.02 $0.02 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.72% 0.71% 0.66% 0.70% 0.90%** 0.86%
Net Investment Income to Average
Net Assets 5.29% 6.58% 6.18% 5.79% 6.59%** 6.56%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.48
Net Realized and Unrealized Gain on
Investments 0.18
------
Total from Investment Operations 0.66
------
DISTRIBUTIONS
Net Investment Income (0.60)
------
Total Distributions (0.60)
------
NET ASSET VALUE, END OF PERIOD $ 11.29
------
------
TOTAL RETURN 6.12%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,559
Ratio of Expenses to Average Net Assets
(2) 0.65%**
Ratio of Net Investment Income to
Average Net Assets (2) 5.28%**
Portfolio Turnover Rate 258%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.86%**
Net Investment Income to Average
Net Assets 5.08%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
189
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 28, 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 1.03 1.14 0.97 0.90 0.14 0.08
Net Realized and Unrealized Gain
(Loss) on Investments 0.47 0.97 (1.40) 1.21 0.19 (0.31)
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.50 2.11 (0.43) 2.11 0.33 (0.23)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (1.05) (1.20) (0.97) (0.90) (0.15) --
In Excess of Net Investment Income (0.00)+ -- -- -- -- --
Net Realized Gain -- -- (0.21) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.05) (1.20) (1.18) (0.90) (0.15) --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $95,663 $62,245 $97,223 $74,500 $20,194 $16,950
Ratio of Expenses to Average Net Assets
(1) 0.75% 0.75% 0.75% 0.75% 0.75%** 0.75%**
Ratio of Net Investment Income to
Average Net Assets (1) 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%**
Portfolio Turnover Rate 117% 90% 74% 104% 24% 9%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.001 $0.02 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%**
Net Investment Income to Average
Net Assets 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.49
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.98
Net Realized and Unrealized Gain on
Investments 0.45
------
Total from Investment Operations 1.43
------
DISTRIBUTIONS
Net Investment Income (1.02)
------
NET ASSET VALUE, END OF PERIOD $10.90
------
------
TOTAL RETURN 14.37%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 5,665
Ratio of Expenses to Average Net Assets
(2) 1.00%**
Ratio of Net Investment Income to
Average Net Assets (2) 9.49%**
Portfolio Turnover Rate 117%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.05%**
Net Investment Income to Average
Net Assets 9.44%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
190
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
JANUARY 18,
YEAR ENDED 1995*
DECEMBER 31, TO DECEMBER 31,
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.49 0.44
Net Realized and Unrealized Gain
(Loss) on Investments (0.12) 0.42
------ ------
Total from Investment Operations 0.37 0.86
------ ------
DISTRIBUTIONS
Net Investment Income (0.49) (0.45)
In Excess of Net Investment Income -- (0.00)+
Net Realized Gain -- (0.04)
------ ------
Total Distributions (0.49) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.25 $ 10.37
------ ------
------ ------
TOTAL RETURN 3.67% 8.80%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $40,227 $45,869
Ratio of Expenses to Average Net Assets
(1) 0.45% 0.45%**
Ratio of Net Investment Income to
Average Net Assets (1) 4.77% 4.61%**
Portfolio Turnover Rate 45% 180%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.73% 0.73%**
Net Investment Income to Average
Net Assets 4.50% 4.33%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.44
Net Realized and Unrealized Loss on
Investments (0.08)
------
Total from Investment Operations 0.36
------
DISTRIBUTIONS
Net Investment Income (0.49)
------
Total Distributions (0.49)
------
NET ASSET VALUE, END OF PERIOD $ 10.24
------
------
TOTAL RETURN 3.55%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $69
Ratio of Expenses to Average Net Assets
(2) 0.70%**
Ratio of Net Investment Income to
Average Net Assets (2) 4.56%**
Portfolio Turnover Rate 45%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.98%**
Net Investment Income to Average
Net Assets 4.28%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
191
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ------------ ------------ ------------ ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.049 0.054 0.040 0.027 0.005 0.039
------------ ------------ ------------ ------------ ------- -----------
DISTRIBUTIONS
Net Investment Income (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
In Excess of Net Investment Income -- -- -- 0.000+ -- --
------------ ------------ ------------ ------------ ------- -----------
Total Distributions (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
------------ ------------ ------------ ------------ ------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ------------ ------------ ------------ ------- -----------
------------ ------------ ------------ ------------ ------- -----------
TOTAL RETURN 5.03% 5.51% 3.84% 2.76% 0.50% 3.77%
------------ ------------ ------------ ------------ ------- -----------
------------ ------------ ------------ ------------ ------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968
Ratio of Expenses to Average Net Assets
(1) 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52%
Ratio of Net Investment Income to
Average Net Assets (1) 4.92% 5.37% 3.77% 2.71% 3.11%** 3.74%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 0.54% 0.59%** N/A
Net Investment Income to Average
Net Assets N/A N/A N/A 2.70% 3.07%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.030 0.034 0.020 0.019 0.004 0.026
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
In Excess of Net Investment Income -- -- -- (0.000)+ -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.02% 3.44% 2.44% 1.91% 0.37% 2.74%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $721,410 $451,519 $359,444 $266,524 $208,866 $206,691
Ratio of Expenses to Average Net Assets
(1) 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55%
Ratio of Net Investment Income to
Average Net Assets (1) 2.98% 3.38% 2.42% 1.89% 2.31%** 2.66%
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 0.56% 0.67%** N/A
Net Investment Income to Average
Net Assets N/A N/A N/A 1.87% 2.21%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
192
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of December 31, 1996, the Fund was comprised of 26 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). The International Magnum and the
Technology Portfolios commenced operations on March 15, 1996 and September 16,
1996, respectively. On January 2, 1996, each Portfolio (with the exception of
the International Small Cap, Money Market and Municipal Money Market Portfolios)
began offering an additional class of shares - Class B. All the outstanding
shares of the Portfolios prior to January 2, 1996, were redesignated Class A
shares on January 2, 1996. Both classes of shares have identical voting rights
(except shareholders of a Class have exclusive voting rights regarding any
matter relating solely to that Class of shares), dividend, liquidation and other
rights. Please refer to the manager's reports included elsewhere in this report
for a description of each Portfolio's investment objectives.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. Securities owned by the Money Market and Municipal Money Market
Portfolios are stated at amortized cost which 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 income and/or capital gains is
earned.
3. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements
under which a 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. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter
into reverse repurchase agreements with institutions that the Portfolio's
investment adviser has determined are creditworthy. Under a reverse repurchase
agreement, the Portfolio receives cash from the sale of securities and agrees to
repurchase the securities at a mutually agreed upon date and price. Reverse
repurchase agreements involve market risk that the value of the securities
purchased with the proceeds from the sale of securities received by the
Portfolio may decline below the
- --------------------------------------------------------------------------------
193
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
price of the securities the Portfolio is obligated to repurchase. The Portfolio
is also subject to credit risk equal to the amount by which the value of
securities subject to repurchase exceeds the Portfolio's liability under the
reverse repurchase agreement. Securities subject to repurchase under reverse
repurchase agreements are designated as such in the Statements of Net Assets.
At December 31, 1996 the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Value of securities subject to repurchase..... $37,616,940
------------
Liability for Reverse Repurchase Agreement.... 34,545,000
Weighted Average Interest Rate................ 5.75%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the year ended December 31, 1996 was
approximately $19,866,000, at a weighted average interest rate of 5.887%.
5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities are treated as ordinary income
for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward 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 at December 31, 1996, the
Portfolios value the foreign shares at the closing exchange price of the local
shares. Such securities are reflected as fair valued in the statements of net
assets.
6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter
into forward foreign currency exchange contracts to attempt to protect
securities and related receivables and payables against changes in future
foreign currency exchange rates. A forward foreign currency exchange contract is
an agreement between two parties to buy or sell
- --------------------------------------------------------------------------------
194
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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 using the applicable forward rate and the change in market value is
recorded by the Portfolios as unrealized gain or loss. The Portfolios record
realized gains or losses when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
is generally limited to the amount of the unrealized gain on the contracts, if
any, at the date of default. Risks may also arise from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, certain Portfolios may purchase
securities on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
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.
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.
8. LOAN AGREEMENTS: Certain Portfolios may invest in fixed and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders")
deemed to be creditworthy by the investment adviser. The Portfolio's investments
in Loans may be in the form of participations in Loans ("Participations") or
assignments of all or a portion of Loans ("Assignments") from third parties. The
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. The Portfolio has the right to receive payments of principal, interest
and any fees to which it is entitled only upon receipt by the Lender of the
payments from the borrower. The Portfolio generally has no right to enforce
compliance by the borrower with the terms of the loan agreement. As a result,
the Portfolio may be subject to the credit risk of both the borrower and the
Lender that is selling the Participation. When the Portfolio purchases
Assignments from Lenders, it typically acquires direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Portfolio as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
9. SHORT SALES: The Aggressive Equity, Emerging Markets Debt and Technology
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 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 at the time they
were sold short and (2) any cash, U.S. government securities or other liquid
high grade debt obligations deposited as collateral with the broker in
connection with the short sale. Short sales by the Portfolio involve certain
risks and special considerations. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases cannot exceed the
total amount invested.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their portfolio securities. Premiums are received and are
- --------------------------------------------------------------------------------
195
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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 are exercised or are canceled in closing purchase transactions are
added to the proceeds or netted against the amount paid on the transaction to
determine the realized gain or loss. By writing a covered call option, a
Portfolio foregoes in exchange for the premium the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase. By writing a covered put option, a Portfolio, in exchange for
the premium, accepts the risk of a decline in the market value of the underlying
security below the exercise price.
Certain Portfolios may purchase call and put options on their portfolio
securities. Each Portfolio may purchase call options to protect against an
increase in the price of the security it anticipates purchasing. Each Portfolio
may purchase put options on their securities to protect against a decline in the
value of the security 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.
11. SECURITY LENDING: Certain Portfolios may lend investment securities to
certain qualified institutional investors who borrow securities in order to
complete certain transactions. By lending investment securities, a Portfolio
attempts to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur and any interest earned or dividends declared during the term of the
loan would be for the account of the Portfolio. Risks of delay in recovery of
the securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of securities loaned increases above the value of the collateral
received.
Portfolios that lend securities receive cash as collateral in an amount equal to
or exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in U.S. Government securities or interest
bearing repurchase agreements with approved counterparties. A portion of the
interest received on the repurchase agreements is retained by the Fund and the
remainder is rebated to the borrower of the securities. The net amount of
interest earned and interest rebated is included in the Statement of Operations
as interest income. The value of loaned securities and related collateral
outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 32,752 $ 34,886
Asian Equity.................... 22,736 23,576
International Equity............ 621,449 660,048
</TABLE>
Morgan Stanley Trust Company, an affiliate of the investment adviser,
administers the security lending program and has earned fees for its services in
the amount of $282,000 during the year ended December 31, 1996.
12. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks of the underlying instruments as well as of the issuer
of the structured security. Structured securities are typically sold in private
placement transactions with no active trading market. Investments in Structured
Securities may be more volatile than their underlying instruments, however, any
loss is limited to the amount of the original investment.
13. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date (except for certain foreign dividends which may
be recorded as soon as the Fund is informed of such dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on
- --------------------------------------------------------------------------------
196
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Dividends to the
shareholders of the Money Market and the Municipal Money Market Portfolios are
accrued daily and are distributed on or about the 15th of each month.
Distributions for the remaining Portfolios are recorded on the ex-distribution
date.
The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
The amount and character of income and capital gain distributions to be paid by
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 forward 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.
A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio and are included in paid
in capital. During the year ended December 31, 1996, such transaction fees
totaled approximately $442,000.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., provides the Fund with
investment advisory services under the terms of an Investment Advisory and
Management Agreement (the "Agreement") at the annual rates of average daily net
assets indicated below. MSAM has agreed to reduce fees payable to it and to
reimburse the Portfolios, if necessary, if the annual operating expenses, as
defined, expressed as a percentage of average daily net assets, exceed the
maximum ratios indicated as follows:
<TABLE>
<CAPTION>
MAXIMUM
EXPENSE RATIO
--------------------------
PORTFOLIO ADVISORY FEE CLASS A CLASS B
- ------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Active Country Allocation...... .65% .80% 1.05%
Asian Equity................... .80 1.00 1.25
Emerging Markets............... 1.25 1.75 2.00
European Equity................ .80 1.00 1.25
Global Equity.................. .80 1.00 1.25
Gold........................... 1.00 1.25 1.50
International Equity........... .80 1.00 1.25
International Magnum........... .80 1.00 1.25
International Small Cap........ .95 1.15 N/A
Japanese Equity................ .80 1.00 1.25
Latin American................. 1.10 1.70 1.95
Aggressive Equity.............. .80 1.00 1.25
Emerging Growth................ 1.00 1.25 1.50
Equity Growth.................. .60 .80 1.05
Small Cap Value Equity......... .85 1.00 1.25
Technology..................... 1.00 1.25 1.50
U.S. Real Estate............... .80 1.00 1.25
Value Equity................... .50 .70 .95
Balanced....................... .50 .70 .95
Emerging Markets Debt.......... 1.00 1.75 2.00
Fixed Income................... .35 .45 .60
Global Fixed Income............ .40 .50 .65
High Yield..................... .50 .75 1.00
Municipal Bond................. .35 .45 .70
Money Markets.................. .30 .55 N/A
Municipal Money Market......... .30 .57 N/A
</TABLE>
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to .40% of the average daily net assets of the Gold Portfolio.
The Sub-Adviser has agreed to a proportionate reduction in its fees if the
Adviser is required to waive its fees or to reimburse the Gold Portfolio.
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.15% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and
- --------------------------------------------------------------------------------
197
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company, Chase provides certain administrative services to the Fund.
For such services, MSAM pays Chase a portion of the fee MSAM receives from the
Fund. In addition, the Fund incurs local administration fees in connection with
doing business with certain emerging market countries.
D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., and an affiliate of MSAM,
serves as the distributor of the Fund and provides Class B shareholders of each
applicable Portfolio with distribution services pursuant to a Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the Investment Company Act of
1940. Under the Plan, the Distributor is entitled to receive from each
Portfolio, except the International Small Cap, Money Market and Municipal Money
Market Portfolios, a distribution fee, which is accrued daily and paid
quarterly, at an annual rate of 0.25% of the Class B shares' average daily net
assets. The Distributor may voluntarily waive from time to time all or any
portion of its distribution fee. The Distributor has agreed to reduce its fees
to 0.15% of the Class B shares' average daily net assets for the Fixed Income
and Global Fixed Income Portfolios.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Group, Inc., acts as custodian for the Fund's assets held
outside the United States in accordance with a custodian agreement. Custodian
fees are computed and payable monthly based on assets held, investment purchases
and sales activity, an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses.
For the year ended December 31, 1996, the following Portfolios incurred custody
fees and had amounts payable to MSTC at December 31, 1996:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 227 $ 48
Asian Equity................. 781 182
Emerging Markets............. 3,204 774
European Equity.............. 101 26
Global Equity................ 26 7
Gold......................... 14 1
International Equity......... 622 186
International Magnum......... 73 21
International Small Cap...... 126 31
Japanese Equity.............. 41 11
Latin American............... 90 29
Emerging Markets Debt........ 180 46
Global Fixed Income.......... 42 10
</TABLE>
In addition, for the year ended December 31, 1996, the following Portfolios have
earned interest income and incurred interest expense on balances with MSTC as
follows:
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
------------------- -------------------
<S> <C> <C>
Active Country
Allocation............... $ 2 $ 4
Asian Equity.............. 1 31
Emerging Markets.......... 14 119
European Equity........... 31 2
Global Equity............. 1 --
Gold...................... 1 --
International Magnum...... -- 1
Japanese Equity........... -- 1
Latin American............ 1 2
Emerging Markets Debt..... 38 206
Global Fixed Income....... 18 5
</TABLE>
During the year ended December 31, 1996, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $308,000.
- --------------------------------------------------------------------------------
198
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
F. PURCHASES AND SALES: During the year ended December 31, 1996, purchases and
sales of investment securities, other than long-term U.S. Government securities
and short-term investments, were:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ------------------------------------ --------- ---------
<S> <C> <C>
Active Country Allocation........... $ 114,782 $ 108,396
Asian Equity........................ 350,723 272,753
Emerging Markets.................... 963,673 632,208
European Equity..................... 98,430 27,891
Global Equity....................... 20,007 30,242
Gold................................ 44,293 22,036
International Equity................ 604,004 330,607
International Magnum................ 99,527 9,135
International Small Cap............. 74,502 76,633
Japanese Equity..................... 133,742 69,368
Latin American...................... 55,311 48,119
Aggressive Equity................... 207,881 176,566
Emerging Growth..................... 32,718 89,275
Equity Growth....................... 484,502 358,763
Small Cap Value Equity.............. 12,761 43,840
Technology.......................... 7,117 2,682
U.S. Real Estate.................... 293,417 205,048
Value Equity........................ 53,148 109,284
Balanced............................ 2,036 10,436
Emerging Markets Debt............... 984,460 1,061,231
Fixed Income........................ 83,164 79,513
Global Fixed Income................. 191,665 198,548
High Yield.......................... 120,627 91,562
Municipal Bond...................... 16,876 22,981
</TABLE>
Purchases and sales during the year ended December 31, 1996 of long-term U.S.
Government securities occurred in the Balanced, Fixed Income and Global Fixed
Income Portfolios only and totaled:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- -------------------------------------- ----------- ---------
<S> <C> <C>
Balanced.............................. $ 1,183 $ 7,503
Fixed Income.......................... 188,643 192,850
Global Fixed Income................... 69,484 58,140
</TABLE>
During the year ended December 31, 1996, the following Portfolios paid brokerage
commissions to Morgan Stanley & Co., Incorporated, an affiliated broker/dealer,
of approximately:
<TABLE>
<CAPTION>
BROKERAGE
COMMISSION
PORTFOLIO (000)
- ----------------------------------------------- ---------------
<S> <C>
Asian Equity................................... $ 354
Emerging Markets............................... 290
European Equity................................ 12
Global Equity.................................. 5
International Equity........................... 47
International Magnum........................... 3
Japanese Equity................................ 105
Latin American................................. 3
U.S. Real Estate............................... 8
</TABLE>
G. OTHER: At December 31, 1996, cost, unrealized appreciation, unrealized
depreciation, and net unrealized appreciation (depreciation) for U.S. Federal
income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET APPREC.
COST APPREC. DEPREC. (DEPREC.)
PORTFOLIO (000) (000) (000) (000)
- ------------------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active Country
Allocation............. $ 175,563 $ 20,764 $ (13,603) $ 7,161
Asian Equity............ 350,057 50,328 (32,402) 17,926
Emerging Markets........ 1,301,489 217,574 (192,303) 25,271
European Equity......... 147,712 29,358 (4,274) 25,084
Global Equity........... 67,413 20,657 (4,304) 16,353
Gold.................... 30,461 589 (5,776) (5,187)
International Equity.... 1,635,662 540,805 (66,964) 473,841
International Magnum.... 103,581 7,880 (5,131) 2,749
International Small
Cap.................... 212,243 35,733 (21,190) 14,543
Japanese Equity......... 167,186 2,883 (23,960) (21,077)
Latin American.......... 28,992 3,514 (853) 2,661
Aggressive Equity....... 74,862 3,551 (2,169) 1,382
Emerging Growth......... 45,189 22,710 (913) 21,797
Equity Growth........... 405,039 30,016 (4,483) 25,533
Small Cap Value
Equity................. 20,804 4,547 (524) 4,023
Technology.............. 4,525 420 (132) 288
U.S. Real Estate........ 186,125 33,884 (1,875) 32,009
Value Equity............ 92,700 18,519 (1,924) 16,595
Balanced................ 6,979 865 (68) 797
Emerging Markets Debt... 176,805 7,781 (1,598) 6,183
Fixed Income............ 128,848 2,362 (643) 1,719
Global Fixed Income..... 105,410 2,613 (627) 1,986
High Yield.............. 98,278 4,683 (2,848) 1,835
Municipal Bond.......... 38,620 1,000 (51) 949
Money Market............ 1,281,212 -- -- --
Municipal Money
Market................. 719,259 -- -- --
</TABLE>
At December 31, 1996, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
------------------------------------------
PORTFOLIO 2001 2002 2003 2004 TOTAL
- -------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Emerging Markets.......... $ $ $ 11,112 $ $ 11,112
Japanese Equity........... -- -- 1,668 -- 1,668
Technology................ -- -- -- 4 4
Fixed Income.............. -- 5,532 -- -- 5,532
Global Fixed Income....... -- 2,720 1,780 -- 4,500
High Yield................ -- -- 3,604 -- 3,604
Municipal Bond............ -- -- -- 6 6
Money Market.............. -- 13 -- 469 482
Municipal Money
Market................... 1 7 1 23 32
</TABLE>
During the year ended December 31, 1996, the Japanese Equity, Latin American,
Fixed Income, Global Fixed Income and High Yield Portfolios utilized capital
loss carryforwards for U.S. Federal income tax purposes of approximately
$998,000, $224,000, $2,759,000, $2,572,000, and $1,435,000 respectively.
To the extent that capital loss carryovers are used to offset any future capital
gains realized during the
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199
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
carryover period as provided by U.S. Federal income tax regulations, no capital
gains tax liability will be incurred by a Portfolio for gains realized and not
distributed. To the extent that capital gains are offset, such gains will not be
distributed to the shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first day of the Portfolio's next
taxable year. For the period from November 1, 1996 to December 31, 1996 certain
Portfolios incurred and elected to defer until January 1, 1997 for U.S. Federal
income tax purposes net capital and net currency losses of approximately:
<TABLE>
<CAPTION>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ----------------------------------------- ----------- -----------
<S> <C> <C>
Asian Equity............................. $ -- $ 369
Emerging Markets......................... -- 274
European Equity.......................... -- 215
Gold..................................... 1,750 --
Japanese Equity.......................... 3,596 --
Latin American........................... -- 4
Emerging Markets Debt.................... -- 72
High Yield............................... 404 --
</TABLE>
During the year ended December 31, 1996, the following Portfolio wrote covered
call options as follows:
COVERED CALL OPTIONS:
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- ------------------------------------ ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1995............................... $ -- $ --
Options written during the period... 78,897 1,569
Options expired during the period... (32,530) (392)
Options exercised during the
period............................. (46,367) (1,177)
------------- -----------
Options outstanding at December 31,
1996............................... $ -- $ --
------------- -----------
------------- -----------
</TABLE>
At December 31, 1996, 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.
Assets and liabilities, including Portfolio securities and foreign currency
holdings were translated at the following exchange rates as of December 31,
1996:
<TABLE>
<S> <C> <C> <C>
Argentine Peso...................... 0.99982 = $1.00
Australian Dollar................... 1.25889 = $1.00
Austrian Schilling.................. 10.82950 = $1.00
Belgian Franc....................... 31.72750 = $1.00
Brazilian Real...................... 1.03910 = $1.00
British Pound....................... 0.58374 = $1.00
Canadian Dollar..................... 1.36965 = $1.00
Colombian Peso...................... 1,006.20000 = $1.00
Czech Korona........................ 27.20400 = $1.00
Danish Krone........................ 5.89075 = $1.00
Deutsche Mark....................... 1.53875 = $1.00
Egyptian Pound...................... 3.39250 = $1.00
Finnish Markka...................... 4.60000 = $1.00
French Franc........................ 5.18700 = $1.00
Greek Drachma....................... 246.71000 = $1.00
Hong Kong Dollar.................... 7.73450 = $1.00
Hungarian Forint.................... 161.70000 = $1.00
Indian Rupee........................ 35.85 = $1.00
Indonesian Rupiah................... 2362.00000 = $1.00
Irish Punt.......................... 0.59028 = $1.00
Israeli Shekel...................... 3.24390 = $1.00
Italian Lira........................ 1617.00000 = $1.00
Japanese Yen........................ 115.81000 = $1.00
Korean Won.......................... 845.00000 = $1.00
Malaysian Ringgit................... 2.52550 = $1.00
Mexican Peso........................ 7.88500 = $1.00
Moroccan Dirham..................... 8.75505 = $1.00
Netherlands Guilder................. 1.72760 = $1.00
New Zealand......................... 1.41453 = $1.00
Norwegian Krona..................... 6.37010 = $1.00
Pakistan Rupee...................... 40.07990 = $1.00
Peruvian Sole....................... 2.61150 = $1.00
Philippine Peso..................... 26.30000 = $1.00
Poland Zlotey....................... 2.86740 = $1.00
Portuguese Escudo................... 155.05000 = $1.00
Singapore Dollar.................... 1.39930 = $1.00
South African Rand.................. 4.67850 = $1.00
Spanish Peseta...................... 129.82500 = $1.00
Swedish Krona....................... 6.81635 = $1.00
Swiss Franc......................... 1.33850 = $1.00
Taiwan Dollar....................... 27.50000 = $1.00
Thai Baht........................... 25.64600 = $1.00
Turkey Lira......................... 108,450.00000 = $1.00
Venezuelan Bolivar.................. 476.25500 = $1.00
</TABLE>
From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
- --------------------------------------------------------------------------------
200
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Institutional Fund, Inc.
In our opinion, the accompanying statements of net assets and the related
statements of operations, of changes in net assets and of cash flows (the
Emerging Markets Debt Portfolio only) and the financial highlights present
fairly, in all material respects, the financial position of each of the
portfolios constituting Morgan Stanley Institutional Fund, Inc. (the "Fund") at
December 31, 1996, the results of each of their operations, the changes in each
of their net assets, the Emerging Markets Debt Portfolio's cash flows and the
financial highlights for the periods indicated, 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 securities at December 31, 1996 by
correspondence with the custodians, brokers and counterparties and the
application of alternative auditing procedures where confirmations from brokers
and counterparties were not received, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
201
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
- --------------------------------------------------------------------------------
For the year ended December 31, 1996, the percentages of distributions taxable
as ordinary income, as reported on Form 1099-DIV, that qualify for the dividends
received deduction for corporations for the Global Equity, Aggressive Equity,
Equity Growth, Small Cap Value Equity, Value Equity, Balanced and High Yield
Portfolios are 28.6%, 5.2%, 8.1%, 60.5%, 64.7%, 29.3% and 2.6%, respectively.
For the year ended December 31, 1996, the percentage of exempt interest
dividends paid by the Municipal Bond and Municipal Money Market Portfolios are
100% and 94%, respectively.
For the year ended December 31, 1996, the following Portfolios intend to pass
through to shareholders foreign tax credits and have derived gross income from
sources within foreign countries amounting to:
<TABLE>
<CAPTION>
FOREIGN TAX
CREDIT FOREIGN SOURCE
PASS-THROUGH INCOME
FUND (000) (000)
- ----------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Active Country Allocation.............................................. $ 413 $ 3,409
Asian Equity........................................................... 896 7,437
Emerging Markets....................................................... 2,630 29,870
European Equity........................................................ 471 3,732
Global Equity.......................................................... 149 1,267
International Equity................................................... 5,573 50,453
International Small Cap................................................ 681 5,509
Japanese Equity........................................................ 231 1,534
Global Fixed Income.................................................... 120 4,835
</TABLE>
For the year ended December 31, 1996, the following Portfolios intend to
distribute long-term capital gains totaling:
<TABLE>
<CAPTION>
LONG-TERM
CAPITAL GAINS
FUND (000)
- --------------------------------------------------------------------------------------- -----------------
<S> <C>
Active Country Allocation.............................................................. $ 5,372
Asian Equity........................................................................... 24,144
European Equity........................................................................ 201
Global Equity.......................................................................... 4,766
Gold................................................................................... 32
International Small Cap................................................................ 4,786
Latin American......................................................................... 2,099
Emerging Growth........................................................................ 26,399
Equity Growth.......................................................................... 6,171
Small Cap Value Equity................................................................. 5,183
U.S. Real Estate....................................................................... 412
Value Equity........................................................................... 13,798
Balanced............................................................................... 1,914
</TABLE>
- --------------------------------------------------------------------------------
202
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
- -----------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley
Asset Management Inc. and Morgan Stanley Asset
Management Limited; Managing Director,
Morgan Stanley & Co. Incorporated; Director,
Morgan Stanley Group Inc.
Frederick B. Whittemore
VICE-CHAIRMAN OF THE BOARD
Advisory Director, Morgan Stanley & Co.,
Incorporated
Warren J. Olsen
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director, Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally
Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation
Frederick O. Robertshaw
Of Counsel, Bryan, Cave
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
DISTRIBUTOR
Morgan Stanley & Co., Incorporated
1251 Avenue of the Americas
New York, New York 10020
CUSTODIANS
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
OFFICERS
James W. Grisham
VICE PRESIDENT
Michael F. Klein
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Karl O. Hartmann
ASSISTANT SECRETARY
James R. Rooney
TREASURER
Joanna M. Haigney
ASSISTANT TREASURER
FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.
- --------------------------------------------------------------------------------
203
<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1997
[LOGO]
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active Country Allocation................. 4
Asian Equity.............................. 16
Emerging Markets.......................... 21
European Equity .......................... 29
Global Equity ............................ 34
Gold...................................... 39
International Equity ..................... 42
International Magnum ..................... 49
International Small Cap................... 55
Japanese Equity........................... 60
Latin American............................ 64
U.S. Equity Portfolios:
Aggressive Equity......................... 69
Emerging Growth........................... 74
Equity Growth............................. 79
Small Cap Value Equity.................... 84
Technology................................ 89
U.S. Real Estate.......................... 94
Value Equity.............................. 99
Balanced Portfolio.......................... 103
Fixed Income Portfolios:
Emerging Markets Debt..................... 107
Fixed Income.............................. 112
Global Fixed Income....................... 116
High Yield................................ 120
Municipal Bond............................ 125
Money Market Portfolios:
Money Market.............................. 129
Municipal Money Market.................... 133
Statement of Operations..................... 141
Statement of Changes in Net Assets.......... 145
Financial Highlights ....................... 158
Notes to Financial Statements............... 183
Officers and Directors ..................... 192
</TABLE>
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Fund, Inc. Prospectuses
describe in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectuses carefully before you invest
or send money.
- --------------------------------------------------------------------------------
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
FELLOW SHAREHOLDERS:
We are pleased to present to you the Fund's semi-annual report for the six
months ended June 30, 1997. Our Fund now offers 27 portfolios, including 11
global and international equity portfolios, eight U.S. equity portfolios, a
balanced portfolio, five fixed-income portfolios and two money market
portfolios.
The performance of each of the portfolios and commentaries from the
portfolio managers discussing the results of each portfolio are contained in
this report. The investment performance of the portfolios relative to their
respective benchmarks is also presented in the performance summary on page two
of this report. For the first half of 1997, approximately 70% of the Fund's
portfolios met or exceeded their benchmarks and eleven of twelve of our global
and international equity and bond portfolios performed at or above their
benchmark returns.
The beginning of the first quarter of 1997 saw continued strength in most
equity markets, as prices were driven higher by, among other factors, a
supportive interest rate environment, favorable market sentiment as well as by
continued impressive mutual fund flows. By March, however, investors began to
focus on the likelihood of a Federal Reserve-induced hike in short-term interest
rates, and many markets sold off considerably. Global fixed-income markets had
more disparate returns over the quarter, with the U.S. and high yielding
European markets retreating while Japan continued to rally.
The second quarter of 1997 provided investors with almost an ideal
investment environment. Markets around the world posted impressive gains, many
reaching new highs, driven by contained inflation, surging liquidity and
improving corporate earnings. The supportive environment and the lack of further
hikes in the Federal Funds rate allowed bond yields to fall almost 70 basis
points in the U.S. during the first half of the year, and international markets
rallied as well. Japan was the notable exception, as stronger than expected
growth resulted in negative bond returns for the second quarter.
On July 31, 1997, the Fund began offering shares of its newest portfolio --
the Equity Plus Portfolio -- which invests primarily in equity securities of
issuers included in the S&P 500. The Portfolio seeks to achieve a total return
that exceeds the S&P 500 with price volatility similar to that of the S&P 500.
Our portfolio managers have provided their insights as to the outlook for
the remainder of 1997 in their commentaries. We hope you find their reports
informative. As always, we sincerely appreciate your support of the Fund.
Sincerely,
[SIGNATURE]
Michael F. Klein
PRESIDENT
August 1997
- --------------------------------------------------------------------------------
1
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE SIX MONTH TOTAL RETURN
------------------ ------------------- ---------------- ---------------------------
COMPARABLE
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B INDICES
-------- -------- ---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 1/02/96 $ 142,237 $ 29 $ 12.99 $ 12.97 13.55% 13.37% 11.21%(1)
Asian Equity 7/01/91 1/02/96 318,844 4,884 19.16 19.15 2.30 2.19 0.19(2)
Emerging Markets 9/25/92 1/02/96 1,808,434 14,489 18.44 18.42 25.78 25.65 17.10(3)
European Equity 4/02/93 1/02/96 239,958 4,125 19.18 19.14 14.85 14.82 14.26(4)
Global Equity 7/15/92 1/02/96 96,056 5,063 18.97 18.90 16.81 16.60 15.38(5)
Gold 2/01/94 1/02/96 24,180 1,119 6.60 6.60 -28.86 -28.75 -17.73(6)
International Equity 8/04/89 1/02/96 2,840,689 3,008 19.59 19.54 15.58 15.42 11.21(1)
International Magnum 3/15/96 3/15/96 140,458 30,351 12.37 12.33 16.04 15.99 11.21(1)
International Small Cap 12/15/92 -- 266,527 -- 18.20 -- 8.14 -- 11.21(1)
Japanese Equity 4/25/94 1/02/96 172,141 2,408 9.82 9.77 23.37 23.05 9.07(7)
Latin American 1/18/95 1/02/96 75,766 3,374 16.31 16.28 44.08 43.94 40.50(8)
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 133,897 14,402 16.40 16.39 13.76 13.71 20.61(10)
Emerging Growth 11/01/89 1/02/96 58,596 1,097 13.60 13.53 0.74 0.60 11.70(9)
Equity Growth 4/02/91 1/02/96 500,808 8,449 16.97 16.94 13.74 13.62 20.61(10)
Small Cap Value Equity 12/17/92 1/02/96 27,149 4,067 12.60 12.59 16.23 16.17 11.25(11)
Technology 9/16/96 9/16/96 16,214 1,334 13.65 13.62 27.45 27.17 20.61(10)
U.S. Real Estate 2/24/95 1/02/96 299,436 12,251 15.98 15.93 11.46 11.20 5.73(12)
Value Equity 1/31/90 1/02/96 97,500 1,975 15.66 15.62 13.49 13.13 20.61(10)
BALANCED PORTFOLIO 2/20/90 1/02/96 5,439 1,246 8.75 8.72 8.01 7.70 11.36(13)
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 162,199 2,933 8.84 8.82 17.24 17.13 10.27(14)
Fixed Income 5/15/91 1/02/96 133,959 2,663 10.64 10.65 3.13 3.16 3.09(15)
Global Fixed Income 5/01/91 1/02/96 85,760 405 11.01 11.00 -1.07 -1.12 -1.09(16)
High Yield 9/28/92 1/02/96 111,679 5,737 11.33 11.31 7.55 7.32 5.88(17)
Municipal Bond 1/18/95 1/02/96 53,554 -- 10.31 -- 2.42 -- 2.63(18)
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,275,275 -- 1.00 -- 2.50 -- --
Municipal Money Market 2/10/89 -- 711,656 -- 1.00 -- 1.52 -- --
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF JUNE 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
30 DAY
CURRENT YIELD++ 7 DAY 7 DAY 30 DAY 30 DAY
----------------- CURRENT EFFECTIVE CURRENT COMPARABLE
CLASS A CLASS B YIELD+ YIELD+ YIELD++ YIELD
------- ------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolios: Money Market Portfolios:
Emerging Markets Debt 8.07% 7.90% Money Market 5.11% 5.24% 5.11% 5.02%(19)
Fixed Income 6.31 6.15 Municipal Money Market 3.67 3.74 3.36 3.28(20)
Global Fixed Income 4.97 4.82
High Yield 8.20 7.95
Municipal Bond 4.45 --
</TABLE>
- --------------------------------------------------------------------------------
+The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at June 30, 1997 with all dividends reinvested. As with all
money market portfolios, yields fluctuate as market conditions change and the
7 day yields are not necessarily indicative of future performance.
++The current 30 day yield reflects the net investment income generated by the
Portfolio over a specified 30-day period expressed as an annual percentage.
Expenses accrued for the 30-day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indiciative of future performance.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL FIVE AVERAGE ANNUAL TOTAL
ONE YEAR TOTAL RETURN YEAR TOTAL RETURN RETURN SINCE INCEPTION
- ------------------------------- --------------------------- -------------------------------------------------------------
COMPARABLE COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B INDICES CLASS A INDICES CLASS A INDICES--CLASS A CLASS B INDICES--CLASS B
- ------- ------- ----------- ------------ ------------ ----------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15.17% 14.86% 12.84%(1) 11.32% 12.83%(1) 10.43% 10.51%(1) 15.39% 11.65%(1)
0.11 -0.14 0.95(2) 14.43 12.73(2) 17.09 15.47(2) 3.44 6.01(2)
17.28 17.07 11.31(3) -- -- 17.01 15.01(3) 24.98 16.71(3)
25.57 25.20 29.99(4) -- -- 21.03 18.83(4) 24.47 23.78(4)
26.51 26.05 22.27(5) -- -- 20.87 15.17(5) 26.64 19.45(5)
- -35.04 -35.04 -22.07(6) -- -- -4.26 -8.13(6) -13.40 -16.41(6)
24.18 23.79 12.84(1) 17.92 12.83(1) 13.23 5.15(1) 23.39 11.65(1)
20.32 20.11 12.84(1) -- -- 19.29 14.07(1) 18.95 14.07(1)
9.22 -- 12.84(1) -- -- 16.49 14.89(1) -- --(1)
12.87 12.26 -8.87(7) -- -- 4.55 -1.81(7) 13.61 -4.83(7)
59.31 59.04 45.84(8) -- -- 31.55 19.16(8) 61.74 41.20(8)
30.71 30.50 34.70(10) -- -- 42.33 32.98(10) 36.35 29.55(10)
-2.42 -2.65 21.69(9) 8.65 20.67(9) 11.25 16.22(9) 2.79 23.02(9)
27.71 27.35 34.70(10) 20.92 19.78(10) 18.01 18.05(10) 29.80 29.55(10)
30.24 30.00 20.09(11) -- -- 16.45 17.44(11) 26.54 20.48(11)
36.50* 36.20* 32.12*(10) -- -- -- -- -- --
40.01 39.54 33.87(12) -- -- 30.94 23.59(12) 33.36 27.09(12)
25.18 24.80 34.70(10) 17.24 19.78(10) 13.97 17.86(10) 21.74 29.55(10)
15.30 14.82 20.86(13) 11.41 13.25(13) 10.82 12.42(13) 12.18 17.62(13)
49.05 48.77 33.04(14) -- -- 21.51 14.37(14) 44.89 32.32(14)
8.89 8.75 8.15(15) 7.25 7.12(15) 8.19 8.15(15) 5.05 4.54(15)
5.09 4.91 4.48(16) 6.38 7.26(16) 7.60 8.83(16) 3.28 2.17(16)
18.40 18.15 14.66(17) -- -- 13.21 11.38(17) 14.71 12.28(17)
6.28 -- 7.03(18) -- -- 6.07 7.73(18) -- --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
* Cumulative (unannualized) total return since inception of the Portfolio.
<TABLE>
<C> <S>
INDICES:
(1) MSCI EAFE (Europe, Australia, and Far East)
(2) MSCI Combined Far East Free ex-Japan
(3) IFC Global Total Return Composite
(4) MSCI Europe
(5) MSCI World
(6) Philadelphia Gold and Silver
(7) MSCI Japan
(8) MSCI Emerging Markets Global Latin America
(9) NASDAQ Composite
(10) S&P 500
(11) Russell 2500
(12) NAREIT Equity
(13) Indata Balanced-Median
(14) J.P. Morgan Emerging Markets Bond Plus
(15) Lehman Aggregate Bond
(16) J.P. Morgan Traded Global Bond
(17) CS First Boston High Yield
(18) Lehman 7-Year Municipal Bond
(19) IBC Money Fund Comparable Yield
(20) IBC Municipal Money Market Fund Comparable Yield
</TABLE>
Past performance should not be construed as a guarantee 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.
Investments in the Money Market and Municipal Money Market Portfolios are
neither insured nor guaranteed by the U.S. Government. There is no assurance
that the Money Market and Municipal Money Market Portfolios will be able to
maintain a stable net asset value of $1.00 per share. Please read the
Portfolios' prospectuses carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.0%
France 8.2%
Germany 9.6%
Hong Kong 3.5%
Italy 3.8%
Japan 32.5%
Korea 1.2%
Netherlands 3.6%
Singapore 4.0%
Spain 3.6%
Sweden 3.4%
Switzerland 4.3%
Thailand 1.4%
United Kingdom 16.2%
Other 2.7%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 13.55% 15.17% 11.32% 10.43%
PORTFOLIO -- CLASS
B.................... 13.37 14.86 N/A 15.39
INDEX -- CLASS A..... 11.21 12.84 12.83 10.51
INDEX -- CLASS B..... 11.21 12.84 N/A 11.65
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE 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 Active Country Allocation Portfolio invests in international equity markets,
with emphasis placed upon countries, rather than stock selection. This approach
reflects our belief that a diversified selection of securities representing
exposure to countries that we find attractive provides an effective way to
maximize the return and minimize the risk associated with global investing.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.55% and 15.17%, respectively, for the Class A shares; and
13.37% and 14.86%, respectively, for the Class B shares as compared to total
returns of 11.21% and 12.84%, respectively, for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). For the five-year period ended
June 30, 1997, the average annual total return for Class A was 11.32% as
compared to 12.83% for the Index. From inception on January 17, 1992 to June 30,
1997, the average annual total return of Class A was 10.43% as compared to
10.51% for the Index. From inception on January 2, 1996 to June 30, 1997, the
average annual total return of Class B was 15.39% as compared to 11.65% for the
Index.
The returns for the second quarter of 1997 for selected indices is shown below:
<TABLE>
<CAPTION>
MSCI INDICES USD LOCAL
- --------------------------------------- ----------- -----------
<S> <C> <C>
EAFE................................... 12.98% 11.68%
Europe................................. 8.94 11.12
Japan.................................. 23.67 14.30
Pacific Ex-Japan....................... 6.64 8.30
Emerging Markets....................... 9.17 10.77
</TABLE>
PERFORMANCE REVIEW:
Driven by liquidity and lower interest rates, global equity markets continued
their inexorable climb during the second quarter. The Portfolio's neutral weight
in Japan served us well as Japan rallied sharply between mid-April and mid-May
from 17,500 to 20,500. Within Europe, underweights to the high flying, very
fully valued Dutch (+13.5%) and Swiss markets (+19.0%) were offset by an
overweight to Spain (+22.3%) and some tactical shifts in France and the U.K.
During the quarter we reduced the U.K. slightly before the election, and
increased Italy 1-2.%
In June, we removed the underweight to Japanese banks as the market rallied and
investors began to differentiate between high and low quality banks.
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
Importantly, Japanese real estate has bottomed and the possibility of further
loan securitization and international partnerships is high.
In Asia, our slight underweight in Hong Kong early in the second quarter cost us
a few basis points of return, although we raised our allocation in mid-June. Our
zero weight in Malaysia added significantly to returns as the market fell a
precipitous 11.8% for the second quarter. Singapore, where we were overweight,
disappointed with flat returns. New Zealand, an underperformer in the first
quarter, rallied 13.5% on the back of interest rate reductions, while Australia
trailed at a respectable +8.8%. We have no allocation to New Zealand due to
heavy exposure to NZ Telecom and pulp and paper, and we are benchmark neutral in
Australia. In early July we sold our small positions in Thailand and Korea which
had rallied 35% and 24% respectively, and took the opportunity to exit these
markets while both were cheap. Slow export growth and indications that economic
structural issues will take some time to be worked out diluted our earlier
enthusiasm for these markets.
During the second quarter, currency hedging added to returns. We reduced the yen
hedge to zero at $/Y127, reinstated it at $/Y113 for a time and then reduced it
back to zero at $/Y113 by quarter-end. Unlike the yen, continental European
currencies continued their decline against the dollar throughout the quarter,
falling by about 5%. In June, we removed the deutsche mark and Swiss franc
hedges entirely and reduced currency hedges against the French franc, Dutch
guilder, and Spanish peseta to 25%. European currencies should continue to
weaken, but the deutsche mark and the Swiss franc are subject to periodic EMU
related strength. Other European currencies have weakened substantially and are
beginning to gain support from economic recoveries. We believe the yen is stuck
in a trading range: bound by its trade surplus on one side and low interest
rates and weak economic fundamentals on the other.
INVESTMENT OUTLOOK:
Overall, the markets performed exceptionally in the first half, and we are
increasingly uneasy about valuation levels and the rate of change. With few
exceptions, European markets appear to be experiencing a demand-driven blow-off.
Current valuations leave no room for short-term setbacks -- such as earnings
disappointments or further intransigence on structural pension and tax reform in
Germany, Italy, Spain and France. Since quarter end, we have selectively been
raising cash to between 7% and 10%. Most of the monies have been shaved off of
European weights (the Netherlands, France, and the U.K.), and we have pulled
back on select Asian markets (such as Hong Kong and Singapore) which are highly
correlated to the U.S. We added a few percentage points to Italy, a market which
has underperformed, is undervalued, and should benefit from lower short-term
interest rates. The U.K. underweight is due to the impact of sterling strength
on profits, continued 1997 earnings downgrades and the belief that short rates
need to rise further.
Target portfolio weights are now slightly underweight Europe (53% vs. 57%), Asia
(8% vs. 10%), and Japan (31% vs. 33%), with 8% cash.
JAPAN
While it appears that the Japanese economy has withstood the effects of the
April 1 consumption tax hike, it has done so with the aid of the lagged effect
of a weak yen, loose monetary policy, and increased foreign demand. The June
Tankan survey showed that small and medium sized companies -- which employ 75%
of Japanese workers -- are still depressed. Japanese domestic demand needs to
improve in order for the market to broaden beyond the current focus on a few,
over-owned, high-growth exporters. Signs of personal income growth and improved
investment spending are positive. Continued government fiscal consolidation will
not be helpful, but a less splintered LDP may adopt bolder structural reforms.
EUROPE
In Europe, markets have been focused on economic growth and the likelihood that
neither France nor Germany will achieve the 3% deficit-to-GDP ratio for Economic
and Monetary Union (EMU). The much awaited budget of the new Socialist-led
French government alleviated many fears, as corporate taxes were raised in an
attempt to keep the country on course to join EMU. While German political
squabbling about strict adherence to the 3% level continues, we agree with the
consensus that EMU will go forward, but with a larger number of countries and a
weaker Euro. EMU, though not without its risks, should be very positive for
Europe. Productive capital allowed to flow freely across borders without
currency risk will increase competition for investment and jobs, lower taxes on
capital and improve wage and labor
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
flexibility. We have already seen evidence of corporate consolidation and
government de-regulation in preparation, and we believe the trend will continue.
ASIA
Asian news has been dominated by the devaluation of the Thai baht and its
contagion to the Philippines, Indonesia, Malaysia, Singapore and most recently
Hong Kong. While parallels to Mexico in 1994 are inevitable, we do not think
they are valid. Compared to Latin America, Asian average growth rates are much
faster (4.5% versus 7.0%) and levels of indebtedness much lower (99% versus
203%). Property price levels and current account deficits need to come down, but
deep recessions will not be necessary to maintain stability. Though disruptive,
softening the Asian currency peg to the U.S. Dollar is a long-term policy
positive and an indication of financial market maturity. We have gone to an
underweight in the region because of reduced investor flows, the competitive
squeeze on profits, and the high Asian correlation with the U.S. market in
market pullbacks. However, many Asian markets, like Malaysia and Singapore are
back at 1990 valuation levels. At a later date, underowned, more competitive,
and ignored -- they should be poised to outperform.
Barton M. Biggs
PORTFOLIO MANAGER
Madhav Dhar
PORTFOLIO MANAGER
Francine J. Bovich
PORTFOLIO MANAGER
Ann D. Thivierge
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (96.7%)
AUSTRALIA (1.8%)
10,800 Amcor Ltd......................................... $ 72
5,800 Australian Gas Light Co., Ltd..................... 34
15,900 Australian National Industries Ltd................ 19
20,250 Boral Ltd......................................... 64
3,900 Brambles Industries Ltd........................... 77
30,987 Broken Hill Proprietary Co., Ltd.................. 456
8,997 Burns, Philip & Co., Ltd.......................... 17
8,276 Coca Cola Amatil Ltd.............................. 107
17,714 Coles Myer Ltd.................................... 92
(a)9,183 Crown Ltd......................................... 15
18,200 CSR Ltd........................................... 71
31,000 Fosters Brewing Corp.............................. 58
10,100 Gio Australia Holdings Ltd........................ 31
20,082 Goodman Fielder Ltd............................... 30
5,500 ICI Australia Ltd................................. 54
4,100 Leighton Holdings Ltd............................. 20
4,400 Lend Lease Corp., Ltd............................. 93
27,261 MIM Holdings Ltd.................................. 40
22,440 National Australia Bank Ltd....................... 322
4,837 Newcrest Mining Ltd............................... 13
30,846 News Corp., Ltd................................... 148
25,891 Normandy Mining Ltd............................... 29
12,765 North Ltd......................................... 49
14,700 Pacific Dunlop Ltd................................ 44
15,600 Pioneer International Ltd......................... 60
3,700 Plutonic Resources Ltd............................ 12
3,149 Renison Goldfields Consolidated Ltd............... 12
5,300 Rio Tinto, Ltd.................................... 90
9,925 Santos Ltd........................................ 42
3,300 Smith (Howard) Ltd................................ 31
2,000 Sons of Gwalia Ltd................................ 7
10,267 Southcorp Holdings Ltd............................ 38
5,400 TABCORP Holdings Ltd.............................. 29
1,067 Westfield Trust (New)............................. 2
28,000 Westpac Banking Corp.............................. 169
16,166 WMC Ltd........................................... 102
----------
2,549
----------
FRANCE (8.1%)
1,108 Accor S.A......................................... 166
4,039 Alcatel Alsthom................................... 506
9,417 AXA S.A. ......................................... 586
5,723 Banque Nationale de Paris......................... 236
925 BIC Corp. ........................................ 151
713 Bouygues.......................................... 59
(a)889 Canal Plus........................................ 173
1,075 Carrefour S.A. ................................... 781
2,450 Casino Guichard-Perrachon......................... 121
801 Cie Bancaire S.A.................................. 102
2,289 Cie de Saint Gobain............................... 334
84,260 Cie de Suez, S.A.................................. 207
3,611 Cie Financiere de Paribas S.A., Class A........... 250
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,133 Cie Generale des Eaux............................. $ 402
7,100 Elf Aquitaine S.A. ............................... 766
825 Eridania Beghin-Say S.A. ......................... 124
300 Essilor International............................. 81
2,133 Groupe Danone..................................... 352
2,021 Havas S.A......................................... 146
2,010 L'air Liquide..................................... 319
1,430 L'air Liquide RFD................................. 227
2,592 Lafarge S.A....................................... 161
3,000 Lagardere S.C.A. ................................. 87
855 Legrand........................................... 151
(a)1,835 L'OREAL........................................... 773
2,400 LVMH Moet Hennessy Louis Vuitton.................. 645
1,739 Lyonnaise des Eaux................................ 175
3,364 Michelin Compagnie Generale des Establissements,
Class B......................................... 202
1,850 Pernod Ricard..................................... 95
605 Pinault-Printemps S.A. ........................... 291
520 Promodes.......................................... 203
1,450 PSA Peugeot Citroen S.A. ......................... 140
9,342 Rhone-Poulenc S.A., Class A....................... 382
130 Sagem............................................. 66
2,976 Sanofi S.A........................................ 292
3,641 Schneider S.A..................................... 194
(a)58 Simco S.A. (New).................................. 5
675 Simco S.A. (RFD).................................. 54
100 Societe Eurafrance S.A............................ 41
2,731 Societe Generale.................................. 305
200 Sodexho S.A....................................... 102
3,296 Thomson CSF....................................... 85
6,654 Total S.A., Class B............................... 673
6,900 Usinor Sacilor.................................... 124
1,800 Valeo S.A......................................... 112
1,740 Worms et Compagnie................................ 103
----------
11,550
----------
GERMANY (9.3%)
1,200 Adidas AG......................................... 134
(a)850 AGIV AG........................................... 19
5,650 Allianz AG........................................ 1,207
100 AMB Aachener & Muenchener Beteiligungs AG......... 91
14,800 BASF AG........................................... 546
18,100 Bayer AG.......................................... 698
6,850 Bayerische Hypotheken Bank AG..................... 207
6,500 Bayerische Vereinsbank AG......................... 266
1,450 Bilfinger & Berger Bau AG......................... 61
(a)200 Brau Und Brunnen AG............................... 16
700 CKAG Colonia Konzern AG........................... 66
2,000 Continential AG................................... 50
13,350 Daimler-Benz AG................................... 1,087
2,450 Degussa AG........................................ 130
12,550 Deutsche Bank AG.................................. 737
55,156 Deutsche Telekom AG............................... 1,356
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
GERMANY (CONT.)
<TABLE>
<C> <S> <C>
11,300 Dresdner Bank AG.................................. $ 396
1,350 Heidelberger Zement AG............................ 131
2,600 Hochtief AG....................................... 116
300 Karstadt AG....................................... 108
(a)1,250 Kloeckner-Humboldt-Deutz AG....................... 12
250 Linde AG.......................................... 194
9,000 Lufthansa AG...................................... 173
350 MAN AG............................................ 109
950 Mannesmann AG..................................... 425
4,250 Merck KGaA........................................ 185
(a)2,615 Metro AG.......................................... 285
209 Muenchener Rueck AG (Registered).................. 592
450 Preussag AG....................................... 132
8,800 RWE AG............................................ 379
1,600 SAP AG............................................ 321
1,700 Schering AG....................................... 182
14,300 Siemens AG........................................ 857
(a)100 STRABAG AG........................................ 9
900 Thyssen AG........................................ 217
12,900 VEBA AG........................................... 729
650 Viag AG........................................... 297
(a)256 Viag AG (RFD)..................................... 116
750 Volkswagen AG..................................... 569
----------
13,205
----------
HONG KONG (3.5%)
29,500 Bank of East Asia Ltd............................. 123
78,000 Cathay Pacific Airways Ltd........................ 162
48,000 Cheung Kong Holdings Ltd.......................... 474
52,500 China Light & Power Co., Ltd...................... 297
35,985 Chinese Estates Holdings.......................... 34
15,800 Giordano Holdings Ltd............................. 11
29,000 Hang Lung Development Co.......................... 53
40,600 Hang Seng Bank Ltd................................ 579
4,400 Hong Kong Aircraft Engineering Co., Ltd........... 16
79,008 Hong Kong & China Gas Co., Ltd.................... 158
30,082 Hong Kong & Shanghai Hotel Ltd.................... 48
242,668 Hong Kong Telecommunications Ltd.................. 579
91,198 Hopewell Holdings Ltd............................. 58
81,000 Hutchison Whampoa Ltd............................. 700
21,000 Hysan Development Co., Ltd........................ 62
9,000 Johnson Electric Holdings Ltd..................... 27
39,465 New World Development Co., Ltd.................... 235
33,000 Oriental Press Group Ltd.......................... 14
12,800 Peregrine Investment Holdings Ltd................. 26
37,240 Shangri-La Asia Ltd............................... 45
35,398 Shun Tak Holdings Ltd............................. 22
60,000 Sino Land Co...................................... 65
38,000 South China Morning Post Holdings Ltd............. 37
50,000 Sun Hung Kai Properties Ltd....................... 602
33,500 Swire Pacific Ltd., Class A....................... 302
10,000 Television Broadcasts Ltd......................... 45
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
48,000 Wharf Holdings Ltd................................ $ 208
5,652 Wing Lung Bank Ltd................................ 36
----------
5,018
----------
ITALY (3.8%)
26,512 Assicurazioni Generali S.p.A...................... 482
41,700 Banca Commerciale Italiana........................ 86
16,300 Banco Ambrosiano Veneto S.p.A..................... 47
5,844 Benetton Group S.p.A.............................. 93
4,500 Cartiere Burgo.................................... 25
71,000 Credito Italiano.................................. 130
19,000 Edison S.p.A...................................... 95
229,000 ENI S.p.A......................................... 1,297
4,800 Falck Acciaierie & Ferriere Lombarde.............. 18
96,500 Fiat S.p.A........................................ 347
21,800 Fiat S.p.A. Di Risp (NCS)......................... 41
(a)6,500 Impregilo S.p.A................................... 4
25,000 Istituto Bancario San Paolo....................... 182
18,200 Istituto Mobiliare Italiano S.p.A................. 164
121,900 Istituto Nazionale delle Assicurazioni............ 186
(a)4,800 Italcementi....................................... 12
(a)6,850 Italcementi Di Risp............................... 43
19,800 Italgas........................................... 64
13,900 Magneti Marelli S.p.A............................. 24
34,500 Mediaset S.p.A.................................... 147
14,500 Mediobanca S.p.A.................................. 88
(a)85,574 Montedison S.p.A.................................. 57
(a)26,900 Montedison S.p.A. Di Risp (NCS)................... 17
(a)103,250 Olivetti S.p.A.................................... 29
46,920 Parmalat Finanziaria S.p.A........................ 66
48,000 Pirelli S.p.A..................................... 119
8,515 R.A.S. S.p.A...................................... 67
7,000 Rinascente S.p.A.................................. 39
3,900 SAI............................................... 30
4,900 Sasib S.p.A....................................... 17
9,000 Sirti S.p.A....................................... 52
18,000 Snia BPD S.p.A.................................... 16
185,500 Telecom Italia S.p.A.............................. 556
45,500 Telecom Italia S.p.A. Di Risp (NCS)............... 90
188,900 Telecom Italia Mobile S.p.A....................... 611
45,000 Telecom Italia Mobile S.p.A. (RNC)................ 81
----------
5,422
----------
JAPAN (32.5%)
2,390 Advantest Corp.................................... 184
31,000 Ajinomoto Co...................................... 333
(a)18,000 Aoki Corp......................................... 21
2,400 Aoyama Trading Co................................. 77
59,000 Asahi Bank Ltd.................................... 502
18,000 Asahi Breweries Ltd............................... 269
55,000 Asahi Chemical Industry Co., Ltd.................. 329
52,000 Asahi Glass Co., Ltd.............................. 517
18,000 Bridgestone Co.................................... 418
22,000 Canon, Inc........................................ 599
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
11,000 Casio Computer Co................................. $ 96
29,000 Chiba Bank........................................ 173
18,000 Chugai Pharmaceuticals Co......................... 162
21,000 Dai Nippon Printing Co., Ltd...................... 475
19,000 Daiei, Inc........................................ 122
18,000 Daikin Industries Ltd............................. 163
18,000 Daiwa House Industry.............................. 220
36,000 Daiwa Securities Co., Ltd......................... 284
22,000 Denso Corp........................................ 526
107 East Japan Railway Co............................. 549
12,000 Ebara Corp........................................ 180
7,700 Fanuc............................................. 296
63,000 Fuji Bank......................................... 946
11,000 Fuji Photo Film Ltd............................... 443
47,000 Fujitsu Ltd....................................... 652
14,000 Furukawa Electric Co.............................. 89
25,000 Hankyu Corp....................................... 138
18,000 Hazama Corp....................................... 37
91,000 Hitachi Ltd....................................... 1,017
24,000 Honda Motor Co.................................... 723
57,000 Industrial Bank of Japan.......................... 886
(a)11,000 Ito-Yokado Co., Ltd............................... 638
56,000 Japan Airlines Co................................. 255
46,000 Japan Energy Corp................................. 120
20,000 Joyo Bank......................................... 110
9,000 Jusco Co., Ltd.................................... 304
36,000 Kajima Corp....................................... 211
24,200 Kansai Electric Power Co.......................... 467
33,000 Kao Corp.......................................... 458
29,000 Kawasaki Steel Corp............................... 94
44,000 Kinki Nippon Railway.............................. 269
36,000 Kirin Brewery Co., Ltd............................ 374
36,000 Komatsu Ltd....................................... 292
55,000 Kubota Corp....................................... 269
36,000 Kumagai Gumi Co................................... 60
5,400 Kyocera Corp...................................... 429
18,000 Kyowa Hakko Kogyo................................. 135
55,000 Marubeni Corp..................................... 250
4,000 Marui Co., Ltd.................................... 74
55,000 Matsushita Electric Industries Ltd................ 1,109
55,000 Mitsubishi Chemical Corp.......................... 180
50,000 Mitsubishi Corp................................... 624
64,000 Mitsubishi Electric Corp.......................... 358
39,000 Mitsubishi Estate Co., Ltd........................ 565
99,000 Mitsubishi Heavy Industries Ltd................... 760
37,000 Mitsubishi Materials Corp......................... 148
33,000 Mitsubishi Trust & Banking Co..................... 521
55,000 Mitsui & Co....................................... 528
36,000 Mitsui Engineering & Shipbuilding................. 79
29,000 Mitsui Fudosan Co................................. 400
27,000 Mitsui Trust & Banking Co., Ltd................... 204
20,000 Mitsukoshi Ltd.................................... 142
6,000 Murata Manufacturing Co., Ltd..................... 239
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
12,000 Mycal Corp........................................ $ 173
31,000 NEC Corp.......................................... 433
18,000 NGK Insulators.................................... 198
14,000 Nippon Express Co., Ltd........................... 112
18,000 Nippon Fire & Marine Insurance Co................. 97
18,000 Nippon Light Metal Co............................. 65
18,000 Nippon Meat Packers, Inc.......................... 232
52,000 Nippon Oil Co..................................... 285
201,000 Nippon Steel Co................................... 642
272 Nippon Telegraph & Telephone Corp................. 2,612
55,000 Nippon Yusen Kabushiki Kaisha..................... 214
69,000 Nissan Motor Co................................... 535
106,000 NKK Corp.......................................... 228
47,000 Nomura Securities Co., Ltd........................ 648
21,000 Odakyu Electric Railway Corp...................... 125
36,000 Oji Paper Co., Ltd. (New)......................... 223
80,000 Osaka Gas Co...................................... 230
18,000 Penta-Ocean Construction.......................... 58
6,000 Pioneer Electric Corp............................. 146
2,000 Rohm Co........................................... 206
71,000 Sakura Bank....................................... 544
14,000 Sankyo Co., Ltd................................... 470
55,000 Sanyo Electric Co., Ltd........................... 247
4,000 Secom Co., Ltd.................................... 294
3,600 Sega Enterprises.................................. 119
18,000 Sekisui House Co., Ltd............................ 182
36,000 Sharp Corp........................................ 496
5,000 Shimano, Inc...................................... 105
26,000 Shimizu Corp...................................... 156
8,000 Shin-Etsu Chemical Co............................. 212
8,000 Shiseido Co., Ltd................................. 132
25,000 Shizuoka Bank..................................... 286
(a)36,000 Showa Denko....................................... 94
8,400 Sony Corp......................................... 732
72,000 Sumitomo Bank..................................... 1,181
73,000 Sumitomo Chemical Co.............................. 331
36,000 Sumitomo Corp..................................... 342
24,000 Sumitomo Electric................................. 402
7,000 Sumitomo Forestry Co., Ltd........................ 77
17,000 Sumitomo Metal & Mining Co........................ 120
65,000 Sumitomo Metal Industries......................... 185
18,000 Sumitomo Osaka Cement Co., Ltd.................... 57
36,000 Taisei Corp., Ltd................................. 167
11,000 Taisho Pharmaceutical Co.......................... 297
22,000 Takeda Chemical................................... 618
36,000 Teijin Ltd........................................ 170
106,000 The Bank of Tokyo-Mitsubushi...................... 2,128
25,000 Tobu Railway Co................................... 115
13,000 Tohoku Electric Power............................. 231
55,000 Tokai Bank........................................ 566
55,000 Tokio Marine & Fire Insurance Co.................. 720
33,700 Tokyo Electric Power Co........................... 709
2,000 Tokyo Electron Ltd................................ 96
73,000 Tokyo Gas Co...................................... 203
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
31,000 Tokyu Corp........................................ $ 192
25,000 Toppan Printing Co., Ltd.......................... 393
55,000 Toray Industries, Inc............................. 392
18,000 Toto Ltd.......................................... 222
36,000 Toyoba Co......................................... 95
79,000 Toyota Motor Corp................................. 2,331
36,000 Ube Industries Ltd................................ 105
36,000 Yamaichi Securities Co............................ 107
33,000 Yasuda Trust & Banking Co......................... 126
----------
46,301
----------
KOREA (1.2%)
3,710 Cho Hung Bank Co., Ltd. (Foreign)................. 25
3,320 Commercial Bank of Korea.......................... 18
2,570 Daewoo Corp....................................... 21
8,050 Daewoo Heavy Industries........................... 66
1,110 Daewoo Securities Co.............................. 20
820 Dong-Ah Construction Industrial Co................ 16
3,780 Hanil Bank........................................ 21
(a)1,134 Hyundai Engineering & Construction Co.
(Foreign)....................................... 29
(d)910 Hyundai Motor Co.,Ltd............................. 30
(d)11,390 Korea Electric Power.............................. 340
3,410 Korea First Bank.................................. 14
33,700 Korea Fund, Inc. (The)............................ 497
(d)84 Korea Mobile Telecommunications Corp. (Foreign)... 63
1,760 L.G. Chemical Ltd................................. 24
(d)2,130 Pohang Iron & Steel Co., Ltd...................... 218
1,330 Samsung Corp...................................... 18
(d)560 Samsung Display Devices Co........................ 31
(d)1,620 Samsung Electronics............................... 181
220 Tong Yang Cement Co............................... 4
1,677 Yukong Ltd........................................ 41
----------
1,677
----------
NETHERLANDS (3.6%)
21,304 ABN Amro Holdings N.V............................. 397
1,250 Akzo Nobel N.V.................................... 171
11,700 Elsevier N.V...................................... 196
1,400 Getronics N.V..................................... 45
850 Heineken N.V...................................... 145
12,908 ING Groep N.V..................................... 596
1,556 KLM Royal Dutch Airlines N.V...................... 48
2,729 Koninklijke Ahold N.V............................. 230
1,800 Koninklijke KNP BT N.V............................ 41
7,567 Koninklijke PTT Nederland N.V..................... 297
450 Nedlloyd Groep N.V................................ 13
300 Oce N.V........................................... 39
5,700 Philips Electronics N.V........................... 409
34,800 Royal Dutch Petroleum Co.......................... 1,812
639 Stork N.V......................................... 26
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
2,600 Unilever N.V...................................... $ 548
1,085 Wolters Kluwer N.V................................ 132
----------
5,145
----------
SINGAPORE (4.0%)
(d)24,000 Amcol Holdings Ltd................................ --
58,000 City Developments Ltd............................. 568
(a)7,000 Creative Technology Ltd........................... 120
17,000 Cycle & Carriage Ltd.............................. 176
68,000 DBS Land Ltd...................................... 215
35,000 Development Bank of Singapore Ltd. (Foreign)...... 441
21,000 First Capital Corp., Ltd.......................... 55
21,800 Fraser & Neave Ltd................................ 155
41,000 Hai Sun Hup Group Ltd............................. 29
34,000 Hotel Properties Ltd.............................. 58
15,000 Inchcape Bhd...................................... 54
9,000 Jurong Shipyard Ltd............................... 39
59,750 Keppel Corp., Ltd................................. 265
8,000 Metro Holdings Ltd................................ 26
25,000 Natsteel Ltd...................................... 64
63,000 Neptune Orient Lines Ltd. (Foreign)............... 56
51,560 Oversea-Chinese Banking Corp. (Foreign)........... 534
11,000 Overseas Union Enterprise Ltd..................... 51
24,000 Parkway Holdings Ltd.............................. 107
4,000 Robinson & Co. Ltd................................ 21
11,600 Shangri-La Hotel Ltd.............................. 35
65,000 Singapore Airlines Ltd. (Foreign)................. 582
14,800 Singapore Press Holdings (Foreign)................ 298
53,000 Singapore Technologies Industrial Corp............ 136
448,000 Singapore Telecommunications Ltd.................. 827
25,000 Straits Trading Co., Ltd.......................... 55
104,000 United Industrial Corp., Ltd...................... 79
59,000 United Overseas Bank Ltd. (Foreign)............... 607
(a)40,000 United Overseas Land Ltd.......................... 54
----------
5,707
----------
SPAIN (3.6%)
435 Acerinox S.A...................................... 82
59 Aguas de Barcelona................................ 2
1,430 Aguas de Barcelona (New).......................... 59
4,200 Argentaria S.A.................................... 235
6,769 Autopistas Concesionaria Espanola S.A............. 92
7,500 Banco Bilbao Vizcaya S.A. (Registered)............ 610
5,500 Banco Central Hispano Americano S.A............... 201
16,000 Banco Santander S.A............................... 493
500 Corporacion Financiera Alba....................... 64
945 Corporacion Mapfre................................ 50
1,900 Dragados y Construccion S.A....................... 40
1,650 Ebro Agricolas S.A................................ 32
750 ENCE S.A.......................................... 13
8,600 Endesa S.A........................................ 723
(a)5,700 Ercros S.A........................................ 6
550 Fomento Construction y Contractas S.A............. 70
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
1,250 Gas Natural SDG S.A............................... $ 273
31,200 Iberdrola S.A..................................... 394
700 Metro Vacesa...................................... 25
200 Portland Valderrivas S.A.......................... 16
10,100 Repsol S.A........................................ 427
1,200 Tabacalera S.A., Class A.......................... 64
31,500 Telefonica de Espana S.A.......................... 911
9,800 Union Electrica Fenosa S.A........................ 89
1,750 Uralita S.A....................................... 20
1,467 Vallehermoso S.A.................................. 40
750 Viscofan Envolturas Celulosicas S.A............... 18
284 Zardoya Otis S.A.................................. 37
----------
5,086
----------
SWEDEN (3.4%)
24,400 ABB AB, Class A................................... 342
4,500 AGA AB, Class A................................... 61
3,700 AGA AB, Class B................................... 49
49,633 Astra AB, Class A................................. 924
4,650 Atlas Copco AB, Class A........................... 121
2,600 Electrolux AB, Series B........................... 188
30,300 Ericsson LM, Class B.............................. 1,193
1,300 Esselte AB, Class A............................... 31
6,500 Hennes & Mauritz AB, Class B...................... 233
3,000 Securitas AB, Class B............................. 84
3,900 Skandia Forsakrings AB............................ 144
17,600 Skandinaviska Enskilda Banken, Class A ........... 190
4,400 Skanska AB, Class B............................... 195
2,700 S.K.F. AB, Class B................................ 70
11,050 Stora Kopparbergs Bergslags Aktiebolag, Class A... 179
6,800 Svenska Cellulosa AB, Class B..................... 145
7,100 Svenska Handelsbanken, Class A.................... 227
16,900 Swedish Match AB.................................. 57
4,600 Trelleborg AB, Class B............................ 75
13,650 Volvo AB, Class B................................. 365
----------
4,873
----------
SWITZERLAND (4.3%)
145 ABB AG............................................ 220
275 Adecco S.A........................................ 105
85 Alusuisse-Lonza Holdings Ltd. (Registered) ....... 88
2,850 CS Holding AG (Registered)........................ 366
15 Georg Fischer AG (Bearer)......................... 21
100 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 94
595 Nestle S.A. (Registered).......................... 785
975 Novartis AG (Registered).......................... 1,559
25 Roche Holding AG (Bearer)......................... 343
105 Roche Holding AG (Registered)..................... 950
25 SGS Surveillance.................................. 53
80 SMH AG (Bearer)................................... 46
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
60 Sulzer AG (Registered)............................ $ 51
(a)1,150 Swiss Bank Corp. (Registered)..................... 308
215 Swiss Reinsurance (Registered).................... 304
(a)50 SwissAir (Registered)............................. 56
320 Union Bank of Switzerland (Bearer)................ 366
350 Union Bank of Switzerland (Registered)............ 80
(a)95 Valora Holding AG................................. 20
720 Zuerich Versicherung (Registered)................. 286
----------
6,101
----------
THAILAND (1.4%)
14,600 Advanced Information Service PCL (Foreign)........ 104
2,100 Banpu PCL (Foreign)............................... 31
(d)22,100 Bangchak Petroleum PCL (Foreign).................. 9
28,100 Bangkok Bank PCL (Foreign)........................ 193
(d)86,209 Bangkok Metropolitan Bank PCL (Foreign)........... 18
28,775 Bank of Ayudhya PCL (Foreign)..................... 45
(a,d)2,000 Castle Peak Holdings PCL (Foreign)................ 10
(d)8,000 CMIC Finance & Securities PCL (Foreign)........... 2
2,400 CP Feedmill PCL (Foreign)......................... 6
28,400 Dhana Siam Finance & Securities PCL (Foreign)..... 15
18,600 General Finance & Securities PCL (Foreign)........ 12
21,800 Industrial Finance Corp. of Thailand (Foreign).... 28
(a,d)2,200 International Broadcasting Corp., Ltd.
(Foreign)....................................... 1
(d)2,500 International Engineering PCL (Foreign)........... 2
(d)15,500 Italian Thai Development PCL (Foreign)............ 35
14,100 Jasmine International PCL (Foreign)............... 12
86,700 Krung Thai Bank PCL (Foreign)..................... 90
16,800 Land & House Co., Ltd. (Foreign).................. 35
23,651 National Finance & Securities PCL (Foreign)....... 15
(d)25,900 National Petrochemical PCL (Foreign).............. 26
(a,d)10,600 NTS Steel Groups PCL (Foreign).................... 1
(a,d)13,500 One Holding PCL (Foreign)......................... --
(a,d)8,700 Padaeng Industry PCL (Foreign).................... 2
24,900 Phatra Thanakit PCL (Foreign)..................... 31
(a,d)6,100 Phoenix Pulp & Paper PCL (Foreign)................ 5
30,300 PTT Exploration & Production PCL (Foreign)........ 440
23,500 Quality House PCL (Foreign)....................... 9
1,100 Saha-Union PCL.................................... 1
(a,d)31,900 Sahaviriya Steel Industry PCL (Foreign)........... 6
(d)14,700 Shinawatra Computer Co. PCL (Foreign)............. 102
(d)14,800 Shinawatra Satellite PCL (Foreign)................ 18
(d)7,100 Siam Cement PCL (Foreign)......................... 123
34,700 Siam City Bank PCL (Foreign)...................... 20
7,400 Siam City Cement PCL (Foreign).................... 30
13,700 Siam Commercial Bank PCL (Foreign)................ 56
(a)138,800 TelecomAsia Corp. PCL (Foreign)................... 161
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
THAILAND (CONT.)
<TABLE>
<C> <S> <C>
28,300 Thai Airways International PCL (Foreign).......... $ 34
22,500 Thai Farmers Bank PCL (Foreign)................... 96
18,100 Thai Military Bank PCL (Foreign).................. 20
3,200 Thai Plastic & Chemical PCL....................... 10
(a,d)39,900 Thai Telephone & Telecommunications Co.
(Foreign)....................................... 17
5,700 Tipco Asphalt PCL................................. 30
(d)13,600 TPI Polene PCL.................................... 7
(d)24,700 United Communication Industry PCL (Foreign)....... 102
(d)10,800 Wattachak Co., Ltd. (Foreign)..................... 2
----------
2,012
----------
UNITED KINGDOM (16.2%)
30,000 Abbey National plc................................ 410
15,000 Arjo Wiggins Appleton plc......................... 44
10,700 Associated British Foods plc...................... 92
36,417 Barclays plc...................................... 723
23,600 Bass plc.......................................... 288
66,435 BAT Industries plc................................ 595
94,300 BG plc............................................ 345
14,954 BICC plc.......................................... 44
27,810 Blue Circle Industries plc........................ 199
14,970 BOC Group plc..................................... 260
23,600 Boots Co. plc..................................... 277
15,000 BPB Industries plc................................ 81
10,675 British Aerospace plc............................. 238
25,725 British Airways plc............................... 293
122,109 British Petroleum Co. plc......................... 1,519
34,300 British Sky Broadcasting plc...................... 250
42,900 British Steel plc................................. 107
124,300 British Telecommunications plc.................... 923
90,005 BTR plc........................................... 308
6,426 Burmah Castrol plc................................ 109
53,572 Cable & Wireless plc.............................. 491
23,580 Cadbury Schweppes plc............................. 210
17,140 Caradon plc....................................... 57
(a)94,300 Centrica plc...................................... 115
19,243 Coats Viyella plc................................. 40
14,996 Commercial Union plc.............................. 158
10,700 Courtaulds plc.................................... 60
2,116 De La Rue Co. plc................................. 13
10,694 EMI Group plc..................................... 192
62,100 General Electric plc.............................. 371
12,815 GKN plc........................................... 220
68,600 Glaxo Wellcome plc................................ 1,419
14,972 Granada Group plc................................. 197
47,194 Grand Metropolitan plc............................ 454
25,700 Great Universal Stores plc........................ 261
17,163 Guardian Royal Exchange plc....................... 78
47,100 Guinness plc...................................... 461
12,840 Hanson plc........................................ 64
27,900 Harrisons & Crosfield plc......................... 51
47,188 HSBC Holdings plc................................. 1,398
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
19,300 Imperial Chemical Industries plc.................. $ 268
25,719 Ladbroke Group plc................................ 101
17,100 Land Securities plc............................... 242
17,100 Lasmo plc......................................... 75
25,700 Legal & General Group plc......................... 174
117,900 Lloyds TSB Group plc.............................. 1,211
17,096 Lonrho plc........................................ 36
75,000 Marks and Spencer plc............................. 622
12,900 MEPC plc.......................................... 106
30,000 National Power plc................................ 261
17,155 Peninsular & Oriental Steam Navigation Co. plc.... 171
32,120 Pilkington plc.................................... 74
42,862 Prudential Corp. plc.............................. 419
19,300 Rank Group plc.................................... 122
12,816 Redland plc....................................... 73
30,000 Reed International plc............................ 290
36,400 Reuters Holdings plc.............................. 384
12,900 Rexam plc......................................... 54
6,400 RMC Group plc..................................... 104
30,028 Royal & Sun Alliance Insurance Group plc ......... 222
10,670 Royal Bank of Scotland Group plc.................. 100
25,748 RTZ Corp. plc..................................... 449
19,327 Safeway plc....................................... 112
34,323 Sainsbury (J) plc................................. 208
4,300 Schroders plc..................................... 118
21,430 Scottish Power plc................................ 139
42,900 Sears plc......................................... 49
12,846 Sedgwick Group plc................................ 26
10,700 Slough Estates plc................................ 53
53,598 Smithkline Beecham plc............................ 987
10,738 Southern Electric plc............................. 79
30,007 Tarmac plc........................................ 62
17,116 Taylor Woodrow plc................................ 50
40,720 Tesco plc......................................... 251
14,952 Thames Water plc.................................. 172
10,750 Thorn plc......................................... 30
10,717 TI Group plc...................................... 93
15,000 Unilever plc...................................... 429
14,986 United Utilities plc.............................. 164
70,756 Vodafone Group plc................................ 345
19,300 Zeneca Group plc.................................. 638
----------
22,978
----------
TOTAL COMMON STOCKS (Cost $124,060)........................... 137,624
----------
PREFERRED STOCKS (0.4%)
AUSTRALIA (0.1%)
23,778 News Corp., Ltd................................... 94
----------
GERMANY (0.3%)
5,850 RWE AG............................................ 204
1,100 SAP AG............................................ 227
----------
431
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ITALY (0.0%)
33,000 Fiat S.p.A........................................ $ 61
----------
TOTAL PREFERRED STOCKS (Cost $515)............................ 586
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
FRANCE (0.0%)
(a)675 Simco S.A., expiring 7/02/97...................... --
----------
ITALY (0.0%)
(a)7,000 Rinascente S.p.A., expiring 7/23/97............... 1
----------
SPAIN (0.0%)
(a)700 Metro Vacesa, expiring 7/26/97.................... --
----------
SWITZERLAND (0.0%)
(a)60 Sulzer AG, expiring 7/17/97....................... --
----------
THAILAND (0.0%)
(a,d)13,600 TPI Polene PCL, expiring 7/11/97.................. 2
----------
TOTAL RIGHTS (Cost $0)........................................ 3
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)620 Casino Guichard-Perrachon, expiring 12/31/99...... 9
(a)4,333 Cie Generale des Eaux, expiring 5/02/01........... 3
----------
12
----------
HONG KONG (0.0%)
(a)8,582 Hong Kong & Shanghai Hotel, Ltd., expiring
10/12/98........................................ 2
(a)2,300 Hysan Development Co., Ltd., expiring 4/30/98..... 1
(a)11,500 Oriental Press Group Ltd., expiring 10/02/98...... 1
(a)1,750 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... 1
(a)12,800 Stelux Holdings International Ltd., expiring
2/28/98......................................... 1
----------
6
----------
ITALY (0.0%)
(a)2,950 R.A.S. S.p.A., expiring 12/31/97.................. 6
(a)1,550 R.A.S. S.p.A. Saving Shares, expiring 12/31/97.... 3
(a)1,050 Rinascente S.p.A., expiring 12/31/99.............. --
----------
9
----------
SINGAPORE (0.0%)
(a)11,750 Straits Steamship, expiring 12/20/00.............. 11
----------
SWITZERLAND (0.0%)
(a)112 Roche Holding A.G., expiring 5/05/98.............. 9
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
THAILAND (0.0%)
(a)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ $ 1
(a)1,980 One Holding PCL, expiring 10/14/01................ --
----------
1
----------
TOTAL WARRANTS (Cost $10)..................................... 48
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.1%)
AUSTRALIA (0.1%)
20,221 General Property Trust............................ 40
(a)20,348 Westfield Trust................................... 42
----------
TOTAL UNITS (Cost $73)........................................ 82
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE DEBENTURE (0.1%)
FRANCE (0.1%)
FRF 60 Sanofi S.A. 4.00%, 1/01/00 (Cost $38)............. 65
----------
FIXED INCOME SECURITY (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01 (Cost $27).............................. 31
----------
TOTAL FOREIGN SECURITIES (97.3)% (Cost $124,723).............. 138,439
----------
SHORT-TERM INVESTMENT (2.8%)
REPURCHASE AGREEMENT (2.8%)
$ 4,025 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $4,026,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,093 (Cost $4,025)..... 4,025
----------
FOREIGN CURRENCY (0.5%)
AUD 17 Australian Dollar................................. 12
ATS 23 Austrian Schilling................................ 2
BEF 15 Belgian Franc..................................... --
GBP 20 British Pound..................................... 34
DEM 66 German Mark....................................... 38
HKD 323 Hong Kong Dollar.................................. 42
IDR 114,982 Indonesian Rupiah................................. 47
ITL 86,882 Italian Lira...................................... 51
JPY 32,984 Japanese Yen...................................... 288
MYR 22 Malaysian Ringgit................................. 9
SGD 28 Singapore Dollar.................................. 20
KRW 4,961 South Korean Won.................................. 5
ESP 4,250 Spanish Peseta.................................... 29
SEK 30 Swedish Krona..................................... 4
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FOREIGN CURRENCY (CONT.)
<TABLE>
<C> <S> <C>
CHF 7 Swiss Franc....................................... $ 5
THB 3,751 Thai Baht......................................... 145
----------
TOTAL FOREIGN CURRENCY (Cost $732)............................ 731
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.6%) (Cost $129,480)............... 143,195
--------
OTHER ASSETS (40.4%)
Cash....................................... $ 140
Securities at Value, Held as Collateral for
Securities Lending....................... 41,808
Receivable for Investments Sold............ 14,216
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 745
Dividends Receivable....................... 484
Foreign Withholding Tax Reclaim
Receivable............................... 84
Security Lending Income Receivable......... 15
Interest Receivable........................ 1
Other...................................... 11 57,504
----------
LIABILITIES (-41.0%)
Collateral on Securities Loaned, at Value.. (41,808)
Payable for Portfolio Shares Redeemed...... (12,561)
Payable for Investments Purchased.......... (3,691)
Investment Advisory Fees Payable........... (211)
Custodian Fees Payable..................... (44)
Administrative Fees Payable................ (29)
Security Lending Expense Payable........... (21)
Directors' Fees & Expenses Payable......... (7)
Payable for Foreign Taxes.................. (4)
Other Liabilities.......................... (57) (58,433)
---------- --------
NET ASSETS (100%)........................................ $142,266
--------
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
- -------------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................. $106,772
Undistributed Net Investment Income.......... 1,479
Accumulated Net Realized Gain................ 19,640
Unrealized Appreciation on Investments and
Foreign Currency Translations (Net of
accrual for foreign tax of $4 on unrealized
appreciation on investments)............... 14,375
--------
NET ASSETS................................... $142,266
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $142,237
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 10,951,513 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $12.99
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $29
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,243 outstanding $0.001 par value
shares (authorized 500,000,000 shares).......... $12.97
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the
portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- ------------
AUD 316 $ 239 7/01/97 U.S.$ 237 $ 237 $ (2)
JPY 450,259 3,930 7/01/97 U.S.$ 3,928 3,928 (2)
SEK 3,339 432 7/01/97 U.S.$ 434 434 2
U.S.$ 9 9 7/01/97 ESP 1,393 9 --
U.S.$ 9 9 7/01/97 ESP 1,393 9 --
GBP 1,242 2,067 7/01/97 U.S.$ 2,071 2,071 4
ITL 838,490 493 7/01/97 U.S.$ 498 498 5
SGD 749 524 7/01/97 U.S.$ 524 524 --
DEM 2,126 1,220 7/03/97 U.S.$ 1,228 1,228 8
CHF 784 537 7/03/97 U.S.$ 544 544 7
HKD 3,329 430 7/03/97 U.S.$ 430 430 --
THB 3,621 140 7/03/97 U.S.$ 140 140 --
U.S.$ 4,555 4,555 7/30/97 DEM 7,848 4,511 (44)
DEM 7,848 4,511 7/30/97 U.S.$ 4,675 4,675 164
NLG 5,685 2,909 8/18/97 U.S.$ 2,995 2,995 86
CHF 7,616 5,248 8/18/97 U.S.$ 5,360 5,360 112
U.S.$ 798 798 8/18/97 NLG 1,544 790 (8)
U.S.$ 725 725 8/18/97 NLG 1,401 717 (8)
THB 16,304 618 8/18/97 U.S.$ 610 610 (8)
U.S.$ 2,000 2,000 8/18/97 CHF 2,782 1,917 (83)
U.S.$ 913 913 8/18/97 CHF 1,305 900 (13)
U.S.$ 2,470 2,470 8/18/97 CHF 3,530 2,432 (38)
U.S.$ 733 733 8/18/97 THB 19,790 750 17
THB 3,487 132 8/18/97 U.S.$ 130 130 (2)
U.S.$ 40 40 8/19/97 THB 1,078 41 1
THB 17,767 673 8/19/97 U.S.$ 660 660 (13)
JPY 1,852,593 16,305 8/25/97 U.S.$ 16,600 16,600 295
U.S.$ 4,582 4,582 8/25/97 JPY 520,584 4,582 --
U.S.$ 11,731 11,731 8/25/97 JPY 1,332,009 11,723 (8)
U.S.$ 1,218 1,218 8/29/97 DEM 2,094 1,207 (11)
U.S.$ 3,309 3,309 8/29/97 DEM 5,679 3,272 (37)
DEM 7,773 4,479 8/29/97 U.S.$ 4,541 4,541 62
U.S.$ 4,879 4,879 9/15/97 FRF 28,257 4,835 (44)
U.S.$ 255 255 9/15/97 FRF 1,474 252 (3)
FRF 46,187 7,903 9/15/97 U.S.$ 8,150 8,150 247
THB 38,817 1,455 9/16/97 U.S.$ 1,498 1,498 43
ESP 201,382 1,369 9/26/97 U.S.$ 1,385 1,385 16
-------- -------- ------
$ 93,840 $ 94,585 $ 745
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at Fair Value -- See note A-1 to financial
statements
FRF -- French Franc
NCS -- Non Convertible Shares
NLG -- Netherlands Guilder
PCL -- Public Company Limited
RFD -- Ranked for Dividend
RNC -- Non Convertible Savings Share
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------
Capital Equipment...................... $ 17,879 12.6%
Consumer Goods......................... 27,923 19.6
Energy................................. 13,082 9.2
Finance................................ 34,267 24.1
Gold Mines............................. 68 --
Materials.............................. 19,617 13.8
Multi-Industry......................... 3,898 2.7
Services............................... 21,705 15.3
--------- ---
$ 138,439 97.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 1.2%
Hong Kong 36.0%
Indonesia 6.9%
Korea 8.0%
Malaysia 15.8%
Philippines 4.1%
Singapore 11.6%
Taiwan 12.3%
Thailand 3.4%
Other 0.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) COMBINED FAR EAST FREE EX-JAPAN INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEAR INCEPTION
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A...... 2.30% 0.11% 14.43% 17.09%
PORTFOLIO -- CLASS B...... 2.19 -0.14 N/A 3.44
INDEX -- CLASS A.......... 0.19 0.95 12.73 15.47
INDEX -- CLASS B.......... 0.19 0.95 N/A 6.01
</TABLE>
1. The MSCI Combined 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 (included 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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
COMBINED 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 which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 2.30% and 0.11%, respectively, for the Class A shares; and
2.19% and -0.14%, respectively, for the Class B shares as compared to total
returns of 0.19% and 0.95%, respectively, for the Morgan Stanley Capital
International (MSCI) Combined Far East Free ex-Japan Index (the "Index"). For
the five-year period ended June 30, 1997, the average annual total return for
Class A was 14.43% as compared to 12.73% for the Index. From inception on July
1, 1991 to June 30, 1997, the average annual total return of Class A was 17.09%
as compared to 15.47% for the Index. From inception on January 2, 1996 to June
30, 1997, the average annual total return of Class B was 3.44% as compared to
6.01% for the Index.
Continuing the pattern set in 1996, the individual Asian markets showed a great
divergence in performance in the first half of 1997. The rise in the Asian
markets was led by the greater China markets where Taiwan (+26.6%), China
(+10.3%) and Hong Kong (+8.1%) staged sharp increases ahead of Hong Kong's
handover to China on July 1, 1997. Rounding out the Northeast Asian markets,
Korea also showed a sharp rise, gaining 9.7%. In contrast, the Southeast Asian
markets of Thailand (-37.3%), The Philippines (-12.2%) and Malaysia (-12.2%)
registered sharp falls.
As of June 30, 1997, the Portfolio was overweighted compared to the Index in
Hong Kong (35.8% vs. 33.3%), Korea (8.0% vs. 5.9%), Singapore (11.4% vs. 11.1%)
and China (1.2% vs. 0.8%). It was underweight everywhere else, most notably in
Malaysia (15.7% vs. 18.4%).
Following the first quarter where the Hong Kong market fell -9.5%, the Portfolio
increased its exposure to that market from 30% to 36%. The
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
Portfolio's increased weight in Hong Kong stood it in good stead as the market
staged a sharp rebound. Euphoria over China concept plays and in particular red
chips led the way. Sentiment and liquidity further contributed, as asset
injection stories propelled the red chips ever higher while traditional blue
chip stocks languished. The rally culminated in an all-time high of 15,197 on
the Hang Seng Index on June 27, 1997, the last trading day before the handover.
With the handover complete, red chip fever has subsided and talk of increasing
the supply of residential units in Hong Kong has caused the property sector to
weaken. The Portfolio will be looking to take its Hong Kong weighting down while
shifting towards better value blue chips such as the major property developers
if they weaken further.
The Portfolio also sharply increased its weight in Taiwan over the half-year
from 4.3% to 12.3%. Following on a strong 1996 performance of 38.9%, the Taiwan
market continued to surge, up 26.6% for the first half. This sharp rise was
powered primarily by the electronics sector which surged more than 60% on strong
earnings growth in the second quarter alone. The Portfolio intends to maintain
its weighting in this market as domestic liquidity continues to be high. The
position will be trimmed, however, if the central bank anticipates a further
pick up in domestic growth and moves to tighten liquidity.
The Portfolio also increased its weight in Korea since the beginning of the year
from 4.5% to 8.0% and will continue to look for good values in that market. The
Korean economy appears to have bottomed as positive export growth generated its
first monthly trade surplus in 30 months. Equally encouraging, there are also
signs that the Korean corporate culture is finally changing. The zealousness
with which many Korean companies pursued market share gains and top line growth
is finally beginning to shift towards interest in the bottom line which should
bode well for equity investors.
By contrast, the Portfolio sharply cut its weighting in Malaysia over the second
quarter, from 22.6% to 15.7%, following a flat first quarter. Bank Negara's
curbs on property lending and stock market margin loans in April finally forced
the economy to confront its problems with the impending oversupply in the
property market and an infrastructure spending binge. The subsequent severity of
the market fallout indicated an overstretched market. Although the long-term
fundamentals for Malaysia remain good, short-term prospects are not promising,
especially in the aftermath of the fallout from the depegging of the Thai baht.
The Portfolio is looking to maintain its underweight in Malaysia barring
unforeseen positive developments.
The Portfolio's weighting in Thailand has also been taken down, from 8.4% to
3.2%, due to a combination of Portfolio sales and a collapsing market. This
market has continued to be a disaster, falling -37.3% this year following a
- -38.0% decline last year. Most recently, confidence plummeted as the government
resorted to capital controls and increased interest rates to fend off the
currency speculators. The gloom was further compounded by news of a slowing
economy as the mounting financial crisis resulted in the suspension of 16
finance companies. The depegging of the Thai baht at the beginning of July is
the first step towards addressing the Thai financial crisis. Recovery, however,
will be a slow and painful process, and the first sharp rally since the baht
broke is proving hard to sustain. The Portfolio will selectively continue to
seek to acquire good companies at low prices but it is still too early to bet on
the Thai market.
The Thai financial crisis and the final depegging of the Thai baht have brought
into focus the common ills of the fast growing Southeast Asian nations. Thailand
is further along the economic cycle but the pain it is going through has
heightened investors' wariness about the region in general and is likely to
prove a dampener on the markets in the near term. The collapse in the Thai
market and the correction in Malaysia, Singapore and the Philippines have
brought market valuations back to attractive levels but short-term sentiment
remains poor.
In summary, the Portfolio will continue to selectively seek to move out of more
extended markets like Hong Kong into the more distressed situations in Southeast
Asia.
Ean Wah Chin
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCKS (99.2%)
CHINA (1.2%)
1,968,000 Guangshen Railway Co., Ltd., Class H.............. $ 864
3,299,000 Qingling Motors Co., Class H...................... 1,703
137,000 Shenzhen Fangda Co., Ltd., Class B................ 199
(a)4,901,000 Zhejiang Expressway Co. Ltd., Class H............. 1,189
----------
3,955
----------
HONG KONG (36.0%)
2,136,000 Cheung Kong Holdings Ltd.......................... 21,092
408,000 China Merchants Holdings International Co.,
Ltd............................................. 1,269
2,918,000 China Resources Enterprise Ltd.................... 14,313
337,000 Dao Heng Bank Group Ltd........................... 1,844
409,300 Hang Seng Bank Ltd................................ 5,838
1,436,000 Henderson Land Development Co., Ltd............... 12,743
617,220 HSBC Holdings plc................................. 18,563
1,752,000 Hutchison Whampoa Ltd............................. 15,152
1,069,000 New World Development Co., Ltd.................... 6,375
1,006,000 Ng Fung Hong Ltd.................................. 1,506
1,786,000 Shanghai Industrial Holdings Ltd.................. 11,112
569,100 Sun Hung Kai Properties Ltd....................... 6,850
----------
116,657
----------
INDONESIA (6.9%)
1,190,000 Astra International (Foreign)..................... 4,893
(d)3,246,683 Bank International Indonesia (Foreign)............ 2,803
(d)3,900,000 Bank Negara Indonesia (Foreign)................... 2,486
(d)733,000 Bimantara Citra (Foreign)......................... 1,281
(d)377,000 Gudang Garam (Foreign)............................ 1,581
(d)403,200 Hanjaya Mandala Sampoerna
(Foreign)....................................... 1,538
(d)884,400 Indofood Sukses Makmur (Foreign).................. 2,036
(d)1,174,000 Matahari Putra Prima (Foreign).................... 2,365
(a,d)1,349,000 Mayora Indah (Foreign)............................ 763
(a,d)454,000 Putra Surya Multidana (Foreign)................... 723
(d)1,057,000 Telekomunikasi Indonesia (Foreign)................ 1,728
----------
22,197
----------
KOREA (8.0%)
51,180 Hansol Paper Co................................... 1,297
(d)107,250 Housing & Commercial Bank, Korea (New)............ 2,002
67,568 Kookmin Bank GDR.................................. 1,427
(a,d)94,367 Kookmin Bank GDR (New)............................ 1,741
106,660 Korea Electric Power Corp......................... 3,183
23,490 LG Information & Communication Ltd. RFD (New)..... 2,910
(d)35,030 Pohang Iron & Steel Co., Ltd. ADR................. 3,588
(a,e)7,960 Samsung Electronics GDR (New)..................... 472
(d)66,698 Samsung Electronics GDS........................... 7,466
(d)133,761 Shinhan Bank Co., Ltd............................. 1,939
----------
26,025
----------
MALAYSIA (15.8%)
309,000 Arab Malaysian Corp., Bhd......................... 1,151
3,063,000 Berjaya Group Bhd................................. 3,762
236,000 Berjaya Sports Toto Bhd........................... 1,113
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
1,118,000 Commerce Asset Holdings Bhd....................... $ 2,946
220,000 Dialog Group Bhd.................................. 3,181
362,000 Edaran Otomobil Nasional Bhd...................... 3,083
636,700 Genting Bhd....................................... 3,052
813,000 IJM Corp. Bhd..................................... 1,707
513,000 Jaya Tiasa Holdings Bhd........................... 2,581
(a)848,000 Leader Universal Holdings Bhd..................... 1,525
58,000 Lityan Holdings Bhd............................... 707
388,500 Malayan Banking Bhd............................... 4,079
96,316 Malaysian International Shipping Bhd (Foreign).... 250
267,000 Malaysian Pacific Industries Bhd.................. 1,164
309,000 Malaysian Resources Corp. Bhd..................... 851
687,000 Multi-Purpose Holdings Bhd........................ 964
544,000 Rashid Hussain Bhd................................ 3,448
1,339,000 Resorts World Bhd................................. 4,032
2,456,000 Sime Darby Bhd.................................... 8,174
467,000 United Engineers Ltd.............................. 3,367
----------
51,137
----------
PHILIPPINES (4.1%)
4,782,171 Ayala Land, Inc., Class B......................... 4,397
(a)15,461,000 Digital Telecommunications Philippines, Inc....... 1,495
(a)4,764,200 DMCI Holdings, Inc................................ 1,571
(a)2,536,000 Fil-Estate Land, Inc.............................. 740
2,823,100 JG Summit Holding, Class B........................ 578
501,234 Manila Electric Co., Class B...................... 2,471
6,486,000 SM Prime Holdings, Inc., Class B.................. 1,918
----------
13,170
----------
SINGAPORE (11.5%)
225,500 Development Bank of Singapore Ltd. (Foreign)...... 2,839
634,000 Electronic Resources Ltd.......................... 998
265,000 Jurong Shipyard Ltd............................... 1,149
2,543,000 Natsteel Ltd...................................... 6,474
296,378 Oversea-Chinese Banking Corp. (Foreign)........... 3,068
(a)841,000 Pacific Century Regional Development.............. 1,171
598,000 Parkway Holdings Ltd.............................. 2,677
337,400 Singapore Press Holdings (Foreign)................ 6,797
(a)2,146,000 Summit Holdings Ltd............................... 1,621
(a)948,000 Super Coffeemix Manufacturing Ltd................. 789
266,200 United Overseas Bank Ltd. (Foreign)............... 2,737
(a)1,207,200 Want Want Holdings................................ 4,008
953,000 Wing Tai Holdings Ltd............................. 2,746
----------
37,074
----------
TAIWAN (12.3%)
(a)1,200,000 Acer, Inc......................................... 4,317
(a)500,000 Asustek Computer, Inc............................. 6,619
278,150 Cathay Life Insurance Co., Ltd.................... 1,591
(a)930,000 China Development Corp............................ 4,800
791,400 China Steel Corp.................................. 837
(a)1,716,000 Compal Electronics................................ 6,790
2,310,000 Far East Textiles Ltd............................. 3,631
1,455,150 Formosa Plastics Corp............................. 3,507
830,000 Great Wall Enterprises Co......................... 657
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TAIWAN (CONT.)
<TABLE>
<C> <S> <C>
(a)1,606,740 Kuoyang Construction.............................. $ 3,872
998,200 Siliconware Precision Industries Co............... 3,375
----------
39,996
----------
THAILAND (3.4%)
433,100 Bangkok Bank PCL (Foreign)........................ 2,976
185,000 Big C Supercenter PCL (Foreign)................... 59
(a)287,700 Eastern Water Resources Development and Management
PCL............................................. 333
5,800 I.C.C. International PCL.......................... 19
(d)58,000 I.C.C. International PCL (Foreign)................ 181
25,000 Matichon PCL (Foreign)............................ 58
162,700 Nation Multimedia Group PCL....................... 346
(d)24,000 Nation Multimedia Group PCL (Foreign)............. 51
(d)911,700 National Petrochemical PCL (Foreign).............. 933
291,000 Quality House PCL (Foreign)....................... 99
(d)87,000 Robinson Department Store PCL (Foreign)........... 31
514,800 Siam Commercial Bank PCL (Foreign)................ 2,106
(a)40,000 Sino Thai Engineering & Construction PCL.......... 111
(a,d)21,000 Sino Thai Engineering & Construction PCL
(Foreign)....................................... 58
577,270 Thai Farmers Bank PCL (Foreign)................... 2,451
59,500 Thai Rung Union Car PCL........................... 215
(d)38,000 Thai Rung Union Car PCL (Foreign)................. 137
(d)33,000 Thai Storage Battery PCL (Foreign)................ 33
166,500 Thai Theparos Food Product PCL (Foreign).......... 257
(d)144,700 United Communications Industry PCL (Foreign)...... 598
----------
11,052
----------
TOTAL COMMON STOCKS (Cost $290,823)................................. 321,263
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.1%)
MALAYSIA (0.0%)
(a)203,600 Commerce Asset Holdings Bhd, expiring 7/23/97..... 7
----------
SINGAPORE (0.1%)
(a)317,000 Electronic Resources Ltd., expiring 7/07/97....... 211
----------
TOTAL RIGHTS (Cost $0).............................................. 218
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a)127,250 Commerce Asset Holdings Bhd, expiring 3/16/02..... 20
(a)77,714 Rashid Hussain Bhd, expiring 12/31/02............. --
----------
TOTAL WARRANTS (Cost $0)............................................ 20
----------
TOTAL FOREIGN SECURITIES (99.3%) (Cost $290,823).................... 321,501
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 6,370 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $6,371,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $6,481 (Cost $6,370).... $ 6,370
---------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- -------------
FOREIGN CURRENCY (0.5%)
HKD 3 Hong Kong Dollar................................. --
IDR 1,053,258 Indonesian Rupiah................................ 433
MYR 677 Malaysian Ringgit................................ 268
PHP 11,103 Philippines Peso................................. 421
SGD 19 Singapore Dollar................................. 13
KRW 403,384 South Korean Won................................. 454
TWD 1,820 Taiwan Dollar.................................... 66
---------
TOTAL FOREIGN CURRENCY (Cost $1,656).............................. 1,655
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (101.8%) (Cost $298,849)............... 329,526
--------
OTHER ASSETS (12.7%)
Securities at Value, Held as Collateral for
Securities Lending....................... $ 37,586
Receivable for Investments Sold............ 3,177
Dividends Receivable....................... 193
Receivable for Portfolio Shares Sold....... 124
Security Lending Income Receivable......... 37
Foreign Withholding Tax Reclaim
Receivable............................... 26
Interest Receivable........................ 1
Other...................................... 19 41,163
----------
LIABILITIES (-14.5%)
Collateral on Securities Loaned, at
Value.................................... (37,586)
Payable for Investments Purchased.......... (6,541)
Payable for Portfolio Shares Redeemed...... (1,108)
Bank Overdraft............................. (706)
Investment Advisory Fees Payable........... (474)
Payable for Closed Foreign Currency
Exchange Contracts....................... (112)
Custodian Fees Payable..................... (106)
Deferred Foreign Taxes Payable............. (94)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (80)
Security Lending Fees Payable.............. (45)
Administrative Fees Payable................ (43)
Directors' Fees & Expenses Payable......... (15)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (48) (46,961)
---------- --------
NET ASSETS (100%)........................................ $323,728
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $290,816
Undistributed Net Investment Income............... 1,258
Accumulated Net Realized Gain..................... 1,154
Unrealized Appreciation on Investments and Foreign
Currency Translations (Net of accrual for
foreign taxes of $94 on unrealized aprreciation
on investments)................................. 30,500
--------
NET ASSETS........................................ $323,728
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $318,844
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,638,769 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $19.16
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $4,884
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 255,010 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $19.15
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ----------- --------------- -------- ------------
MYR 388 $ 154 7/01/97 U.S.$ 154 $ 154 $ --
U.S.$ 49 49 7/01/97 SGD 70 49 --
U.S.$ 460 460 7/01/97 IDR 1,117,083 459 (1)
IDR 398,277 164 7/02/97 U.S.$ 164 164 --
U.S.$ 88 88 7/02/97 THB 2,284 88 --
U.S.$ 296 296 7/02/97 IDR 720,331 296 --
U.S.$ 223 223 7/03/97 IDR 542,794 223 --
U.S.$ 1,381 1,381 7/03/97 HKD 10,700 1,381 --
U.S.$ 1,446 1,446 7/03/97 SGD 2,067 1,446 --
U.S.$ 108 108 7/03/97 THB 2,791 108 --
HKD 17,066 2,203 7/03/97 U.S.$ 2,202 2,202 (1)
HKD 3,341 431 7/07/97 U.S.$ 431 431 --
HKD 3,341 431 7/07/97 U.S.$ 431 431 --
U.S.$ 1,755 1,755 7/08/97 MYR 4,429 1,754 (1)
THB 315,361 11,955 8/18/97 U.S.$ 11,878 11,878 (77)
-------- -------- -----
$ 21,144 $ 21,064 $ (80)
-------- -------- -----
-------- -------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $36,062 or 11.1% of net assets at June 30, 1997)
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
GDS -- Global Depositary Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
THB -- Thai Baht
- --------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATIONS
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 47,486 14.7%
Consumer Goods......................... 37,386 11.5
Energy................................. 5,653 1.7
Finance................................ 149,834 46.3
Materials.............................. 22,181 6.9
Multi-Industry......................... 30,166 9.3
Services............................... 28,795 8.9
--------- ---
$ 321,501 99.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.4%
Brazil 16.5%
Bulgaria 0.4%
Chile 0.6%
China 0.1%
Colombia 0.2%
Egypt 1.3%
Hong Kong 2.8%
Hungary 0.5%
India 10.0%
Indonesia 5.2%
Israel 2.3%
Korea 7.0%
Malaysia 1.1%
Mexico 11.0%
Morocco 0.4%
Pakistan 3.1%
Peru 0.5%
Poland 1.6%
Russia 7.1%
Singapore 0.4%
South Africa 7.6%
Taiwan 4.5%
Thailand 5.2%
Turkey 4.2%
Venezuela 0.3%
Zimbabwe 0.9%
Other 2.8%
</TABLE>
PERFORMANCE COMPARED TO THE IFC GLOBAL
TOTAL RETURN COMPOSITE INDEX(1)
- -------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 25.78% 17.28% 17.01%
PORTFOLIO -- CLASS B.... 25.65 17.07 24.98
INDEX -- CLASS A........ 17.10 11.31 15.01
INDEX -- CLASS B........ 17.10 11.31 16.71
</TABLE>
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES, 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 Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 25.78% and 17.28%, respectively, for the Class A shares; and
25.65% and 17.07%, respectively, for the Class B shares as compared to total
returns of 17.10% and 11.31%, respectively, for the IFC Global Total Return
Composite Index (the "Index"). From inception on September 25, 1992 to June 30,
1997, the average annual total return of Class A was 17.01% as compared to
15.01% for the Index. From inception on January 2, 1996 to June 30, 1997, the
average annual total return of Class B was 24.98% as compared to 16.71% for the
Index.
The second quarter was volatile, with returns ranging from -26.0% in Thailand to
44.5% in Russia. Latin America continued its outperformance in the second
quarter. All markets in the region were up during the second quarter. Brazil, up
51.2% year-to-date and 25.0% during the quarter, remains the anchor in the
region. Privatization and strong earnings growth underpinned the region's 20.9%
return in U.S. dollars terms over the quarter. While we remain optimistic about
the positive impact that privatization will have in the region, we are concerned
that the market may be anticipating too much good news on the horizon, and are
lightening up our exposure to Brazil. Going forward, our exposure in Brazil will
be concentrated in those stocks that have compelling valuations, superior
management expertise or limited downside risk to a macro shock. We continue to
like Mexico, where falling interest rates and a stable peso contribute to a
solid economic recovery. Positive news on the consumer front further supports
this market.
Asia continues to convulse with macro-economic imbalances created by
overinvestment, growth of current account deficits and inflexible exchange
rates. In May, a speculative attack on the Thai baht prompted officials to raise
interest rates precipitously and to institute a two-tiered currency system,
further diminishing badly needed inflows of foreign capital to this market.
The Bank of Thailand moved to a managed float of the baht in July. The value of
the baht would be set by market forces, but the flotation would be managed by
the authorities. The baht peg to a basket of currencies has been discontinued.
We hedged our Thai currency exposure in May as we believed that the Thai market
represented value but we also believed that a devaluation was in the offing. The
hedge was put on when the baht traded at 26. It subsequently went to 20 and
finally to 29. The baht
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
has been trading in a range since the announcement, but we believe that there
could be further depreciation near term. We also believe that the Thai market
has bottomed and that this event is bullish for the stock market, although
bearish for the economy. Our projection for the baht level in the near term is
in the 31-32 area. We have maintained approximately 50% of our hedge in the
aftermath of the devaluation. We achieved a return of approximately 8% on the
portion of the hedge that was closed out. We will continue to monitor this
situation closely to determine if and when we should unwind our remaining baht
hedges. Possible next steps include a financial sector restructuring package and
the elimination of the two tier foreign exchange system. Thailand needs foreign
capital flows to finance its economic recovery and these controls are hampering
capital inflows. Also, as the currency stabilizes the need for these controls
should disappear.
Further in the region, markets like Malaysia (-12.2% year-to-date) and the
Philippines (-12.2% year-to-date) have suffered as fears of Thai style property
and finance problems led to sell-offs. We are significantly underweight Malaysia
and are out of the Philippines, which has positively impacted Portfolio
performance. With these two markets 20-25% off their highs, we are re-examining
our extreme underweight in these countries.
In Russia, falling interest rates and significant progress on both the economic
restructuring and tax reform fronts supported the market. Russia was up 44.5%
during the second quarter and 117.3% year-to-date. Lower rates are luring local
investors, further boosting returns. The inclusion of Russia in the IFC's
investable index also favorably impacted performance. We favor energy and
electric utility stocks in this market, as valuations remain attractive and
growth prospects long-term are solid.
India has shaken off the malaise of political instability and is refocussed on
the business of market liberalization and reform. Tax cuts, lower interest rates
and the new coalition government have brought local and foreign investors into
the market, which is up 27.4% in the second quarter and 36.4% so far this year.
The market has been led so far by a select few companies, but with easing rates
and projected pick-ups in industrial production, we expect to see an increasing
breadth in advances. Pakistan has followed its political rival. Similar problems
have led to similar opportunities. The market continues to rise on the back of
low valuations and stabilizing politics. We will continue to raise our weight in
Pakistan, mainly through Pakistan Telecom, as we expect some positive
developments on tariff rates.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
MSCI Emerging Markets Indices
Performance ($US)
3 Months to June 30 1997
% Change
THAILAND -26.0%
CZECH REPUBLIC -20.4%
POLAND -15.5%
PHILIPPINES -14.3%
MALAYSIA -12.1%
TURKEY -0.6%
PAKISTAN 1.1%
SOUTH AFRICA 1.3%
GREECE 6.4%
INDONESIA 6.9%
COLOMBIA 7.7%
JORDAN 10.3%
ISRAEL 12.0%
CHINA 12.9%
KOREA 13.4%
PORTUGAL 14.4%
ARGENTINA 15.0%
CHILE 15.2%
TAIWAN 15.6%
PERU 16.0%
MEXICO 18.1%
HONGKONG 19.4%
BRAZIL 25.0%
HUNGARY 26.0%
INDIA 27.4%
SRI LANKA 29.5%
VENEZUELA 44.2%
RUSSIA 44.5%
</TABLE>
Madhav Dhar
PORTFOLIO MANAGER
Robert L. Meyer
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (96.0%)
ARGENTINA (2.4%)
(a)6 Acindar, Class B.................................. $ --
(a)119,870 Nortel ADR........................................ 3,251
293,038 Quilmes (Registered).............................. 3,004
96,208 Telecom Argentina ADR............................. 5,051
673,485 Telefonica Argentina ADR.......................... 23,319
286,585 YPF ADR........................................... 8,812
----------
43,437
----------
BRAZIL (16.5%)
(q)373,153,448 Banco Bradesco (Preferred)........................ 3,761
(a,d,q)295,998,880 Banco Nacional (Preferred)........................ 14
(q)40,997,030 Brahma (Preferred)................................ 31,226
351,070 Brahma ADR........................................ 5,376
(q)620,000 Brasmotor (Preferred)............................. 138
(e)20,000 CELESC GDR........................................ 2,780
(q)520,963,993 CEMIG (Preferred)................................. 26,856
237,486 CEMIG ADR......................................... 11,956
(e)84,361 CEMIG ADR......................................... 4,348
(q)11,559,000 Coteminas (Preferred)............................. 4,509
(a)33,704,500 CRT............................................... 50,716
(q)1,232,300 CRT (Preferred)................................... 1,854
45,390,000 Eletrobras........................................ 25,380
356,347 Eletrobras ADR.................................... 9,942
(q)17,525,850 Eletrobras, Class B (Preferred)................... 10,451
(q)18,089,800 Itaubanco (Preferred)............................. 10,132
9,666,000 Lightpar.......................................... 3,852
(q)119,019,000 Lojas Arapua (Preferred).......................... 1,935
(e)120,830 Lojas Arapua ADR.................................. 2,003
(q)52,673,000 Lojas Renner (Preferred).......................... 2,701
(a,q)39,236,000 Pao de Acucar (Preferred)......................... 893
(e,q)152,589 Pao de Acucar ADR (Preferred)..................... 3,471
(q)63,285,333 Petrobras (Preferred)............................. 17,577
(q)12,500 Sadia Concordia (Preferred)....................... 13
79,644,000 Telebras.......................................... 10,801
(q)128,136,000 Telebras (Preferred).............................. 19,436
(a,e)7,769 Telebras ADR...................................... 1,179
151,605 Telebras ADR...................................... 23,006
(a)4,957,162 TELESP............................................ 1,462
(q)6,496,914 TELESP(Preferred)................................. 2,124
(a,q)294,330 Unibanco GDR (Preferred).......................... 10,927
----------
300,819
----------
CHILE (0.6%)
147,900 CCU ADR........................................... 3,245
71,100 Enersis ADR....................................... 2,528
167,112 Santa Isabel ADR.................................. 5,389
----------
11,162
----------
CHINA (0.1%)
4,056,000 Guangshen Railway Co., Ltd., Class H.............. 1,780
----------
COLOMBIA (0.2%)
10,728,000 Banco de Colombia................................. 3,933
----------
EGYPT (1.3%)
89,993 Ameriyah Cement Co................................ 2,192
185,840 Commercial International Bank..................... 3,888
(a)187,700 Commercial International Bank GDR (Registered).... 3,913
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
114,650 Eastern Tobacco................................... $ 2,901
(a)11,525 Egypt American Bank............................... 454
49,350 Egyptian Finance & Industrial..................... 2,948
78,000 Helwan Cement..................................... 1,651
20,460 Madinet Nasr Housing & Development................ 1,445
21,655 North Cairo Flour Mills Co........................ 1,128
125,765 Torah Portland Cement............................. 3,182
----------
23,702
----------
HONG KONG (2.8%)
717,000 Cheung Kong Holdings Ltd.......................... 7,080
(a)2,748,000 China Everbright-IHD Holdings Ltd................. 8,211
7,143,000 China Resources Beijing Land...................... 5,301
2,392,000 China Resources Enterprise Ltd.................... 11,733
60,000 Guangshen Railway Co., Ltd. ADR................... 1,313
441,000 Hutchison Whampoa Ltd............................. 3,814
606,000 New World Development Co., Ltd.................... 3,614
1,098,000 Shanghai Industrial Holdings Ltd.................. 6,831
7,015,000 Zhenhai Refining & Chemical Co., Ltd., Class H.... 2,535
----------
50,432
----------
HUNGARY (0.5%)
(a)21,178 Borsod Chem Rt. GDR (Registered).................. 823
7,700 Gedeon Richter.................................... 709
28,300 Gedeon Richter GDR (Registered)................... 2,604
(a)158,984 MOL Magyar Olaj-es Gazipari Rt. GDR
(Registered).................................... 3,537
112,800 Tisza Vegyi Kombinat Rt. GDR (Registered)......... 1,932
----------
9,605
----------
INDIA (9.9%)
230,000 American Dry Fruits............................... 41
200 Andhra Valley Power Supply Co., Ltd............... 1
(a)485,675 Apollo Tyres Ltd.................................. 1,506
1,337 Associated Cement Cos., Ltd....................... 54
358 Bharat Forge Co., Ltd., Class A................... 1
4,525,900 Bharat Heavy Electricals.......................... 48,894
(a)151,400 Bharat Pipes & Fittings Ltd., Class B............. 3
710,040 Birla VXL Ltd..................................... 268
141,642 Carrier Aircon Ltd................................ 969
335,400 Ceat Ltd.......................................... 288
10,702 Century Textiles and Industries Ltd............... 658
1,148,400 Container Corp. of India Ltd...................... 16,777
350,100 Crompton Greaves Ltd.............................. 729
115,100 Dabur India Ltd................................... 771
(a)600,000 DCL Polyesters Ltd................................ 95
14,500 Delta Industries Ltd.............................. 4
260,300 Esab India Ltd.................................... 765
50,000 Essel Packagings Ltd.............................. 182
(d)2,200 Federal Bank Ltd. (New)........................... 5
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
INDIA (CONT.)
<C> <S> <C>
(a,d)200,300 Garware Plastics & Polyester (New)................ $ 319
376,700 Garware Plastics & Polyester, Class A............. 621
688,500 Godrej Soaps Ltd.................................. 442
3,109,500 Great Eastern Shipping Co......................... 4,256
329,000 Gujarat Ambuja Cements Ltd........................ 3,184
75,100 Gujarat Narmada Valley Fertilizers Co., Ltd....... 48
(a)511,321 Hero Honda, Class B............................... 7,327
740,100 Hindustan Development Corp., Ltd.................. 219
129,706 Housing Development Finance Corp.................. 14,792
315,400 ICI India Ltd..................................... 1,603
(a,g)55,194 India Magnum Fund Ltd., (The) Class A............. 2,870
(a,f,g)78,000 India Magnum Fund Ltd., (The) Class A (acquired
11/25/92-3/01/94, Cost $3,872).................. 4,056
(a)644,615 India Organic Chemical Ltd........................ 81
(a)1,000,000 Indian Petrochemicals Corp., Ltd.................. 4,050
(a,d)4,125 Indian Seamless Metal Tubes Ltd. (New)............ 2
(a)200 Indian Seamless Steel & Alloys.................... --
(a)571,047 Indo Rama Synthetics Ltd.......................... 407
(d)171,154 Indo Rama Synthetics Ltd. (New)................... 111
140 Industrial Credit & Investment Corp. of Indian
Ltd............................................. --
1,149,500 Industrial Finance Corp. of India................. 1,027
100,000 Infosys Technology Ltd............................ 5,196
100 ITC Agrotech Ltd., Class B........................ --
(a)614,900 ITC Bhadrachalam Paperboards Ltd.................. 790
(d)500,913 ITC Bhadrachalam Paperboards Ltd. (New)........... 609
542,619 ITC Ltd........................................... 8,530
5,292 JCT Ltd. GDR...................................... 8
(a)1,500,162 JK Synthetics Ltd................................. 241
490,000 KEC International Ltd............................. 660
135,900 Kirloskar Oil Engines Ltd......................... 224
185,450 Lakme Ltd., Class B............................... 2,135
150,000 Lakshmi Precision Screws.......................... 88
10 Madras Cement Ltd................................. 2
748,800 Mahanagar Telephone Nigam......................... 6,353
309,534 Mahavir Spinning Mills Ltd........................ 640
(a,g)42,697,100 Morgan Stanley Growth Fund........................ 7,633
(a,g)19,389 Morgan Stanley India Investment Fund, Inc......... 251
98,631 MRF Ltd., Class B................................. 8,127
25,000 OM Sindoori Hotels Ltd............................ 59
350,000 Patheja Forgings & Auto Parts, Class B............ 140
530 PCS Data Products Ltd., Class B................... --
(a)218,440 Philips India Ltd................................. 531
150 Priyadarshini Cement Ltd., Class B................ --
(a)83,100 Raymond Ltd....................................... 151
(a,d)104,875 Raymond Ltd. (Bonus Shares)....................... 176
(a)1,248,100 Sanghi Polyesters Ltd............................. 209
190,900 Shanti Gears Ltd.................................. 747
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
(a)37,300 Sharp Industries Ltd.............................. $ 4
140,636 Shree Vindhya Paper Mills......................... 67
(a)50 Siemens India Ltd................................. --
(a)45,000 Sri Venkatesa Mills Ltd........................... 126
1,605,150 State Bank of India............................... 15,256
67,000 Sudarshan Chemical Industries Ltd................. 97
212,662 Tata Engineering & Locomotive, Class A............ 2,685
470 Tata Hydro-Electric Power Supply Co............... 1
111 Tata Iron and Steel Co., Ltd...................... 1
196,017 Tube Investments of India......................... 320
1,676 United Phosphorus Ltd. GDR........................ 11
1,092,200 Uttam Steels Ltd., Class A........................ 296
100 Videocon International Ltd., Class A.............. --
2,100 Videsh Sanchar Nigam Ltd.......................... 68
89,600 Wartsila Diesel Ltd............................... 995
----------
180,853
----------
INDONESIA (5.2%)
(a)6,118,500 Astra International (Foreign)..................... 25,158
(a,d)11,288,294 Bank International Indonesia (Foreign)............ 9,747
20,407,000 Bank Negara Indonesia (Foreign)................... 13,006
(d)4,580,500 Bimantara Citra (Foreign)......................... 8,005
(d)2,344,000 Gudang Garam (Foreign)............................ 9,831
(d)2,973,000 Hanjaya Mandala Sampoerna (Foreign)............... 11,338
6,148,789 Indah Kiat Pulp & Paper Corp...................... 1,075
(d)6,426,432 Indah Kiat Pulp & Paper Corp. (Foreign)........... 3,765
(a,d)2,150,400 Indofood Sukses Makmur (Foreign).................. 4,952
(a,d)3,480,500 Matahari Putra Prima (Foreign).................... 7,013
889,000 Mayora Indah (Foreign)............................ 503
365,000 Putra Surya Multidana (Foreign)................... 581
----------
94,974
----------
ISRAEL (2.3%)
(a)2,047,600 Bank Hapoalim Ltd. (Registered)................... 4,261
(a)152,300 Blue Square ADR................................... 2,627
413,803 Elbit Systems Ltd................................. 4,942
5,250 First International Bank of Israel, Class 1....... 760
4,561 First International Bank of Israel, Class 5....... 3,514
106,835 Koor Industries Ltd............................... 9,459
768,000 Osem Investment Ltd............................... 4,072
4,002,150 Supersol Ltd...................................... 12,838
----------
42,473
----------
KOREA (7.0%)
154,800 Cho Hung Bank Co., Ltd............................ 1,028
374,700 Cho Hung Bank Co., Ltd. GDR....................... 2,717
(a)215,640 Hansol Paper Co., Ltd............................. 5,464
(a)7,309 Hanwa Chemical Corp............................... 58
(a)449,710 Housing & Commercial Bank, Korea.................. 8,395
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
KOREA (CONT.)
<C> <S> <C>
(a)265,160 Hyundai Engineering & Construction Co............. $ 6,808
385,247 Kookmin Bank GDR.................................. 8,138
(a,d)340,325 Kookmin Bank GDR (New)............................ 6,279
403,310 Korea Electric Power Corp......................... 12,036
270,400 Korea Exchange Bank............................... 1,781
140,720 LG Information & Communication Ltd................ 17,431
(d)94,980 Pohang Iron & Steel Co., Ltd...................... 9,728
101,070 Pohang Iron & Steel Co., Ltd. ADR................. 3,234
(a)281,325 Samsung Electronics............................... 31,492
(e)112,454 Samsung Electronics GDR........................... 6,311
433,830 Shinhan Bank Co., Ltd............................. 6,288
----------
127,188
----------
MALAYSIA (1.1%)
1,956,000 Commerce Asset Holding Bhd........................ 5,153
1,010,200 Genting Bhd....................................... 4,843
431,000 Rashid Hussain Bhd................................ 2,732
1,442,000 Resorts World Bhd................................. 4,342
390,000 United Engineers Ltd.............................. 2,812
----------
19,882
----------
MEXICO (11.0%)
397,452 Apasco............................................ 2,846
(a)2,959,139 Banacci, Class B.................................. 7,610
(a)966,103 Banacci, Class L.................................. 2,256
(a)2,991,308 Bancomer, Class B................................. 1,444
(a,e)878,610 Bancomer, Class B ADR............................. 8,566
212,805 Carso ADR......................................... 3,001
975,710 Carso, Class A1................................... 6,802
1,483,278 Cemex CPO......................................... 6,451
1,098,597 Cemex CPO ADR..................................... 9,530
(a)584,290 Cemex, Class B.................................... 2,858
660,570 Cemex, Class B ADR................................ 6,362
146,857 Cifra, Class A.................................... 272
1,200,725 Cifra, Class C.................................... 1,922
135,236 Desc ADR.......................................... 3,939
7,111,302 FEMSA, Class B.................................... 42,406
(a,e)62,006 Gruma ADR......................................... 1,147
(a)157,945 Gruma, Class B.................................... 732
2,537,746 Kimberly, Class A................................. 10,174
1,055,469 Maseca, Class B................................... 1,155
(a)985,073 Televisa CPO GDR.................................. 29,922
21,975 Telmex ADR........................................ 1,049
1,049,040 Telmex, Class L ADR............................... 50,092
----------
200,536
----------
MOROCCO (0.4%)
82,900 SNI Maroc, Series 'V' (Bearer).................... 6,302
----------
PAKISTAN (3.1%)
15 Cherat Cement Ltd................................. --
31,200 Dewan Salman Fibre................................ 27
(a)843,419 D.G. Khan Cement Ltd.............................. 254
6,776,500 Fauji Fertilizer Co., Ltd......................... 13,329
(a)5,289,000 Hub Power Co...................................... 5,352
(a)2,068,660 Karachi Electric Supply Corp...................... 614
(a)1,256,519 Nishat Mills Ltd.................................. 622
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
956,506 Pakistan State Oil Co., Ltd....................... $ 7,703
(a)38,350 Pakistan Telecommunications Corp. GDS............. 2,895
29,255,200 Pakistan Telecommunications Corp., Class A........ 22,257
(a)5,286,254 Sui Northern Gas.................................. 4,152
----------
57,205
----------
PERU (0.5%)
47 Cementos Lima..................................... --
248,010 Tel Peru, Class B ADR............................. 6,495
103,950 Telefonica del Peru S.A. ADR...................... 2,722
----------
9,217
----------
PHILIPPINES (0.0%)
28,120 Ayala Land, Inc., Class B......................... 26
----------
POLAND (1.6%)
(a)165,000 Agros Holding S.A., Class C....................... 4,393
(a)33,000 Agros Holding S.A., Class D....................... 703
(a)72,900 Bank of Handlowy W Warszawie S.A.................. 776
1,356,158 BIG, S.A.......................................... 1,630
27,340 Bank Slaski S.A................................... 1,955
68,000 BRE Bank.......................................... 1,428
139,560 Debica S.A........................................ 2,866
(a)33,400 Eastbridge NV..................................... 2,245
632,000 Elektrim S.A...................................... 5,500
(a)288,468 Exbud S.A......................................... 2,905
(a)2,085,038 International UNP Holdings Ltd.................... 302
(a)373,740 Mostostal Exports S.A............................. 1,183
491,000 Polifarb Wroclaw S.A.............................. 1,838
11,125 Wedel S.A......................................... 599
----------
28,323
----------
RUSSIA (6.5%)
(a)592,359 Alliance Cellulose Ltd............................ 3,981
82,039,000 Edinaya Energetics (2nd Issue).................... 29,690
(a)400,000 Global Tele-Systems Group, Inc. (Registered)...... 8,000
(a)13,765,000 Irkutskenergo..................................... 4,687
(a)322,100 LUKoil Holding.................................... 6,323
80,000 LUKoil Holding ADR................................ 6,280
(a,e)127,230 LUKoil Holding GDR................................ 9,988
11,038,000 Mosenergo......................................... 15,464
(a)352,340 Noyabrskneftegaz.................................. 3,885
(a)2,171,100 Rostelecom (New).................................. 8,424
(a)317,851 Russian Telecomm Development Corp................. 1,510
(a)990 Storyfirst Communications, Inc., Class C.......... 660
(a)2,640 Storyfirst Communications, Inc., Class D.......... 1,980
(a)3,250 Storyfirst Communications, Inc., Class E.......... 3,250
(a)1,331 Storyfirst Communications, Inc., Class F.......... 3,327
121,800 Surgutneftgaz ADR................................. 6,516
(a)45,000 Tatneft ADR....................................... 4,793
----------
118,758
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
SINGAPORE (0.4%)
(a)1,891,200 Want Want Holdings................................ $ 6,279
----------
SOUTH AFRICA (7.5%)
523,000 Amalgamated Banks of South Africa................. 3,752
1,131,600 Barlow Rand Ltd................................... 12,309
288,725 Bidvest Group Ltd................................. 2,227
121,200 De Beers Centenary AG............................. 4,475
6,050 Dreifontein Consolidated Ltd...................... 41
1,291,000 Ellerine Holdings Ltd............................. 9,191
103,668 Foodcorp Ltd...................................... 788
769,000 First National Bank Holdings Ltd.................. 6,610
1,770,000 Gencor Ltd........................................ 8,154
(a)1,608,300 Illovo Sugar Ltd.................................. 3,687
924,300 Malbak Ltd........................................ 1,467
(g)224,490 Morgan Stanley Africa Investment Fund, Inc........ 4,013
23,526 New Clicks Holdings Ltd........................... 25
890,000 Persetel Holdings Ltd............................. 6,258
2,163,500 Rembrandt Group Ltd............................... 23,080
1,340,900 Reunert Ltd....................................... 4,596
152,416 South African Druggists Ltd....................... 1,277
500,000 Sage Group Ltd.................................... 2,645
3,078,900 Sasol Ltd......................................... 40,378
800,000 Spur Holdings Ltd................................. 1,534
----------
136,507
----------
TAIWAN (4.5%)
(a)2,420,000 Acer, Inc......................................... 8,705
(a)1,810,000 Asustek Computer, Inc............................. 23,960
(a)980,000 China Development Corp............................ 5,059
(a)3,832,400 Compal Electronics................................ 15,164
8,083,000 Far Eastern Textiles.............................. 12,706
1,536,900 Formosa Plastics Corp............................. 3,704
(a)1,919,060 Kuoyang Construction.............................. 4,625
1,950,200 Siliconware Precision Industries Co............... 6,594
----------
80,517
----------
THAILAND (5.2%)
283,000 Advanced Information Service PCL.................. 2,469
1,150,650 Advanced Information Service PCL (Foreign)........ 8,217
44,600 Ban Pu Coal Co., Ltd. (Foreign)................... 651
3,290,500 Bangkok Bank PCL (Foreign)........................ 22,610
818,000 Central Pattana PCL (Foreign)..................... 1,137
1,139,000 Industrial Finance Corp. of Thailand (Foreign).... 1,451
(a)212,000 Lanna Lignite PCL................................. 1,498
(a)12,000 Lanna Lignite PCL (Foreign)....................... 80
873,000 National Finance & Securities PCL................. 547
1,596,000 National Finance & Securities PCL (Foreign)....... 1,001
2,168,400 National Petrochemical PCL........................ 2,218
(d)265,000 National Petrochemical PCL (Foreign).............. 271
36,000 Shinawatra Computer Co. PCL....................... 249
(d)1,325,400 Shinawatra Computer Co. PCL (Foreign)............. 9,158
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
150,000 Siam Cement PCL (Foreign)......................... $ 2,594
3,017,600 Siam Commercial Bank PCL (Foreign)................ 12,348
4,919,600 Thai Farmers Bank PCL (Foreign)................... 20,890
352,000 Tipco Asphalt PCL................................. 1,834
1,297,000 United Communications Industry PCL................ 5,357
(d)71,200 United Communications Industry PCL (Foreign)...... 294
----------
94,874
----------
TURKEY (4.2%)
12,340,300 Aksa.............................................. 997
58,474,500 Arcelik........................................... 7,874
29,366,500 Bossa............................................. 662
41,314,050 Ege Biracilik..................................... 9,597
43,404,000 Erciyas Biracilik................................. 5,187
97,591,000 Eregli Demir Celik................................ 16,263
(a)157,929,699 Garanti Bankasi A.S............................... 5,955
85,297,759 Garanti Bankasi A.S. (New)........................ 3,216
896,750 Guney Biracilik Ve Malt Sanayii................... 51
4,060,000 Migros (Registered)............................... 2,870
45,393,000 Sabah............................................. 405
5,805,000 Trakya Cam Sanayii................................ 254
1,102,406 Turkiye Garanti Bankasi ADR....................... 4,158
36,780,000 Vestel Elektronik Sanayi Ve Ticaret A.S........... 2,055
(a)168,832,200 Yapi Kredi (New).................................. 3,865
601,356,510 Yapi Ve Kredi Bankasi A.S......................... 13,766
----------
77,175
----------
VENEZUELA (0.3%)
79,630 Cantv ADR......................................... 3,434
1,540,000 Electricidad de Caracas........................... 2,467
----------
5,901
----------
ZIMBABWE (0.9%)
1,740,000 Delta Corp........................................ 2,670
(a)559,500 Meikles Africa Ltd................................ 1,376
(e)9,900,000 Trans Zambezi Industries Ltd...................... 8,854
3,800,000 Trans Zambezi Industries Ltd. (Registered)........ 3,399
----------
16,299
----------
TOTAL COMMON STOCKS (Cost $1,473,941)................................ 1,748,159
----------
PREFERRED STOCKS (0.0%)
INDIA (0.0%)
(a)2,700 Fabworth (India) Ltd.............................. 1
----------
RUSSIA (0.0%)
(a)85,000 Norilsk Nickel.................................... 459
----------
TOTAL PREFERRED STOCKS (Cost $357)................................... 460
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)1,200,493 CRT............................................... 275
----------
INDIA (0.0%)
(a)2,700 Philips India Ltd................................. --
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
MALAYSIA (0.0%)
(a)391,200 Commerce Asset Holding Bhd........................ $ 23
----------
TURKEY (0.0%)
(a)2,380,000 TAT Konserve...................................... 160
----------
TOTAL RIGHTS (Cost $0)............................................... 458
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------------
WARRANTS (0.0%)
INDIA (0.0%)
(a,d)176,850 Apollo Tyres Ltd., expiring 2/28/98............... 68
(a,d)27,383 Flex Industries Ltd., expiring 11/23/97........... 26
----------
94
----------
INDONESIA (0.0%)
(a)1,003,404 Bank International Indonesia (Foreign), expiring
1/17/00......................................... 392
(a)1,093,118 Indah Kiat Pulp & Paper Corp., expiring 7/11/02... 191
----------
583
----------
MALAYSIA (0.0%)
(a)244,500 Commerce Asset Holding Bhd, expiring 3/16/02...... --
----------
THAILAND (0.0%)
(a)800,000 Thai Farmers Bank PCL (Foreign), expiring
9/30/99......................................... 241
(a)970,662 Thai Farmers Bank PCL (Foreign), expiring
9/15/02......................................... 422
----------
663
----------
TOTAL WARRANTS (Cost $1,458)......................................... 1,340
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FIXED INCOME SECURITIES (0.4%)
BULGARIA (0.4%)
U.S.$ (n)6,250 Bulgaria Front Loaded Interest Reduction Bond,
Series A, 2.25%, 7/28/12........................ 3,570
3,950 Bulgaria Discount Bond, Series A, 'Euro',
(Floating Rate) 6.563%, 7/28/24................. 2,913
----------
TOTAL FIXED INCOME SECURITIES (Cost $4,529).......................... 6,483
----------
CONVERTIBLE DEBENTURES (0.3%)
INDIA (0.0%)
INR (d)336 DCM Shriram Industries Ltd.,
7.50%, 2/21/02.................................. 373
----------
RUSSIA (0.2%)
U.S.$ 1 Storyfirst Communications, Inc.,
First Section, Tranche I, 25.00%, 7/30/97....... 802
1 Storyfirst Communications, Inc., Second Section,
Tranche I, 25.00%, 7/30/97...................... 885
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
U.S.$ (w)-- Storyfirst Communications, Inc., Tranche II,
26.00%, 7/30/97................................. $ 441
1 Storyfirst Communications, Inc., Tranche IV,
28.00%, 7/30/97................................. 667
(a)1 Storyfirst Communications, Inc., Tranche V,
29.00%, 7/30/97................................. 762
----------
3,557
----------
SOUTH AFRICA (0.1%)
ZAR 111 Sasol Ltd. 8.50%.................................. 1,387
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $5,381)........................... 5,317
----------
NON-CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR (d)341 DCM Shriram Industries Ltd.,
9.90%, 2/21/02.................................. 479
(d)700 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98........................................ 1,815
----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $2,865)....................... 2,294
----------
LOAN AGREEMENTS (0.4%)
POLAND (0.0%)
U.S.$ 54 Republic of Poland Interest Arrears PDI Bonds,
(Floating Rate), 4.00%, 10/27/14................ 46
----------
RUSSIA (0.4%)
CHF (b)11,910 Bank for Foreign Economic Affairs, 0.00%,
12/31/00........................................ 7,240
----------
TOTAL LOAN AGREEMENTS (Cost $3,270).................................. 7,286
----------
TOTAL FOREIGN SECURITIES (97.2%) (Cost $1,491,801)................... 1,771,797
----------
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT (1.4%)
U.S.$ 24,636 Chase Securities, Inc. 5.70%, dated 7/01/97, to be
repurchased at $24,640, collateralized by U.S.
Treasury Notes, 5.625%, due 2/15/06, valued at
$25,049 (Cost $24,636).......................... 24,636
----------
FOREIGN CURRENCY (1.0%)
ARP 4 Argentine Peso.................................... 4
BRL 3,529 Brazilian Real.................................... 3,278
COP 160,515 Colombian Peso.................................... 147
HKD 1,533 Hong Kong Dollar.................................. 198
HUF 60,939 Hungarian Forint.................................. 326
INR 76,294 Indian Rupee...................................... 2,131
IDR 2,003,489 Indonesian Rupiah................................. 824
MYR 296 Malaysian Ringgit................................. 117
MXP 2,504 Mexican Peso...................................... 316
PKR 8,251 Pakistani Rupee................................... 204
PHP 3,204 Philippines Peso.................................. 121
PLZ 5,623 Polish Zloty...................................... 1,711
ZAR 12,597 South African Rand................................ 2,777
KRW 728,384 South Korean Won.................................. 820
LKR 2 Sri Lankan Rupee.................................. --
TWD 70,747 Taiwan Dollar..................................... 2,545
THB 45,802 Thai Baht......................................... 1,768
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (CONT.)
TRL 46,049,113 Turkish Lira...................................... $ 310
VEB 423,461 Venezuelan Bolivar................................ 870
----------
TOTAL FOREIGN CURRENCY (Cost $18,649)................................ 18,467
----------
TOTAL INVESTMENTS (99.6%) (Cost $1,535,086).......................... 1,814,900
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.4%)
Cash................................................... $ 12,901
Receivable for Investments Sold........................ 34,144
Receivable for Portfolio Shares Sold................... 9,029
Dividends Receivable................................... 5,442
Interest Receivable.................................... 399
Foreign Withholding Tax Reclaim Receivable............. 55
Other.................................................. 59 62,029
----------
LIABILITIES (-3.0%)
Payable for Investments Purchased...................... (39,640)
Payable for Foreign Taxes.............................. (6,023)
Investment Advisory Fees Payable....................... (5,189)
Custodian Fees Payable................................. (1,094)
Payable for Portfolio Shares Redeemed.................. (870)
Net Unrealized Loss on Foreign Currency Exchange
Contracts............................................ (376)
Administrative Fees Payable............................ (218)
Payable for Closed Foreign Currency Exchange
Contracts............................................ (109)
Payable for Stamp Duty Tax............................. (61)
Directors' Fees & Expenses Payable..................... (47)
Sub-Administrative Fees Payable........................ (45)
Distribution Fees Payable.............................. (15)
Other Liabilities...................................... (319) (54,006)
---------- ----------
NET ASSETS (100%).................................................... $1,822,923
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................. $1,449,752
Undistributed Net Investment Income............. 3,548
Accumulated Net Realized Gain................... 96,308
Unrealized Appreciation on Investments and
Foreign Currency Translations (Net of accrual
for foreign taxes of $6,023 on unrealized
appreciation on investments).................. 273,315
----------
NET ASSETS...................................... $1,822,923
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------
NET ASSETS...................................... $1,808,434
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 98,090,062 outstanding $0.001
par value shares (authorized 500,000,000
shares)....................................... $18.44
----------
----------
CLASS B:
- ------------------------------------------------
NET ASSETS...................................... $14,489
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 786,792 outstanding $0.001 par
value shares (authorized 500,000,000
shares)....................................... $18.42
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- -------------- -------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
PLZ 3,134 $ 954 7/01/97 U.S.$ 954 $ 954 $ --
U.S.$ 5,145 5,145 7/01/97 ZAR 23,279 5,131 (14)
U.S.$ 2,597 2,597 7/02/97 THB 67,182 2,593 (4)
U.S.$ 2,276 2,276 7/02/97 PKR 91,835 2,272 (4)
HKD 13,195 1,703 7/03/97 U.S.$ 1,703 1,703 --
U.S $ 2,896 2,896 7/03/97 THB 74,910 2,892 (4)
HKD 5,911 763 7/07/97 U.S.$ 763 763 --
THB 449,017 17,022 8/18/97 U.S.$ 16,800 16,800 (222)
THB 96,552 3,660 8/18/97 U.S.$ 3,600 3,600 (60)
THB 488,058 18,495 8/19/97 U.S.$ 18,130 18,130 (365)
U.S.$ 2,975 2,975 8/19/97 THB 8,176 3,038 63
THB 1,063,469 39,853 9/16/97 U.S.$ 40,087 40,087 234
-------- -------- ------------
$ 98,339 $ 97,963 $ (376)
-------- -------- ------------
-------- -------- ------------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $84,378 or 4.6% of net assets at June 30, 1997)
were valued at fair value-See note A-1 to financial statements.
(e) -- 144A Security -- Certain conditions for public sale may exist
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $4,056 or 0.2% of net assets. (Total cost $3,782)
(g) -- The fund is advised by an affliate
(n) -- Step Bond- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(q) -- Non-voting stock
(w) -- Amount is less than $500.
ADR -- American Depositary Receipt
CHF -- Swiss Franc
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
PCL -- Public Company Limited
PDI -- Past Due Interest
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect on June 30, 1997.
SUMMARY OF FOREIGN SECURITIES BY INDUSTY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- --------------------------------------------------------------------------
Capital Equipment...................... $ 139,244 7.6%
Consumer Products...................... 314,183 17.2
Energy................................. 277,069 15.2
Finance................................ 342,975 18.8
Goldmines.............................. 6,093 0.4
Loan Agreements........................ 7,286 0.4
Materials.............................. 116,414 6.4
Multi-Industry......................... 165,859 9.1
Services............................... 402,674 22.1
----------- ---
$ 1,771,797 97.2%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Austria 1.0%
Belgium 1.0%
Denmark 2.3%
Finland 3.7%
France 11.7%
Germany 13.0%
Italy 5.6%
Netherlands 10.8%
Norway 1.9%
Portugal 0.4%
Spain 4.6%
Sweden 5.6%
Switzerland 14.3%
United Kingdom 23.7%
Other 0.4%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 14.85% 25.57% 21.03%
PORTFOLIO -- CLASS B.... 14.82 25.20 24.47
INDEX -- CLASS A........ 14.26 29.99 18.83
INDEX -- CLASS B........ 14.26 29.99 23.78
</TABLE>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (assumes
dividends are reinvested).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE MEASURED BY THE MSCI
EUROPE 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 European Equity Portfolio is to seek long-term
capital appreciation through investment in equity securities of European
issuers. Equity securities for this purpose include stocks and stock equivalents
such as securities convertible into common and preferred stocks and securities
having equity characteristics, such as rights and warrants to purchase common
stock.
The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 14.85% and 25.57%, respectively, for the Class A shares; and
14.82% and 25.20%, respectively, for the Class B shares as compared to total
returns of 14.26% and 29.99%, respectively, for the Morgan Stanley Capital
International (MSCI) Europe Index (the "Index"). From inception on April 2, 1993
to June 30, 1997, the average annual total return of Class A was 21.03% as
compared to 18.83% for the Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 24.47% as compared to
23.78% for the Index.
During this period the European equity markets continued their strong
performance. In U.S. dollar terms, the Swiss market was the top performer with
the export stocks leading the way helped by a weaker Swiss franc. The Spanish
market was also strong, up over 20% following excellent performance in 1996.
Telefonica, the telecommunications group has continued its strong performance
helped by the fast growing mobile phone market and their exposure to Latin
America. We have also started to see good returns from some of the smaller
stocks in Spain with Bodegas y Bebidas one of the top performers in the market.
The only European market to show negative returns year-to-date is Austria with
the banks being particularly poor performers.
- --------------------------------------------------------------------------------
European Equity Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
The investment environment in continental Europe is largely similar across
markets and is positive for equities, with slow but steady growth and low
inflation. Growth continues to be driven by the export sector, helped by weaker
currencies, although in some markets there are some signs of a pick up in the
domestic economy. In France, the surprise win by the leftist coalition in the
general election initially led to a weak equity market but this was soon
reversed when the new government committed to a sound fiscal policy and a
pro-European stance. The exception has been the U.K. with stronger levels of
growth and inflationary concerns leading to the Bank of England raising interest
rates.
The Portfolio remains overweight in Switzerland, Spain and the Netherlands and
underweight the U.K.. However, we have been adding to the U.K. market as we find
value relative to other European Markets. In recent months we have added the
following stocks to the Portfolio.
Esselte is an office products manufacturer with a strong pan-European position
as well as strong market share in the USA and Australia. The firm's management
has had to restructure the group's operations to confront the competition from
superstore chains. This rationalization has included using the superstores as an
important outlet for their products. The company is now well placed to pick up
in the growth of this market, particularly in Europe.
Peninsular & Oriental Steam Navigation is a diverse conglomerate of
transport-related and investment property assets. Its most valuable business is
Peninsular & Oriental Steam Navigation Cruises, which owns the Peninsular &
Oriental Steam Navigation and Princess brands. Peninsular & Oriental Steam
Navigation's fundamental problem in the past has been poor capital allocation
and over-investment in capital-intensive, low return businesses, particularly
containers and bulk shipping. Peninsular & Oriental Steam Navigation should
increase its return on capital through better asset utilization, disposal of low
yielding assets and better allocation of capital. Peninsular & Oriental Steam
Navigation's discount to the sum of its parts should close up as better returns
start to emerge. In addition, Peninsular & Oriental Steam Navigation's extensive
U.K. property holdings makes it a backdoor play on the turning U.K. property
market and its asset intensity a backstop against any return of inflation.
Valora is a Swiss retail conglomerate whose main division runs a Kiosk network
commanding a 60% share of the Swiss market. Its two other divisions, foods
wholesaling and mattresses, are also market leaders. Following years of
mis-management, the group is currently restructuring the Kiosk division.
We expect this reorganization to unlock the significant cash generating
capabilities of the division. The benefits of the restructuring are not yet
priced in. Purchased on 7.1 times cash flow, the stock offers attractive value.
Valmet is the world's leading paper machine manufacturer with a strong global
position. In recent years it has expanded from its strong European base and is
now well established in both North America and the fast growing markets in Asia.
In recent years the group has reduced its cyclicality by increasing the use of
subcontractors and expanding the service and maintenance business. Valmet has a
strong financial position and is cheap on earnings and cash flow.
Pharmacia & Upjohn is a pharmaceutical company whose price has fallen in recent
months due to a combination of disappointing earnings announcements and the
surprise resignation of the CEO. Earnings have declined due to adverse currency
exposure and higher marketing costs ahead of new drug launches. We believe,
however, that the product pipeline is underrated and includes a potential
blockbuster, Detrusitol (incontinence), and this should lead to above sector
average revenue growth of 7-8% per annum over the next five years. Management is
targeting operating margins of 25% over the same period.
Spectra-Physics is a high-tech conglomerate currently slimming down its field of
activities. The company has had a weak track record in recent years after, by
the admission of the new CEO, having become 'lazy' on double digit margins
resulting in a lack of focused new product development and a number of
acquisitions in unrelated areas. The focus is now on measurement technology. The
new CEO is not only consolidating the business and rejuvenating new product
development, but also focusing on the cost base. The emphasis in the past had
tended to be on scientific and technological expertise while the commerciality
of the products and processes tended to take second place.
Robert Sargent
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (96.4%)
AUSTRIA (1.0%)
27,890 Boehler-Uddeholm AG............................... $ 2,163
6,230 Radex-Heraklith Industriebet...................... 263
----------
2,426
----------
BELGIUM (1.0%)
52,300 G.I.B. Holdings Ltd............................... 2,502
55 G.I.B. Holdings Ltd. VVPR (New)................... 3
----------
2,505
----------
DENMARK (2.3%)
50,000 BG Bank A/S....................................... 2,765
52,700 Unidanmark A/S, Class A (Registered).............. 2,962
----------
5,727
----------
FINLAND (3.7%)
(a)68,600 Amer-Yhtymae Oy, Class A.......................... 1,235
48,600 Huhtamaki Oy, Series 1............................ 2,093
6,825 Kone Oy, Class B.................................. 815
300,000 Merita Ltd., Class A.............................. 1,000
247,600 Rautaruukki Oy.................................... 2,600
69,700 Valmet Oy......................................... 1,206
----------
8,949
----------
FRANCE (11.7%)
10,800 Alcatel Alsthom................................... 1,353
25,804 Banque Nationale de Paris......................... 1,064
4,900 Bongrain S.A...................................... 1,918
22,000 Cie de Saint Gobain............................... 3,209
23,300 Elf Aquitaine S.A................................. 2,515
14,990 Eridania Beghin-Say S.A........................... 2,245
17,400 Groupe Danone..................................... 2,876
48,511 Lafarge S.A....................................... 3,018
53,600 Legris Industries S.A............................. 2,527
(a)22,800 SGS-Thompson Microelectronics N.V................. 1,801
35,600 Total S.A., Class B............................... 3,600
140,000 Usinor Sacilor.................................... 2,526
----------
28,652
----------
GERMANY (9.8%)
53,000 BASF AG........................................... 1,956
62,550 Bayer AG.......................................... 2,411
2,400 Buderus AG........................................ 1,333
111,100 Gerresheimer Glas AG.............................. 1,864
173,700 Lufthansa AG...................................... 3,343
2,300 Mannesmann AG..................................... 1,028
(a)11,800 Metro AG.......................................... 1,286
2,675 Suedzucker AG..................................... 1,435
46,400 VEBA AG........................................... 2,622
6,000 Viag AG........................................... 2,741
5,000 Volkswagen AG..................................... 3,791
----------
23,810
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
ITALY (5.6%)
605,000 Editoriale L'Expresso S.p.A....................... $ 2,015
270,800 Marzotto (Gaetano) & Figli S.p.A.................. 2,266
(a)921,400 Olivetti S.p.A.................................... 261
1,009,000 Sogefi S.p.A...................................... 2,553
765,000 Stet Di Risp (NCS)................................ 2,655
811,000 Telecom Italia S.p.A.............................. 2,429
814,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,611
----------
13,790
----------
NETHERLANDS (10.8%)
143,164 ABN Amro Holdings N.V............................. 2,672
18,600 Akzo Nobel N.V.................................... 2,551
10,357 Hollandsche Beton Groep N.V....................... 2,364
80,700 ING Groep N.V..................................... 3,724
40,800 KLM Royal Dutch Airlines N.V...................... 1,259
35,000 Koninklijke Bijenkorf Beheer N.V.................. 2,450
138,380 Koninklijke KNP BT N.V............................ 3,154
41,900 Koninklijke Van Ommeren N.V....................... 1,628
91,000 Philips Electronics N.V........................... 6,523
----------
26,325
----------
NORWAY (1.9%)
367,200 Den Norske Bank ASA............................... 1,438
130,120 Saga Petroleum A/S, Class B....................... 2,273
(a)167,600 Storebrand ASA.................................... 1,000
----------
4,711
----------
PORTUGAL (0.4%)
53,000 Banco Totta & Acores, S.A., Class B
(Registered).................................... 886
----------
SPAIN (4.6%)
11,518 Bodegas y Bebidas S.A............................. 524
204,000 Iberdrola S.A..................................... 2,577
156,600 Telefonica de Espana S.A.......................... 4,530
314,600 Uralita S.A....................................... 3,515
----------
11,146
----------
SWEDEN (5.6%)
21,950 Esselte AB, Class B............................... 517
117,500 Nordbanken AB..................................... 3,950
20,000 Pharmacia & Upjohn, Inc........................... 675
43,900 Skandia Forsakrings AB............................ 1,618
77,500 S.K.F. AB, Class B................................ 2,004
88,900 Sparbanken Sverige AB, Class A.................... 1,977
69,300 Spectra-Physics AB, Class A....................... 1,246
50,000 Svenska Handelsbanken, Class A.................... 1,600
----------
13,587
----------
SWITZERLAND (14.3%)
(a)2,440 Ascom Holdings AG (Bearer)........................ 3,411
(a)540 Baloise Holding Ltd. (Registered)................. 1,287
1,710 Bobst AG (Bearer)................................. 2,905
7,550 Forbo Holding AG (Registered)..................... 3,258
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
3,800 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ $ 3,589
(a)4,000 Magazine Globus (Participating Certificates)...... 2,164
3,100 Nestle S.A. (Registered).......................... 4,090
486 Novartis AG (Bearer).............................. 776
1,173 Novartis AG (Registered).......................... 1,875
10,800 Oerlikon-Buehrle Holding AG (Registered).......... 1,265
600 Schindler Holding AG (Participating
Certificates)................................... 750
1,320 Schindler Holding AG (Registered)................. 1,695
1,760 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 2,616
3,030 Sulzer AG (Registered)............................ 2,594
(a)5,800 Valora Holding AG................................. 1,232
3,750 Zuerich Versicherung (Registered)................. 1,492
----------
34,999
----------
UNITED KINGDOM (23.7%)
262,700 Associated British Foods plc...................... 2,262
402,392 BAT Industries plc................................ 3,601
339,100 BG plc............................................ 1,242
191,600 Bank of Scotland.................................. 1,231
210,500 Bass plc.......................................... 2,569
421,600 British Telecommunications plc.................... 3,131
207,550 Burmah Castrol plc................................ 3,511
462,134 Christian Salvesen plc............................ 2,170
630,000 Courtaulds Textiles plc........................... 3,221
491,500 Grand Metropolitan plc............................ 4,730
563,900 Imperial Tobacco Group plc........................ 3,624
902,552 John Mowlem & Co. plc............................. 1,849
460,000 Kwik Save Group plc............................... 2,320
113,600 Peninsular & Oriental Steam
Navigation Co................................... 1,131
7,200 Premier Farnell plc............................... 56
302,900 Racal Electronic plc.............................. 1,210
258,000 Reckitt & Colman plc.............................. 3,854
346,822 Royal & Sun Alliance Insurance Group plc.......... 2,564
359,050 Scottish Hydro-Electric plc....................... 2,481
180,000 Southern Electric plc............................. 1,325
447,318 Tate & Lyle plc................................... 3,326
120,000 Unilever plc...................................... 3,435
728,600 WPP Group plc..................................... 2,978
----------
57,821
----------
TOTAL COMMON STOCKS (Cost $189,810)............................. 235,334
----------
PREFERRED STOCKS (3.2%)
GERMANY (3.2%)
8,263 Dyckerhoff AG..................................... 2,991
36,000 Hornbach Holding AG............................... 3,004
3,200 Volkswagen AG..................................... 1,790
----------
TOTAL PREFERRED STOCKS (Cost $4,926)............................ 7,785
----------
TOTAL FOREIGN SECURITIES (99.6%) (Cost $194,736)................ 243,119
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 523 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $523,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $533 (Cost $523)......... $ 523
----------
FOREIGN CURRENCY (1.0%)
GBP 1 British Pound..................................... 1
DKK 1 Danish Krone...................................... --
DEM 3,912 German Mark....................................... 2,244
ITL 28,976 Italian Lira...................................... 17
ESP 928 Spanish Peseta.................................... 6
CHF 175 Swiss Franc....................................... 120
----------
TOTAL FOREIGN CURRENCY (Cost $2,412)............................ 2,388
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.8%) (Cost $197,671)............... 246,030
--------
OTHER ASSETS (0.7%)
Dividends Receivable....................... $ 1,002
Foreign Withholding Tax Reclaim
Receivable............................... 334
Receivable for Investments Sold............ 245
Receivable for Portfolio Shares Sold....... 101
Other Assets............................... 1 1,683
----------
LIABILITIES (-1.5%)
Payable for Portfolio Shares Redeemed...... (1,912)
Bank Overdraft............................. (652)
Payable for Investments Purchased.......... (557)
Investment Advisory Fees Payable........... (399)
Custodian Fees Payable..................... (36)
Administrative Fees Payable................ (30)
Directors' Fees & Expenses Payable......... (6)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (36) (3,630)
---------- --------
NET ASSETS (100%)........................................ $244,083
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $185,994
Undistributed Net Investment Income............... 3,491
Accumulated Net Realized Gain..................... 6,235
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 48,363
--------
NET ASSETS........................................ $244,083
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $239,958
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 12,511,764 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $19.18
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $4,125
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 215,469 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $19.14
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the
portfolio is obligated to deliver or is to receive foreign currency in
exchange for US dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------ ----------- ------------ ------ ------------
U.S.$ 380 $ 380 7/2/97 GBP 228 $ 380 $ --
------ ------ -----
------ ------ -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------------------------------
<S> <C> <C>
Capital Equipment $ 42,469 17.4 %
Consumer Goods 55,693 22.8
Energy 16,057 6.6
Finance 33,230 13.6
Materials 51,375 21.1
Multi-Industry 6,448 2.6
Services 37,847 15.5
---------- ---
$ 243,119 99.6 %
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.2%
Canada 0.4%
France 4.0%
Germany 8.0%
Hong Kong 0.7%
Ireland 5.3%
Italy 2.8%
Japan 10.2%
Netherlands 4.8%
Spain 2.8%
Sweden 0.5%
Switzerland 4.8%
United Kingdom 9.3%
United States 42.0%
Other 3.2%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 16.81% 26.51% 20.87%
PORTFOLIO -- CLASS B.... 16.60 26.05 26.64
INDEX -- CLASS A........ 15.38 22.27 15.17
INDEX -- CLASS B........ 15.38 22.27 19.45
</TABLE>
1. The MSCI World Index is an unmanaged index of common stocks and includes
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region (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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing in equity securities of issuers throughout the
world, including U.S. issuers. Investments may also be made with discretion in
issuers located in emerging markets.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 16.81% and 26.51%, respectively, for the Class A shares; and
16.60% and 26.05%, respectively, for the Class B shares as compared to total
returns of 15.38% and 22.27%, respectively, for the Morgan Stanley Capital
International (MSCI) World Index (the "Index"). From inception on July 15, 1992
to June 30, 1997, the average annual total return of Class A was 20.87% as
compared to 15.17% for the Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 26.64% as compared to
19.45% for the Index.
A stunning rally in the U.S. saw the MSCI USA Index up 17.7% for the second
quarter as indicators suggested second quarter GDP growth had slowed from the
first quarter's unsustainable 5.9%. Investors were encouraged by the Federal
Reserve Board's decision to leave interest rates unchanged at their May meeting,
reconfirmed on July 2nd. Inflation was key, the consumption price deflator at
1.8% suggests underlying inflation remains quiescent and below 2%. Further
budget deficit reductions, a mooted cut in capital gains tax, heavy mutual fund
inflows (for May, $20 billion) and continuing merger activity all helped power
the Index to new records.
Japan, unusually in recent times, was one of the strongest markets over the
quarter. The MSCI Japan Index rose 23.7% in U.S. dollars, 14.3% in yen,
reflecting the sharp currency rise that followed Japanese Treasury officials'
remarks in response to U.S. concerns about Japan's rising trade surplus.
Financial sector problems, most recently manifest in the Nomura Securities
scandal, continue to plague the banks. April's Value Added Tax (VAT) hike,
however, was less of a drag on domestic consumption than expected. Japan remains
a two tier market -- large manufacturers/ exporters thrive while smaller,
non-manufacturing companies from a range of sectors, particularly those facing
deregulation, continue to struggle.
The MSCI Europe Index rose 8.9% in U.S. dollar terms and 11.1% in local
currency. Political concerns dominated the quarter, with the initial shock of a
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
Socialist administration in France and the German government's unusual public
disagreement with the Bundesbank over the treatment of its gold reserves. Spain
and Switzerland were again outstanding performers.
The U.K. lagged the other major markets as interest rates rose to offset an
overheating domestic economy. The MSCI U.K. Index rose 8% in U.S. dollars and
6.5% in sterling terms. The 25 basis point rate rise that followed Labor's
landslide election in May was followed in June by a further 25 basis point
increase as the Bank of England quickly utilized its hard won independence.
While currency strength continued to dampen exports, this was offset by strong
gains in the financial sector with the listing of the Norwich Union Building
Society and takeover speculation at National Westminster Bank.
Clearly, it is difficult to argue that the U.S. market is other than fully
priced. Only time will tell whether there has been a 'paradigm' shift given the
continued lack of pricing power in the face of both robust economic growth and a
fully employed workforce. Earnings, however, have consistently beaten the
consensus for the past seventeen quarters, continuing to confound most market
strategists. Labor markets, however, remain tight and yet productivity gains are
strong and jobs are still perceived as being easily available. With early
indications of a return to 3-4% GDP growth in the second half of the year the
prospect of further interest rate tightening remains a strong possibility.
In terms of currencies, we still subscribe to the view that the U.S. dollar
should be underpinned as the Fed is likely to raise rates further and European
and Japanese central banks will initially be inclined not to follow. Low levels
of nominal yields will also continue to encourage capital outflows from these
regions despite recent words of caution from the Japanese as investors search
for higher returns. Ongoing financial sector problems are likely in our opinion
to prevent the Bank of Japan from raising rates this year.
Our overall position in the United States remains slightly underweight versus
the benchmark and we remain at about half weighting in Japan following a recent
visit there from our Chief Investment Officer, which reinforced our belief that
it is currently hard to find value in this market. We are overweight in Europe
where we continue to find relative value primarily in The Netherlands,
Switzerland and Germany.
Frances Campion
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Global Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (95.1%)
AUSTRALIA (1.2%)
163,407 Coles Myer Ltd.................................... $ 850
105,100 CSR Ltd........................................... 407
----------
1,257
----------
CANADA (0.4%)
5,350 Potash Corp. of Saskatchewan, Inc................. 403
----------
FRANCE (4.0%)
27,352 Banque Nationale de Paris......................... 1,128
2,010 Bongrain S.A...................................... 786
9,266 Elf Aquitaine S.A................................. 1,000
11,000 Scor S.A.......................................... 443
10,365 Valeo S.A......................................... 644
----------
4,001
----------
GERMANY (6.3%)
25,900 BASF AG........................................... 956
32,920 Bayer AG.......................................... 1,269
3,470 Karstadt AG....................................... 1,254
1,900 Mannesmann AG..................................... 849
(a)2,364 Sinn AG........................................... 502
(a)175 Varta AG.......................................... 28
6,600 VEBA AG........................................... 373
800 Viag AG........................................... 366
1,000 Volkswagen AG..................................... 758
----------
6,355
----------
HONG KONG (0.7%)
189,600 Jardine Strategic Holdings, Inc................... 717
----------
IRELAND (5.3%)
690,253 Anglo Irish Bank Corp. plc........................ 878
69,200 Clondalkin Group plc.............................. 671
264,836 Green Property plc................................ 1,435
462,436 Irish Life plc.................................... 2,380
----------
5,364
----------
ITALY (2.8%)
(a)624,000 Olivetti S.p.A.................................... 177
431,000 Stet Di Risp (NCS)................................ 1,496
603,400 Telecom Italia S.p.A. Di Risp (NCS)............... 1,195
----------
2,868
----------
JAPAN (10.2%)
140 East Japan Railway Co............................. 718
66,000 Fuji Photo Film Ltd............................... 2,656
21,000 Hitachi Ltd....................................... 235
81,000 Kao Corp.......................................... 1,124
47,000 Matsushita Electric Industries Ltd................ 948
140,000 Nichido Fire & Marine Insurance Co., Ltd.......... 1,021
222,000 NKK Corp.......................................... 477
9,000 Sony Corp......................................... 785
86,000 Sumitomo Rubber Industries........................ 579
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
13,000 TDK Corp.......................................... $ 954
37,400 Toyo Seikan Kaisha Ltd............................ 829
----------
10,326
----------
NETHERLANDS (4.8%)
83,012 ABN Amro Holdings N.V............................. 1,549
1,888 Hollandsche Beton Groep N.V....................... 431
35,324 ING Groep N.V..................................... 1,630
17,200 Philips Electronics N.V........................... 1,233
----------
4,843
----------
SPAIN (2.8%)
51,300 Iberdrola S.A..................................... 648
74,800 Telefonica de Espana S.A.......................... 2,164
----------
2,812
----------
SWEDEN (0.5%)
14,300 Skandia Forsakrings AB............................ 527
----------
SWITZERLAND (4.8%)
(a)400 Ascom Holdings AG (Bearer)........................ 559
370 Bobst AG (Bearer)................................. 629
1,200 Forbo Holding AG (Registered)..................... 518
835 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 789
(a)1,200 Magazine Globus (Participating Certificates)...... 649
780 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 1,159
680 Sulzer AG (Registered)............................ 582
----------
4,885
----------
UNITED KINGDOM (9.3%)
36,900 Bass plc.......................................... 450
26,500 Burmah Castrol plc................................ 448
228,888 Christian Salvesen plc............................ 1,075
61,000 Imperial Tobacco Group plc........................ 392
103,413 John Mowlem & Co. plc............................. 212
241,400 Matthews (Bernard) plc............................ 454
(a,d)653,333 Pentos plc........................................ --
85,550 Racal Electronic plc.............................. 342
138,491 Reckitt & Colman plc.............................. 2,069
63,702 Rolls-Royce plc................................... 243
57,600 Scottish Hydro-Electric plc....................... 398
126,553 Southern Electric plc............................. 931
101,577 Tate & Lyle plc................................... 755
40,000 Unilever plc...................................... 1,145
113,800 WPP Group plc..................................... 465
----------
9,379
----------
UNITED STATES (42.0%)
23,800 Albertson's, Inc.................................. 869
17,750 Aluminum Company of America....................... 1,338
(a)13,300 AMR Corp.......................................... 1,230
36,904 Ascent Entertainment Group, Inc................... 337
16,200 AT&T Corp......................................... 568
(a)26,300 Beazer Homes USA, Inc............................. 421
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
21,800 Borg-Warner Automotive, Inc....................... $ 1,179
33,300 Browning-Ferris Industries, Inc................... 1,107
(a)129,300 Cadiz Land Co., Inc............................... 679
75,500 Comsat Corp....................................... 1,798
(a)69,000 Data General Corp................................. 1,794
(a)109,000 Egghead, Inc...................................... 429
43,100 Enhance Financial Services Group, Inc............. 1,891
23,500 Finova Group, Inc................................. 1,798
(a)90,600 GenRad, Inc....................................... 2,050
13,800 Georgia Pacific Corp.............................. 1,178
39,300 Greenfield Industries, Inc........................ 1,061
16,100 Greenpoint Financial Corp......................... 1,072
34,000 Houghton Mifflin Co............................... 2,270
22,500 IBP, Inc.......................................... 523
(a)83,000 InteliData Technologies Corp...................... 399
20,900 Lukens, Inc....................................... 393
11,200 MBIA, Inc......................................... 1,264
61,400 MCI Communications Corp........................... 2,350
24,600 Mellon Bank Corp.................................. 1,110
(a)1,012 NCR Corp.......................................... 30
34,700 Penncorp Financial Group, Inc..................... 1,336
4,900 Pennzoil Co....................................... 376
53,800 Pharmacia & Upjohn, Inc........................... 1,870
67,500 Philip Morris Cos., Inc........................... 2,995
22,000 Polaroid Corp..................................... 1,221
12,000 Prime Retail, Inc................................. 161
14,050 Tandy Corp........................................ 787
11,300 Tecumseh Products Co., Class A.................... 676
38,100 Terra Nova (Bermuda) Holdings Ltd., Class A....... 800
(a)16,800 Toys "R" Us, Inc.................................. 588
28,800 UST Corp.......................................... 644
(a)47,400 Waban, Inc........................................ 1,526
(a)135,400 WorldCorp, Inc.................................... 347
----------
42,465
----------
TOTAL COMMON STOCKS (Cost $71,244)............................... 96,202
----------
PREFERRED STOCKS (1.7%)
GERMANY (1.7%)
3,000 Volkswagen AG (Cost $647)......................... 1,678
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -------------
RIGHTS (0.0%)
SWITZERLAND (0.0%)
(a)680 Sulzer AG (Cost $0)............................... --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
CONVERTIBLE BOND (0.0%)
HONG KONG (0.0%)
$ 21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/49 (Cost $21).............................. $ 26
----------
TOTAL FOREIGN & U.S. SECURITIES (96.8%) (Cost $71,912)........... 97,906
----------
SHORT-TERM INVESTMENT (0.9%)
REPURCHASE AGREEMENT (0.9%)
895 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $895,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $913 (Cost $895)......... 895
----------
FOREIGN CURRENCY (1.5%)
GBP 1 British Pound..................................... 1
FRF 111 French Franc...................................... 19
DEM 2,329 German Mark....................................... 1,336
ITL 134,052 Italian Lira...................................... 79
JPY 3,676 Japanese Yen...................................... 32
NLG 64 Netherlands Guilder............................... 33
ESP 5 Spanish Peseta.................................... --
SEK 33 Swedish Krona..................................... 4
CHF 29 Swiss Franc....................................... 20
----------
TOTAL FOREIGN CURRENCY (Cost $1,540)............................. 1,524
----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL INVESTMENTS (99.2%) (Cost $74,347)................. 100,325
--------
OTHER ASSETS (1.0%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 616
Dividends Receivable....................... 240
Receivable for Investments Sold............ 73
Foreign Withholding Tax Reclaim
Receivable............................... 64
Receivable for Portfolio Shares Sold....... 14
Other...................................... 5 1,012
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable........... (161)
Administrative Fees Payable................ (13)
Custodian Fees Payable..................... (12)
Directors' Fees & Expenses Payable......... (4)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (25) (218)
---------- --------
NET ASSETS (100%)........................................ $101,119
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 70,095
Undistributed Net Investment Income............... 854
Accumulated Net Realized Gain..................... 3,578
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 26,592
--------
NET ASSETS........................................ $101,119
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $96,056
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,064,602 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $18.97
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $5,063
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 267,847 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $18.90
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- ------- ----------- ------------ ------- ------------
NLG 6,000 $ 3,072 08/25/97 U.S.$ 3,205 $ 3,205 $ 133
FRF 17,668 3,022 09/12/97 U.S.$ 3,500 3,500 478
FRF 2,703 465 12/05/97 U.S.$ 470 470 5
------- ------- -----
$ 6,559 $ 7,175 $ 616
-------
------- ------- -----
------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------------------------------
Capital Equipment...................... $ 21,724 21.5%
Consumer Goods......................... 1,678 1.7
Consumer Products...................... 14,906 14.7
Electrical & Electronics............... 4,327 4.3
Energy................................. 2,870 2.8
Finance................................ 20,564 20.3
Materials.............................. 7,453 7.4
Mining................................. 403 0.4
Multi-Industry......................... 4,221 4.2
Services............................... 19,760 19.5
-------- ---
$ 97,906 96.8%
-------- ---
-------- ---
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Africa 24.0%
Australia 25.6%
Canada 23.5%
United Kingdom 1.9%
United States 17.9%
Other 7.1%
</TABLE>
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
------- ------- -------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.......... -28.86% -35.04% -4.26%
PORTFOLIO -- CLASS B.......... -28.75 -35.04 -13.40
INDEX -- CLASS A.............. -17.73 -22.07 -8.13
INDEX -- CLASS B.............. -17.73 -22.07 -16.41
</TABLE>
1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of the
leading companies involved in the mining of gold and silver.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 Gold Portfolio seeks to provide long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged in
gold-related activities.
Companies involved in the exploration, mining, fabrication, processing,
distribution or trading of gold (or, to a lesser degree, silver, platinum, or
other precious metals or minerals) qualify as Portfolio candidates. Mining
shares differ fundamentally from investments in gold bullion. Because companies
can produce positive cash flows and increase gold reserves in the ground through
exploration and discovery, mining company equity shares provide investors with a
more dynamic investment vehicle. Portfolio securities are selected on the basis
of relative valuation, liquidity, and risk diversification.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of -28.86% and -35.04%, respectively, for the Class A shares and
- -28.75% and -35.04%, respectively, for the Class B shares as compared to total
returns of -17.73% and -22.07%, respectively, for the Philadelphia Gold and
Silver Index (the "Index"). From inception on February 1, 1994 to June 30, 1997,
the average annual total return of Class A was -4.26% as compared to -8.13% for
the Index. From inception on January 2, 1996 to June 30, 1997, the average
annual total return of Class B was -13.40% as compared to -16.41% for the Index.
The Portfolio lagged XAU performance for the first half due to our exposure to
intermediate capitalization shares in North America, Australia, and South
Africa. The gold share market focused on the larger capitalization shares that
provide better liquidity but at significantly inferior valuations. The
Portfolio's positions in companies such as Arizona Star, Ashanti, Stillwater,
and Normandy provide outstanding values.
The dramatic and news-provoking new low in gold occurred immediately after the
quarter end and appears to culminate several months of negative news generated
by central banks and the persistent forward hedging of producers. Australia's
reserve reallocation announcement came as a nasty surprise to a market that was
focused on sales from European central banks relating to the EMU. The Australian
announcement followed rumblings during the second quarter by Belgium (relating
to increased coin sales),
- --------------------------------------------------------------------------------
Gold Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GOLD PORTFOLIO (CONT.)
by Germany attempting to revalue its gold reserves, and by a June report
suggesting the possibility of gold sales from the US Federal Reserve.
Gold grabbed center stage in global financial discussions when Germany announced
plans to "re-value" its gold holdings in order to offset some of its debt, a
plan that was later rejected. This is an interesting maneuver because it
attempts to activate the "dormant" positions to provide a perceived benefit, and
does so without any physical flow into the market. The "mark to market" achieves
debt reduction without the sale. The revaluation also sheds light on the
long-term appreciation of gold holdings, which according to our work have
appreciated at a faster rate than U.S. T-Bills from 1970-1995, despite the
unusually low returns during the last 15 years of the financial asset boom. Gold
will remain a primary topic of discussion as the EMU evolves.
The foundation of our investment thesis is that gold is a negatively correlated
asset class that is a unique monetary reserve for safety and store of value. In
our year-end 1996 piece we applied Sir Isaac Newton's First Law of Motion to the
current financial landscape: "An object in motion remains in motion and an
object at rest remains at rest, at constant velocity, until acted upon by an
unbalanced force". As the S&P forges new ground into high valuation extremes,
the market has perversely diminished the role of safety.
Physical demand for gold is rising on a global basis and is increasing as the
price declines. First quarter demand was the highest ever, eclipsing the prior
record set at the 1993 price lows. Central banks have no vested interest in
driving the price lower, and large reserve holders could increase gold holdings.
Producers will reduce hedging as mines become unprofitable. They have no
interest in locking in losses; the better alternative is to shut down mines.
Speculators are at historic extremes for short positions. Change on the margin
will be toward buying in shorts. The standard commodity model is still at work:
as the commodity price goes lower, the demand increases and supply decreases.
Gold is at the bottom of its 4-, 12-, and 17-year trading range, and selective
gold shares represent outstanding value.
Peter F. Palmedo
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (92.9%)
AFRICA (24.0%)
171,000 Ashanti Goldfields Co. GDR........................ $ 1,999
(a)700,000 Avgold Ltd........................................ 687
153,000 Free State Consolidated Gold Mines Ltd. ADR....... 765
(a)93,000 Harmony Gold Mining Co., Ltd. ADR................. 430
333,000 H.J. Joel Mining Co., Ltd......................... 257
15,000 Impala Platinum Holdings Ltd. ADR................. 168
25,000 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 120
(a)93,905 Western Area Gold Mining ADR...................... 632
42,700 Western Deep Levels Ltd. ADR...................... 1,019
----------
6,077
----------
AUSTRALIA (25.6%)
(a)366,000 Acacia Resources Ltd.............................. 481
(a)355,000 Emperor Mines Ltd................................. 496
(a)300,000 Lihir Gold Ltd.................................... 501
632,217 Newcrest Mining Ltd............................... 1,747
1,120,000 Normandy Mining Ltd............................... 1,260
267,000 Plutonic Resources Ltd............................ 835
199,500 Sons of Gwalia Ltd................................ 743
(a)1,186,594 Wiluna Mines Ltd.................................. 421
----------
6,484
----------
CANADA (23.5%)
83,000 Agnico-Eagle Mines Ltd............................ 797
(a)178,000 Arizona Star Resource Corp........................ 1,141
(a)50,000 Bema Gold Corp.................................... 302
(a)45,000 Eldorado Gold Corp., Ltd.......................... 176
(a)300,000 Meridian Gold, Inc. (Installment Receipts --
second installment: $2.50/Shr due on 7/31/97)... 815
(a)166,600 Miramar Mining Corp............................... 603
66,000 Placer Dome, Inc.................................. 1,081
132,000 Prime Resource Group, Inc......................... 956
(a)290,000 TVI Pacific, Inc.................................. 71
----------
5,942
----------
UNITED KINGDOM (1.9%)
227,200 Lonrho plc........................................ 480
----------
UNITED STATES (17.9%)
(a)206,000 Dakota Mining Corp................................ 206
(a)110,000 Gold Reserve Corp................................. 883
(a)141,600 Pegasus Gold, Inc................................. 867
(a)458,000 Royal Oak Mines, Inc.............................. 1,088
(a)66,000 Stillwater Mining Co.............................. 1,469
----------
4,513
----------
TOTAL COMMON STOCKS (Cost $34,759)............................ 23,496
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.4%)
REPURCHASE AGREEMENT (7.4%)
$ 1,882 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $1,882,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,917 (Cost $1,882)..... $ 1,882
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.3%) (Cost $36,641)................ 25,378
--------
OTHER ASSETS (0.1%)
Cash....................................... $ 1
Receivable for Portfolio Shares Sold....... 33
Dividends Receivable....................... 2 36
-----
LIABILITIES (-0.4%)
Investment Advisory Fees Payable........... (29)
Sub-Advisory Fees Payable.................. (20)
Payable for Portfolio Shares Redeemed...... (16)
Custodian Fees Payable..................... (6)
Administrative Fees Payable................ (4)
Distribution Fees Payable.................. (2)
Directors' Fees & Expenses Payable......... (1)
Other Liabilities.......................... (37) (115)
----- --------
NET ASSETS (100%)........................................ $ 25,299
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 42,479
Overdistributed Net Investment Income.............. (8)
Accumulated Net Realized Loss...................... (5,909)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................ (11,263)
--------
NET ASSETS......................................... $ 25,299
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $24,180
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,662,600 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $6.60
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,119
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 169,606 outstanding $.001 par value
shares (authorized 500,000,000 shares)........... $6.60
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Diversified............................ $ 480 1.9%
Gold Mines............................. 21,917 86.6
Materials.............................. 1,099 4.4
-------- ---
$ 23,496 92.9%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Gold Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.8%
Belgium 0.4%
Denmark 1.9%
Finland 0.5%
France 10.6%
Germany 7.8%
Hong Kong 2.9%
Italy 1.6%
Japan 20.9%
Netherlands 7.8%
New Zealand 0.9%
Norway 0.3%
Spain 2.9%
Sweden 3.4%
Switzerland 5.6%
United Kingdom 20.0%
Other 9.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 15.58% 24.18% 17.92% 13.23%
PORTFOLIO -- CLASS
B.................... 15.42 23.79 N/A 23.39
INDEX -- CLASS A..... 11.21 12.84 12.83 5.15
INDEX -- CLASS B..... 11.21 12.84 N/A 11.65
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC 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 investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 15.58% and 24.18%, respectively, for the Class A shares; and
15.42% and 23.79%, respectively, for the Class B shares as compared to total
returns of 11.21% and 12.84%, respectively, for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). For the five-year period ended
June 30, 1997, the average annual total return for Class A was 17.92% as
compared to 12.83% for the Index. From inception on August 4, 1989 to June 30,
1997, the average annual total return of Class A was 13.23% as compared to 5.15%
for the Index. From inception on January 2, 1996 to June 30, 1997, the average
annual total return of Class B was 23.39% as compared to 11.65% for the Index.
The Portfolio's outperformance for the six month period ended June 30, 1997, was
driven by the underweight position in Japanese equities, strong returns from
Japanese stocks held and the zero weightings in Singapore and Malaysia. Other
positive factors were currency hedging and returns in the Netherlands. Negative
factors included U.K. stock returns and Hong Kong stock returns. Poor relative
returns were also observed in Spain and Sweden.
All cautious utterances made earlier in the year with respect to equity
valuations have been disregarded as investors on a global scale have migrated to
equities from bonds whose nominal yields have declined to what is perceived as
unattractive levels.
The justification for this move beyond the initial phase of self-justification
through price momentum will be continued growth in corporate profits as earnings
yields on most major markets exceed bond yields. In Continental Europe, a
combination of currency weakness and restructuring will ensure 1997 fulfills
heady expectations while the most recent news from the United States has been
surprisingly encouraging. However, with Japan's economy showing little signs of
life and the yen showing signs of reasserting itself this market looks extended
even on
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
1997 earnings. Elsewhere the problem is 1998, because the world needs an
extrapolation of current conditions to justify current share prices. The bulls
would argue that there is a self-sustaining dynamic at work in that global
competition is preventing any upward pricing in manufactured goods. Be that as
it may, this dynamic does not address the problems of rapidly tightening labor
markets in the U.K. and U.S. and the structural inefficiencies of Europe's labor
markets. Equally this dynamic is driving down corporate profitability in Japan
as the domestic economy deregulates and it is putting a cap on general corporate
profitability as no one has any pricing power.
The sole remaining concentrations of value in the world's developed stock
markets are to be found in Japan's domestic sectors and in the U.K. export
sector. While we believe most such Japanese companies deserve to be cheap due to
secular pressures on profitability which management is failing to confront, the
U.K. export sector boasts some fine franchises where currency strength is solely
a translational problem and where management are genuinely focused on
shareholder returns. This is one area where we are happy to add to holdings at
current levels.
However, even allowing for these opportunities there are numerous stocks in the
Portfolio which sell in absolute terms beyond our judgment of fair value. They
remain in the Portfolio as their relative attractions remain. This is a rather
evasive way of saying we are all, to an extent, momentum investors now.
GERMANY
The Morgan Stanley Capital International Germany Index increased by 4.90% in
U.S. dollar terms and by 9.56% in local currency terms in the second quarter of
1997. During the quarter the top performing sector was transportation with
Lufthansa the state airline up strongly. Other sectors to show above average
returns were media and engineering stocks. Underperformers this quarter included
alcoholic beverages, textile and chemical stocks. The German market continues to
offer some good value opportunities among the small and medium sized companies
while some large companies are again looking more interesting following a period
of underperformance. This would include stocks in the chemical and utility
sectors.
The investment environment in Germany remains favorable with steady growth and
continuing low levels of inflation. Growth continues to be driven by exports
although in recent months there has been a sign of a slight pick up in the
domestic market. Inflation declined from February to April but rose slightly in
May as consumer prices rose 0.4% over the previous month. Seasonal factors
including a rise in holiday prices and an increase in heating oil were blamed.
Inflation for the year should remain around 1.5%. In the current environment
there seems little reason for the Bundesbank to increase interest rates. A
concern for Germany remains the difficulties in meeting the fiscal criteria in
the Maastricht Treaty. The authorities will continue to make savings, however,
an increase in taxes now seems very unlikely. Even if they fail to reduce the
budget deficit below 3.0% of GDP by year end it is unlikely to jeopardize the
process.
FRANCE
During the second quarter of 1997, the Morgan Stanley Capital International
France Index increased by 3.05% in U.S. dollar terms and by 7.48% in French
franc terms. During the quarter, retail stocks showed good performance as did
chemical and the integrated oil companies, Total and Elf Aquitaine; poor
performers included building and tobacco sectors.
In recent weeks the French investment environment has been dominated by the
surprise win by the leftist coalition. The initial market reaction was negative
but this soon reversed when the new government committed to a sound fiscal
policy and a pro-European stance. Concerns must be realized however, in the
ability of France to reach the Maastricht criteria following this change in
government. Growth in France continues to be slow with GDP in the first three
months of 1997 up 0.2% quarter-on-quarter. As with other European countries,
growth is being driven by exports aided by currency weakness. Domestic demand,
on the other hand, continues to be weak. Economic indicators are pointing
towards an upward trend in economic activity helped by improved order intake and
continuing low interest rates. On the negative side, the change of company
restructuring to increase efficiency, a major driver of equity prices in Europe
in recent years, could be diminished by the arrival of the new government.
NETHERLANDS
In the second quarter of 1997 the Morgan Stanley Capital International
Netherlands Index increased by 13.54% in U.S. dollar terms and by 18.59% in
Dutch guilder terms. The top performing sector was
- --------------------------------------------------------------------------------
International Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
electronics driven by Philips, up over 30% in the month of June alone. Other
strong performing sectors included oil and insurance. The weakest performers
included distributors and textiles.
Economic growth in the Netherlands remains strong despite poor GDP numbers in
the first quarter of the year, down 0.6% when compared to the same period last
year. These figures fail to take into account that there were fewer working days
in the first quarter this year and the market is still expecting 3% GDP growth
for the full year. Growth is coming from both increased exports and the domestic
market. Manufacturing has been particularly strong with production up 4.7% in
the three months to April. Consumer confidence remains high and unemployment
levels are continuing to fall. The increase in economic activity is putting some
pressure on inflation which increased to 2.2% in May up from 1.8% in April.
There could be some increase later in the year due to higher wages and an
increase in the oil tax. The Netherlands should have no problems reaching the
Maastricht criteria for entry into EMU.
SWITZERLAND
The Morgan Stanley Capital International Switzerland Index increased by 19.04%
in U.S. dollar terms and by 20.46% in Swiss franc terms in the second quarter of
1997. In the first half of the year, the Swiss market is up 27.5% in U.S. dollar
terms making it the top performer among the mature global markets. During the
quarter the sectors that performed well included insurance and engineering.
Pharmaceuticals also showed relative strength with Novartis continuing to
perform well in the Portfolio, however, it is now reaching full valuation.
Following two years of quarterly declines, GDP actually rose in the first
quarter of 1997. The increase was only 0.1% quarter-on-quarter, however, there
are signs that the economy should continue to improve. Orders in the mechanical
engineering sector have risen for the first time since the second quarter of
1995. Retail sales were also stronger rising 2% year-on-year in April. Inflation
remains very low at an annual rate of 0.6%. Concerns remain in the employment
market with the weak domestic economy and company restructuring pushing up these
rates. The unemployment rate currently stands at 5.3%, low by some standards,
but high for Switzerland.
ITALY
The Morgan Stanley Capital International Italy Index increased by 9.77% in U.S.
dollar terms and by 11.95% in local currency terms during the second quarter of
the year. The telecommunication stocks continued to show relative outperformance
as did health care and textiles. Although the Italian market has been one of the
weakest in our universe there have been some strong individual price moves
particularly among small-and medium-sized companies. Despite the poor
performance of many Italian large cap stocks, we have not found many companies
of suitable quality to add to the Portfolio.
The Italian economy continues to be weak with the first quarter GDP falling 0.3%
quarter-on-quarter. The primary reason was a decline in activity of the
manufacturing sector. Growth should show signs of picking up in the second
quarter, however, due to a larger number of working days and an increase in
industrial activity. In particular, the number of cars purchased was up 50% in
April and 40% in May due to government purchasing incentives. The inflation rate
continues to fall with the year-on-year rate reaching 1.6% in April. Despite
this favorable inflation outlook, the Bank of Italy has hinted that it is
unlikely to further reduce interest rates due to uncertainty over EMU.
SPAIN
During the second quarter of 1997, the Morgan Stanley Capital International
Spain index increased by 22.33% in U.S. dollar terms and by 26.97% in local
currency terms. Having been one of the weakest equity markets in Europe during
the first three months of 1997, it has bounced back to be the top performer in
the second quarter. Retail stocks continued their strong run while banks and
engineering companies also performed well. The strong performance of our Spanish
stocks has enabled us to reduce our weightings, however, there is now no clear
value opportunities in Spain.
The economic environment in Spain is improving and the market now expects GDP
growth for 1997 to be over 3%. There was a pick up in consumer confidence at the
end of 1996 and this has been sustained through the first six months of this
year. The effects of lower interest rates are now being seen on the economy
while the unemployment rate continues to come down, however, it still stands at
over 20%. There is also a growing belief that Spain will be included in the
first wave of countries in EMU and that the worst of the austerity is over.
Inflation has
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
continued to fall rapidly reaching 1.5% in May. This has enabled the Bank of
Spain to cut the intervention rate to 5.25%, the fourth cut this year.
JAPAN
The Japanese stock market enjoyed a strong recovery in the second quarter, with
the MSCI Japan Index appreciating 14.3% in Japanese yen and 23.7% in U.S.
dollars.
Unsurprisingly, in a period of yen strength, it was domestic sectors of the
market rather than blue chip exporters that led the market with even the banking
sector enjoying a return to favor despite a less than encouraging news flow on
the bad debt situation. With the market's recent recovery the market appears
fairly valued with the only remaining cheap stocks deserving to remain so due to
their failure to adapt to a rapidly deregulating domestic market.
A recent visit to Japan to search for value in the domestic sectors was
disappointing. Many historic profit structures in areas associated with public
expenditure are under siege and corporate management is not confronting this
problem by undertaking further painful restructurings. There is a general sense
that yen weakness has made further downsizing unnecessary and the general aura
of comfort exuded by management was not justified by their unfocussed
strategies. Meanwhile the housing sector is slowing faster than generally
expected and margins continue to decline as general construction companies enter
a market which is buoyant relative to their own traditional area of operations.
Therefore, despite its poor relative performance, Japan fails to offer the
combination of value and quality required to justify an increased weighting. One
of the singular facts about our efforts to invest in international value stocks
has been our failure to make money out of apparently cheap Japanese companies
whose management are indifferent to the returns they achieve on their cash flow.
After twelve years of this experience we are not expecting it to change, and
therefore our weighting in Japan is unlikely to increase significantly.
HONG KONG
During the second quarter, the MSCI Hong Kong Index appreciated 20.3% in both
U.S. dollars and Hong Kong dollars.
Behind this strength, and largely outside the Index, lay extreme enthusiasm for
anything associated with mainland corporate interests with so called red chip
stocks enjoying quite remarkable absolute and relative strength. The banking
sector also strengthened buoyed by rapid loan growth and even Hong Kong Telecom
staged an impressive rally as the U.K.'s Cable and Wireless staged an elegant
partial exit from the stock while mainland interests increased their stake. With
a buoyant residential property market and a recovery in commercial rents, the
territory returned to China in an exuberant mood.
Unfortunately, this exuberance has led to excessive optimism in two areas of
extreme importance to Hong Kong's stock market: its residential property market
and economic returns from investment in mainland China. Affordability levels for
Hong Kong apartments are back at unsustainably low levels and it is at the top
of the territory's new Chief Executive's agenda to bring down prices by
increasing supply. Meanwhile, with respect to so called red chips, ratings are
currently beyond any level justified by foreseeable economic returns.
While the worldwide stampede into equities may underpin the market in the
short-to medium-term, the reality of current excesses does not bode well for
further sustained progress in equity prices. Residual value remains in the
stodgy property investment companies and the politically incorrect Jardine
group.
AUSTRALIA
During the second quarter, the MSCI Australia Index appreciated 8.0% in U.S.
dollars and 13.0% in Australian dollars.
Other than strong stock markets worldwide, factors acting in favor of the market
included a fall in short-term rates, a moderate weakening of the Australian
dollar, a more resilient than expected copper price and a bottoming out of the
housing cycle. These factors allowed broad strength to develop across the market
leaving it fully valued, though the economy continues to be stalled by weak
consumption. Meanwhile, News Corp. continues its underperformance as Mr. Murdoch
indulges in one of his acquisition binges. All empirical evidence suggests that
it is best to back him at such moments.
Dominic Caldecott
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (88.1%)
AUSTRALIA (2.8%)
1,418,400 Brambles Industries Ltd........................... $ 28,057
3,563,264 Coles Myer Ltd.................................... 18,542
7,300,000 CSR Ltd........................................... 28,284
1,055,276 North Ltd......................................... 4,025
----------
78,908
----------
BELGIUM (0.4%)
243,350 G.I.B. Holdings Ltd............................... 11,643
2,156 G.I.B. Holdings Ltd. VVPR (New)................... 102
----------
11,745
----------
DENMARK (1.9%)
190,000 Den Danske Bank A/S............................... 18,494
111,600 Novo-Nordisk A/S, Class B......................... 12,174
400,500 Unidanmark A/S, Class A (Registered).............. 22,508
----------
53,176
----------
FINLAND (0.5%)
350,000 Huhtamaki Oy, Series 1............................ 15,071
168,467 Merita Ltd., Class A.............................. 562
----------
15,633
----------
FRANCE (10.6%)
389,600 Alcatel Alsthom................................... 48,810
768,300 Banque Nationale de Paris......................... 31,675
16,110 Bongrain S.A...................................... 6,305
160,900 Cie de Saint Gobain............................... 23,472
419,300 Elf Aquitaine S.A................................. 45,251
223,500 Groupe Danone..................................... 36,941
488,900 Lafarge S.A....................................... 30,417
116,800 PSA Peugeot Citroen S.A........................... 11,293
315,600 Schneider S.A..................................... 16,804
264,750 Scor S.A.......................................... 10,663
255,000 Total S.A., Class B............................... 25,784
767,168 Usinor Sacilor.................................... 13,842
10,350 Valeo S.A......................................... 643
----------
301,900
----------
GERMANY (5.7%)
673,100 BASF AG........................................... 24,845
1,024,500 Bayer AG.......................................... 39,491
500,000 Commerzbank AG.................................... 14,283
389,300 Hoechst AG........................................ 16,502
40,090 Karstadt AG....................................... 14,488
17,335 Mannesmann AG..................................... 7,746
(a)24,900 Varta AG.......................................... 4,052
364,000 VEBA AG........................................... 20,566
43,480 Viag AG........................................... 19,865
----------
161,838
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
HONG KONG (2.8%)
8,728,186 Hong Kong Land Holdings Ltd....................... $ 23,217
14,991,500 Jardine Strategic Holdings, Inc................... 56,668
----------
79,885
----------
ITALY (1.6%)
(a)8,503,700 Olivetti S.p.A.................................... 2,409
(a)177,700 Olivetti Group S.p.A. Di Risp (NCS)............... 51
8,887,000 Stet Di Risp (NCS)................................ 30,849
6,800,000 Telecom Italia S.p.A. Di Risp (NCS)............... 13,462
----------
46,771
----------
JAPAN (20.9%)
1,120,000 Aisin Seiki Co., Ltd.............................. 17,108
347,500 Aoyama Trading Co., Ltd........................... 11,162
1,000,000 Canon, Inc........................................ 27,233
348,000 Chudenko Corp..................................... 9,325
1,640,000 Daibiru Corp...................................... 19,755
2,217,000 Daicel Chemical Industries Ltd.................... 8,573
2,111 East Japan Railway Co............................. 10,835
2,484,000 Fuji Photo Film Ltd............................... 99,954
2,726,000 Hitachi Ltd....................................... 30,457
3,340 Japan Tobacco, Inc................................ 26,384
3,142,000 Kao Corp.......................................... 43,607
1,461,000 Matsushita Electric Industries Ltd................ 29,458
3,626,000 Nichido Fire & Marine Insurance Co., Ltd.......... 26,460
3,025 Nippon Telegraph & Telephone Corp................. 29,045
5,757,000 NKK Corp.......................................... 12,362
232,000 Ryosan Co......................................... 5,427
444,000 Shionogi & Co., Ltd............................... 3,441
364,000 Sony Corp......................................... 31,741
4,224,000 Sumitomo Marine & Fire Insurance Co............... 34,658
1,432,000 Sumitomo Rubber Industries........................ 9,637
366,000 TDK Corp.......................................... 26,867
1,820,100 Toyo Seikan Kaisha Ltd............................ 40,353
1,470,000 Yamanouchi Pharmaceutical Co...................... 39,520
----------
593,362
----------
NETHERLANDS (7.8%)
1,395,600 ABN Amro Holdings N.V............................. 26,043
209,000 Akzo Nobel N.V.................................... 28,665
84,436 Hollandsche Beton Groep N.V....................... 19,274
1,272,700 ING Groep N.V..................................... 58,726
271,100 Koninklijke Bijenkorf Beheer N.V.................. 18,978
290,800 Koninklijke KNP BT N.V............................ 6,628
868,000 Philips Electronics N.V........................... 62,225
----------
220,539
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
NEW ZEALAND (0.9%)
2,236,054 Fisher & Paykel Industries Ltd.................... $ 8,733
6,322,500 Lion Nathan Ltd................................... 16,019
(a,d)392,500 Smith City Group Ltd.............................. --
----------
24,752
----------
NORWAY (0.3%)
2,493,000 Den Norske Bank ASA............................... 9,765
----------
SPAIN (2.9%)
2,255,000 Iberdrola S.A..................................... 28,484
616,500 Repsol S.A........................................ 26,083
941,000 Telefonica de Espana S.A.......................... 27,224
----------
81,791
----------
SWEDEN (3.4%)
207,070 Electrolux AB, Series B........................... 14,941
(a)103,535 Granges AB........................................ 1,372
429,300 Nordbanken AB..................................... 14,434
565,900 Pharmacia & Upjohn, Inc........................... 19,099
265,700 Skandia Forsakrings AB............................ 9,792
452,100 S.K.F. AB, Class B................................ 11,692
364,600 Sparbanken Sverige AB, Class A.................... 8,109
713,200 Svenska Cellulosa AB, Class B..................... 15,171
52,400 Svenska Handelsbanken, Class A.................... 1,677
----------
96,287
----------
SWITZERLAND (5.6%)
(a)2,605 Ascom Holdings AG (Bearer)........................ 3,642
23,040 Forbo Holding AG (Registered)..................... 9,942
20,981 Holderbank Financiere Glarus AG, (Bearer)......... 19,817
38,400 Nestle S.A. (Registered).......................... 50,656
18,200 Novartis AG (Registered).......................... 29,095
13,814 Schindler Holding AG (Participating
Certificates)................................... 17,268
33,900 Sulzer AG (Registered)............................ 29,024
----------
159,444
----------
UNITED KINGDOM (20.0%)
573,700 Associated British Foods plc...................... 4,939
2,162,400 Bank of Scotland.................................. 13,898
3,478,256 BAT Industries plc................................ 31,130
4,652,300 BG plc............................................ 17,043
2,434,300 British Telecommunications plc.................... 18,078
2,062,800 Burmah Castrol plc................................ 34,898
6,291,200 Christian Salvesen plc............................ 29,541
2,412,513 English China Clays plc........................... 8,195
5,462,200 Grand Metropolitan plc............................ 52,570
2,551,400 Imperial Tobacco Group plc........................ 16,399
5,004,063 John Mowlem & Co. plc............................. 10,249
2,748,800 Kwik Save Group plc............................... 13,862
691,600 McAlpine (Alfred) plc............................. 1,589
875,700 National Westminster Bank plc..................... 11,774
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
2,862,000 Peninsular & Oriental Steam Navigation Co. plc.... $ 28,498
179,100 Pilkington plc.................................... 412
865,500 Premier Farnell plc............................... 6,730
3,509,500 Racal Electronic plc.............................. 14,025
4,238,002 Reckitt & Colman plc.............................. 63,299
3,692,100 Redland plc....................................... 20,902
3,603,368 Rolls-Royce plc................................... 13,740
2,914,606 Royal & Sun Alliance Insurance Group plc.......... 21,548
1,066,450 Scottish Hydro-Electric plc....................... 7,369
1,859,073 Southern Electric plc............................. 13,682
2,638,702 Tate & Lyle plc................................... 19,618
2,252,100 Unilever plc...................................... 64,462
6,715,300 WPP Group plc..................................... 27,451
577,333 Williams plc...................................... 3,124
----------
569,025
----------
TOTAL COMMON STOCKS (Cost $1,867,985)............................. 2,504,821
----------
PREFERRED STOCKS (2.1%)
GERMANY (2.1%)
106,950 Volkswagen AG (Cost $21,041)...................... 59,814
----------
CONVERTIBLE PREFERRED STOCKS (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
8/15/97 (Cost $1,908)........................... 2,301
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- --------------
RIGHTS (0.0%)
UNITED KINGDOM (0.0%)
(a)202,685 McAlpine (Alfred) plc, expiring 7/30/99 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
CONVERTIBLE BOND (0.0%)
HONG KONG (0.0%)
$ 20 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/49 (Cost $25).............................. 25
----------
TOTAL FOREIGN SECURITIES (90.3%) (Cost $1,890,959)................ 2,566,961
----------
SHORT-TERM INVESTMENT (3.8%)
REPURCHASE AGREEMENT (3.8%)
109,582 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97 to be repurchased at $109,599,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $111,418 (Cost
$109,582)....................................... 109,582
----------
FOREIGN CURRENCY (7.0%)
AUD 1,901 Australian Dollar................................. 1,436
GBP 32,386 British Pound..................................... 53,926
DKK 7 Danish Krone...................................... 1
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FOREIGN CURRENCY (CONT.)
<TABLE>
<C> <S> <C>
FRF 74,699 French Franc...................................... $ 12,716
DEM 138,763 German Mark....................................... 79,595
ITL 1,224,193 Italian Lira...................................... 720
JPY 5,246,114 Japanese Yen...................................... 45,792
NLG 84 Netherlands Guilder............................... 43
NOK 1 Norwegian Krone................................... --
ESP 638,637 Spanish Peseta.................................... 4,337
SEK 2 Swedish Krona..................................... --
CHF 21 Swiss Franc....................................... 15
----------
TOTAL FOREIGN CURRENCY (Cost $197,298)............................ 198,581
----------
TOTAL INVESTMENTS (101.1%) (Cost $2,197,839)...................... 2,875,124
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (17.9%)
Securities at Value, Held as Collateral for
Securities Loaned........................ $ 472,104
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 13,134
Receivable for Investments Sold............ 11,139
Dividends Receivable....................... 9,383
Foreign Withholding Tax Reclaim
Receivable............................... 1,893
Receivable for Portfolio Shares Sold....... 1,338
Receivable for Security Lending............ 54
Interest Receivable........................ 17
Other...................................... 77 509,139
----------
LIABILITIES (-19.0%)
Collateral on Securities Loaned, at
Value.................................... (472,104)
Payable for Investments Purchased.......... (61,663)
Investment Advisory Fees Payable........... (5,142)
Bank Overdraft............................. (740)
Administrative Fees Payable................ (347)
Payable for Portfolio Shares Redeemed...... (199)
Custodian Fees Payable..................... (160)
Directors' Fees & Expenses Payable......... (74)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (135) (540,566)
---------- ----------
NET ASSETS (100%)........................................ $2,843,697
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................. $1,970,143
Undistributed Net Investment Income............. 29,745
Accumulated Net Realized Gain................... 153,151
Unrealized Appreciation on Investments and
Foreign Currency Translations................. 690,658
----------
NET ASSETS...................................... $2,843,697
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------
NET ASSETS...................................... $2,840,689
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 145,030,804 outstanding $0.001
par value shares (authorized 500,000,000
shares)....................................... $19.59
----------
----------
CLASS B:
- ------------------------------------------------
NET ASSETS...................................... $3,008
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 153,932 outstanding $0.001 par
value shares (authorized 500,000,000
shares)....................................... $19.54
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------- --------- ----------- ----------- --------- ------------
ITL 1,214,092 $ 714 7/01/97 DEM 1,240 $ 711 $ (3)
ESP 307,783 2,090 7/01/97 DEM 3,635 2,085 (5)
U.S.$ 2,385 2,385 7/02/97 NLG 4,680 2,386 1
BEF 8,754 244 7/02/97 GBP 146 243 (1)
AUD 1,901 1,436 7/02/97 GBP 851 1,418 (18)
ESP 330,532 2,245 7/02/97 GBP 1,347 2,243 (2)
SEK 300,000 38,914 9/16/97 U.S.$45,188 45,188 6,274
ESP 5,400,000 36,767 12/02/97 U.S.$41,562 41,562 4,795
AUD 51,000 38,655 1/12/98 U.S.$39,913 39,913 1,258
FRF 970,000 169,260 6/19/98 U.S.$170,095 170,095 835
--------- --------- ------------
$ 292,710 $ 305,844 $ 13,134
---------
--------- --------- ------------
--------- ------------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
BEF -- Belgian Franc
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 474,396 16.7%
Consumer Goods......................... 772,462 27.2
Energy................................. 176,034 6.2
Finance................................ 379,401 13.3
Materials.............................. 376,157 13.2
Multi-Industry......................... 137,809 4.9
Services............................... 250,702 8.8
----------- ---
$ 2,566,961 90.3%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 3.0%
Austria 0.6%
Belgium 0.5%
Denmark 1.3%
Finland 2.0%
France 6.4%
Germany 7.4%
Hong Kong 4.5%
Italy 2.4%
Japan 28.9%
Malaysia 2.3%
Netherlands 5.4%
New Zealand 0.3%
Norway 1.1%
Singapore 2.2%
Spain 2.7%
Sweden 3.4%
Switzerland 7.8%
United Kingdom 13.6%
Other 4.2%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 16.04% 20.32% 19.29%
PORTFOLIO -- CLASS B.... 15.99 20.11 18.95
INDEX................... 11.21 12.84 14.07
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (assumes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by the Adviser. The EAFE countries in
which the Portfolio will invest are those comprising the Morgan Stanley Capital
International (MSCI) EAFE Index, which includes Australia, Japan, New Zealand,
most nations located in Western Europe, and certain developed countries in Asia.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 16.04% and 20.32%, respectively, for the Class A shares; and
15.99% and 20.11%, respectively, for the Class B shares as compared to total
returns of 11.21% and 12.84%, respectively, for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). From inception on March 15, 1996
to June 30, 1997, the average annual total return of Class A was 19.29% and
18.95% for Class B, as compared to 14.07% for the Index.
The second quarter of 1997 provided investors with almost an ideal global
investment environment. Markets around the world all posted impressive gains
driven by continued low inflation, surging liquidity and improving corporate
earnings, with several markets reaching new highs.
The Japanese market posted an impressive gain for the quarter (+23.8% in U.S.
dollar terms; +14.3% in local currency) following an extended period of
underperformance dating back through much of 1996. The economy in Japan is
finally picking up, thereby realizing the lagged benefits of low interest rates
and the devaluation of the yen. The new fiscal year, which began in April, also
saw a surge of liquidity as newly deregulated Japanese pension plans increased
exposure to the equity markets. Overall, consumer and business sentiment appears
to be improving despite an increase in the value added tax (VAT) which was
implemented in April. Nonetheless, the recovery is not so robust that we would
expect interest rates to begin rising any time soon. The Portfolio's weighting
in Japan was maintained at nearly 30% of net assets, contributing to our
substantial gains during the quarter. We also gained from our currency
management, as we unwound all our yen hedges in late April when the yen reached
a low near 126 yen/dollar.We felt the yen had fallen too far, too fast and were
rewarded as the yen
- --------------------------------------------------------------------------------
International Magnum Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
recovered in May. We reinstated our hedges at around 111 yen/dollar, believing
that the yen has settled into a 110-123 trading range.
The markets in Europe continued their extended rally, rising 8.9% for the
quarter in U.S. dollar terms and 11.1% in local currency terms. Elections in
France and U.K. saw conservative incumbents replaced by more liberal leaders,
with the French election contributing to increasing uncertainty regarding the
future of the European Economic and Monetary Union (EMU). The French populous
effectively voted against the austerity measures implemented by the previous
government to achieve the Maastricht criteria, instead favoring a Socialist
government aiming to increase employment. Both France and Germany now look less
likely to achieve the 3% debt-to-GDP ratio required for entry into EMU. We
believe that EMU will go forward but with a larger number of countries in the
first round -- meaning that the Euro will be a weaker currency than the
Deutschemark. As a result, we have maintained our hedged exposure to the
Deutschemark bloc currencies as we expect the dollar to continue to strengthen
moderately against them. Overall, stock selection in Europe remains strong with
Philips Electronics, one of the Portfolio's larger holdings, gaining over 30%
during June (and over 60% during the quarter) on strong earnings reports and the
news of the Dutch company's link up with Lucent Technologies of the U.S. to
develop additional communications equipment.
In Asia, the story was mixed. The Hong Kong market rose over 20% during the
quarter as investors became euphoric ahead of the July 1 handover to China. The
market closed at a record high on June 30, Hong Kong's last day under British
rule. Red chip stock (companies with the strongest ties to China) performed
exceptionally well as investors looked to benefit from Hong Kong's new
sovereignty. In sharp contrast to these gains, the Thai market fell over 25%
during the quarter due to on-going concerns about the health of the nation's
banking system (which was burdened under non-performing real estate loans) and
currency (which the government devalued in early July). Although we are only
invested in the developed markets of Asia, the Thai crisis and the devaluation
of the currency have brought into focus the common ills of the fast growth
Southeast Asian economies. Thus, the markets in Malaysia (-11.8%) and Singapore
(-0.8%) both experienced corrections during the quarter. Overall, we have been
pulling back our allocation to Asia over the past several months. Within Asia,
we have been reducing exposure to Malaysia, Hong Kong and Singapore and
increasing exposure to Australia and New Zealand.
Overall, the markets have performed extremely well through the first half of
1997. Looking ahead, however, we are increasingly cautious as valuations look
extended in the majority of markets around the world. Nonetheless, we will
continue to endeavor to uncover stocks with value and monitor market conditions
to adjust our Portfolio accordingly.
Francine J. Bovich
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
COMMON STOCKS (94.2%)
AUSTRALIA (3.0%)
103,012 Amcor Ltd......................................... $ 685
57,200 Broken Hill Proprietary Co., Ltd.................. 842
57,600 Commonwealth Bank Of Australia.................... 696
32,630 Lend Lease Corp., Ltd............................. 690
46,030 National Australia Bank Ltd....................... 659
141,400 News Corp., Ltd................................... 678
139,500 WMC Ltd........................................... 880
----------
5,130
----------
AUSTRIA (0.6%)
12,500 Boehler-Uddeholm AG............................... 969
1,615 Radex-Heraklith Industriebet...................... 69
----------
1,038
----------
BELGIUM (0.5%)
16,980 G.I.B. Holdings Ltd............................... 812
----------
DENMARK (1.3%)
22,000 BG Bank A/S....................................... 1,217
17,300 Unidanmark A/S, Class A (Registered).............. 972
----------
2,189
----------
FINLAND (2.0%)
(a)26,900 Amer-Yhtymae Oy, Class A.......................... 485
16,800 Huhtamaki Oy, Series 1............................ 723
2,350 Kone Oy, Class B.................................. 281
(a)146,900 Merita Ltd., Class A.............................. 490
93,900 Rautaruukki Oy.................................... 986
28,400 Valmet Crop....................................... 491
----------
3,456
----------
FRANCE (6.4%)
4,100 Alcatel Alsthom................................... 514
11,400 Banque Nationale de Paris......................... 470
1,300 Bongrain S.A...................................... 509
9,800 Cie de Saint Gobain............................... 1,430
9,700 Elf Aquitaine S.A................................. 1,047
5,040 Eridania Beghin-Say S.A........................... 755
6,300 Groupe Danone..................................... 1,041
17,600 Lafarge S.A....................................... 1,095
19,700 Legris Industries S.A............................. 929
(a)8,200 SGS-Thompson Microelectronics N.V................. 648
14,700 Total S.A., Class B............................... 1,486
54,900 Usinor Sacilor.................................... 990
----------
10,914
----------
GERMANY (5.8%)
26,400 BASF AG........................................... 974
24,650 Bayer AG.......................................... 950
900 Buderus AG........................................ 500
58,100 Gerresheimer Glas AG.............................. 975
61,300 Lufthansa AG...................................... 1,180
630 Mannesmann AG..................................... 281
(a)5,300 Metro AG.......................................... 578
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
16,900 VEBA AG........................................... $ 955
2,700 Viag AG........................................... 1,234
2,900 Volkswagen AG..................................... 2,199
----------
9,826
----------
HONG KONG (4.5%)
127,000 Cheung Kong Holdings Ltd.......................... 1,254
181,000 China Resources Enterprise Ltd.................... 888
82,000 Dao Heng Bank Group Ltd........................... 449
90,000 Henderson Land Development Co., Ltd............... 799
46,200 HSBC Holdings plc................................. 1,389
129,000 Hutchison Whampoa Ltd............................. 1,116
81,000 New World Development Co., Ltd.................... 483
144,000 Shanghai Industrial Holdings Ltd.................. 896
37,000 Sun Hung Kai Properties Ltd....................... 445
----------
7,719
----------
ITALY (2.4%)
(a)176,000 Editoriale L'Expresso S.p.A....................... 586
89,000 Marzotto (Gaetano) & Figli S.p.A.................. 745
(a)195,300 Olivetti S.p.A.................................... 55
346,000 Sogefi S.p.A...................................... 875
268,000 Stet Di Risp (NCS)................................ 930
467,000 Telecom Italia S.p.A. Di Risp (NCS)............... 925
----------
4,116
----------
JAPAN (28.9%)
88,000 Amada Co., Ltd.................................... 776
78,000 Asahi Tec Corp.................................... 380
55,000 Canon, Inc........................................ 1,498
51,000 Dai Nippon Printing Co., Ltd...................... 1,153
137,000 Daicel Chemical Industries Ltd.................... 530
59,000 Daifuku Co., Ltd.................................. 778
76,000 Daikin Industries Ltd............................. 690
20,020 FamilyMart........................................ 982
35,000 Fuji Machine Manufacturing Co..................... 1,268
30,000 Fuji Photo Film Ltd............................... 1,207
53,000 Fujitec Co. Ltd................................... 629
118,000 Fujitsu Ltd....................................... 1,637
115,000 Furukawa Electric Co.............................. 732
26,000 Hitachi Credit Corp............................... 504
144,000 Hitachi Ltd....................................... 1,609
60,000 Inabata & Co...................................... 409
111,000 Kaneka Corp....................................... 696
36,000 Kurita Water Industries........................... 958
16,300 Kyocera Ltd....................................... 1,295
59,000 Kyudenko Co., Ltd................................. 497
30,000 Lintec............................................ 547
72,000 Matsushita Electric Industries Ltd................ 1,452
270,000 Mitsubishi Chemical Corp.......................... 881
50,000 Mitsubishi Estate Co., Ltd........................ 724
157,000 Mitsubishi Heavy Industries Ltd................... 1,205
53,000 Mitsumi Electric Co., Ltd......................... 1,263
24,000 Murata Manufacturing Co., Ltd..................... 955
107,000 NEC Corp.......................................... 1,494
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
47,000 Nifco, Inc........................................ $ 492
15,000 Nintendo Corp., Ltd............................... 1,257
29,000 Nippon Pillar Packing............................. 256
141 Nippon Telegraph & Telephone Corp................. 1,354
126,000 Nissan Motor Co................................... 978
45,000 Nissha Printing................................... 518
89,000 Obayashi Corp..................................... 596
110,000 Ricoh Co., Ltd.................................... 1,440
31,000 Rinnai Corp....................................... 666
18,000 Sangetsu Co., Ltd................................. 377
43,000 Sankyo Co., Ltd................................... 1,445
61,000 Sanwa Shutter..................................... 554
79,000 Sekisui Chemical Co............................... 800
71,000 Sekisui House Ltd................................. 719
12,000 Shimamura Co., Ltd................................ 427
17,700 Sony Corp......................................... 1,543
81,000 Sumitomo Marine & Fire Insurance Co............... 665
67,000 Suzuki Motor Co., Ltd............................. 848
19,000 TDK Corp.......................................... 1,395
141,000 Taisei Corp., Ltd................................. 653
31,900 Tokyo Electron Ltd................................ 1,526
196,000 Toshiba Corp...................................... 1,261
38,000 Toyota Motor Corp................................. 1,121
107,000 Tsubakimoto Chain................................. 653
40,000 Yamanouchi Pharmaceutical Co...................... 1,075
----------
49,368
----------
MALAYSIA (2.3%)
309,000 Berjaya Group Bhd................................. 380
66,000 Berjaya Sports Toto Bhd........................... 311
68,000 Commerce Asset Holdings Bhd....................... 179
14,000 Dialog Group Bhd.................................. 202
29,000 Edaran Otomobil Nasional Bhd...................... 247
39,000 Genting Bhd....................................... 187
17,000 Lityan Holdings Bhd............................... 207
50,000 Malayan Banking Bhd............................... 525
70,000 Malaysian Resources Corp. Bhd..................... 193
63,000 Rashid Hussain Bhd................................ 399
62,000 Resorts World Bhd................................. 187
157,000 Sime Darby Bhd.................................... 523
54,000 United Engineers Malaysia Bhd..................... 389
----------
3,929
----------
NETHERLANDS (5.4%)
53,000 ABN Amro Holdings N.V............................. 989
8,950 Akzo Nobel N.V.................................... 1,228
3,000 Hollandsche Beton Groep N.V....................... 685
31,501 ING Groep N.V..................................... 1,454
15,800 KLM Royal Dutch Airlines N.V...................... 487
12,000 Koninklijke Bijenkorf Beheer N.V.................. 840
52,000 Koninklijke KNP BT N.V............................ 1,185
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
16,300 Koninklijke Van Ommeren N.V....................... $ 633
25,100 Philips Electronics N.V........................... 1,799
----------
9,300
----------
NEW ZEALAND (0.3%)
189,280 Fletcher Challenge Forest......................... 459
----------
NORWAY (1.1%)
118,200 Den Norske Bank ASA............................... 463
59,100 Saga Petroleum ASA, Class B....................... 1,032
(a)57,500 Storebrand ASA.................................... 343
----------
1,838
----------
SINGAPORE (2.2%)
69,000 Datacraft Asia Ltd................................ 220
25,000 Development Bank of Singapore Ltd. (Foreign)...... 315
218,000 Electronic Resources Ltd.......................... 343
170,000 NatSteel.......................................... 433
30,040 Oversea-Chinese Banking Corp. (Foreign)........... 311
(a)146,000 Pacific Century Regional Development.............. 203
42,000 Parkway Holdings Ltd.............................. 188
24,000 Singapore Press Holdings (Foreign)................ 483
283,000 Summit Holdings Ltd............................... 214
(a)332,000 Super Coffeemix Manufacturing Ltd................. 276
30,000 United Overseas Bank Ltd. (Foreign)............... 308
(a)104,400 Want Want Holdings................................ 347
69,000 Wing Tai Holdings Ltd............................. 199
----------
3,840
----------
SPAIN (2.7%)
12,600 Banco Bilbao Vizcaya S.A. (Registered)............ 1,024
81,100 Iberdrola S.A..................................... 1,025
46,600 Telefonica de Espana S.A.......................... 1,348
108,200 Uralita S.A....................................... 1,209
----------
4,606
----------
SWEDEN (3.4%)
20,450 Esselte AB, Class B............................... 481
45,600 Nordbanken AB..................................... 1,533
14,500 Pharmacia & Upjohn, Inc........................... 489
25,100 S.K.F. AB, Class B................................ 649
20,000 Skandia Forsakrings AB............................ 737
32,400 Sparbanken Sverige AB, Class A.................... 721
37,700 Spectra-Physics AB, Class A....................... 678
15,900 Svenska Handelsbanken, Class A.................... 509
----------
5,797
----------
SWITZERLAND (7.8%)
(a)490 Ascom Holdings AG (Bearer)........................ 685
(a)410 Baloise Holding Ltd. (Registered)................. 977
600 Bobst AG (Bearer)................................. 1,019
3,290 Forbo Holding AG (Registered)..................... 1,420
1,530 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 1,445
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
(a)380 Magazine Globus (Participating Certificates)...... $ 206
1,440 Nestle S.A. (Registered).......................... 1,900
(a)588 Novartis AG (Registered).......................... 940
(a)4,060 Oerlikon-Buehrle Holding AG (Registered).......... 476
150 Schindler Holding AG (Participating
Certificates)................................... 187
560 Schindler Holding AG (Registered)................. 719
670 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 996
1,380 Sulzer AG (Registered)............................ 1,181
(a)3,000 Valora Holding AG (Registered).................... 637
1,300 Zuerich Versicherung (Registered)................. 517
----------
13,305
----------
UNITED KINGDOM (13.6%)
114,000 Associated British Foods plc...................... 981
75,789 Bank of Scotland.................................. 487
93,000 Bass plc.......................................... 1,135
114,223 BAT Industries plc................................ 1,022
131,600 BG plc............................................ 482
156,000 British Telecommunications plc.................... 1,159
86,300 Burmah Castrol plc................................ 1,460
206,744 Christian Salvesen plc............................ 971
292,100 Courtaulds Textiles plc........................... 1,493
185,700 Grand Metropolitan plc............................ 1,787
232,400 Imperial Tobacco Group plc........................ 1,494
271,519 John Mowlem & Co. plc............................. 556
199,800 Kwik Save Group plc............................... 1,008
47,600 Peninsular & Oriental Steam Navigation Co......... 474
41,000 Premier Farnell plc............................... 319
122,400 Racal Electronic plc.............................. 489
100,500 Reckitt & Colman plc.............................. 1,501
130,000 Royal & Sun Alliance Insurance Group plc.......... 961
131,050 Scottish Hydro-Electric plc....................... 906
63,600 Southern Electric plc............................. 468
229,300 Tate & Lyle plc................................... 1,705
41,900 Unilever plc...................................... 1,199
294,800 WPP Group plc..................................... 1,205
----------
23,262
----------
TOTAL COMMON STOCKS (Cost $141,557)............................ 160,904
----------
PREFERRED STOCKS (1.6%)
GERMANY (1.6%)
2,710 Dyckerhoff AG..................................... 981
12,700 Hornbach Holding AG............................... 1,060
(a)1,300 Suedzucker AG..................................... 697
----------
TOTAL PREFERRED STOCKS (Cost $2,187)........................... 2,738
----------
</TABLE>
<TABLE>
<CAPTION>
NO OF VALUE
RIGHTS (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
RIGHTS (0.0%)
MALAYSIA (0.0%)
(a,d)27,200 Commerce Asset Holdings Bhd, expiring 7/23/97..... $ 2
----------
SINGAPORE (0.0%)
(a,d)109,000 Electronic Resources Ltd., expiring
7/07/97......................................... 72
----------
SWITZERLAND (0.0%)
(a,d)1,180 Sulzer AG, expiring 7/11/97....................... --
----------
TOTAL RIGHTS (Cost $0)......................................... 74
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a,d)17,000 Commerce Asset Holdings Bhd, expiring 3/16/02..... --
(a,d)9,000 Rashid Hussain Bhd, expiring 12/31/02............. --
----------
TOTAL WARRANTS (Cost $0)....................................... --
----------
TOTAL FOREIGN SECURITIES (95.8%) (Cost $143,744)............... 163,716
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 10,616 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $10,618,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $10,798 (Cost $10,616)... 10,616
----------
FOREIGN CURRENCY (0.9%)
GBP 147 British Pound..................................... 244
FRF 438 French Franc...................................... 75
DEM 530 German Mark....................................... 304
ITL 37,650 Italian Lira...................................... 22
JPY 90,454 Japanese Yen...................................... 790
MYR 14 Malaysian Ringgit................................. 6
NZD 151 New Zealand Dollar................................ 103
SGD 2 Singapore Dollar.................................. 1
CHF 65 Swiss Franc....................................... 44
----------
TOTAL FOREIGN CURRENCY (Cost $1,596)........................... 1,589
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- ----------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (102.9%) (Cost $155,956)............ $175,921
--------
OTHER ASSETS (1.6%)
Cash....................................... $ 917
Dividends Receivable....................... 556
Receivable for Investments Sold............ 534
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 524
Foreign Withholding Tax Reclaim
Receivable............................... 127
Receivable for Portfolio Shares Sold....... 8
Interest Receivable........................ 2 2,668
-------
LIABILITIES (-4.5%)
Payable for Investments Purchased.......... (7,300)
Investment Advisory Fees Payable........... (227)
Payable for Closed Foreign Currency
Exchange Contracts....................... (128)
Custodian Fees Payable..................... (40)
Administrative Fees Payable................ (21)
Distribution Fees Payable.................. (16)
Payable for Portfolio Shares Redeemed...... (7)
Directors' Fees & Expenses Payable......... (2)
Other Liabilities.......................... (39) (7,780)
------- --------
NET ASSETS (100%)..................................... $170,809
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $144,713
Undistributed Net Investment Income............... 1,204
Accumulated Net Realized Gain..................... 4,369
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 20,523
--------
NET ASSETS........................................ $170,809
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $140,458
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 11,358,501 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $12.37
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $30,351
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,462,111 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $12.33
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- -----------
U.S.$ 162 $ 162 7/02/97 GBP 97 $ 162 $ --
U.S.$ 258 258 7/02/97 AUD 342 258 --
CHF 416 286 8/18/97 U.S.$ 285 285 (1)
CHF 6,499 4,478 8/18/97 U.S.$ 4,573 4,573 95
NLG 7,447 3,810 8/18/97 U.S.$ 3,921 3,921 111
U.S.$ 1,650 1,650 8/18/97 NLG 3,193 1,633 (17)
U.S.$ 1,650 1,650 8/18/97 CHF 2,354 1,622 (28)
JPY 1,272,263 11,198 8/25/97 U.S.$ 11,400 11,400 202
BEF 19,501 545 8/29/97 U.S.$ 552 552 7
DEM 7,688 4,429 8/29/97 U.S.$ 4,489 4,489 60
U.S. 370 370 8/29/97 BEF 13,115 366 (4)
U.S.$ 1,550 1,550 8/29/97 DEM 2,662 1,534 (16)
FRF 24,463 4,186 9/15/97 U.S.$ 4,317 4,317 131
U.S.$ 1,650 1,650 9/15/97 FRF 9,553 1,634 (16)
-------- -------- -----
$ 36,222 $ 36,746 $524
-------- -------- -----
-------- -------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
AUD -- Australian Dollar
BEF -- Belgian Franc
NCS -- Non Convertible Shares
NLG -- Netherlands Guilder
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 39,088 22.9%
Consumer Goods......................... 36,692 21.5
Electrical & Electronics............... 8,770 5.1
Energy................................. 7,459 4.4
Finance................................ 26,826 15.7
Materials.............................. 19,383 11.3
Multi-Industry......................... 4,169 2.4
Services............................... 21,329 12.5
--------- ---
$ 163,716 95.8%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 8.5%
Denmark 1.3%
Finland 5.7%
France 6.2%
Germany 7.7%
Hong Kong 2.7%
Ireland 2.6%
Italy 1.7%
Japan 11.8%
Netherlands 6.3%
New Zealand 1.0%
Norway 1.8%
Singapore 0.8%
Spain 3.0%
Sweden 1.9%
Switzerland 10.5%
United Kingdom 18.9%
Other 7.6%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO............... 8.14% 9.22% 16.49%
INDEX................... 11.21 12.84 14.89
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (assumes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE 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 International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in the equity securities of non-U.S. issuers. The Portfolio
applies a disciplined bottom-up value approach to identify and invest in small
capitalization companies which are both attractive businesses and available at
cheap prices. A market capitalization cut-off of U.S. $1 billion is used as our
definition of "small."
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 8.14% and 9.22%, respectively, as compared to total returns of
11.21% and 12.84%, respectively, for the Morgan Stanley Capital International
(MSCI) EAFE Index (the "Index"). From inception on December 15, 1992 to June 30,
1997, the average annual total return was 16.49% as compared to 14.89% for the
Index.
The Portfolio's underperformance in the second quarter reversed the strong
outperformance of the first three months of the year and reflected the
Portfolio's significant underweighting in the strong Japanese market and yen,
and the widespread marked underperformance of the small cap universe against the
large cap EAFE Index.
Japan recovered strongly after its first quarter weakness with domestic stocks
the major beneficiaries given significant yen strength. Yet despite their
greater domestic focus, Japanese small caps continued to lag although the
Portfolio's stock selection contributed positively to performance.
In Continental Europe further dollar strength against the major currencies
continued to support the export sector, although there were some slight signs of
recovery in domestic consumption in Switzerland, Germany and Spain. French
stocks bounced back strongly in June given a more positive perception of the new
socialist Government's commitment to fiscal rectitude and the European single
currency. The Vontobel Swiss smaller companies index showed a 9.1%
underperformance relative to large caps during the first half, illustrating the
magnitude of small cap underperformance in Europe. This was also seen in the
U.K. where election euphoria drove the financial and pharmaceutical sectors
higher, completely bypassing small caps. The Hoare Govett smaller companies
index lagged the FT All Share by 5.7%. Sterling strength was a significant
negative to export stocks and hurt the Portfolio's stock selection.
Against this backdrop the Portfolio's strong stock selection in Japan, France,
Hong Kong and Ireland
- --------------------------------------------------------------------------------
International Small Cap Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
was not sufficient to offset particularly weak small cap returns in the U.K.,
Switzerland, the Netherlands, Germany and Australia. The Australian small cap
index lagged large caps by a staggering 9.6% in the first six months of the
year. The Portfolio's Australian and French Franc hedges contributed positively,
offsetting some of the U.S. Dollar strength, while the Fund's underweighting in
Malaysia and Singapore was also of benefit.
Portfolio activity has been high during the first half to the date of this
letter as we sold Kuoni in Switzerland, Pico Far East in Hong Kong, Berentzen
and Spar in Germany, L'Espresso in Italy, Jyske Bank in Denmark and Arnotts and
Burswood in Australia -- all of which had reached over assessed fair value. The
proceeds were invested in a number of new positions.
Westminster Healthcare and Care First are U.K. listed managers of nursing homes,
a sector which has been significantly de-rated over the last few years as growth
expectations proved disappointing. We believe both companies have been oversold
and with strong management teams focused on extracting attractive returns from
their assets, offer good value. Recent acquisition multiples within the sector
lend support to this analysis.
Nutreco Group was a Dutch IPO which has already contributed strongly to the
Portfolio's performance. It is the global market leader in the rapidly growing
salmon fish food industry and the European leader in the compound feed industry.
It is at the forefront of research and development and focuses on higher
value-added products and services. Listed on under 6 times cash flow and 9 times
free cash flow the shares offered good value.
Zehnder is the Swiss listed leading European producer of specialty radiators
which had underperformed due to its exposure to the European construction
markets. Acquired on 4 times cash flow and 7 times free cash flow the stock was
inexpensive given its market positioning, strength of management and, in
particular, its ability to generate good cash flow and returns on capital
employed even at the bottom of the cycle.
Rauma, in Finland, is a world leader in logging equipment, pulp and paper
process technologies, valves and rock crushing equipment. Two of the divisions
are in the process of being restructured while the outlook for logging equipment
is extremely positive. The shares should be re-rated as research coverage
improves combined with enhanced liquidity following the reduction of
UPM-Kymmene's holding. Purchased on 10 times earnings and 8 times free cash flow
the shares offer attractive value.
Li and Fung is Hong Kong's premier trading company with 90 years of know how and
a unique pan Asian sourcing network and a host of value added services to offer
its clients. It acquired the former Inchcape trading arm in 1995 and is
substantially improving its margins with an expected ROI in excess of 55% within
three years. The shares were, acquired on 11 times 1997 earnings and free cash
flow and a yield of over 5.5%.
Looking forward we anticipate few changes in the Portfolio's geographic mix. We
continue to find attractive value in Australia, confirmed by a recent trip,
while in the UK value is also evident following a fairly indiscriminate sell off
of sterling-related stocks. We will, however, tread cautiously seeing no reason
why sterling will weaken in the short-term and our focus will be on translation
rather than transaction related sterling sensitives. The Japanese weighting may
rise modestly given some value is emerging following the massive relative
underperformance of small caps but, as discussed in the March 1997 First Quarter
Report, we are concerned that the pressing need for deregulation will hurt the
majority of Japanese companies. Few companies meet our quality threshold.
Elsewhere we continue to find attractive value in the small cap sector. The
dearth of quality research on many of these stocks creates extremely attractive
pricing inefficiencies and is all the more marked given the outperformance of
large caps this year and the general paucity of value. While it is impossible to
predict when small caps will start to outperform again, the valuations are
compelling.
Margaret Naylor
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (87.4%)
AUSTRALIA (8.5%)
16,100 Arnotts Ltd....................................... $ 107
598,000 Auspine Ltd....................................... 1,603
(a)990,079 Bains Harding Ltd................................. 224
423,782 BRL Hardy Ltd..................................... 1,212
470,300 Burswood Property Trust........................... 622
2,486,636 Country Road Ltd.................................. 2,967
29,035 Eltin Ltd......................................... 55
4,449,421 E.R.G. Ltd........................................ 5,041
417,000 Morgan & Banks Ltd................................ 2,677
6,477,549 Parbury Ltd....................................... 3,963
950,000 Skilled Engineering Ltd........................... 1,744
(a)1,828,500 Solution 6 Holdings Ltd........................... 1,298
699,748 W.D. & H.O. Wills Holdings Ltd.................... 1,030
----------
22,543
----------
DENMARK (1.3%)
76,230 SYD-Sonderjylland Holdings........................ 3,480
----------
FINLAND (5.7%)
39,230 Aamulehti Yhtymae Oy, Series II................... 1,436
(a)63,100 Amer-Yhtymae Oy, Class A.......................... 1,137
55,370 KCI Konecranes International...................... 2,432
48,100 Kone Oy, Class B.................................. 5,745
309,250 Oy Tamro AB....................................... 2,145
56,600 Rauma Oy.......................................... 1,298
90,300 Rautaruukki Oy.................................... 948
----------
15,141
----------
FRANCE (6.2%)
37,576 Dauphin O.T.A..................................... 2,610
74,415 De Dietrich et Compagnie S.A...................... 3,293
71,490 Europeene d'Extincteurs........................... 4,916
92,400 Legris Industries S.A............................. 4,357
(a)59,768 Sediver S.A....................................... 1,221
----------
16,397
----------
GERMANY (2.8%)
16,500 Duerr AG.......................................... 681
120,900 Gerresheimer Glas AG.............................. 2,028
61,765 Marseille-Kliniken AG............................. 1,591
(a)11,433 Sinn AG........................................... 2,426
(a)4,420 Varta AG.......................................... 719
----------
7,445
----------
HONG KONG (2.7%)
1,754,000 Chen Hsong Holdings............................... 1,019
1,097,000 Jardine International Motor Holdings Ltd.......... 1,388
1,750,000 Li & Fung Ltd..................................... 1,965
6,542,000 Vitasoy International Holdings Ltd................ 2,934
----------
7,306
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
IRELAND (2.6%)
73,924 Anglo Irish Bank Corp. plc........................ $ 94
169,700 Clondalkin Group plc.............................. 1,644
955,274 Green Property plc................................ 5,178
----------
6,916
----------
ITALY (1.6%)
580,000 Sogefi S.p.A...................................... 1,467
787,000 Unicem Di Risp (NCS).............................. 2,005
81,000 Vincenzo Zucchi S.p.A............................. 428
199,050 Vincenzo Zucchi S.p.A. (NCS)...................... 469
----------
4,369
----------
JAPAN (11.8%)
15,000 Exedy Corp........................................ 191
231,000 Foster Electric Co., Ltd.......................... 1,553
463,000 Hankyu Realty..................................... 3,726
742,000 Japan Oil Transportation.......................... 2,817
213,000 Japan Vilene Co., Ltd............................. 976
134,000 Kansei Corp....................................... 1,037
388,000 Kirin Beverage Corp............................... 6,774
136,000 Nifco, Inc........................................ 1,425
722,250 Nissan Fire & Insurance Co........................ 3,972
61,000 Sangetsu Co., Ltd................................. 1,278
549,000 Toc Co............................................ 6,517
170,000 Toyoda Gosei Co................................... 1,187
----------
31,453
----------
NETHERLANDS (6.3%)
38,970 Ahrend Groep N.V.................................. 2,633
83,000 Apothekers Cooperatie OPG......................... 2,857
31,745 Atag Holding N.V.................................. 1,737
27,916 Hollandsche Beton Groep N.V....................... 6,372
45,830 Koninklijke Van Ommeren N.V....................... 1,780
(a)65,950 Nutreco Holding N.V............................... 1,369
4,122 Samas Groep N.V................................... 177
----------
16,925
----------
NEW ZEALAND (1.0%)
687,853 Fisher & Paykel Industries Ltd.................... 2,687
----------
NORWAY (1.8%)
73,850 Adelsten ASA, Class B............................. 1,593
103,000 Kverneland ASA.................................... 2,797
(a)228,020 Oceanor........................................... 311
----------
4,701
----------
SINGAPORE (0.8%)
671,000 GP Batteries International Ltd.................... 1,999
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
SPAIN (3.0%)
80,000 Bodegas y Bebidas S.A............................. $ 3,640
92,775 Empresa Nacional Hidroelectrica del Ribagorzana
S.A., Class B................................... 2,202
48,550 Miquel y Costas & Miquel S.A...................... 2,196
----------
8,038
----------
SWEDEN (1.9%)
108,700 Marieberg Tidnings AB............................. 2,699
(a)154,700 Scandic Hotels AB................................. 2,441
----------
5,140
----------
SWITZERLAND (10.5%)
2,600 Bobst AG (Bearer)................................. 4,417
4,967 Bucher Holdings AG (Bearer)....................... 5,171
9,800 Edipresse S.A. (Bearer)........................... 2,316
2,750 LEM Holdings AG................................... 603
(a)4,575 Magazine Globus (Participating Certificates)...... 2,476
4,450 Porst Holding AG (Bearer)......................... 689
14,385 Publicitas Holding S.A. (Registered).............. 2,739
2,865 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 4,258
(a)11,475 Valora Holding AG................................. 2,436
4,470 Zehnder Holding AG, Class B....................... 2,143
910 Zellweger Luwa AG (Bearer)........................ 674
----------
27,922
----------
UNITED KINGDOM (18.9%)
4,004,247 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... 5,201
1,211,900 Bluebird Toys plc................................. 1,857
1,371,200 BSM Group plc..................................... 2,512
462,400 Care First Group plc.............................. 893
796,500 Corporate Services Group plc...................... 2,480
821,300 Devro plc......................................... 4,636
(a)2,540,850 Donelon Tyson plc................................. --
1,782,600 GEI International plc............................. 2,864
519,600 Industrial Control Services Group plc............. 1,185
426,289 International Business Communications (Holdings)
plc............................................. 2,790
1,608,965 John Mowlem & Co. plc............................. 3,295
(a)33,795,100 Kendell plc....................................... --
206,800 Le Riches Stores Ltd.............................. 1,329
206,335 Mallett plc....................................... 332
2,354,600 Matthews (Bernard) plc............................ 4,430
120,000 Northern Leisure plc.............................. 504
651,000 Oriflame International S.A........................ 5,257
(a)2,659,393 Pentos plc........................................ --
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
667,000 Ricardo Group plc................................. $ 1,499
(a)503,100 SGB Group plc..................................... 1,298
(a)1,895,000 Tandem Group plc.................................. 205
1,344,500 The 600 Group plc................................. 2,687
728,700 UniChem plc....................................... 3,106
522,800 Waterman Partnership Holdings plc................. 501
344,000 Westminster Health Care Holdings plc.............. 1,512
----------
50,373
----------
TOTAL COMMON STOCKS (Cost $211,333)................................ 232,835
----------
PREFERRED STOCKS (4.9%)
GERMANY (4.9%)
10,923 Dyckerhoff AG..................................... 3,954
31,650 Hornbach Holding AG............................... 2,641
8,550 STO AG-Vorzug..................................... 3,556
16,100 Wuerttembergische Metallwarenfabrik AG............ 2,932
----------
TOTAL PREFERRED STOCKS (Cost $11,390).............................. 13,083
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
CONVERTIBLE DEBENTURE (0.1%)
ITALY (0.1%)
ITL 518,000 Mediobanca S.p.A 5.50%, 1/01/00 (Cost $328)....... 310
----------
TOTAL FOREIGN SECURITIES (92.4%) (Cost $223,051)................... 246,228
----------
SHORT-TERM INVESTMENT (4.5%)
REPURCHASE AGREEMENT (4.5%)
$ 12,111 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $12,113,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $12,317 (Cost $12,111)... 12,111
----------
FOREIGN CURRENCY (1.6%)
AUD 40 Australian Dollar................................. 30
GBP 132 British Pound..................................... 221
FRF 208 French Franc...................................... 35
DEM 5,290 German Mark....................................... 3,035
ITL 178,509 Italian Lira...................................... 105
JPY 13,167 Japanese Yen...................................... 115
NLG 642 Netherlands Guilder............................... 327
ESP 126 Spanish Peseta.................................... 1
CHF 673 Swiss Franc....................................... 461
----------
TOTAL FOREIGN CURRENCY (Cost $4,359)............................... 4,330
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%) (Cost $239,521)................ $262,669
--------
OTHER ASSETS (2.2%)
Cash....................................... $ 19
Receivable for Investments Sold............ 1,703
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 1,666
Receivable for Portfolio Shares Sold....... 1,592
Dividends Receivable....................... 488
Foreign Withholding Tax Reclaim
Receivable............................... 258
Interest Receivable........................ 10
Other...................................... 9 5,745
----------
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (1,039)
Investment Advisory Fees Payable........... (547)
Payable for Closed Foreign Currency
Exchange Contracts....................... (187)
Custodian Fees Payable..................... (33)
Administrative Fees Payable................ (33)
Directors' Fees & Expenses Payable......... (9)
Other Liabilities.......................... (39) (1,887)
---------- --------
NET ASSETS (100%)........................................ $266,527
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $229,574
Undistributed Net Investment Income............... 2,550
Accumulated Net Realized Gain..................... 9,598
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 24,805
--------
NET ASSETS........................................ $266,527
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,643,353 outstanding $.001 par
value shares (authorized 1,000,000,000
shares)......................................... $18.20
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- -------- ----------- ------------ -------- ------------
FRF 55,000 $ 9,409 9/12/97 U.S.$ 10,896 $ 10,896 $ 1,487
AUD 9,100 6,897 1/12/98 U.S.$ 7,076 7,076 179
-------- -------- ------
$ 16,306 $ 17,972 $ 1,666
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 61,057 22.9%
Consumer Goods......................... 62,025 23.3
Energy................................. 2,202 0.8
Finance................................ 31,155 11.7
Materials.............................. 31,692 11.9
Multi-Industry......................... 8,858 3.3
Services............................... 49,239 18.5
--------- ---
$ 246,228 92.4%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Appliances & Household Durables 7.6%
Audio/Video Products 0.4%
Automobiles 5.4%
Business Materials & Components 1.2%
Business & Public Services 1.7%
Chemicals 5.4%
Construction & Housing 4.9%
Data Processing & Reproduction 3.0%
Electrical & Electronics 13.7%
Electrical Components & Instruments 10.3%
Financial Services 1.2%
Health & Personal Care 5.2%
Industrial Components 0.9%
Insurance 1.2%
Machinery & Engineering 17.5%
Merchandising 3.6%
Metals -- Non-Ferrous 1.4%
Metals -- Steel 0.9%
Real Estate 1.1%
Recreation, Other Consumer Goods 6.0%
Telecommunications 4.6%
Textiles & Apparel 1.1%
Other 1.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 23.37% 12.87% 4.55%
PORTFOLIO -- CLASS B.... 23.05 12.26 13.61
INDEX -- CLASS A........ 9.07 -8.87 -1.81
INDEX -- CLASS B........ 9.07 -8.87 -4.83
</TABLE>
1. The MSCI Japan Index is an unmanaged index of common stocks (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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities include common and preferred stocks, convertible
securities and rights and warrants to purchase common stocks.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 23.37% and 12.87%, respectively, for the Class A shares; and
23.05% and 12.26%, respectively, for the Class B shares as compared to total
returns of 9.07% and -8.87%, respectively, for the Morgan Stanley Capital
International (MSCI) Japan Index (the "Index"). From inception on April 25, 1994
to June 30, 1997, the average annual total return for Class A was 4.55% as
compared to -1.81% for the Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 13.61% as compared to
- -4.83% for the Index.
During the second quarter of 1997, the Japanese equity market rebounded sharply
from the low set in February. This rally came despite a consumption tax hike
from 3 to 5% in April, the collapse of Nissan Life Insurance, scandals at Nomura
and DKB as well as sharp strengthening of the yen. Sentiment also improved after
April as the severely depressed banking sector stage a technical rally and
overall anxiety regarding the Japanese economy softened.
In retrospect, we believe that the stock market digested the weakening economic
growth of the April-June quarter (stemming from the consumption tax hike) in the
November to February sell-off. In fact, as the second quarter progressed many
market participants became more encouraged that economic prospects are brighter
than the prevailing negative consensus, with such conviction confirmed by the
release of June's Bank of Japan "Tankan" report. This quarterly survey was "+7",
significantly better than the consensus estimates. Moreover, on a global basis,
Japanese domestic shortcomings look less severe when compared with the French
election results and Germany's mounting budget deficit problems. Therefore, on a
global macro level, confidence and relative optimism for Japan yet again began
to emerge.
The financial sector, particularly banks, staged a sharp technical rebound from
severely oversold levels with large open short interest positions contributing
to a volatile rally during the second quarter. The
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
announcement that troubled Nippon Credit Bank and Bankers Trust formed alliances
and that Hokkaido Bank and Takushoku Bank will merge also helped to raise
interest in the sector. The Ministry of Finance appeared to not allow large
banks to fail. Also, the 5% equity stake a large U.S. investor took in Wako
Securities provided evidence that mergers and acquisitions activity in the
Japanese financial sector with Big Bang looming may accelerate.
International Blue chips, the market bellcow since mid 1996, entered a
consolidation period in June. This sector, favored by domestic pension funds and
foreign investors for both value and growth, sold off primarily from the rapid
appreciation of the yen. The sharp appreciation of the yen came from a mounting
trade surplus between Japan and the U.S., particularly during April and May. At
the Washington G-7 meeting in April, statements were issued that "proper
currency levels are necessary" for the trade balance to correct. Moreover,
official U.S. statements directed to Japan posed strong language that the
Japanese domestic economy must be improved. As such, although most international
blue chips' earnings are more resilient now to a stronger yen, some investors
had ample reason to take profits in this sector.
We believe that focus should not be on the Japanese economic recovery but more
on the degree to which it will improve. Evidence such as June's Tankan report
and bottom-up earnings results we are witnessing from leading companies in Japan
suggest that the recovery is well on its way. However, the drag on the domestic
economy from mounting bankruptcy rates and banks' non-performing loans as well
as inefficient fiscal policy remain serious. In order for the domestic economy
to continue improving and show real private demand increases, additional policy
changes including further deregulation and administrative reform will need to
take place. We are hopeful this will occur. The LDP has recently shown it is
getting stronger with less internal friction and therefore a concerted policy
drive will be easier to implement.
While the scandals at Nomura, DKB and bankruptcy at Nissan Life were a few
casualties during the first half of 1996, we believe there are potentially more
such cases which could negatively affect the financial sector. On the other
hand, international blue chips and globally competitive deregulated Japanese
industries will likely see a continued improvement in earnings and demand from
domestic and foreign investors. Moreover, these companies are also "domestic
demand" plays because Japan is rapidly shifting to digital broadcasting, e-mail,
PC's and multimedia and therefore companies such as SONY are not only "export"
plays on the market but enjoy a large growing domestic market.
We believe that the yen will stabilize in a trading range of 110-123 to the
dollar and the recent 10% correction in the currency should begin to impact
trade surplus numbers less negatively. Our Portfolio will continue to favor
electronics, blue chips, multimedia and high technology companies which
represent value and show visible earning momentum.
John R. Alkire
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.3%)
APPLIANCES & HOUSEHOLD DURABLES (7.6%)
253,000 Matsushita Electric Industries Ltd................ $ 5,101
127,400 Rinnai Corp....................................... 2,736
62,000 Sony Corp......................................... 5,406
----------
13,243
----------
AUDIO/VIDEO PRODUCTS (0.4%)
54,000 Nissha Printing................................... 622
----------
AUTOMOBILES (5.4%)
458,000 Nissan Motor Co................................... 3,554
234,000 Suzuki Motor Co., Ltd............................. 2,962
100,000 Toyota Motor Corp................................. 2,950
----------
9,466
----------
BUILDING MATERIALS & COMPONENTS (1.2%)
180,000 Fujitec Co., Ltd.................................. 2,137
----------
BUSINESS & PUBLIC SERVICES (1.7%)
133,000 Dai Nippon Printing Co., Ltd...................... 3,007
----------
CHEMICALS (5.4%)
461,000 Daicel Chemical Industries Ltd.................... 1,783
439,000 Kaneka Corp....................................... 2,751
623,000 Mitsubishi Chemical Corp.......................... 2,034
97,000 Okura Industrial Co., Ltd......................... 382
252,000 Sekisui Chemical Co............................... 2,551
----------
9,501
----------
CONSTRUCTION & HOUSING (4.9%)
200,000 Kyudenko Co., Ltd................................. 1,686
332,000 Obayashi Corp..................................... 2,223
257,000 Sekisui House Ltd................................. 2,602
430,000 Taisei Corp., Ltd................................. 1,993
----------
8,504
----------
DATA PROCESSING & REPRODUCTION (3.0%)
192,000 Canon, Inc........................................ 5,229
----------
ELECTRICAL & ELECTRONICS (13.7%)
395,000 Fujitsu Ltd....................................... 5,482
467,000 Hitachi Ltd....................................... 5,218
160,000 Mitsumi Electric Co., Ltd......................... 3,813
356,000 NEC Corp.......................................... 4,972
678,000 Toshiba Corp...................................... 4,361
----------
23,846
----------
ELECTRONIC COMPONENTS & INSTRUMENTS (10.3%)
57,000 Kyocera Ltd....................................... 4,528
90,000 Murata Manufacturing Co., Ltd..................... 3,582
65,000 TDK Corp.......................................... 4,771
107,700 Tokyo Electron Ltd................................ 5,152
----------
18,033
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL SERVICES (1.2%)
107,000 Hitachi Credit Corp............................... $ 2,073
----------
HEALTH & PERSONAL CARE (5.2%)
153,000 Sankyo Co., Ltd................................... 5,142
144,000 Yamanouchi Pharmaceutical Co...................... 3,871
----------
9,013
----------
INDUSTRIAL COMPONENTS (0.9%)
154,000 Nifco, Inc........................................ 1,613
----------
INSURANCE (1.2%)
266,000 Sumitomo Marine & Fire Insurance Co............... 2,182
----------
MACHINERY & ENGINEERING (17.5%)
373,000 Amada Co., Ltd.................................... 3,288
175,000 Daifuku Co., Ltd.................................. 2,307
252,000 Daikin Industries Ltd............................. 2,288
141,000 Fuji Machine Manufacturing Co..................... 5,108
139,000 Kurita Water Industries........................... 3,700
598,000 Mitsubishi Heavy Industries Ltd................... 4,588
203,000 Nippon Pillar Packing............................. 1,790
390,000 Ricoh Co., Ltd.................................... 5,106
397,000 Tsubakimoto Chain................................. 2,426
----------
30,601
----------
MERCHANDISING (3.6%)
66,020 Family Mart....................................... 3,239
223,000 Inabata & Co...................................... 1,520
76,000 Sangetsu Co., Ltd................................. 1,592
----------
6,351
----------
METAL-NON-FERROUS (1.4%)
259,000 Sanwa Shutter..................................... 2,351
----------
METALS-STEEL (0.9%)
320,000 Asahi Tec Corp.................................... 1,558
----------
REAL ESTATE (1.1%)
137,000 Mitsubishi Estate Co., Ltd........................ 1,985
----------
RECREATION, OTHER CONSUMER GOODS (6.0%)
90,000 Fuji Photo Film Ltd............................... 3,622
110,000 Lintec............................................ 2,007
57,000 Nintendo Corp., Ltd............................... 4,776
----------
10,405
----------
TELECOMMUNICATIONS (3.3%)
590 Nippon Telegraph & Telephone Corp................. 5,665
----------
TELECOMMUNICATIONS EQUIPMENT (1.3%)
350,000 Furukawa Electric Co.............................. 2,227
----------
TEXTILES & APPAREL (1.1%)
55,000 Shimamura Co., Ltd................................ 1,959
----------
TOTAL COMMON STOCKS (Cost $157,897)........................... 171,571
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOREIGN CURRENCY (0.4%)
JPY 78,253 Japanese Yen (Cost $683).......................... $ 683
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.7%) (Cost $158,580)................ 172,254
--------
OTHER ASSETS (3.1%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 3,124
Receivable for Investments Sold............ 1,880
Receivable for Portfolio Shares Sold....... 368
Dividends Receivable....................... 44
Other...................................... 4 5,420
----------
LIABILITIES (-1.8%)
Bank Overdraft............................. (1,358)
Payable for Portfolio Shares Redeemed...... (1,339)
Investment Advisory Fees Payable........... (309)
Payable for Investments Purchased.......... (47)
Administrative Fees Payable................ (23)
Custodian Fees Payable..................... (11)
Directors' Fees & Expenses Payable......... (7)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (30) (3,125)
---------- --------
NET ASSETS (100%)........................................ $174,549
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $167,338
Accumulated Net Investment Loss................... (9,142)
Accumulated Net Realized Loss..................... (443)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 16,796
--------
NET ASSETS........................................ $174,549
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $172,141
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 17,538,339 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $9.82
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,408
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 246,580 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $9.77
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -------------- --------- ----------- -------------- --------- ------------
JPY 4,197,500 $ 36,840 8/06/97 U.S.$ 34,864 $ 34,864 $ (1,976)
JPY 2,796,324 24,542 8/06/97 U.S.$ 23,100 23,100 (1,442)
U.S.$ 22,475 22,475 8/06/97 JPY 2,796,324 24,542 2,067
JPY 2,421,150 21,249 8/06/97 U.S.$ 20,000 20,000 (1,249)
U.S.$ 19,454 19,454 8/06/97 JPY 2,421,150 21,249 1,795
U.S.$ 33,743 33,743 8/06/97 JPY 4,197,500 36,840 3,097
JPY 4,824,820 43,168 12/11/97 U.S.$ 44,000 44,000 832
--------- --------- ------------
$ 201,471 $ 204,595 $ 3,124
---------
--------- --------- ------------
--------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 7.2%
Brazil 47.4%
Chile 8.4%
Colombia 2.1%
Mexico 27.4%
Peru 2.1%
Venezuela 3.1%
Other 2.3%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 44.08% 59.31% 31.55%
PORTFOLIO -- CLASS B.... 43.94 59.04 61.74
INDEX -- CLASS A........ 40.50 45.84 19.16
INDEX -- CLASS B........ 40.50 45.84 41.20
</TABLE>
1. The MSCI Emerging Markets Global Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Argentina,
Brazil, Chile, Colombia, Peru, Mexico and Venezuela (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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 investment objective of the Latin American Portfolio is long-term capital
appreciation through investment primarily in equity securities of Latin American
issuers. The Portfolio may also invest in debt securities issued or guaranteed
by a Latin American government or governmental entity.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 44.08% and 59.31%, respectively, for the Class A shares; and
43.94% and 59.04%, respectively, for the Class B shares as compared to total
returns of 40.50% and 45.84%, respectively, for the Morgan Stanley Capital
International (MSCI) Emerging Markets Global Latin America Index (the "Index").
From inception on January 18, 1995 to June 30, 1997, the average annual total
return of Class A was 31.55% as compared to 19.16% for the Index. From inception
on January 2, 1996 to June 30, 1997, the average annual total return of Class B
was 61.74% as compared to 41.20% for the Index.
Overall the Latin American equity markets enjoyed a remarkable quarter, as the
MSCI Latin America Index advanced 22.0% for the three months ended June 30,
1997. The favorable performance was the result of a confluence of factors,
particularly positive momentum on the privatization front in Brazil, a
broadening of the economic recovery in Mexico, and an end to the drought in
Chile.
ARGENTINA
Argentina did not contain any particularly market-impacting news during the
quarter, and advanced largely in sympathy with the region. The strong economic
recovery, led by construction and mining, continues to accelerate and this has
provided a sound backdrop for the equity market. There has been little evidence
of a consumer recovery and, with unemployment hovering in the high teens, we do
not expect to see a robust turnaround in the near future. Our overall outlook
remains for the recovery to continue and center on infrastructure and fixed
investment, for the political environment to remain benign, and the equity
market to move more or less in line with the region.
BRAZIL
Brazil again propelled the region, both on the news front as well as the
performance front. Setting the tone for the second quarter was the successful
privatization of mining giant CVRD to a private consortium at a 20% premium to
the minimum price.
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
Another boost was the positive change in tariffs for both the telecommunications
and electric utility industries; this measure not only should favorably impact
profitability in both sectors, but is also a positive step toward eventual
privatization. On the political reform front, there was not much tangible
progress made in the second quarter, but industry level improvements as well as
local liquidity factors -- i.e. a flow of local money from fixed income funds to
equity funds -- dominated the market's performance.
Looking ahead, we think the Brazilian market has perhaps verged on getting ahead
of itself. While we continue to be extremely bullish on the positive fundamental
developments in core segments of the economy, we are beginning to get the sense
that perhaps valuation and sentiment levels have reached the point where too
much good news is "being priced in." As such, we have modestly cut back on our
weighting in the market, and have a market weight position; that market weight
position is represented by stock specific ideas, as we are actually underweight
most of the blue chip "Bras" stocks.
CHILE
Chile, interestingly, is out of step with the rest of the region even though its
stock market has performed in line. The Chilean economy is in the midst of a
Chile-style "slowdown" (i.e. GDP growth of 5-6%) from an unsustainably brisk
pace last year, as the monetary authorities have engineered a soft landing. As a
result, interest rates have in fact been loosened this year in order to pick up
the economic pace and to acknowledge that inflationary pressures have been
contained. This easing of monetary policy has provided a favorable climate for
equity performance, notwithstanding the fact that overall earnings growth in the
market is lackluster.
Another important item driving the market, and in particular affecting the
all-important electric utility sector (roughly 35% of the total market
capitalization), has been the drought. The drought has had the effect of raising
costs for certain electric generators, thereby dampening profits. As the drought
ended in the second quarter due to a deluge of rain (in fact there were,
ironically enough, floods) the electric utility sector stocks surged as
investors' concerns eased.
COLOMBIA
Colombia was the laggard in the region as its market is the least correlated
with the region and boasted the best performance going in to the second quarter.
Further, economic growth continued to surprise on the downside as the
government's efforts to dampen stubborn inflationary pressures has slowed
economic activity. While valuation levels are still the cheapest in the region,
we feel that the country warrants a discount owing to its uncertain economic
outlook and political woes.
MEXICO
Mexico staged a dramatic turnaround in the latter part of the second quarter.
After having fallen precipitously early in the quarter on the back of
disappointing first quarter corporate earnings published in April, sentiment
subsequently reversed itself as a) signs of a broadening of the economic
recovery began to emerge, and b) investors began to realize that the
congressional and mayoral elections in July would be a benign event. These two
processes restored confidence to the market and it paced the region in the
latter part of the quarter.
We feel strongly that Mexico has made great strides to restore balance to its
fiscal, trade, and current accounts. The economy is on a solid footing,
employment levels are picking up, and the consumer is (albeit slowly)
recovering. Further, the political arena has opened up considerably. Free,
democratic elections will take place in July in what is widely viewed to be the
fairest electoral process Mexico has seen in this century. Although an opening
up of the political arena is not without risks, we believe that it is healthy
for the long-run sustainability of the economic program.
PERU
Peru had a strong quarter, stemming in large part from a dramatic turnaround in
the economy as well as from a dramatic end to the hostage crisis. GDP growth is
expected to recover quite strongly from the slowdown in 1996, and this should
bode well for earnings growth. However, the economy suffers from a natural
resource dependence which makes it vulnerable to commodity price swings, and the
political scenario is relatively uncertain. President Fujimori, while enjoying a
short spurt in popularity after the successful rescue of the hostages, continues
to plummet in popularity ratings and this has engendered a decline in confidence
in the country. We continue to underweight the market.
- --------------------------------------------------------------------------------
Latin American Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
VENEZUELA
After lagging in the first quarter, Venezuela played catch-up and paced the
region in the second quarter. Strong first quarter earnings by bellwether
telephone stock CANTV buoyed the market, and this was subsequently followed by a
successful resolution of the long-awaited "severance program," which will entail
short-term costs for private and government companies, but is a long-term
positive as it helps liberalize the labor markets. Overall we are constructive
on the Venezuelan market as the government appears genuinely committed to
following through on its reform program.
Robert L. Meyer
PORTFOLIO MANAGER
Andy Skov
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (97.7%)
ARGENTINA (7.2%)
(a)406,390 Acindar, Class B............................. $ 1,040
147,977 Banco del Suquia, Class B.................... 576
(a)10,106 Disco ADR.................................... 400
6,475 Quilmes...................................... 66
26,493 Quilmes ADR.................................. 308
167,291 Siderar, Class A............................. 686
(e)10,365 Siderar ADR.................................. 337
5,405 Telecom Argentina ADR........................ 284
25,143 Telefonica Argentina ADR..................... 871
35,595 YPF ADR...................................... 1,095
----------
5,663
----------
BRAZIL (47.4%)
(a,d,q)11,847,000 Banco Nacional (Preferred)................... 1
(q)2,390,000 Brahma (Preferred)........................... 1,820
(q)39,655 Brahma ADR (Preferred)....................... 607
(q)14,069 CEMIG ADR (Preferred)........................ 708
(e,q)1,042 CEMIG ADR (Preferred)........................ 54
(q)51,779,010 CEMIG (Preferred)............................ 2,669
(q)2,516,000 Coteminas (Preferred)........................ 982
(q)2,098,316 CPFL (Preferred)............................. 349
(a,q)6,510,258 CRT (Preferred).............................. 9,796
(q)29,986 CVRD (Preferred)............................. 663
(q)34,986 CVRD (Preferred B)........................... --
(q)6,170 CVRD ADR (Preferred)......................... 138
4,756,000 Eletrobras................................... 2,659
71,750 Eletrobras ADR............................... 2,002
(q)742,000 Eletrobras, Class B (Preferred).............. 442
(q)5,375 Eletrobras, Class B ADR (Preferred).......... 159
(q)13,284,000 Ericsson Telecomunicacoes (Preferred)........ 790
(q)562,000 Iven (Preferred)............................. 384
949,000 Lightpar..................................... 378
(e,q)13,460 Lojas Arapua ADR (Preferred)................. 223
(q)32,237,000 Lojas Arapua (Preferred)..................... 524
(q)18,223,000 Lojas Renner (Preferred)..................... 934
(q)21,450 Pao de Acucar ADR (Preferred)................ 492
(q)9,213,000 Petrobras (Preferred)........................ 2,559
11,474,000 Telebras..................................... 1,556
(q)17,185 Telebras ADR (Preferred)..................... 2,608
(q)21,683,000 Telebras (Preferred)......................... 3,289
(q)20,120 Unibanco GDR (Preferred)..................... 747
----------
37,533
----------
CHILE (8.4%)
16,265 Andina, Class B ADR.......................... 339
56,325 CCU ADR...................................... 1,236
37,083 Chilectra ADR................................ 1,067
10,380 Enersis ADR.................................. 369
18,870 Quinenco ADR................................. 349
91,193 Santa Isabel ADR............................. 2,941
19,400 Unimarc ADR.................................. 364
----------
6,665
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COLOMBIA (2.1%)
1,796,923 Banco de Colombia............................ $ 659
141,690 Bavaria...................................... 1,017
----------
1,676
----------
MEXICO (27.4%)
(a)203,429 Banacci, Class B............................. 523
(a)78,246 Banacci, Class L............................. 183
(a)406,140 Bancomer, Class B............................ 196
(a,e)3,224 Bancomer, Class B ADR........................ 31
(a)306,754 Banorte, Class B............................. 320
59,553 Carso, Class A1.............................. 415
2,790 Carso ADR.................................... 39
259,935 Cemex CPO.................................... 1,131
34,620 Cemex ADR CPO................................ 300
89,290 Cemex, Class B............................... 437
90,910 Cemex, Class B ADR........................... 876
42,505 Cifra, Class B............................... 79
78,823 Cifra, Class B ADR........................... 145
34,270 Cifra, Class C............................... 55
16,072 Coke Femsa ADR............................... 830
669,655 FEMSA, Class B............................... 3,993
(e)46,440 FEMSA ADR.................................... 276
25,975 Grupo Modelo, Class C........................ 180
12,020 Hylsamex GDR (Registered).................... 359
862,900 Kimberly, Class A............................ 3,459
123,225 Maseca, Class B.............................. 135
39,395 Maseca, Class B ADR.......................... 650
14,936 Panamco...................................... 491
324,150 Soriana, Class B............................. 815
(a)21,115 Tamsa, ADR................................... 389
(a)76,145 Televisa GDR CPO............................. 2,313
63,927 Telmex ADR................................... 3,053
----------
21,673
----------
PERU (2.1%)
49,220 Banco Wiese ADR.............................. 320
5,900 Credicorp.................................... 130
328,694 Ferreyros.................................... 378
14,000 Luz Del Sur.................................. 16
30,550 Peru, Class B ADR............................ 800
----------
1,644
----------
VENEZUELA (3.1%)
24,660 CANTV ADR.................................... 1,063
832,177 Electricidad de Caracas...................... 1,333
6,580 Mavesa ADR................................... 67
----------
2,463
----------
TOTAL COMMON STOCKS (Cost $64,274)............................... 77,317
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)11,000 Lojas Arapua, expiring 12/31/97 (Cost $0).... $ --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------------
FOREIGN CURRENCY (0.1%)
ARP 1 Argentine Peso............................... 1
COP 38,893 Colombian Peso............................... 36
MXP 497 Mexican Peso................................. 63
PSS 2 Peruvian New Sol............................. 1
VEB 2,164 Venezuelan Bolivar........................... 4
----------
TOTAL FOREIGN CURRENCY (Cost $105)............................... 105
----------
TOTAL INVESTMENTS (97.8%) (Cost $64,379)......................... 77,422
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (7.7%)
Cash......................................... 1,441
Receivable for Investments Sold.............. 2,708
Receivable for Portfolio Shares Sold......... 1,609
Dividends Receivable......................... 293
Other........................................ 17 6,068
----------
LIABILITIES (-5.5%)
Payable for Investments Purchased............ (3,402)
Payable for Portfolio Shares Redeemed........ (449)
Unrealized Loss on Foreign Currency Exchange
Contracts.................................. (203)
Investment Advisory Fees Payable............. (184)
Custodian Fees Payable....................... (51)
Payable for Foreign Taxes.................... (13)
Administrative Fees Payable.................. (10)
Sub-Administration Fees Payable.............. (3)
Distribution Fees Payable.................... (2)
Directors' Fees & Expenses Payable........... (2)
Other Liabilities............................ (31) (4,350)
---------- --------
NET ASSETS (100%)........................................ $ 79,140
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 54,738
Undistributed Net Investment Income.... 143
Accumulated Net Realized Gain.......... 11,232
Unrealized Appreciation on Investments
and Foreign Currency Translations
(Net of accrued foreign tax of $13 on
unrealized appreciation on
investments)......................... 13,027
----------
NET ASSETS............................. $ 79,140
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $75,766
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 4,644,502 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $16.31
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $3,374
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 207,292 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $16.28
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements.
(e) -- 144A Security -- Certain conditions for public sale may exist.
(q) -- Non-voting stock
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 364 0.5%
Consumer Goods......................... 17,327 21.9
Energy................................. 15,844 20.0
Finance................................ 3,685 4.6
Materials.............................. 11,482 14.5
Multi-Industry......................... 2,193 2.8
Services............................... 26,422 33.4
-------- ---
$ 77,317 97.7%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 11.1%
Consumer Cyclical 33.5%
Consumer Staples 13.7%
Diversified 14.7%
Energy 1.3%
Finance 20.3%
Materials 1.1%
Services 2.0%
Technology 1.4%
Other 0.9%
</TABLE>
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.......... 13.76% 30.71% 42.33%
PORTFOLIO -- CLASS B.......... 13.71 30.50 36.35
LIPPER CAP. APPRECIATION INDEX
-- CLASS A................... 10.16 14.87 22.61
S&P 500 INDEX -- CLASS A...... 20.61 34.70 32.98
LIPPER CAP. APPRECIATION INDEX
-- CLASS B................... 10.16 14.87 16.89
S&P 500 INDEX -- CLASS B...... 20.61 34.70 29.55
</TABLE>
1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 Index is an unmanaged index of common
stocks.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE PORTFOLIO'S CONCENTRATION OF ITS ASSETS IN A SMALLER NUMBER OF ISSUERS AND
ITS USE OF EQUITY-LINKED SECURITIES WILL SUBJECT IT TO GREATER RISKS. 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.
The Aggressive Equity Portfolio seeks capital appreciation through a
concentrated, non-diversified portfolio of corporate equity and equity-linked
securities. Short sales and options can be used to enhance performance. It is
anticipated that the Portfolio will hold thirty names or less, although it may
hold more from time to time.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.76% and 30.71%, respectively, for the Class A shares; and
13.71% and 30.50%, respectively, for the Class B shares as compared to total
returns of 10.16% and 14.87%, respectively, for the Lipper Capital Appreciation
Index and 20.61% and 34.70%, respectively, for the S&P 500 Index. From inception
on March 8, 1995 to June 30, 1997, the average annual total return of Class A
was 42.33% as compared to 22.61% for the Lipper Capital Appreciation Index and
32.98% for the S&P 500 Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 36.35% as compared to
16.89% for the Lipper Capital Appreciation Index and 29.55% for the S&P 500
Index.
While the Portfolio delivered strong returns in the first quarter (3.60% versus
2.69% for the S&P 500 and -4.54% for the Lipper Capital Appreciation Index), the
June quarter was a difficult period for the Portfolio relative both to the
overall U.S. market and to our large cap growth benchmarks.
Our investment style is to concentrate quite heavily when our conviction in a
security is high and we believe the growth fundamentals of a company are very
strong. We also concentrate when positive earnings surprise vis-a-vis consensus
expectations is likely. But it is not a "surprise" if the stock is already owned
in virtually every growth portfolio and has surged. We tend to feel more
comfortable with stocks that may be temporarily under a cloud but where growth
fundamentals remain intact. We refer to this as "headline" risk as opposed to
earnings risk.
Since late 1996, we have felt that many of the high quality, large
capitalization growth stocks are not attractive investments, favoring instead
higher beta, less well established growth company stocks where growth is rapid
and the price/earnings ratio to growth rate is reasonable. Our call was either
wrong or painfully early. In both the first and second quarters of 1997, many of
the largest capitalization stocks
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
moved sharply higher, typically without any upward earnings estimate revisions
and sometimes in the face of downward revisions. The following statistics
illustrate this point.
<TABLE>
<CAPTION>
% GAIN IN RECENT P/E ON AVERAGE P/E
FIRST HALF ESTIMATE SUSTAINABLE PROJECTED -----------------
1997 REVISIONS GROWTH RATE 1997 EARNINGS 1994 1995 1996
------------- ----------- ---------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GE............ 33% Up 13% 26.0 14.9 15.8 19.4
Merck......... 28% Down 14% 26.9 15.4 19.6 23.2
Coca Cola..... 28% Flat 18% 40.1 24.3 26.5 32.1
Gillette...... 22% Down 18% 36.4 21.9 24.9 39.1
Disney........ 14% Down 18% 29.4 21.7 20.2 32.8
</TABLE>
Many factors are driving the powerful bull market in U.S. stocks, including
strong corporate profit growth, sustained low inflation, moderate interest rates
and increased shareholder orientation among corporate managements. But what is
driving the strong performance of the blue chip stocks versus the broader equity
market? There are a variety of possible factors, but the explosion in passive
index investing is likely the most important. Active managers in U.S. stocks
underperformed index funds by a wide margin in 1994, 1995, 1996 and again in
1997 (year-to-date). This has led to a perverse situation in which larger cap
means better due to money flows. This is further compounded by the buying power
of price momentum investors who are purchasing blue chips on the basis of the
strong uptrends in stock prices.
We do not know where all this will lead, but one thing is clear: stocks cannot
rise faster than the underlying companies' growth rates over the long term. Our
best guess is that the blue chips will begin to flatten out as investors accept
more risk for greater reward. Our largest holding at June 30, HFS, represents
the type of stock we think should outperform over the next 12-18 months.
HFS, a consumer services and franchising company that recently announced a
merger with direct marketer CUC International, is trading at about 25 times
projected 1997 earnings, with a near-term growth rate of 30% plus and a
sustainable growth rate, we think, of 20-25%. The balance sheet, pro forma for
the merger, is underleveraged and free cash flow generation is extremely strong.
Consensus earnings estimates should rise over the next 12 months. Looking out 18
months, we could see HFS trading, conservatively, at 20-25 times projected 1999
earnings, within a range of $82-102 (up 32-65%). But a much higher multiple is
conceivable given the price/earnings to growth ratios enjoyed by the blue chip
growth stocks. Other names in the Portfolio at June that fit into this category
of high beta/low P/E ratio to growth include: Clear Channel Communications,
Gtech, KIII Communications and Cracker Barrel.
Our second largest holding at June 30 was Philip Morris. After taking profits
and downsizing our big tobacco bet in early 1997, shareholders may wonder why we
added to it again in the second quarter. The tobacco stocks have once again
drifted to huge P/E discounts to their true peer group of stocks -- consumer
products, food, beverage and drug stocks. The result is that the tobacco stocks
appear to be in a "win-win" position, much like last year when they had sold off
in the spring and again in the autumn on litigation fears. The current fear is
that the recently proposed $368 billion global settlement will not make it
through Congress without more pain being inflicted on the industry. Our view is
that, as usual, the industry is in a much stronger position in this battle than
what is portrayed in the media. We say this for several reasons:
- - Consumers have been warned for 30 years, and the product cannot be made
illegal since it creates gigantic tax revenues and prohibition would lead to a
black market. Combining income and excise taxes, Philip Morris is the largest
taxpayer in America.
- - Despite all the noise in the media, plaintiffs continue to have a very hard
time battling the deep-pocketed cigarette industry. After winning a case last
August, the plaintiffs lost the next two cases. The industry has never paid a
dime to plaintiffs. Hence, while health advocates and other anti-tobacco
activists scream about wanting the industry to feel more pain, the plaintiffs'
bar and state attorneys general want the deal to go through.
- - Finally, and importantly, business is strong and we expect solid EPS growth in
1998 and beyond.
Our third largest holding at June 30 was United Technologies, a global
multi-industry company with interests in jet engines (Pratt and Whitney), air
conditioning (Carrier), elevators (Otis), automotive parts (UT Automotive) and
helicopters (Sikorsky). Like our other multi-industry holdings -- Allied Signal,
Textron and ITT Industries -- United Technologies provides some cyclical
exposure to the Portfolio. But these companies are really "growth cyclicals"
benefiting from increased international demand, rising profit margins due to
restructuring and substantial free cash flow generation. We believe each of
these
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
companies is executing a GE-type transformation from cyclical to stable growth
company. We expect UTX and Allied Signal to each grow in excess of 15%
compounded over the next 3-5 years, with Textron growing about 15%. ITT is a
cheaper, turnaround play but fundamentals are strong.
Kurt A. Feuerman
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (99.1%)
CAPITAL GOODS-CONSTRUCTION (11.1%)
AEROSPACE & DEFENSE (11.1%)
41,100 Boeing Co......................................... $ 2,181
(a)25,700 Litton Industries, Inc............................ 1,242
24,300 McDonnell Douglas Corp............................ 1,665
25,300 Thiokol Corp...................................... 1,771
116,400 United Technologies Corp.......................... 9,661
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 16,520
----------
CONSUMER-CYCLICAL (33.5%)
BROADCAST-RADIO & TELEVISION (2.5%)
(a)47,900 Clear Channel Communications, Inc................. 2,946
15,800 Time Warner, Inc.................................. 762
----------
3,708
----------
ENTERTAINMENT & LEISURE (3.1%)
(a)144,300 GTECH Holdings Corp............................... 4,654
----------
FOOD SERVICE & LODGING (2.3%)
80,300 Cracker Barrel Old Country Store, Inc............. 2,128
24,700 McDonald's Corp................................... 1,193
----------
3,321
----------
GAMING & LODGING (19.5%)
(a)498,900 HFS, Inc.......................................... 28,936
----------
LEISURE RELATED (1.0%)
81,400 International Game Technology..................... 1,445
----------
PUBLISHING (2.5%)
(a)311,500 K-III Communications Corp......................... 3,738
----------
RETAIL-GENERAL (2.6%)
56,700 Home Depot, Inc................................... 3,909
----------
TOTAL CONSUMER-CYCLICAL..................................... 49,711
----------
CONSUMER-STAPLES (13.7%)
BEVERAGES (4.1%)
266,700 Coca Cola Enterprises, Inc........................ 6,134
----------
HEALTH CARE SUPPLIES & SERVICES (2.1%)
30,300 Aetna, Inc........................................ 3,102
----------
CIGARETTES (7.5%)
249,200 Philip Morris Cos., Inc........................... 11,058
----------
TOTAL CONSUMER-STAPLES...................................... 20,294
----------
DIVERSIFIED (14.7%)
38,100 Allied Signal, Inc................................ 3,200
(a)156 Berkshire Hathaway, Inc., Class A................. 7,363
63,300 ITT Industries, Inc............................... 1,630
42,200 Loews Corp........................................ 4,225
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
50,800 Textron, Inc...................................... $ 3,372
102,300 Viad Corp......................................... 1,969
----------
TOTAL DIVERSIFIED............................................. 21,759
----------
ENERGY (1.3%)
COAL, GAS, & OIL (1.3%)
(a)25,800 Diamond Offshore Drilling, Inc.................... 2,016
----------
FINANCE (20.3%)
BANKING (7.1%)
35,800 BankAmerica Corp.................................. 2,311
25,100 Citicorp.......................................... 3,026
19,400 Wells Fargo & Co.................................. 5,228
----------
10,565
----------
FINANCIAL SERVICES (4.7%)
33,400 American Express Co............................... 2,488
19,250 Franklin Resources, Inc........................... 1,397
24,200 Student Loan Marketing Association................ 3,073
----------
6,958
----------
INSURANCE (8.5%)
34,000 Ace Ltd........................................... 2,512
52,000 CMAC Investment Corp.............................. 2,483
(a)34,500 CNA Financial Corp................................ 3,638
30,700 MGIC Investment Corp.............................. 1,472
17,400 Progressive Corp.................................. 1,514
37,300 USF&G Corp........................................ 895
----------
12,514
----------
TOTAL FINANCE............................................... 30,037
----------
MATERIALS (1.1%)
CHEMICALS (1.1%)
25,600 E.I. du Pont de Nemours & Co...................... 1,610
----------
SERVICES (2.0%)
TRANSPORTATION (2.0%)
(a)15,800 AMR Corp.......................................... 1,462
(a)42,100 US Airways Group, Inc............................. 1,474
----------
TOTAL SERVICES.............................................. 2,936
----------
TECHNOLOGY (1.4%)
ELECTRONICS (0.4%)
20,200 Watkins-Johnson Co................................ 621
----------
OFFICE EQUIPMENT (1.0%)
19,200 Xerox Corp........................................ 1,514
----------
TOTAL TECHNOLOGY............................................ 2,135
----------
TOTAL COMMON STOCKS (Cost $134,697)........................... 147,018
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 4,736 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $4,737
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,818 (Cost $4,736)..... $ 4,736
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (102.3%) (Cost $139,433)............... 151,754
--------
OTHER ASSETS (7.5%)
Cash....................................... $ 2,978
Receivable for Securities Sold Short....... 5,745
Receivable for Investments Sold............ 2,152
Dividends Receivable....................... 136
Receivable for Portfolio Shares Sold....... 75
Interest Receivable........................ 1 11,087
----------
LIABILITIES (-9.8%)
Payable for Investments Purchased.......... (6,532)
Securities Sold Short, at Value (Proceeds
$5,745).................................. (6,332)
Payable for Portfolio Shares Redeemed...... (1,344)
Investment Advisory Fees Payable........... (256)
Administrative Fees Payable................ (18)
Custodian Fees Payable..................... (17)
Distribution Fees Payable.................. (7)
Directors' Fees & Expenses Payable......... (3)
Other Liabilities.......................... (33) (14,542)
---------- --------
NET ASSETS (100%)........................................ $148,299
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 126,802
Undistributed Net Investment Income.... 29
Accumulated Net Realized Gain.......... 9,734
Unrealized Appreciation on Investments
and Securities Sold Short............ 11,734
----------
NET ASSETS............................. $ 148,299
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $ 133,897
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 8,163,568 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $16.40
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $14,402
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 878,973 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $16.39
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT (NOTE A-9)
<S> <C> <C>
VALUE
SHARES (000)
- --------- ---------
CUC International, Inc. (Total Proceeds
245,300 $5,745).............................. $ 6,332
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods -
Construction 0.2%
Consumer - Cyclical 17.3%
Consumer - Staples 17.7%
Diversified 0.4%
Energy 3.8%
Finance 9.4%
Materials 0.3%
Services 17.6%
Technology 32.8%
Other 0.5%
</TABLE>
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO CLASS --
A................... 0.74% -2.42% 8.65% 11.25%
PORTFOLIO CLASS --
B................... 0.60 -2.65 N/A 2.79
INDEX -- CLASS A.... 11.70 21.69 20.67 16.22
INDEX -- CLASS B.... 11.70 21.69 N/A 23.02
</TABLE>
1. The NASDAQ Composite Index is an unmanaged index of common stocks.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 Emerging Growth Portfolio invests primarily in growth-oriented equity
securities of small-to-medium sized domestic corporations and, to a limited
extent, foreign corporations. Such companies generally have gross revenues
ranging from $10 million to $750 million.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 0.74% and -2.42%, respectively, for the Class A shares; and
0.60% and -2.65%, respectively, for the Class B shares as compared to total
returns of 11.70% and 21.69%, respectively, for the NASDAQ Composite Index (the
"Index"). For the five-year period ended June 30, 1997, the average annual total
return for Class A was 8.65% as compared to 20.67% for the Index. From inception
on November 1, 1989 to June 30, 1997, the average annual total return of Class A
was 11.25% as compared to 16.22% for the Index. From inception on January 2,
1996 to June 30, 1997, the average annual total return of Class B was 2.79% as
compared to 23.02% for the Index.
The first six months of 1997 have been a difficult period for the Portfolio. For
the first quarter of 1997, the Portfolio underperformed the Index (-11.63% for
the Class A shares vs. -5.37%). In April we saw a continuation of trends
experienced in the first quarter of 1997 when small capitalization stocks
significantly underperformed their larger cap brethren.
The small cap-weighted Russell 2000 index increased only 0.13% while the larger
cap S&P 500 rose 5.84% for the month. This underperformance, which began 12-18
months ago, came to an abrupt halt in May when small capitalization stocks
rallied strongly. The Russell 2000 climbed 11.1% with the S&P 500 up only 5.86%
for the month. In June, the Russell 2000 rose 4.1% in line with the S&P 500
which increased 4.4%.
During the period we increased the number of securities held in the Portfolio as
we broadened our exposure to the Health Care and Technology sectors while
introducing a number of new companies in the Energy, Finance and Real Estate
sectors. In Health Care, we increased our weighting across all sub-groups
including devices, services and pharmaceuticals. Notable additions include
Nitinol Medical, a recent IPO that has developed a number of innovative medical
devices and established marketing partnerships with two leading device
companies. In pharmaceuticals, we added to our position in Sangstat
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
Medical, a company that is awaiting approval on two potentially significant
drugs targeting the organ transplantation market.
In Technology, we added a number of new positions such as Tekelec Inc. and PMC
Sierra, and increased our weighting in such stocks as Linear Technology. Despite
the underperformance of the technology-laden NASDAQ and the relatively
lackluster performance of the Russell 2000 Technology sub-group over the month
of June our increased weighting proved to be an effective strategy due to strong
stock selection. In Energy, we introduced a number of new positions with
exposure to the offshore drilling markets which are currently experiencing a
favorable supply-demand imbalance resulting in increasing pricing. Notable
additions include Falcon Drilling and Ensco International.
We established a number of small positions in the Finance sector including Texas
Regional Bancshares and Triad Guaranty Inc. In the Real Estate sector we added
Crescent Real Estate Equities and Starwood Lodging Trust while eliminating our
position in Promus Hotel Corporation.
At June 30, the Portfolio held 135 positions and approximately 2% in cash. In
addition to focusing on stock selection during the weak period for small caps
one of our strategies has been to broaden out the securities portfolio in terms
of number of holdings. While we remain concentrated in our favorite issues, we
now have a very extensive "farm team" of names in the Portfolio -- smaller
positions in dynamic, high quality emerging growth companies in industries that
are newer to us (energy, REITS). This strategy of broadening the portfolio
contributed significantly to our outperformance in June.
Looking forward we believe the U.S. market's breadth late in the period, as
demonstrated by the recent strength in both large and small cap stocks, supports
our belief in the underlying vitality of Emerging Growth stocks (which previous
to May had been underperforming). While we have seen some narrowing of the
valuation gap between large and small caps we believe significant opportunity
remains in small cap stocks. We feel confident that the changes we have made in
the portfolio leave us well positioned to capitalize on this opportunity.
Kurt A. Feuerman
PORTFOLIO MANAGER
David R. Lascano
PORTFOLIO MANAGER
Christopher R. Blair
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (99.5%)
CAPITAL GOODS-CONSTRUCTION (0.2%)
ELECTRICAL EQUIPMENT (0.2%)
(a)2,900 Semtech Corp...................................... $ 106
----------
CONSUMER-CYCLICAL (17.3%)
AUTOMOTIVE (1.3%)
(a)20,200 O'Reilly Automotive, Inc.......................... 778
----------
BROADCAST-RADIO & TELEVISION (2.5%)
(a)18,800 Clear Channel Communications, Inc................. 1,156
(a)6,400 Heftel Broadcasting Corp., Class A................ 349
----------
1,505
----------
ENTERTAINMENT & LEISURE (3.1%)
8,700 Electronic Arts, Inc.............................. 293
(a)47,200 GTECH Holdings Corp............................... 1,522
----------
1,815
----------
FOOD SERVICE & LODGING (1.0%)
9,000 Cracker Barrel Old Country Store, Inc............. 237
(a)11,200 Einstein/Noah Bagel Corp.......................... 133
9,500 La Quinta Inns, Inc............................... 208
----------
578
----------
GAMING & LODGING (6.3%)
(a)64,300 HFS, Inc.......................................... 3,729
----------
PRINTING & PUBLISHING (2.0%)
(a)101,400 K-III Communications Corp......................... 1,217
----------
RETAIL-GENERAL (1.1%)
(a)23,800 General Nutrition Cos., Inc....................... 663
----------
TOTAL CONSUMER-CYCLICAL..................................... 10,285
----------
CONSUMER-STAPLES (17.7%)
BEVERAGES & TOBACCO (1.4%)
(a)10,400 Consolidated Cigar Holdings, Inc.................. 289
(a)14,000 Starbucks Corp.................................... 545
----------
834
----------
DRUGS (1.1%)
(a)22,800 Genzyme Corp.-General Division.................... 630
----------
HEALTH CARE SUPPLIES & SERVICES (14.3%)
(a)3,500 Advanced Health Corp.............................. 63
(a)2,000 Agouron Pharmaceuticals, Inc...................... 162
(a)18,700 Applied Imaging Corp.............................. 117
(a)13,200 ArQule, Inc....................................... 226
(a)5,300 Arterial Vascular Engineering, Inc................ 170
(a)8,400 Aviron............................................ 103
(a)6,000 CRA Managed Care, Inc............................. 313
(a)9,000 Dura Pharmaceuticals, Inc......................... 358
(a)9,300 Elan Corp. plc ADR................................ 421
(a)1,900 EmCare Holdings, Inc.............................. 69
(a)18,500 HEALTHSOUTH Corp.................................. 461
(a)13,400 Health Management Associates, Inc.,
Class A......................................... 382
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)6,000 Henry Schein, Inc................................. $ 184
9,300 Horizon Mental Health Management, Inc............. 209
(a)2,300 Human Genome Sciences, Inc........................ 76
(a)800 Incyte Pharmaceuticals, Inc....................... 52
(a)7,600 Inhale Therapeutic Systems........................ 182
7,500 Jones Medical Industries, Inc..................... 356
2,300 Manor Care, Inc................................... 75
(a)9,800 Medicis Pharmaceutical, Class A................... 487
(a)12,900 Mentor Corp....................................... 382
(a)19,000 Nitinol Medical Technologies, Inc................. 283
3,300 Novoste Corp...................................... 54
11,900 OccuSystems, Inc.................................. 345
4,100 Omnicare, Inc..................................... 129
(a)3,600 Parexel International Corp........................ 113
(a)1,700 Perclose, Inc..................................... 42
(a)20,100 Phycor, Inc....................................... 691
(a)1,300 Quintiles Transnational Corp...................... 90
(a)3,000 Renal Care Group, Inc............................. 125
(a)8,200 Renal Treatment Centers, Inc...................... 220
(a)22,200 SangStat Medical Corp............................. 500
(a)13,000 Total Renal Care Holdings, Inc.................... 522
(a)4,700 Vertex Pharmaceuticals, Inc....................... 179
(a)7,200 Vivus, Inc........................................ 171
(a)11,200 Zonagen, Inc...................................... 242
----------
8,554
----------
HOSPITAL SUPPLIES & SERVICES (0.9%)
(a)12,100 Pediatrix Medical Group, Inc...................... 554
----------
TOTAL CONSUMER-STAPLES...................................... 10,572
----------
DIVERSIFIED (0.4%)
7,400 Matthews International Corp., Class A............. 266
----------
ENERGY (3.8%)
COAL, GAS, & OIL (3.8%)
3,400 Camco International, Inc.......................... 186
23,900 Elan Energy, Inc.................................. 172
(a)8,500 ENSCO International, Inc.......................... 448
9,900 EVI, Inc.......................................... 416
(a)5,400 Falcon Drilling Co., Inc.......................... 311
(a)9,800 Forecenergy, Inc.................................. 298
(a)8,900 Newfield Exploration Co........................... 178
(a)5,200 Ocean Energy, Inc................................. 241
----------
TOTAL ENERGY................................................ 2,250
----------
FINANCE (9.4%)
BANKING (0.2%)
3,000 Texas Regional Bancshares, Inc., Class A.......... 124
----------
FINANCIAL SERVICES (4.7%)
12,800 Advanta Corp, Class A............................. 469
(a)14,400 BA Merchant Services, Inc., Class A............... 275
36,500 CMAC Investment Corp.............................. 1,743
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCE (CONT.)
FINANCIAL SERVICES (CONT.)
<TABLE>
<C> <S> <C>
6,700 FIRSTPLUS Financial Group, Inc.................... $ 228
(a)1,800 Triad Guaranty, Inc............................... 80
----------
2,795
----------
INSURANCE (0.6%)
7,500 Mutual Risk Management Ltd........................ 344
----------
REAL ESTATE (3.9%)
8,700 Beacon Properties Corp. REIT...................... 290
9,900 CarrAmerica Realty Corp. REIT..................... 285
(a)1,000 Crescent Operating, Inc........................... 12
10,000 Crescent Real Estate Equities, Inc................ 318
8,100 Federal Realty REIT............................... 219
17,600 Homeside, Inc..................................... 385
7,000 Starwood Lodging REIT............................. 299
13,000 Trizec Hahn Corp. REIT............................ 278
(a)14,600 Westfield America, Inc............................ 246
----------
2,332
----------
TOTAL FINANCE............................................... 5,595
----------
MATERIALS (0.3%)
BUILDING MATERIALS & COMPONENTS (0.1%)
(a)4,400 Kaynar Technologies, Inc.......................... 80
----------
MISCELLANEOUS (0.2%)
3,700 Delta & Pine Land Co.............................. 132
----------
TOTAL MATERIALS............................................. 212
----------
SERVICES (17.6%)
BUSINESS SERVICES (10.2%)
(a)16,200 Acxiom Corp....................................... 332
(a)23,900 BISYS Group, Inc.................................. 1,002
(a)9,400 Data Processing Resources Corp.................... 216
11,600 First USA Paymentech, Inc......................... 336
(a)10,200 Gartner Group, Inc., Class A...................... 366
4,900 JLK Direct Distribution, Inc., Class A............ 126
(a)3,100 Keane, Inc........................................ 161
(a)29,050 Paychex, Inc...................................... 1,115
(a)19,700 SunGard Data Systems, Inc......................... 916
(a)15,800 TeleTech Holdings, Inc............................ 414
(a)40,500 Whittman-Hart, Inc................................ 1,139
----------
6,123
----------
PROFESSIONAL SERVICES (7.4%)
(a)12,200 Apollo Group, Inc., Class A....................... 430
(a)15,200 Corrections Corp. of America...................... 604
(a)9,800 DeVry, Inc........................................ 265
9,500 G & K Services, Inc., Class A..................... 349
17,000 NFO Research, Inc................................. 421
(a)18,900 Robert Half International, Inc.................... 889
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)30,300 Romac International, Inc.......................... $ 992
(a)18,200 Wilmar Industries, Inc............................ 448
----------
4,398
----------
TOTAL SERVICES.............................................. 10,521
----------
TECHNOLOGY (32.8%)
COMPUTERS (1.1%)
(a)25,100 PMC-Sierra, Inc................................... 656
----------
ELECTRONICS (12.2%)
(a)4,000 Altera Corp....................................... 202
(a)11,200 Fusion Systems Corp............................... 443
(a)16,000 Kent Electronics Corp............................. 587
(a)12,900 KLA............................................... 629
(a)11,100 Level One Communications, Inc..................... 425
32,700 Linear Technology Corp............................ 1,688
(a)8,900 Maxim Integrated Products, Inc.................... 505
27,150 Molex, Inc., Class A.............................. 942
(a)300 Sierra Semiconductor Corp......................... 8
29,400 Watkins-Johnson Co................................ 904
(a)19,700 Xilinx, Inc....................................... 965
----------
7,298
----------
OFFICE EQUIPMENT (1.3%)
(a)12,900 Compuware Corp.................................... 616
(a)6,700 ONTRACK Data International, Inc................... 151
----------
767
----------
SOFTWARE SERVICES (9.4%)
(a)3,100 America Online, Inc............................... 172
4,800 Autodesk, Inc..................................... 184
(a)12,400 Avant Corp........................................ 400
(a)1,900 Baan Company, N.V................................. 131
(a)5,100 Citrix Systems, Inc............................... 224
(a)14,000 Peoplesoft, Inc................................... 739
(a)7,700 Siebel Systems, Inc............................... 248
(a)23,700 Sterling Commerce, Inc............................ 779
(a)15,500 Symantec Corp..................................... 302
(a)15,900 Transaction Systems Architects, Inc., Class A..... 545
(a)41,000 USCS International, Inc........................... 1,343
(a)19,100 Vantive Corp...................................... 540
----------
5,607
----------
TELECOMMUNICATIONS (8.8%)
(a)23,500 ADC Telecommunications, Inc....................... 784
(a)16,400 Advanced Fibre Communications..................... 991
(a)17,600 Glenayre Technologies, Inc........................ 288
(a)3,200 Globalstar Telecommunications, Ltd................ 96
(a)10,900 LCI International, Inc............................ 238
(a)3,000 LHS Group, Inc.................................... 131
(a)20,700 Mobile Telecommunications Technologies Corp....... 296
(a)14,000 Octel Communications Corp......................... 327
(a)11,200 Premisys Communications, Inc...................... 176
(a)6,600 Tekelec, Inc...................................... 233
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
TELECOMMUNICATIONS (CONT.)
<TABLE>
<C> <S> <C>
(a)15,300 Teleport Communications Group, Inc., Class A...... $ 520
(a)21,200 Tellabs, Inc...................................... 1,182
----------
5,262
----------
TOTAL TECHNOLOGY............................................ 19,590
----------
TOTAL COMMON STOCKS (Cost $50,424)............................ 59,397
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (1.9%)
REPURCHASE AGREEMENT (1.9%)
$ 1,159 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $1,159,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,182 (Cost $1,159)..... $ 1,159
----------
TOTAL INVESTMENTS (101.4%) (Cost $51,583)..................... 60,556
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.0%)
Receivable for Investments Sold............ $ 1,705
Receivable for Portfolio Shares Sold....... 87
Dividends Receivable....................... 4
Other...................................... 7 1,803
----------
LIABILITIES (-4.4%)
Payable for Investments Purchased.......... (2,208)
Bank Overdraft............................. (273)
Investment Advisory Fees Payable........... (133)
Custodian Fees Payable..................... (10)
Payable for Portfolio Shares Redeemed...... (9)
Administrative Fees Payable................ (8)
Directors' Fees & Expenses Payable......... (4)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (20) (2,666)
---------- ----------
NET ASSETS (100%)........................................ $ 59,693
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 27,578
Accumulated Net Investment Loss.................... (274)
Accumulated Net Realized Gain...................... 23,417
Unrealized Appreciation on Investments............. 8,972
----------
NET ASSETS......................................... $ 59,693
----------
----------
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $58,596
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,309,755 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $13.60
----------
----------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,097
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 81,061 outstanding $.001 par value
shares (authorized 500,000,000 shares)........... $13.53
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods-Construction 9.8%
Consumer Cyclical 24.7%
Consumer Staples 13.4%
Diversified 11.5%
Energy 2.6%
Finance 20.0%
Materials 1.1%
Services 2.6%
Technology 10.3%
Other 4.0%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 13.74% 27.71% 20.92% 18.01%
PORTFOLIO -- CLASS B... 13.62 27.35 N/A 29.80
INDEX -- CLASS A....... 20.61 34.70 19.78 18.05
INDEX -- CLASS B....... 20.61 34.70 N/A 29.55
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting sustainable earnings growth.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.74% and 27.71%, respectively, for the Class A shares; and
13.62% and 27.35%, respectively, for the Class B shares as compared to total
returns of 20.61% and 34.70%, respectively, for the S&P 500 Index (the "Index").
For the five-year period ended June 30, 1997, the average annual total return
for Class A was 20.92% as compared to 19.78% for the Index. From inception on
April 2, 1991 to June 30, 1997, the average annual total return of Class A was
18.01% as compared to 18.05% for the Index. From inception on January 2, 1996 to
June 30, 1997, the average annual total return of Class B was 29.80% as compared
to 29.55% for the Index.
After generating reasonable returns in the first quarter (the Portfolio gained
1.67% for Class A shares versus 2.69% for the S&P 500, 0.43% for the Russell
1000 Growth Index and -0.34 for the Lipper Growth Index), the June quarter was a
difficult period for the Portfolio relative both to the overall U.S. market and
to our large cap growth benchmarks. The Portfolio's Class A shares rose 11.87%
in the quarter, while the S&P 500, Russell 1000 Growth and Lipper Growth indices
rose 17.45%, 18.68% and 15.79%, respectively. Year-to-date the Portfolio's Class
A shares gained 13.58% against 20.58% for the S&P 500, 15.79% for the Russell
1000 Growth Index and 15.4% for the Lipper Growth Index.
Our investment style is to concentrate quite heavily when our conviction in a
security is high and we believe the growth fundamentals of a company are very
strong. We also concentrate when positive earnings surprise vis-a-vis consensus
expectations is likely. But it is not a "surprise" if the stock is already owned
in virtually every growth portfolio and has surged. We tend to feel more
comfortable with stocks that may be temporarily under a cloud but where growth
fundamentals remain intact. We refer to this as "headline" risk as opposed to
earnings risk.
Since late 1996, we have felt that many of the high quality, large
capitalization growth stocks are not attractive investments, favoring instead
higher beta, less
- --------------------------------------------------------------------------------
Equity Growth Portfolio
79
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
well established growth company stocks where growth is rapid and the
price/earnings ratio to growth rate is reasonable. Our call was either wrong or
painfully early. In both the first and second quarters of 1997, many of the
largest capitalization stocks moved sharply higher, typically without any upward
earnings estimate revisions and sometimes in the face of downward revisions. The
following statistics illustrate this point.
<TABLE>
<CAPTION>
% GAIN IN RECENT P/E ON AVERAGE P/E
FIRST HALF ESTIMATE SUSTAINABLE PROJECTED -----------------
1997 REVISIONS GROWTH RATE 1997 EARNINGS 1994 1995 1996
------------- ----------- ---------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GE............. 33% Up 13% 26.0 14.9 15.8 19.4
Merck.......... 28% Down 14% 26.9 15.4 19.6 23.2
Coca Cola...... 28% Flat 18% 40.1 24.3 26.5 32.1
Gillette....... 22% Down 18% 36.4 21.9 24.9 39.1
Disney......... 14% Down 18% 29.4 21.7 20.2 32.8
</TABLE>
Many factors are driving the powerful bull market in U.S. stocks, including
strong corporate profit growth, sustained low inflation, moderate interest rates
and increased shareholder orientation among corporate managements. But what is
driving the strong performance of the blue chip stocks versus the broader equity
market? There are a variety of possible factors, but the explosion in passive
index investing is likely the most important. Active managers in U.S. stocks
underperformed index funds by a wide margin in 1994, 1995, 1996 and again
year-to-date in 1997. This has led to a perverse situation in which larger cap
means better due to money flows. This is further compounded by the buying power
of price momentum investors who are purchasing blue chips on the basis of the
strong uptrends in stock prices.
We do not know where all this will lead, but one thing is clear: stocks cannot
rise faster than the underlying companies' growth rates over the long term. Our
best guess is that the blue chips will begin to flatten out as investors accept
more risk for greater reward. Our largest holding at June 30, HFS, represents
the type of stock we think should outperform over the next 12-18 months.
HFS, a consumer services and franchising company that recently announced a
merger with direct marketer CUC International, is trading at about 25 times
projected 1997 earnings, with a near-term growth rate of 30% plus and a
sustainable growth rate, we think, of 20-25%. The balance sheet, pro forma for
the merger, is underleveraged and free cash flow generation is extremely strong.
Consensus earnings estimates should rise over the next 12 months. Looking out 18
months, we could see HFS trading, conservatively, at 20-25 times projected 1999
earnings, within a range of $82-102 (up 32-65%). But a much higher multiple is
conceivable given the price/earnings to growth ratios enjoyed by the blue chip
growth stocks. Other names in the Portfolio at June that fit into this category
of high beta/low P/E ratio to growth include: Clear Channel Communications,
GTech, KIII Communications and Cracker Barrel.
Three groups that represent major commitments in the Portfolio are financial
services; multi-industry/aerospace; and tobacco. Financial services represented
approximately 20% of the Portfolio (based on net assets) at June 30, compared to
15% for the S&P 500 index and 6% for the Russell 1000 Growth Index. We have
believed for several years, and continue to feel, that selected financial
services companies enjoy robust growth fundamentals, yet investors tend to look
backwards and treat these stocks like the cyclical, interest-sensitive names
they used to be. We believe that the banking, credit card, brokerage/asset
management and insurance industries all have greater growth prospects than is
generally acknowledged. In addition, earnings estimates have been rising, even
in the face of the recent Fed Funds rate hike, and we feel confident that, for
the better positioned companies, further rate increases would not lead to
downward estimate revisions. In banking, our largest holding is Wells Fargo, and
we also hold meaningful positions in Citicorp, BankAmerica and Chase. We own
American Express, the dominant player in credit cards with a strong money
management arm. In the brokerage/asset management area we own Merrill Lynch and
Franklin Resources and in insurance our significant holdings include Aetna,
CMAC, Ace Limited, CNA Financial and Berkshire Hathaway (which owns 100% of
Geico).
Our third largest holding at June 30 was United Technologies, a global
multi-industry company with interests in jet engines (Pratt and Whitney), air
conditioning (Carrier), elevators (Otis), automotive parts (UT Automotive) and
helicopters (Sikorsky). Like our other multi-industry holdings --Allied Signal,
Textron and ITT Industries -- United Technologies provides some cyclical
exposure to the Portfolio. But these companies are really "growth cyclicals"
benefiting from increased international demand, rising profit margins due to
restructuring and substantial free cash flow generation. We believe each of
these companies is executing a GE-type transformation from cyclical to stable
growth company. We expect United Technologies and Allied Signal to each grow in
excess of 15%
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
compounded over the next 3-5 years, with Textron growing about 15%. ITT is a
cheaper, turnaround play but fundamentals are strong.
United Technologies is also appealing because its Pratt and Whitney division is
benefiting from the strong upcycle in the commercial aircraft industry. The
purest play in this, of course, is Boeing, which is also a major holding in the
Portfolio. Boeing is expected to close on its merger with McDonnell Douglas this
summer. We hold a combined position of about 3% in Boeing and McDonnell Douglas.
The new Boeing will be a unique and exciting cyclical growth story due to a
confluence of positives:
- - With Douglas Aircraft gone, Boeing will be the larger of two players in a
global duopoly, perfectly positioned to benefit from rising demand for
commercial aircraft.
- - As one of the largest defense contractors, Boeing should be far less
vulnerable to a weakening economy than before.
- - It is very unlikely that Boeing will need to develop a new aircraft during
this cycle, instead focusing on less costly derivatives of existing models.
This should drive profit margins much higher.
- - Earnings momentum should be very strong, with EPS growth of 40% projected in
1998, followed by close to 20% growth in 1999.
- - The balance sheet is underleveraged, meaning the company may begin to
repurchase shares by 1999.
After taking profits and downsizing our big tobacco bet in early 1997, we added
to it again in the second quarter. Why? The tobacco stocks have once again
drifted to huge P/E discounts to their true peer group of stocks -- consumer
products, food, beverage and drug stocks. The result is that the tobacco stocks
appear to be in a "win-win" position, much like last year when they had sold off
in the spring and again in the autumn on litigation fears. The current fear is
that the recently proposed $368 billion global settlement will not make it
through Congress without more pain being inflicted on the industry. Our view is
that, as usual, the industry is in a much stronger position in this battle than
what is portrayed in the media. We say this for these reasons:
- - Consumers have been warned for 30 years, and the product cannot be made
illegal since it creates gigantic tax revenues and prohibition would lead to a
black market. Combining income and excise taxes, Philip Morris is the largest
taxpayer in America.
- - Despite all the noise in the media, plaintiffs continue to have a very hard
time battling the deep-pocketed cigarette industry. After winning a case last
August, the plaintiffs lost the next two cases. The industry has never paid a
dime to plaintiffs. Hence, while health advocates and other anti-tobacco
activists scream about wanting the industry to feel more pain, the plaintiffs'
bar and state attorneys general want the deal to go through.
- - Finally, and importantly, business is strong and we expect solid EPS growth in
1998 and beyond.
We own two tobacco stocks, Philip Morris and Loews. Philip Morris is our second
largest holding and together the two stocks account for about 9% of the
Portfolio (based on net assets).
Kurt Feuerman
PORTFOLIO MANAGER
Margaret K. Johnson
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Equity Growth Portfolio
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (96.0%)
CAPITAL GOODS-CONSTRUCTION (9.8%)
AEROSPACE & DEFENSE (9.8%)
121,600 Boeing Co......................................... $ 6,452
(a)72,700 Gulfstream Aerospace Corp......................... 2,145
(a)90,900 Litton Industries, Inc............................ 4,392
117,689 McDonnell Douglas Corp............................ 8,062
70,100 Thiokol Corp...................................... 4,907
291,500 United Technologies Corp.......................... 24,195
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 50,153
----------
CONSUMER-CYCLICAL (24.7%)
AUTOMOTIVE (1.0%)
60,600 Ford Motor Co..................................... 2,288
(a)70,000 O'Reilly Automotive, Inc.......................... 2,695
----------
4,983
----------
BROADCAST-RADIO & TELEVISION (3.1%)
(a)166,800 Clear Channel Communications, Inc................. 10,258
(a)54,950 Heftel Broadcasting Corp., Class A................ 3,036
55,200 Time Warner, Inc.................................. 2,663
----------
15,957
----------
ENTERTAINMENT & LEISURE (2.7%)
(a)376,900 GTECH Holdings Corp............................... 12,155
(a)58,100 WMS Industries, Inc............................... 1,456
----------
13,611
----------
FOOD SERVICE (2.7%)
282,500 Cracker Barrel Old Country Store, Inc............. 7,486
(a)88,900 Einstein/Noah Bagel Corp.......................... 1,061
106,600 McDonald's Corp................................... 5,150
----------
13,697
----------
GAMING & LODGING (9.5%)
500 Doubletree Corp................................... 21
(a)759,200 HFS, Inc.......................................... 44,034
258,900 International Game Technology..................... 4,595
----------
48,650
----------
PUBLISHING (2.7%)
26,300 Gannett Co., Inc.................................. 2,597
(a)913,100 K-III Communications Corp......................... 10,957
----------
13,554
----------
RETAIL-FOODS (0.3%)
(a)59,500 Dominick's Supermarkets, Inc...................... 1,584
----------
RETAIL-GENERAL (2.7%)
174,200 Home Depot, Inc................................... 12,009
(a)68,500 Woolworth Corp.................................... 1,644
----------
13,653
----------
TOTAL CONSUMER-CYCLICAL..................................... 125,689
----------
CONSUMER-STAPLES (13.4%)
BEVERAGES (2.0%)
445,500 Coca Cola Enterprises, Inc........................ 10,247
----------
CIGARETTES (6.8%)
779,000 Philip Morris Cos., Inc........................... 34,568
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOOD (1.2%)
121,500 Campbell Soup Co.................................. $ 6,075
----------
HOSPITAL SUPPLIES & SERVICES (3.4%)
92,000 Aetna, Inc........................................ 9,418
105,300 Becton Dickinson & Co............................. 5,331
64,850 Columbia/HCA Healthcare Corp...................... 2,549
----------
17,298
----------
TOTAL CONSUMER-STAPLES...................................... 68,188
----------
DIVERSIFIED (11.5%)
116,400 Allied Signal, Inc................................ 9,778
(a)356 Berkshire Hathaway, Inc., Class A................. 16,803
84,900 Hillenbrand Industries............................ 4,033
218,900 ITT Industries, Inc............................... 5,637
101,400 Loews Corp........................................ 10,153
600 Service Corp. International....................... 20
124,600 Textron, Inc...................................... 8,270
2,400 U.S. Industries, Inc.............................. 85
209,200 Viad Corp......................................... 4,027
----------
TOTAL DIVERSIFIED............................................. 58,806
----------
ENERGY (2.6%)
COAL, GAS, & OIL (2.6%)
(a)32,000 AES Corp.......................................... 2,264
34,700 Amoco Corp........................................ 3,017
23,200 British Petroleum Co. plc ADR..................... 1,737
(a)47,600 Diamond Offshore Drilling, Inc.................... 3,719
2,700 Santa Fe International Corp....................... 92
19,600 Schlumberger, Ltd................................. 2,450
----------
TOTAL ENERGY................................................ 13,279
----------
FINANCE (20.0%)
BANKING (7.4%)
124,800 BankAmerica Corp.................................. 8,057
54,568 Chase Manhattan Corp.............................. 5,297
50,600 Citicorp.......................................... 6,100
51,900 H.F. Ahmanson & Co................................ 2,232
59,133 Wells Fargo & Co.................................. 15,936
----------
37,622
----------
FINANCIAL SERVICES (5.7%)
102,700 American Express Co............................... 7,651
83,900 Charles Schwab Corp............................... 3,414
5,600 CIGNA Corp........................................ 994
66,050 Franklin Resources, Inc........................... 4,793
89,400 Merrill Lynch & Co................................ 5,330
(a)36,200 Ocwen Financial Corp.............................. 1,181
44,800 Student Loan Marketing Association................ 5,690
----------
29,053
----------
INSURANCE (6.9%)
(a)121,800 Ace Ltd........................................... 8,998
223,700 CMAC Investment Corp.............................. 10,682
(a)39,200 CNA Financial Corp................................ 4,133
38,000 Equitable Of Iowa Cos............................. 2,128
53,600 MGIC Investment Corp.............................. 2,569
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
82
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCE (CONT.)
INSURANCE (CONT.)
<TABLE>
<C> <S> <C>
32,500 Progressive Corp.................................. $ 2,828
152,400 USF&G Corp........................................ 3,658
----------
34,996
----------
TOTAL FINANCE............................................... 101,671
----------
MATERIALS (1.1%)
CHEMICALS (1.1%)
45,000 E.I. DuPont De Nemours & Co....................... 2,829
65,000 Monsanto Co....................................... 2,799
----------
5,628
----------
SERVICES (2.6%)
PROFESSIONAL SERVICES (0.3%)
(a)60,700 Synder Communications, Inc........................ 1,635
----------
TRANSPORTATION (2.3%)
(a)62,900 AMR Corp.......................................... 5,818
(a)165,400 US Airways Group, Inc............................. 5,789
----------
11,607
----------
TOTAL SERVICES.............................................. 13,242
----------
TECHNOLOGY (10.3%)
COMPUTERS (1.4%)
(a)33,500 Compaq Computer Corp.............................. 3,325
(a)21,800 Dell Computer Corp................................ 2,560
(a)34,900 Seagate Technology, Inc........................... 1,228
----------
7,113
----------
ELECTRONICS (2.9%)
(a)46,800 Applied Materials, Inc............................ 3,314
26,100 Intel Corp........................................ 3,701
46,500 Linear Technology Corp............................ 2,406
41,900 Motorola, Inc..................................... 3,185
24,400 Texas Instruments, Inc............................ 2,051
----------
14,657
----------
OFFICE EQUIPMENT (2.4%)
1,500 Ikon Office Solutions, Inc........................ 37
96,100 International Business Machines Corp.............. 8,667
43,500 Xerox Corp........................................ 3,431
----------
12,135
----------
SOFTWARE SERVICES (2.9%)
(a)43,400 America Online, Inc............................... 2,414
(a)60,200 Microsoft Corp.................................... 7,608
900 Netscape Communications Corp...................... 29
(a)59,200 Oracle System, Corp............................... 2,982
(a)45,900 Sterling Commerce, Inc............................ 1,509
----------
14,542
----------
TELECOMMUNICATIONS (0.7%)
(a)25,800 Globalstar Telecommunications Ltd................. 790
34,700 Iridium World Communications Ltd.................. 629
(a)74,900 WorldCom, Inc..................................... 2,397
----------
3,816
----------
TOTAL TECHNOLOGY............................................ 52,263
----------
TOTAL COMMON STOCKS (Cost $429,041)........................... 488,919
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.8%)
REPURCHASE AGREEMENT(4.8%)
$ 24,334 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $24,338,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $24,742 (Cost $24,334)... $ 24,334
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.8%) (Cost $453,375)............... 513,253
--------
OTHER ASSETS (0.8%)
Receivable for Investments Sold............ $ 3,708
Dividends Receivable....................... 456
Receivable for Portfolio Shares Sold....... 177
Interest Receivable........................ 4
Other...................................... 7 4,352
----------
LIABILITIES (-1.6%)
Payable for Investments Purchased.......... (6,714)
Bank Overdraft............................. (698)
Investment Advisory Fees Payable........... (688)
Payable for Portfolio Shares Redeemed...... (74)
Administrative Fees Payable................ (61)
Custodian Fees Payable..................... (36)
Directors' Fees & Expenses Payable......... (9)
Distribution Fees Payable.................. (4)
Other Liabilities.......................... (64) (8,348)
---------- --------
NET ASSETS (100%)........................................ $509,257
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital.............................. $418,542
Undistributed Net Investment Income.......... 426
Accumulated Net Realized Gain................ 30,411
Unrealized Appreciation on Investments....... 59,878
--------
NET ASSETS............................................... $509,257
--------
--------
CLASS A:
- ---------------------------------------------
NET ASSETS................................... $500,808
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 29,517,538 outstanding $.001
par value shares (authorized 500,000,000
shares).................................... $16.97
--------
--------
CLASS B:
- ---------------------------------------------
NET ASSETS................................... $8,449
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 498,831 outstanding $.001 par
value shares (authorized 500,000,000
shares).................................... $16.94
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
83
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.6%
Banking 8.7%
Building 1.7%
Capital Goods 1.5%
Chemicals 1.5%
Communications 3.2%
Computers 7.6%
Consumer - Durables 1.0%
Consumer - Retail 10.3%
Consumer - Service & Growth 0.9%
Consumer - Staples 2.1%
Electric 1.6%
Energy 7.4%
Entertainment 1.8%
Financial - Diversified 3.5%
Health Care 7.3%
Industrial 7.1%
Insurance 5.5%
Metals 2.0%
Paper & Packaging 1.1%
Restaurants 0.3%
Services 3.9%
Technology 3.2%
Tobacco 1.3%
Transportation 7.0%
Utilities 2.2%
Other 4.7%
</TABLE>
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX
AND S&P 500 INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 16.23% 30.24% 16.45%
PORTFOLIO -- CLASS B... 16.17 30.00 26.54
RUSSELL 2500 INDEX --
CLASS A............... 11.25 20.09 17.44
S&P 500 INDEX -- CLASS
A..................... 20.61 34.70 20.14
RUSSELL 2500 INDEX --
CLASS B............... 11.25 20.09 20.48
S&P 500 INDEX -- CLASS
B..................... 20.61 34.70 29.55
</TABLE>
1. The Russell 2500 Index and the S&P 500 Index are unmanaged indices of common
stock.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Small Cap Value Equity Portfolio invests in equity securities of small- to
medium-sized companies that our research indicates are undervalued relative to
the stock market in general at the time of purchase. The Portfolio's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies will help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 16.23% and 30.24%, respectively, for the Class A shares; and
16.17% and 30.00%, respectively, for the Class B shares as compared to total
returns of 11.25% and 20.09%, respectively, for the Russell 2500 Index and
20.61% and 34.70%, respectively, for the S&P 500 Index. From inception on
December 17, 1992 to June 30, 1997, the average annual total return of Class A
was 16.45% as compared to 17.44% for the Russell 2500 Index and 20.14% for the
S&P 500 Index. From inception on January 2, 1996 to June 30,
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
1997, the average annual total return of Class B was 26.54% as compared to
20.48% for the Russell 2500 Index and 29.55% for the S&P 500 Index.
For the three months ended June 30, 1997, the Portfolio had a total return of
15.07% for the Class A shares and 15.01% for the Class B shares as compared to a
total return of 15.12% for the Russell 2500 Index and 17.46% for the S&P 500
Index.
Both sector and stock selection supported the Portfolio's second quarter
outperformance. Particularly additive was the overweighting in financial
services, a sector which outperformed, and our underweight in utilities, a
sector which underperformed. Individual stocks which were additive to
performance included Franklin Resources in the financials, Computer Products in
technology, Crane, Accustaff, and Air Express in heavy industry and
transportation, and Noble Drilling in the energy sector.
At the start of the quarter we reduced our weighting in financials following the
Federal Reserve tightening. Subsequently, we reversed course and added to
financials after news on inflation and economic growth was moderate,
profitability was better than expected, and the strength of the dollar helped
mitigate inflation pressures. Importantly, sustained labor productivity gains
have reduced the effect of rising wages on profits and prices.
In addition to our overweighting in financials, we are also overweighted in the
oil service and business service stocks. We are maintaining an underweighting in
utilities and basic resources.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William B. Gerlach
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
85
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (95.3%)
AEROSPACE (1.6%)
(a)1,300 Coltec Industries, Inc............................ $ 25
2,600 Doncasters plc ADR................................ 60
1,200 Penn Engineering & Manufacturing Corp............. 24
5,500 Thiokol Corp...................................... 385
----------
494
----------
BANKING (8.7%)
2,400 Amsouth Bancorp................................... 91
2,300 Astoria Financial Corp............................ 109
1,600 City National Corp................................ 39
1,900 Collective Bancorp, Inc........................... 85
5,700 Comerica, Inc..................................... 388
7,400 Community First Bankshares, Inc................... 284
5,000 Cullen/Frost Bankers, Inc......................... 212
2,000 MAF Bancorp, Inc.................................. 84
9,000 North Fork Bancorp., Inc.......................... 192
7,800 Southtrust Corp................................... 323
3,900 Summit Bancorp.................................... 195
8,500 Union Planters Corp............................... 441
2,300 UnionBanCal Corp.................................. 165
2,500 Wilmington Trust Corp............................. 114
----------
2,722
----------
BUILDING (1.7%)
(a)5,800 Champion Enterprises, Inc......................... 87
2,300 Hughes Supply, Inc................................ 92
4,100 Southdown, Inc.................................... 179
(a)4,800 USG Corp.......................................... 175
----------
533
----------
CAPITAL GOODS (1.5%)
12,600 Herman Miller, Inc................................ 454
----------
CHEMICALS (1.5%)
2,400 Fuller (H.B.) Co.................................. 132
7,500 Quaker Chemical Corp.............................. 130
(a)5,700 USA Waste Services, Inc........................... 220
----------
482
----------
COMMUNICATIONS (3.2%)
(a)3,400 ADC Telecommunications, Inc....................... 113
15,800 Journal Register Co............................... 314
5,100 McClatchy Newspapers, Inc......................... 150
1,700 New York Times Co., Class A....................... 84
(a)4,000 Nextel Communications, Inc., Class A.............. 76
(a)4,000 Valassis Communications, Inc...................... 96
400 Washington Post Co., Class B...................... 159
----------
992
----------
COMPUTERS (7.6%)
2,700 Adobe Systems, Inc................................ 95
(a)3,200 Altera Corp....................................... 162
(a)1,600 BMC Software, Inc................................. 89
(a)4,100 Cadence Design Systems, Inc....................... 137
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)4,600 Ceridian Corp..................................... $ 194
(a)6,400 Computer Products, Inc............................ 160
(a)7,000 Fiserv, Inc....................................... 312
(a)7,800 Gateway 2000, Inc................................. 253
10,900 HMT Technology Corp............................... 141
(a)14,900 Overland Data, Inc................................ 80
4,100 Seagate Technology, Inc........................... 144
(a)2,900 Solectron Corp.................................... 203
(a)4,700 Tech Data Corp.................................... 148
(a)7,700 Western Digital Corp.............................. 244
----------
2,362
----------
CONSUMER-DURABLES (1.0%)
5,900 Arvin Industries, Inc............................. 161
(a)4,300 Furniture Brands International, Inc............... 83
1,800 Smith (A.O.) Corp., Class B....................... 64
----------
308
----------
CONSUMER-RETAIL (10.3%)
1,800 American Stores Co................................ 89
3,600 Brylane, Inc...................................... 139
2,800 Callaway Golf Co.................................. 99
13,400 Crane Co.......................................... 560
8,800 CVS Corp.......................................... 451
1,500 Designer Holdings Ltd............................. 15
4,400 Family Dollar Stores, Inc......................... 120
(a)2,200 Fred Meyer, Inc................................... 114
3,100 Guilford Mills, Inc............................... 65
600 Jostens, Inc...................................... 16
(a)8,100 Office Depot, Inc................................. 157
8,500 Pier 1 Imports, Inc............................... 225
2,200 Polo Ralph Lauren Corp............................ 60
4,600 Premark International, Inc........................ 123
8,800 Ross Stores, Inc.................................. 288
12,000 TJX Cos., Inc..................................... 317
4,300 V.F. Corp......................................... 364
----------
3,202
----------
CONSUMER-SERVICE & GROWTH (0.9%)
7,100 Danka Business Systems plc ADR.................... 290
----------
CONSUMER-STAPLES (2.1%)
2,600 Dean Foods Co..................................... 105
1,700 Interstate Bakeries Corp.......................... 101
1,900 Lancaster Colony Corp............................. 92
6,800 Richfood Holdings, Inc............................ 177
9,900 Tyson Foods, Inc., Class A........................ 189
----------
664
----------
ELECTRIC (1.6%)
5,100 Black Hills Corp.................................. 145
(a)5,000 ESS Technology, Inc............................... 67
2,800 Public Service Co. of Colorado.................... 116
(a)2,800 SCI Systems, Inc.................................. 179
----------
507
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ENERGY (7.4%)
4,400 Apache Corp....................................... $ 143
(a)200 Ashland Coal, Inc................................. 6
3,500 Columbia Gas System, Inc.......................... 228
(a)1,100 Diamond Offshore Drilling, Inc.................... 86
1,200 El Paso Natural Gas Co............................ 66
(a)8,000 ENSCO International, Inc.......................... 422
5,000 Global Marine, Inc................................ 116
4,600 National Fuel Gas Co.............................. 193
(a)19,800 Noble Drilling Corp............................... 447
1,800 Pacific Enterprises............................... 61
100 Parker & Parsley Petroleum Co..................... 4
2,400 Sun Co., Inc...................................... 74
3,700 Transocean Offshore, Inc.......................... 269
5,800 Union Texas Petro Holdings, Inc................... 121
(a)2,200 Weatherford Enterra, Inc.......................... 85
----------
2,321
----------
ENTERTAINMENT (1.8%)
(a)3,500 MGM Grand, Inc.................................... 129
13,500 Universal Corp.................................... 429
----------
558
----------
FINANCIAL-DIVERSIFIED (3.5%)
4,800 Bear Stearns Cos., Inc............................ 164
4,600 Capital One Financial Corp........................ 174
5,400 First Financial Corp.............................. 159
5,600 National Commerce Bancorp......................... 123
2,500 Paine Webber Group, Inc........................... 88
900 Student Loan Marketing Association................ 114
9,000 United Asset Management, Inc...................... 255
725 Wellsford Real Porperties, Inc.................... 8
----------
1,085
----------
HEALTH CARE (7.3%)
9,800 Beckman Instruments, Inc.......................... 473
(a)3,900 Biogen, Inc....................................... 132
(a)7,000 FPA Medical Management, Inc....................... 166
(a)2,500 Health Care & Retirement Corp..................... 83
(a)1,300 Healthcare Financial Partners, Inc................ 26
(a)4,200 Marquette Medical Systems, Class A................ 92
(a)12,300 Nellcor Puritan Bennett, Inc...................... 223
1,400 RoTech Medical Corp............................... 28
15,900 Sullivan Dental Products, Inc..................... 290
(a)4,500 Universal Health Services, Inc., Class B.......... 173
(a)3,700 Vencor, Inc....................................... 156
(a)9,200 Wellpoint Health Networks, Inc.................... 422
----------
2,264
----------
INDUSTRIAL (7.1%)
2,600 AGCO Corp......................................... 93
(a)5,600 BJ Services Co.................................... 300
(a)10,300 CDI Corp.......................................... 429
2,000 Franklin Resources, Inc........................... 145
(a)3,300 Hirsch International Corp., Class A............... 73
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,100 JLG Industries, Inc............................... $ 42
(a)5,300 Lear Corp......................................... 235
4,100 MascoTech, Inc.................................... 86
4,100 Precision Drilling Corp........................... 198
(a)5,300 Teradyne, Inc..................................... 208
(a)6,800 Tetra Technologies, Inc........................... 168
(a)3,800 Triumph Group, Inc................................ 118
(a)2,200 Tuboscope Vetco International Corp................ 44
(a)2,800 Varco International, Inc.......................... 90
----------
2,229
----------
INSURANCE (5.5%)
1,500 AMBAC, Inc........................................ 115
4,700 CMAC Investment Corp.............................. 224
3,000 Everest Reinsurance Holdings, Inc................. 119
2,700 Hartford Life, Inc., Class A...................... 101
3,100 Mercury General Corp.............................. 226
11,400 Nationwide Financial Services, Inc.,
Class A......................................... 303
3,000 Progressive Corp.................................. 261
7,300 Reliance Group Holdings, Inc...................... 87
2,200 Torchmark Corp.................................... 157
(a)4,500 Western National Corp............................. 121
----------
1,714
----------
METALS (2.0%)
6,700 General Cable Corp................................ 172
2,700 Kaydon Corp....................................... 134
(a)5,300 Precision Castparts Corp.......................... 316
----------
622
----------
PAPER & PACKAGING (1.1%)
10,000 P.H. Glatfelter Co................................ 200
4,000 Schweitzer-Mauduit International, Inc............. 150
----------
350
----------
RESTAURANTS (0.3%)
5,000 Boston Chicken, Inc............................... 70
(a)2,600 ProSource, Inc.................................... 19
----------
89
----------
SERVICES (3.9%)
(a)20,300 AccuStaff, Inc.................................... 481
9,800 Angelica Corp..................................... 172
(a)3,600 Interim Services, Inc............................. 160
10,500 New England Business Services, Inc................ 276
3,900 Personnel Group of America, Inc................... 112
----------
1,201
----------
TECHNOLOGY (3.2%)
3,700 Coherent, Inc..................................... 165
(a)2,600 Cooper Cameron Corp............................... 122
(a)16,700 Healthdyne Technologies, Inc...................... 288
(a)2,700 Inacom Corp....................................... 84
500 Lam Research Corp................................. 19
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
<TABLE>
<C> <S> <C>
(a)7,700 Symantec Corp..................................... $ 150
900 Tektronix, Inc.................................... 54
2,400 Vishay Intertechnology, Inc....................... 69
(a)1,400 Watson Pharmaceuticals, Inc....................... 59
----------
1,010
----------
TOBACCO (1.3%)
(a)3,600 Consolidated Cigar Holdings, Inc.................. 100
11,600 DIMON, Inc........................................ 307
----------
407
----------
TRANSPORTATION (7.0%)
17,500 Air Express International Corp.................... 696
11,000 Arnold Industries, Inc............................ 187
(a)6,000 Aviation Sales Co................................. 147
5,000 Expeditors International of
Washington, Inc................................. 142
3,600 Harley-Davidson, Inc.............................. 173
1,400 Hertz Corp., Class A.............................. 50
(a)5,300 Midwest Express Holdings.......................... 145
(a)8,700 Offshore Logistics, Inc........................... 164
(a)14,500 OMI Corp.......................................... 139
3,500 PACCAR, Inc....................................... 163
(a)4,100 Tower Automotive, Inc............................. 176
----------
2,182
----------
UTILITIES (2.2%)
5,600 IPALCO Enterprises, Inc........................... 175
6,200 LG&E Energy Corp.................................. 137
6,200 Nevada Power Co................................... 132
2,700 NICOR, Inc........................................ 97
3,000 Oneok, Inc........................................ 97
2,000 Pinnacle West Capital Corp........................ 60
----------
698
----------
TOTAL COMMON STOCKS (Cost $26,727)............................ 29,740
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (6.7%)
REPURCHASE AGREEMENT (6.7%)
$ 2,087 Chase Securities, Inc. 6.685%, dated 6/30/97, due
7/01/97, to be repurchased at $2,087,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $2,123 (Cost $2,087)..... 2,087
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (102.0%) (Cost $28,814)................ $ 31,827
--------
OTHER ASSETS (1.3%)
Receivable for Investments Sold............ $ 285
Receivable for Portfolio Shares Sold....... 100
Dividends Receivable....................... 33
Other...................................... 2 420
----------
LIABILITIES (-3.3%)
Payable for Investments Purchased.......... (851)
Bank Overdraft Payable..................... (90)
Investment Advisory Fees Payable........... (45)
Payable for Portfolio Shares Redeemed...... (13)
Custodian Fees Payable..................... (7)
Administrative Fees Payable................ (4)
Directors' Fees & Expenses Payable......... (2)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (18) (1,031)
---------- --------
NET ASSETS (100.0%)...................................... $ 31,216
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 21,900
Undistributed Net Investment Income................ 61
Accumulated Net Realized Gain...................... 6,242
Unrealized Appreciation on Investments............. 3,013
--------
NET ASSETS......................................... $ 31,216
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $27,149
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,154,016 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $12.60
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $4,067
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 323,101 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $12.59
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Communication Equipment 33.1%
Communication Services 3.8%
Business Services 11.9%
Diversified 2.8%
Drugs 1.4%
Electronic Computers 7.0%
Personal Services 1.5%
Semiconductors & Related Services 17.6%
Surgical & Medical Instruments & Apparatus 0.8%
Software 17.4%
Toys 0.4%
Other 2.3%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
------------------------
SINCE
YTD INCEPTION(3)
---------- ------------
<S> <C> <C>
PORTFOLIO -- CLASS A.................... 27.45% 36.50%
PORTFOLIO -- CLASS B.................... 27.17 36.20
S&P 500 INDEX........................... 20.61 32.12
LIPPER SCIENCE & TECHNOLOGY FUNDS
INDEX................................... 6.94 18.04
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks. The Lipper Science
and Technology Funds Index is a composite index of mutual funds that invest
at least 65% of their assets in science and technology stocks.
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. The Portfolio commenced operations on September 16, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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 investment objective of the Technology Portfolio is to achieve long-term
capital appreciation by investing primarily in equity securities of companies
expected to benefit from their involvement in technology and technology-related
industries. The focus of the Portfolio is to identify significant long-term
technology trends and to invest in those premier companies we believe are
positioned to materially gain from these trends. Stocks selected for the
Portfolio are also expected to meet comprehensive selection criteria. The
Portfolio may invest up to 35% of its total investments in securities of foreign
companies to participate sufficiently in the global technology market.
For the six months ended June 30, 1997 the Portfolio had a total return of
27.45% for the Class A shares and 27.17% for the Class B shares, as compared to
a total return of 20.61% for the S&P 500 Index and 6.94% for the Lipper Science
& Technology Funds Index. For the period from inception on September 16, 1996 to
June 30, 1997 the Portfolio had a total return of 36.50% for the Class A shares
and 36.20% for the Class B shares, as compared to a total return of 32.12% for
the S&P 500 Index, and a total return of 18.04% for the Lipper Science &
Technology Funds Index.
For the three month period ended June 30, 1997, the Portfolio had a total return
of 29.38% for the Class A shares and 29.22% for the Class B shares as compared
to a total return of 17.46% for the S&P 500 Index and 17.84% for the Lipper
Science and Technology Funds Index.
We are quite pleased with the Portfolio's outperformance for the most recent
quarter as we managed to create substantial absolute gains as well as relative
gains within the three month period.
The outperformance for the second quarter was due to broadbased strength across
both our large and small capitalization stocks, as well as each tech sub-sector.
The networking and tech services sectors and the smaller capitalization
companies performed particularly well.
We look forward to the remainder of 1997. Overall fundamentals for technology
continue to be favorable and the healthy U.S. economy provides a supportive
backdrop. There are over 2,000 public technology companies and we strive to
remain invested in the best 100. Some high profile companies will continue to
face obstacles but it is our job to identify
- --------------------------------------------------------------------------------
Technology Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
opportunities as these events unfold. Our goal remains the same; identify the
premier sectors and companies which present compelling investment opportunities
and avoid the sectors and companies with deteriorating fundamentals.
Christopher R. Blair
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCK (97.7%)
COMMUNICATION EQUIPMENT (33.1%)
COMPUTER INTEGRATED SYSTEMS DESIGN (10.0%)
(a)11,600 Bay Networks, Inc................................. $ 308
(a)7,000 3Com Corp......................................... 315
(a)13,700 Cisco Systems, Inc................................ 920
(a)6,300 Premisys Communications, Inc...................... 99
5,100 Scientific-Atlanta, Inc........................... 112
----------
1,754
----------
COMPUTER PERIPHERAL EQUIPMENT (1.9%)
(a)2,000 Adaptec, Inc...................................... 70
(a)10,000 PMC-Sierra, Inc................................... 262
----------
332
----------
ELECTRONIC COMPONENTS & ACCESSORIES (3.8%)
(a)2,500 Integrated Process Equipment Corp................. 63
(a)7,200 Kent Electronics Corp............................. 264
7,066 Molex, Inc., Class A.............................. 246
(a)1,000 Solectron Corp.................................... 70
10,000 Syquest Technology, Inc........................... 23
----------
666
----------
ELECTRONIC PARTS & EQUIPMENT (4.9%)
11,300 Motorola, Inc..................................... 859
----------
TELEPHONE & TELEGRAPH APPARATUS (12.5%)
(a)8,600 ADC Telecommunications, Inc....................... 287
(a)5,000 Advanced Fibre Communications..................... 302
(a)14,000 Intelect Communications Systems................... 59
3,200 Lucent Technologies Inc........................... 231
(a)5,400 Newbridge Networks Corp........................... 235
2,500 Northern Telecommunications Ltd................... 227
(a)7,100 Octel Communications Corp......................... 166
(a)12,000 Polycom Inc....................................... 63
(a)4,700 Tekelec........................................... 166
(a)7,000 Tellabs, Inc...................................... 391
(a)3,000 World Access, Inc................................. 61
----------
2,188
----------
TOTAL COMMUNICATION EQUIPMENT............................... 5,799
----------
COMMUNICATION SERVICES (3.8%)
COMPUTER PROCESSING & DATA PREPARATION (0.4%)
2,200 First USA Paymentech, Inc......................... 64
----------
DIRECT MAIL ADVERTISING SERVICE (0.8%)
5,900 Tele-Communications, Inc., Class A................ 140
----------
RADIO/TELEPHONE COMMUNICATIONS (1.5%)
(a)7,500 Glenayre Technologies, Inc........................ 123
(a)10,200 Mobile Telecommunications Technologies Corp....... 146
----------
269
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
TELEPHONE COMMUNICATIONS (1.1%)
(a)2,200 LCI International, Inc............................ $ 48
(a)4,300 Teleport Communications Group, Inc., Class A...... 147
----------
195
----------
TOTAL COMMUNICATION SERVICES................................ 668
----------
DIVERSIFIED (2.8%)
(a)3,200 Apollo Group, Inc., Class A....................... 113
4,300 Corning, Inc...................................... 239
(a)3,100 DeVry, Inc........................................ 84
(a)1,800 GTECH Holdings Corp............................... 58
100 Hanover Compressor Co............................. 2
----------
496
----------
DRUGS (1.4%)
(a)400 Agouron Pharmaceuticals, Inc...................... 32
5,000 Applied Imaging Corp.............................. 31
(a)800 Dura Pharmaceuticals, Inc......................... 32
(a)300 Incyte Pharmaceuticals, Inc....................... 20
(a)1,500 SangStat Medical Corp............................. 35
(a)800 Vertex Pharmaceuticals, Inc....................... 31
(a)1,000 Vivus, Inc........................................ 24
(a)2,000 Zonagen, Inc...................................... 44
----------
249
----------
OTHER TECHNOLOGY (38.8%)
BUSINESS SERVICES (11.9%)
100 Aris Corp......................................... 2
2,000 Automatic Data Processing, Inc.................... 94
(a)5,000 BA Merchant Services, Inc. Class A................ 95
(a)4,750 BISYS Group, Inc.................................. 198
(a)4,000 Data Processing Resources Corp.................... 94
3,400 Home Side, Inc.................................... 74
(a)2,200 ONTRACK Data International, Inc................... 51
4,000 Paychex, Inc...................................... 152
(a)2,200 Robert Half International, Inc.................... 104
(a)4,400 Romac International, Inc.......................... 144
(a)5,570 Sterling Commerce, Inc............................ 183
(a)3,800 SunGard Data Systems, Inc......................... 177
6,900 TeleTech Holdings, Inc............................ 180
(a)8,900 USCS International, Inc........................... 291
(a)9,100 Whittman-Hart, Inc................................ 256
----------
2,095
----------
ELECTRONIC COMPUTERS (7.0%)
(a)700 Compaq Computer Corp.............................. 69
(a)1,700 Dell Computer Corp................................ 200
8,900 International Business Machines Corp.............. 803
(a)2,400 Sun Microsystems, Inc............................. 89
(a)3,000 Tandem Computers, Inc............................. 61
----------
1,222
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PERSONAL SERVICE (1.5%)
(a)2,100 America Online, Inc............................... $ 117
(a)3,000 CUC International, Inc............................ 77
(a)2,600 Genzyme Corp. (General Division).................. 72
----------
266
----------
SEMICONDUCTORS & RELATED SERVICES (17.6%)
(a)4,700 Advanced Energy Industries, Inc................... 72
(a)1,700 Altera Corp....................................... 86
(a)4,500 Analog Devices, Inc............................... 119
(a)6,100 Applied Materials, Inc............................ 432
1,400 Fusion Systems Corp............................... 55
(a)6,100 KLA Instruments Corp.............................. 297
(a)4,900 Level One Communications, Inc..................... 188
13,317 Linear Technology Corp............................ 689
(a)6,000 Maxim Integrated Products, Inc.................... 341
(a)1,900 Semtech Corp...................................... 69
(a)3,500 Teradyne, Inc..................................... 137
900 Texas Instruments, Inc............................ 76
(a)9,900 Transwitch Corp................................... 85
1,500 Watkins-Johnson Co................................ 46
(a)8,200 Xilinx, Inc....................................... 402
----------
3,094
----------
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS (0.8%)
(a)900 Arqule, Inc....................................... 16
(a)1,000 Arterial Vascular Engineering, Inc................ 32
300 Medtronic, Inc.................................... 24
1,200 Mentor Corp....................................... 35
(a)2,100 Nitinol Medical Technologies, Inc................. 32
----------
139
----------
TOTAL OTHER TECHNOLOGY...................................... 6,816
----------
SOFTWARE (17.4%)
COMMUNICATIONS SOFTWARE (0.7%)
2,000 CyberMedia, Inc................................... 32
2,000 LHS Group, Inc.................................... 88
----------
120
----------
PREPACKAGED SOFTWARE (16.7%)
2,600 Autodesk, Inc..................................... 100
(a)5,400 Avant! Corp....................................... 174
(a)3,700 Citrix Systems, Inc............................... 162
(a)6,200 Compuware Corp.................................... 296
(a)4,300 Electronic Arts, Inc.............................. 145
(a)4,300 Gartner Group, Inc., Class A...................... 154
(a)3,500 Industri-matematik International Corp............. 57
(a)4,600 Microsoft Corp.................................... 582
(a)7,900 Oracle System Corp................................ 398
(a)5,800 Peoplesoft, Inc................................... 306
(a)5,200 Proginet Corp..................................... 18
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,000 SEEC, Inc......................................... $ 19
(a)2,600 Siebel Systems, Inc............................... 84
(a)6,200 Symantec Corp..................................... 121
(a)5,000 Transaction Systems Architects, Inc., Class A..... 173
(a)5,200 Vantive Corp...................................... 147
----------
2,936
----------
TOTAL SOFTWARE.............................................. 3,056
----------
TOYS (0.4%)
(a)3,500 Galoob Toys, Inc.................................. 66
----------
TOTAL COMMON STOCKS (Cost $15,521).......................... 17,150
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
<C> <S> <C>
- ----------
PURCHASED OPTIONS (0.1%)
25 Inso, expiring 8/16/97............................ 6
(a)3,500 TriQuint Semiconductor, Inc., expiring 7/19/97.... 2
(a)4,500 Western Digital, expiring 7/19/97................. 1
----------
TOTAL PURCHASED OPTIONS (Cost $17)............................ 9
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.8%)(Cost $15,538).................. 17,159
--------
OTHER ASSETS (10.9%)
Cash..................................... $ 470
Receivable for Investments Sold.......... 1,098
Receivable for Securities Sold Short..... 198
Receivable due from Broker............... 85
Receivable for Portfolio Shares Sold..... 6
Dividends Receivable..................... 2
Other Assets............................. 49 1,908
----------
LIABILITIES (-8.7%)
Securities Sold Short, at Value
(Proceeds $196).......................... (197)
Payable for Investments Purchased........ (1,236)
Investment Advisory Fees Payable......... (30)
Custodian Fees Payable................... (20)
Administrative Fees Payable.............. (2)
Distribution Fees Payable................ (1)
Other Liabilities........................ (33) (1,519)
---------- --------
NET ASSETS (100%)........................................ $ 17,548
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................. $ 14,619
Accumulated Net Investment Loss.................. (38)
Accumulated Net Realized Gain.................... 1,347
Unrealized Appreciation on Investments........... 1,620
--------
NET ASSETS......................................... $ 17,548
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $16,214
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,188,111 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $13.65
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,334
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 98,002 outstanding $0.001 par value
shares (authorized 500,000,000 shares)........... $13.62
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT (NOTE A-9)
<S> <C> <C>
VALUE
SHARES (000)
- ----------- -----
2,000 Adtran, Inc.............................. $ 50
1,000 Advanced Micro Devices, Inc.............. 36
2,700 Applied Magnetics Corp................... 61
1,000 QUALCOMM, Inc............................ 50
-----
(Total Proceeds $196)................................ $ 197
-----
-----
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 19.5%
Healthcare 9.6%
Land 2.2%
Lodging/Leisure 11.2%
Manufactured Home 6.6%
Office and
Industrial 23.0%
Retail 15.5%
Self Storage 1.5%
Other 11.1%
</TABLE>
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ---------- ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A........... 11.46% 40.01% 30.94%
PORTFOLIO -- CLASS B........... 11.20 39.54 33.36
INDEX -- CLASS A............... 5.73 33.87 23.59
INDEX -- CLASS B............... 5.73 33.87 27.09
</TABLE>
1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System, including 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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The U.S. Real Estate Portfolio seeks to provide 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").
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 11.46% and 40.01%, respectively, for the Class A shares; and
11.20% and 39.54%, respectively, for the Class B shares as compared to total
returns of 5.73% and 33.87%, respectively, for the National Association of Real
Estate Trusts (NAREIT) Equity Index (the "Index"). From inception on February
24, 1995 to June 30, 1997, the average annual total return of Class A was 30.94%
as compared to 23.59% for the Index. From inception on January 2, 1996 to June
30, 1997, the average annual total return of Class B was 33.36% as compared to
27.09% for the Index.
Valuations in the REIT market have gone through some interesting gyrations
during 1997. The Morgan Stanley REIT Index ("RMS") which measures the
performance of REITs on a continuous basis -- as opposed to the Index which
measures performance on a month-end basis -- rose approximately 4% through the
beginning of the year and climbed to a high on March 12. RMS proceeded to hit
its low on April 25 following a decline throughout the month. This represented a
decline of more than 8.5% from its mid-March peak. Since that low, RMS has
proceeded straight up, gaining 9.9% and achieving new highs through quarter-end.
The decline in the early part of the second quarter resulted from a combination
of the correction in the broad equity market as well as a significant amount of
new equity issuance. As we had warned in our last quarterly report, we did not
expect to see strong appreciation until this supply was absorbed. In fact, in
the face of declining valuations in the period from mid-March through April,
REITs continued to raise capital and raised in excess of $3.5 billion of equity
in 25 separate offerings.
Some observers were disappointed to see the REIT market fall along with the
broad equity market in March and April. Our reaction is that REITs have not lost
their defensive characteristics. However, REIT stocks can only retain their
defensive characteristics if their stock prices reflect the underlying value of
their real estate. In the fourth quarter of last year, a number of stocks,
particularly some of the larger cap
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
names, had traded to levels that were at quite significant premiums to their
underlying asset values. These were the stocks that were most penalized during
the correction. We continue to believe that REITs should be viewed as a separate
asset class, distinct from stocks and bonds, providing diversification within a
portfolio. Clearly there is some correlation to other financial assets but as
demonstrated by on-going analysis provided by NAREIT the correlation continues
to wane. This research affirms our basic theory that real estate stocks will
move based on underlying real estate value.
As suggested above, new equity issuance in the REIT market continues at a torrid
pace. Through June 30, REITs had raised almost $10 billion in new equity. This
continues a theme of more real estate moving into the control of the public
markets. With a private institutional real estate market of approximately $1
trillion and equity capitalization at $110 billion, REITs continue to capture a
bigger share of the pie. We see continued equity issuance by existing REITs as
proceeds have primarily been used to pay for the acquisition of individual
properties, portfolios of properties and entire companies. One wildcard in the
growth potential of the assets held by public companies is the exchange of
property for shares by the institutional owners of real estate. In the second
quarter we saw a beginning of this trend as Meridian Industrial Trust entered
into transactions providing both an insurance company and a corporate pension
fund with shares in exchange for industrial properties.
After a dearth of initial public offerings over the course of the last two
years, there were 8 IPOs in the first two quarters raising in excess of $2
billion (this does not include two IPOs concluded immediately after the end of
June). The majority of capital raised was for office companies. We expect to see
a continuance of these IPOs as a result of the arbitrage between the private and
public real estate markets. The sectors that will feature the most new issuance
will be those in which it is not hard to assemble a meaningful collection of
assets combined with public market valuations that provide premium pricing.
At year-end we provided our investment strategy for overweighting and
underweighting asset classes and geographic regions and thought it would be
appropriate to look at year-to-date total returns in each sector according to
the Index. It is interesting to note that once again sector bets on the office
and hotel sectors contributed to excess performance, despite prognosticators
claiming that after 1996 REITs had moved to a stock picker's game. We have been
surprised by the continued strength in the strip center and regional mall
segments of retail and have continued to underweight the retail sector.
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
SECTOR YEAR TO DATE 1997
- ------------------------------------------ ------------------
<S> <C>
Apartments................................ 6.2%
Manufactured Homes........................ 3.6%
Strip Centers............................. 7.5%
Regional Malls............................ 7.6%
Outlet Centers............................ -4.2%
Industrial................................ 1.7%
Office.................................... 5.4%
Self Storage.............................. -1.2%
Triple Net Lease.......................... 3.4%
Hotel..................................... 11.8%
Healthcare................................ 2.7%
Overall................................... 5.7%
</TABLE>
From the perspective of the Portfolio, approximately 65% of the outperformance
was as a result of stock selection and the remainder was from sector allocation.
The largest contributions from a sector allocation perspective were:
overweighting of hotels, under-
weighting of self storage, and underweighting of outlet centers. As we have
discussed previously, real estate cycles in the physical property markets tend
to last a long time, however, valuations in the public markets continue to
fluctuate and as a result we had some modest movements in the Portfolio. The
most significant top-down adjustments were increasing the weighting in the
multifamily sector since valuations were beaten down, and decreasing the
weighting in the office and industrial sectors as we took profits on some office
stocks and reduced industrial positions due to stock valuations continuing to
move far above underlying value.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
The following chart provides a summary of the largest contributors to the
performance of the Portfolio both from a top-down and bottom-up perspective,
along with the rationales for the positions.
<TABLE>
<CAPTION>
FUND POSITION SECTOR RATIONALE
- -------------------- ------------------- --------------------
<S> <C> <C>
Bottom-up
- ---------
Essex Properties Apartments Attractive Pacific
markets
Chateau Communities Manufactured Home Favorable
risk-return
Urban Shopping
Centers Regional Malls High-end retail
continues to
improve
Pacific Gulf
Properties Industrial Small cap with
Pacific-focus
Meridian Industrial
Properties Industrial Small cap growth
story
Extended Stay of
America Hotels Momentum investors
exit
Top-down
- --------
Overweighting Hotels Lack of new supply
at upper-end
Underweighting Self storage Public market
premiums excessive
Underweighting Outlet centers Sector continues to
worsen
</TABLE>
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (86.9%)
APARTMENT (19.5%)
33,100 Amli Residential Properties Trust REIT............ $ 782
172,200 Associated Estates Realty Corp. REIT.............. 4,047
276,600 Avalon Properties, Inc. REIT...................... 7,918
256,100 Bay Apartment Communities, Inc. REIT.............. 9,476
14,900 Columbus Realty Trust REIT........................ 339
343,100 Essex Property Trust, Inc. REIT................... 11,022
165,000 Gables Residental Trust REIT...................... 4,166
240,400 Merry Land & Investment
Company, Inc. REIT.............................. 5,214
181,500 Oasis Residential, Inc. REIT...................... 4,265
243,900 Security Capital Atlantic, Inc. REIT.............. 5,838
35,100 Summit Properties, Inc. REIT...................... 724
(a)654,898 Wellsford Real Porperties, Inc.................... 7,204
----------
60,995
----------
HEALTHCARE (9.6%)
(a)92,000 Alexandria Real Estate Equities, Inc. REIT........ 2,018
(a)180,300 Assisted Living Concepts, Inc..................... 1,983
95,500 Health Care Property Investors, Inc. REIT......... 3,366
21,900 LTC Properties, Inc. REIT......................... 397
547,500 Nationwide Health Properties, Inc. REIT........... 12,045
309,000 Omega Healthcare Investors, Inc. REIT............. 10,101
----------
29,910
----------
LAND (1.9%)
(a)589,684 Atlantic Gulf Communities Corp.................... 3,759
(a)117,200 Catellus Development Corp......................... 2,124
----------
5,883
----------
LODGING/LEISURE (11.2%)
561,900 American General Hospitality Corp. REIT........... 13,907
(a)324,400 Extended Stay America, Inc........................ 5,109
(a)318,300 Host Marriott Corp................................ 5,670
(a)473,000 John Q Hammons Hotels, Inc........................ 4,375
(a)203,900 Servico, Inc...................................... 3,033
64,400 Starwood Lodging Trust REIT....................... 2,749
----------
34,843
----------
MANUFACTURED HOME (6.6%)
530,452 Chateau Communities, Inc. REIT.................... 15,184
232,700 Manufactured Home
Communities, Inc. REIT.......................... 5,367
----------
20,551
----------
OFFICE AND INDUSTRIAL (22.1%)
INDUSTRIAL (3.3%)
35,750 EastGroup Properties, Inc. REIT................... 720
112,872 Meridian Industrial Trust, Inc. REIT.............. 2,652
313,100 Pacific Gulf Properties, Inc. REIT................ 6,888
----------
10,260
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
OFFICE (17.4%)
244,900 Arden Realty Group, Inc........................... $ 6,367
185,700 Beacon Properties Corp. REIT...................... 6,198
504,954 Brandywine Realty Trust REIT...................... 10,226
(a)7,400 Brookfield Properties Corp........................ 86
(a)256,600 Brookfield Properties Corp. (Installment
Receipts-second installment: CAD6.50/Shr due on
2/13/98)........................................ 1,794
195,600 CarrAmerica Realty Corp. REIT..................... 5,624
134,400 Cornerstone Properties, Inc. REIT................. 2,066
610,000 Great Lakes, Inc. REIT............................ 10,027
79,500 Kilroy Realty Corp. REIT.......................... 2,007
136,100 Koger Equity, Inc. REIT........................... 2,484
344,318 Trizec Hahn Corp. REIT............................ 7,360
----------
54,239
----------
OFFICE AND INDUSTRIAL (1.4%)
82,400 Boston Properties, Inc. REIT...................... 2,266
79,700 Prentiss Properties Trust REIT.................... 2,042
----------
4,308
----------
TOTAL OFFICE AND INDUSTRIAL................................. 68,807
----------
RETAIL (14.5%)
REGIONAL MALL (9.8%)
566,100 First Union Real Estate REIT...................... 7,996
382,600 Taubman Centers, Inc. REIT........................ 5,069
330,500 Urban Shopping Centers, Inc. REIT................. 10,535
420,100 Westfield America, Inc. REIT...................... 7,089
----------
30,689
----------
SHOPPING CENTER (1.5%)
80,100 Federal Realty Investment Trust REIT.............. 2,163
34,300 IRT Property Co. REIT............................. 403
2,200 Ramco-Gershenson Properties Trust REIT............ 39
149,000 Western Investment Real Estate
Trust REIT...................................... 2,067
----------
4,672
----------
STRIP CENTER (3.2%)
143,200 Alexander Haagen Properties, Inc. REIT............ 2,327
515,900 Burnham Pacific Property Trust REIT............... 7,094
10,300 Price REIT, Inc................................... 375
----------
9,796
----------
TOTAL RETAIL................................................ 45,157
----------
SELF STORAGE (1.5%)
166,600 Shurgard Storage Centers, Inc.,
Series A, REIT.................................. 4,665
----------
TOTAL COMMON STOCKS (Cost $238,864)........................... 270,811
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (0.8%)
SHOPPING CENTER (0.8%)
81,600 First Washington Realty Trust, Series A........... $ 2,489
(d)33,150 Great Lakes, Inc. REIT............................ --
----------
TOTAL PREFERRED STOCKS (Cost $2,285)............................ 2,489
----------
CONVERTIBLE PREFERRED STOCK (0.3%)
LAND (0.3%)
(a,d)107,021 Atlantic Gulf Communities Corp. (Cost $1,070)..... 1,070
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.4%)
INDUSTRIAL (0.4%)
(a)184,843 Meridian Industrial Trust, Inc. REIT, expiring
2/23/99......................................... 1,305
----------
LAND (0.0%)
(a,d)62,000 Atlantic Gulf Communities Corp., Class A, expiring
6/23/04......................................... --
(a,d)62,000 Atlantic Gulf Communities Corp., Class B, expiring
6/23/04......................................... --
(a,d)62,000 Atlantic Gulf Communities Corp., Class C, expiring
6/23/04......................................... --
----------
--
----------
TOTAL WARRANTS (Cost $300)...................................... 1,305
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CORPORATE BOND (0.5%)
OFFICE (0.5%)
$ 2,934 Brookfield Properties Corp. 6.00%, 2/14/07
(Installment Receipts -- second installment:
CAD50.00 per debenture due at 2/13/98) (Cost
$1,130)......................................... 1,637
----------
SHORT-TERM INVESTMENT (4.8%)
REPURCHASE AGREEMENT (4.8%)
14,913 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $14,915,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $15,164 (Cost $14,913)... 14,913
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS (93.7%) (Cost $258,562)...................... $ 292,225
----------
OTHER ASSETS (7.2%)
Receivable for Portfolio Shares Sold.............. $ 11,209
Receivable for Investments Sold................... 9,899
Dividends Receivable.............................. 1,336
Interest Receivable............................... 3
Other............................................. 1 22,448
----------
LIABILITIES (-0.9%)
Payable for Investments Purchased................. (1,774)
Investment Advisory Fees Payable.................. (504)
Bank Overdraft.................................... (347)
Payable for Portfolio Shares Redeemed............. (227)
Administrative Fees Payable....................... (35)
Custodian Fees Payable............................ (31)
Distribution Fees Payable......................... (6)
Directors' Fees & Expenses Payable................ (6)
Dividends Payable................................. (2)
Other Liabilities................................. (54) (2,986)
---------- ----------
NET ASSETS (100%)............................................... $ 311,687
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 246,279
Undistributed Net Investment Income............... 2,255
Accumulated Net Realized Gain..................... 29,490
Unrealized Appreciation on Investments............ 33,663
-----------
NET ASSETS........................................ $ 311,687
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------
NET ASSETS........................................ $299,436
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 18,741,365 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $15.98
-----------
-----------
CLASS B:
- --------
NET ASSETS........................................ $12,251
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 768,835 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $15.93
-----------
-----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
CAD -- Canadian Dollar
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.1%
Banking 15.3%
Capital Goods 2.5%
Chemicals 2.4%
Communications 7.0%
Consumer-Durables 3.9%
Consumer-Retail 7.4%
Consumer-Staples 7.3%
Energy 10.0%
Financial-Diversified 3.0%
Health Care 3.5%
Industrial 2.7%
Insurance 7.2%
Metals 1.3%
Paper & Packaging 4.2%
Services 3.8%
Technology 4.6%
Transportation 3.5%
Utilities 7.4%
Other 1.9%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE INDATA EQUITY-MEDIAN INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 13.49% 25.18% 17.24% 13.97%
PORTFOLIO -- CLASS B... 13.13 24.80 N/A 21.74
S&P 500 INDEX -- CLASS
A..................... 20.61 34.70 19.78 17.86
INDATA EQUITY-MEDIAN
INDEX -- CLASS A...... 15.44 27.86 17.91 16.06
S&P 500 INDEX -- CLASS
B..................... 20.61 34.70 N/A 29.55
INDATA EQUITY-MEDIAN
INDEX -- CLASS B...... 15.44 27.86 N/A 25.33
</TABLE>
1. The S&P 500 Stock Index and the Indata Equity-Median Index are unmanaged
indices of common stocks. The Indata Equity-Median Index includes an average
asset allocation of 7.6% cash and 92.4% equity based on $514 billion in
assets among 1,396 portfolios for the period ended June 30, 1997.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
Our value investment philosophy for the Value Equity Portfolio is based on the
premise that a diversified portfolio of undervalued securities will outperform
the market over the long-term, and can be expected to preserve principal in a
difficult market environment.
Key aspects of our philosophy are as follows:
Reversion to mean valuation levels (return to the long term average) is the
most consistent and powerful force in investing.
We buy companies selling at less than our research measures to be their true
worth.
Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.
We limit our universe of investments to larger, liquid stocks. This is a
list similar to the S&P 500.
Investment decisions are based on research undertaken by the Morgan Stanley
Asset Management/Chicago investment team.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.49% and 25.18%, respectively, for the Class A shares; and
13.13% and 24.80%, respectively, for the Class B shares as compared to total
returns of 20.61% and 34.70%, respectively, for the S&P 500 Index and 15.44% and
27.86%, respectively, for the Indata Equity-Median Index. For the five-year
period ended June 30, 1997 and for the period from inception on January 31, 1990
to June 30, 1997, the average annual total return for Class A was 17.24% and
13.97%, respectively, as compared to 19.78% and 17.86%, respectively, for the
S&P 500 Index and 17.91% and 16.06%, respectively, for the Indata Equity-Median
Index. From inception on January 2, 1996 to June 30, 1997, the average annual
total return of Class B was 21.74% as compared to 29.55% for the S&P 500 Index
and 25.33% for the Indata Equity-Median Index. According to LIPPER MUTUAL FUNDS
QUARTERLY, the average equity-income mutual fund (value-style fund) had a return
of 12.85% in the quarter ended June 30, 1997, while the average general equity
fund declined -1.98%, and 14.75% year-to-date.
- --------------------------------------------------------------------------------
Value Equity Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
PRICE-
EARNINGS PRICE-TO-BOOK
------------ ----------------
<S> <C> <C>
Value Equity Portfolio.............. 15.8x 2.8x
S&P 500............................. 21.0x 5.1x
</TABLE>
After a volatile and progressively weaker first quarter, the market solidly
rebounded in the second quarter, resulting in an overall very strong first half.
The major market indices peaked during the first quarter, bottomed in April and
advanced to new highs through June. Escalating fears of interest rate increases
and a strong economy growing at 5.8% in the first quarter contrasted with
subsiding fears of rate increases and a moderating economy in the second
quarter. This change in sentiment produced the difference in performance of the
first and second quarters. While the Fed did raise interest rates at one of the
three meetings held in the first half, strong corporate profitability, benign
inflation and strong mutual fund inflows supported the market advance in the
second quarter.
Within this environment, large cap stocks continued to significantly outperform
small cap stocks. The larger cap Russell 1000 returned 18.62% for the first half
compared to a return of 10.20% for the smaller cap Russell 2000. Style effect
depended upon market cap size. In the large cap area, growth outperformed value
stocks. The Russell 1000 Growth Index increased 19.55% for the first half
compared to the Russell 1000 Value Index return of 17.68%. In the small cap
area, value significantly outperformed growth as small cap growth stocks
declined severely during the first half, although they managed to rebound before
quarter-end. The Russell 2000 Value Index increased 14.81% compared to the
Russell 2000 Growth Index return of 5.23%.
During the first half, the best performing sectors in the Portfolio were capital
goods, up 37%, health care, up 35%, consumer services, up 29%, and metals, up
27%. Underperforming sectors for the first half included electric utilities,
which were flat, paper and forest products, up 2%, consumer durables, up 3%, and
transportation, up 5%. The best performing stocks in the first half were Deere,
up 37%, Sallie Mae, also up 37%, Bausch & Lomb, up 36%, and Texas Instruments,
Sprint and St. Paul Cos., all up 32%. Stocks providing the biggest
disappointment included AT&T, down 14%, Texas Utilities, down 13%, Pinnacle
West, down 4%, Eastman Kodak, down 3%, and Rockwell, down 2%.
Changes made to the Portfolio in the first half included decreasing the exposure
to consumer staples by selling the final position in American Brands and paring
back on Philip Morris and RJR Nabisco. We adjusted the composition of the energy
sector by establishing positions in Occidental Petroleum and USX-Marathon and
paring back Exxon, which outperformed other integrated oil peers during the
first half. We pared back on GPU due to concerns about the cost and resolution
of their stranded assets. We increased exposure to the retail sector by
purchasing a full position in Wal-Mart. Wal-Mart began generating positive free
cash flow in 1996 and recently announced a 30% dividend increase and a stock
buyback program. We also added to the existing Woolworth position on price
weakness. We established a partial position in Olin, a chemical company that is
also restructuring its businesses, selling assets, paying down debt and
generating cash for additional value-added actions. Finally, we sold the
remaining position in Apple Computer as the company fundamentals continued to
deteriorate and showed no signs of improvement. Compared to the S&P 500 Index,
we continue to overweight financial services and utilities, and underweight
technology and health care.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.1%)
AEROSPACE (1.1%)
13,000 United Technologies Corp.......................... $ 1,079
----------
BANKING (15.3%)
30,100 BankAmerica Corp.................................. 1,943
22,800 BankBoston Corp................................... 1,643
27,000 Bankers Trust (New York) Corp..................... 2,349
20,400 Chase Manhattan Corp.............................. 1,980
57,900 First of America Bank Corp........................ 2,649
57,800 Mellon Bank Corp.................................. 2,608
48,600 PNC Bank Corp..................................... 2,023
----------
15,195
----------
CAPITAL GOODS (2.5%)
44,800 Deere & Co........................................ 2,458
----------
CHEMICALS (2.4%)
32,075 Eastman Chemical Co............................... 2,037
9,600 Olin Corp......................................... 375
----------
2,412
----------
COMMUNICATIONS (7.0%)
73,600 AT&T Corp......................................... 2,581
42,500 Sprint Corp....................................... 2,237
56,000 U.S. WEST Communications Group.................... 2,110
----------
6,928
----------
CONSUMER-DURABLES (3.9%)
65,800 Chrysler Corp..................................... 2,159
30,400 General Motors Corp............................... 1,693
----------
3,852
----------
CONSUMER-RETAIL (7.4%)
49,200 J.C. Penney Co., Inc.............................. 2,568
60,400 Wal-Mart Stores, Inc.............................. 2,042
(a)116,000 Woolworth Corp.................................... 2,784
----------
7,394
----------
CONSUMER-STAPLES (7.3%)
118,700 Fleming Cos., Inc................................. 2,137
59,600 Philip Morris Cos., Inc........................... 2,645
74,300 RJR Nabisco Holdings Corp......................... 2,452
----------
7,234
----------
ENERGY (10.0%)
52,200 Ashland, Inc...................................... 2,421
40,000 Atlantic Richfield Co............................. 2,820
12,800 Exxon Corp........................................ 787
28,200 Mobil Corp........................................ 1,970
37,600 Occidental Petroleum Corp......................... 942
34,700 USX-Marathon Group................................ 1,002
----------
9,942
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL-DIVERSIFIED (3.0%)
23,250 Student Loan Marketing Association................ $ 2,953
----------
HEALTH CARE (3.5%)
56,000 Bausch & Lomb, Inc................................ 2,639
16,500 Baxter International, Inc......................... 862
----------
3,501
----------
INDUSTRIAL (2.7%)
13,362 Hanson plc ADR.................................... 334
39,900 Rockwell International Corp....................... 2,354
----------
2,688
----------
INSURANCE (7.2%)
46,200 American General Corp............................. 2,206
43,500 Lincoln National Corp............................. 2,800
28,000 St. Paul Cos., Inc................................ 2,135
----------
7,141
----------
METALS (1.3%)
15,400 Phelps Dodge Corp................................. 1,312
----------
PAPER & PACKAGING (4.2%)
97,200 Louisiana-Pacific Corp............................ 2,053
30,600 Willamette Industries, Inc........................ 2,142
----------
4,195
----------
SERVICES (3.8%)
11,200 Eastman Kodak Co.................................. 859
16,700 McGraw-Hill Cos., Inc............................. 982
88,400 Ogden Corp........................................ 1,923
----------
3,764
----------
TECHNOLOGY (4.6%)
33,900 Harris Corp....................................... 2,848
20,889 Texas Instruments, Inc............................ 1,756
----------
4,604
----------
TRANSPORTATION (3.5%)
(a)17,900 AMR Corp.......................................... 1,656
56,100 Ryder System, Inc................................. 1,851
----------
3,507
----------
UTILITIES (7.4%)
41,800 GPU, Inc.......................................... 1,500
53,100 NIPSCO Industries, Inc............................ 2,194
63,100 Pinnacle West Capital Corp........................ 1,897
52,700 Texas Utilities Co................................ 1,815
----------
7,406
----------
TOTAL COMMON STOCKS (Cost $76,870)............................ 97,565
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.4%)
REPURCHASE AGREEMENT (0.4%)
$ 366 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $366,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $375 (Cost $366)......... $ 366
----------
TOTAL INVESTMENTS (98.5%) (Cost $77,236)...................... 97,931
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Receivable for Investments Sold............ $ 1,466
Dividends Receivable....................... 295
Other...................................... 5 1,766
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable........... (108)
Payable for Fund Shares Redeemed........... (45)
Administrative Fees Payable................ (14)
Custodian Fees Payable..................... (14)
Directors' Fees & Expenses Payable......... (5)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (35) (222)
---------- --------
NET ASSETS (100%)........................................ $ 99,475
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 64,859
Undistributed Net Investment Income.... 607
Accumulated Net Realized Gain.......... 13,314
Unrealized Appreciation on
Investments.......................... 20,695
----------
NET ASSETS............................. $ 99,475
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $97,500
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 6,227,527 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $15.66
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,975
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 126,488 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $15.62
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 0.5%
Banking 7.1%
Capital Goods 1.1%
Chemicals 1.0%
Communications 3.2%
Consumer - Durables 2.0%
Consumer - Retail 3.7%
Consumer - Service & Growth 1.4%
Consumer - Staples 3.4%
Energy 5.4%
Financial - Diversified 1.4%
Health Care 1.6%
Industrial 1.6%
Insurance 3.2%
Metals 1.1%
Paper & Packaging 1.9%
Services 0.8%
Technology 2.3%
Transportation 1.2%
Utilities 3.8%
U.S. Treasury Notes 47.1%
Other 5.2%
</TABLE>
PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX(1)
- -----------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 8.01% 15.30% 11.41% 10.82%
PORTFOLIO -- CLASS
B.................... 7.70 14.82 N/A 12.18
INDEX -- CLASS A..... 11.36 20.86 13.25 12.42
INDEX -- CLASS B..... 11.36 20.86 N/A 17.62
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 1.9% cash, 36.8% bonds and 61.3% equity based on $49 billion in
assets among 549 portfolios for the period ended June 30, 1997 (includes
dividends). The index returns are gross of management fees; the Portfolio
returns are net of management fees and other expenses.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The Balanced Portfolio's value investment philosophy is based on the premise
that a diversified portfolio of undervalued equity securities and fixed income
securities will outperform the market over the long-term and can be expected to
preserve principal in a difficult market environment.
The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 8.01% and 15.30%, respectively, for the Class A shares; and
7.70% and 14.82%, respectively, for the Class B shares as compared to total
returns of 11.36% and 20.86%, respectively, for the Indata Balanced-Median Index
(the "Index"). For the five-year period ended June 30, 1997, the average annual
total return of Class A was 11.41% as compared to 13.25% for the Index. From
inception on February 20, 1990 to June 30, 1997, the average annual total return
of Class A was 10.82% as compared to 12.42% for the Index. From inception on
January 2, 1996 to June 30, 1997, the average annual total return of Class B was
12.18% as compared to 17.62% for the Index.
Our asset allocation, based on market value at June 30, 1997, is as follows:
<TABLE>
<S> <C>
Equities............................................. 48.0%
Fixed Income......................................... 47.3
Cash................................................. 4.7
---------
100%
---------
---------
</TABLE>
EQUITIES
For the quarter ended June 30, 1997, the equity component of the Balanced
Portfolio had a gross return of 11.39% and for six months ended June 30, 1997
returned 14.73%. The S&P 500 returned 17.46% for the quarter ended June 30, 1997
and 20.61% for the six months ended June 30, 1997.
After a volatile and progressively weaker first quarter, the market solidly
rebounded in the second quarter, resulting in an overall very strong first half.
The major market indices peaked during the first quarter, bottomed in April and
advanced to new highs through June. Escalating fears of interest rate increases
and a strong economy growing at 5.8% in the first quarter contrasted with
subsiding fears of rate increases and a moderating economy in the second
quarter. This change in sentiment produced the difference in
- --------------------------------------------------------------------------------
Balanced Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
performance of the first and second quarters. While the Fed did raise interest
rates at one of the three meetings held in the first half, strong corporate
profitability, benign inflation and strong mutual fund inflows supported the
market advance in the second quarter.
Within this environment, large cap stocks continued to significantly outperform
small cap stocks. The larger cap Russell 1000 returned 18.62% for the first half
compared to a return of 10.20% for the smaller cap Russell 2000. Style effect
depended upon market cap size. In the large cap area, growth outperformed value
stocks. The Russell 1000 Growth Index increased 19.55% for the first half
compared to the Russell 1000 Value Index return of 17.68%. In the small cap
area, value significantly outperformed growth as small cap growth stocks
declined severely during the first half, although they managed to rebound before
second quarter-end. The Russell 2000 Value Index increased 14.81% compared to
the Russell 2000 Growth Index return of 5.23%.
The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the MSIF Value Equity Portfolio. The equity portion
of the Portfolio has a wide valuation gap as compared to the characteristics of
the S&P 500 Index.
<TABLE>
<CAPTION>
P/E P/B
---------- ----------
<S> <C> <C>
Portfolio-equity portion.................... 15.8x 2.8x
S&P 500..................................... 21.0x 5.1x
</TABLE>
During the first half, the best performing sectors in the equity portion of the
Portfolio were capital goods, up 37%, health care, up 35%, consumer services, up
29%, and metals, up 27%. Underperforming sectors for the first half included
electric utilities, which were flat, paper and forest products, up 2%, consumer
durables, up 3%, and transportation, up 5%. The best performing stocks in the
first half were Deere, up 37%, Sallie Mae, also up 37%, Bausch & Lomb, up 36%,
and Texas Instruments, Sprint and St. Paul Cos., all up 32%. Stocks providing
the biggest disappointment included AT&T, down 14%, Texas Utilities, down 13%,
Pinnacle West, down 4%, Eastman Kodak, down 3%, and Rockwell, down 2%.
Changes made to the equity portion of the Portfolio in the first half included
decreasing the exposure to consumer staples by selling the final position in
American Brands and paring back on Philip Morris and RJR Nabisco. We adjusted
the composition of the energy sector by establishing positions in Occidental
Petroleum and USX-Marathon and paring back Exxon, which outperformed other
integrated oil peers during the first half. We pared back on GPU due to concerns
about the cost and resolution of their stranded assets. We increased exposure to
the retail sector by purchasing a full position in Wal-Mart. Wal-Mart began
generating positive free cash flow in 1996 and recently announced a 30% dividend
increase and a stock buyback program. We also added to the existing Woolworth
position on price weakness. We established a partial position in Olin, a
chemical company that is also restructuring its businesses, selling assets,
paying down debt and generating cash for additional value-added actions.
Finally, we sold the remaining position in Apple Computer as the company
fundamentals continued to deteriorate and showed no signs of improvement.
Compared to the S&P 500 Index, we continue to overweight financial services and
utilities, and underweight technology and health care.
FIXED INCOME
The fixed income portion of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the six months
ended June 30, 1997, the fixed income portion of the Portfolio had total return
of 2.74% compared to a return of 2.83% for the Lehman
Intermediate-Government/Corporate Index (MSAM/Chicago's fixed-income benchmark).
The Portfolio began the year at a weighted average maturity of 3.3 years. During
the first half of 1997, interest rates rose across all maturity spectrums, with
the largest increase occurring in the two, three and five year maturities. This
upward shift in the yield curve hurt the performance of the Portfolio. With the
continued strength in the economy, the increase in short-term Fed funds rate,
and the potential for further rate increases, we have allowed the weighted
average maturity and average duration of the fixed income portion of the
Portfolio to shorten. We are comfortable with our current position, which is
less than the benchmark.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (47.7%)
AEROSPACE (0.5%)
450 United Technologies Corp.......................... $ 37
----------
BANKING (7.1%)
1,100 BankAmerica Corp.................................. 71
800 BankBoston Corp................................... 58
750 Bankers Trust (New York) Corp..................... 65
650 Chase Manhattan Corp.............................. 63
1,800 First of America Bank Corp........................ 82
1,600 Mellon Bank Corp.................................. 72
1,450 PNC Bank Corp..................................... 61
----------
472
----------
CAPITAL GOODS (1.1%)
1,300 Deere & Co........................................ 71
----------
CHEMICALS (1.0%)
825 Eastman Chemical Co............................... 52
400 Olin Corp......................................... 16
----------
68
----------
COMMUNICATIONS (3.2%)
2,500 AT&T Corp......................................... 88
1,050 Sprint Corp....................................... 55
1,800 U.S. West, Inc.................................... 68
----------
211
----------
CONSUMER-DURABLES (2.0%)
2,050 Chrysler Corp..................................... 67
1,150 General Motors Corp............................... 64
----------
131
----------
CONSUMER-RETAIL (3.7%)
1,550 J.C. Penney Co., Inc.............................. 81
2,000 Wal-Mart Stores, Inc.............................. 68
(a)4,000 Woolworth Corp.................................... 96
----------
245
----------
CONSUMER-SERVICE & GROWTH (1.4%)
400 Eastman Kodak Co.................................. 31
2,900 Ogden Corp........................................ 63
----------
94
----------
CONSUMER-STAPLES (3.4%)
3,500 Fleming Cos., Inc................................. 63
1,925 Philip Morris Cos., Inc........................... 85
2,500 RJR Nabisco Holdings Corp......................... 83
----------
231
----------
ENERGY (5.4%)
1,700 Ashland, Inc...................................... 79
1,200 Atlantic Richfield Co............................. 84
550 Exxon Corp........................................ 34
1,200 Mobil Corp........................................ 84
1,400 Occidental Petroleum Corp......................... 35
1,700 USX-Marathon Group................................ 49
----------
365
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL-DIVERSIFIED (1.4%)
750 Student Loan Marketing Association................ $ 95
----------
HEALTH CARE (1.6%)
1,650 Bausch & Lomb, Inc................................ 78
600 Baxter International, Inc......................... 31
----------
109
----------
INDUSTRIAL (1.6%)
556 Hanson plc ADR.................................... 14
1,550 Rockwell International Corp....................... 91
----------
105
----------
INSURANCE (3.2%)
1,050 American General Corp............................. 50
1,450 Lincoln National Corp............................. 93
900 St. Paul Cos., Inc................................ 69
----------
212
----------
METALS (1.1%)
850 Phelps Dodge Corp................................. 73
----------
PAPER & PACKAGING (1.9%)
3,100 Louisiana-Pacific Corp............................ 66
900 Willamette Industries, Inc........................ 63
----------
129
----------
SERVICES (0.8%)
900 McGraw-Hill Cos., Inc............................. 53
----------
TECHNOLOGY (2.3%)
1,125 Harris Corp....................................... 94
700 Texas Instruments, Inc............................ 59
----------
153
----------
TRANSPORTATION (1.2%)
(a)500 AMR Corp.......................................... 46
1,150 Ryder System, Inc................................. 38
----------
84
----------
UTILITIES (3.8%)
1,450 GPU, Inc.......................................... 52
1,700 NIPSCO Industries, Inc............................ 71
2,100 Pinnacle West Capital Corp........................ 63
1,950 Texas Utilities Co................................ 67
----------
253
----------
TOTAL COMMON STOCKS (Cost $2,425)............................. 3,191
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITY (47.1%)
US TREASURY NOTE (47.1%)
$ 3,203 U.S. Treasury Note 5.50%, 4/15/00 (Cost $3,129)... 3,146
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
$ 313 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $313,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $320 (Cost $313)......... $ 313
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.5%) (Cost $5,867)......................... 6,650
--------
OTHER ASSETS (0.9%)
Cash............................................ $ 1
Interest Receivable............................. 37
Dividends Receivable............................ 9
Due from Adviser................................ 8
Receivable for Investments Sold................. 6 61
----------
LIABILITIES (-0.4%)
Professional Fees Payable....................... (11)
Custodian Fees Payable.......................... (7)
Administrative Fees Payable..................... (1)
Directors' Fees & Expenses Payable.............. (1)
Distribution Fees Payable....................... (1)
Other Liabilities............................... (5) (26)
---------- --------
NET ASSETS (100%)............................................... $ 6,685
--------
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 5,157
Undistributed Net Investment Income.... 67
Accumulated Net Realized Gain.......... 678
Unrealized Appreciation on
Investments.......................... 783
----------
NET ASSETS............................. $ 6,685
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $5,439
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 621,766 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $8.75
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,246
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 142,899 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $8.72
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 11.8%
Brazil 14.9%
Bulgaria 5.0%
Ecuador 2.4%
Ivory Coast 3.9%
Jamaica 5.0%
Mexico 20.1%
Morocco 3.6%
Panama 1.4%
Peru 2.6%
Russia 19.7%
South Africa 2.5%
Venezuela 12.5%
Other -5.4%
</TABLE>
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND PLUS INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------
AVERAGE
ANNUAL
SINCE
YTD ONE YEAR INCEPTION
---------- ------------ ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A......... 17.24% 49.05% 21.51%
PORTFOLIO -- CLASS B......... 17.13 48.77 44.89
INDEX -- CLASS A............. 10.27 33.04 14.37
INDEX -- CLASS B............. 10.27 33.04 32.32
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of all Brady bonds outstanding loans and Eurobonds, as well as U.S.
Dollar local market instruments of Argentina, Brazil, Bulgaria, Mexico,
Morocco, Russia, Nigeria, the Philippines, Poland and Venezuela.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government,
government-related and corporate issuers located in emerging countries.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 17.24% and 49.05%, respectively, for the Class A shares; and
17.13% and 48.77%, respectively, for the Class B shares as compared to total
returns of 10.27% and 33.04%, respectively, for the J.P. Morgan Emerging Markets
Bond Plus Index (the "Index"). From inception on February 1, 1994 to June 30,
1997, the average annual total return of Class A was 21.51% as compared to
14.37% for the Index. From inception on January 2, 1996 to June 30, 1997, the
average annual total return of Class B was 44.89% as compared to 32.32% for the
Index. As of June 30, 1997, the Portfolio had a 30-day yield of 8.07% for the
Class A shares and 7.90% for the Class B shares.
For the first few weeks of the fiscal year the trend of an across the board
tightening of credit spreads continued unabated. Attractive relative valuations,
the stretch for incremental yield and easy global monetary conditions prompted
increases in allocations to emerging market assets. Federal Reserve Governor
Greenspan's comments on the state of credit markets, extended valuations and
mispricing of risk stopped the music suddenly. A correction in fixed income
markets started in late February and lasted for much of March.
The emerging markets didn't surprise by behaving differently during this market
correction. An increase in risk premiums affected all countries and all bonds. A
correction, precipitated by possible Fed action and deepened by redemptions and
a reduction in committed capital tends to affect the broad market. The weight of
money heading for the exits drowns the fundamentals for a while.
During the second quarter of 1997, the emerging debt markets recovered from
their late first quarter correction buoyed by falling U.S. interest rates and a
renewed investor appetite for yield. U.S. interest rates fell by 35 to 40 basis
points across the yield curve. This decline in rates was prompted by signs of
moderating economic growth and the lack of evidence of any inflationary
pressures in the system. These factors reassured investors that the Federal
Reserve would not increase interest rates anytime soon. In addition to the
positive interest rate environment, a confluence of
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
events both fundamental and technical in nature bolstered the performance of
emerging markets debt. On the fundamental front, improving macro-economic
outlooks and rating upgrades by major U.S. ratings agencies in Argentina,
Brazil, the Philippines, Uruguay, and Venezuela provided support. While on
the technical front, a continuation of the trend of Brady bond retirement and
debt buybacks as well as a strong inflow of funds from non-dedicated or
"crossover" investors caused spreads on emerging markets debt to tighten back
to levels not seen since 1993.
During the first half of the year, Bulgaria, Morocco, and Peru outperformed the
universe of emerging market debt, while the Philippines, Poland, and Nigeria
were the performance laggards. The Portfolio's overweight positions in Bulgaria
and Morocco as well as underweights in Nigeria, the Philippines and Poland
allowed the Portfolio to outperform the broad market benchmark.
Bulgarian bonds were the best performing in the emerging country universe during
the second quarter. The election of a reformist democratic government in April
assured investors that prudent macro-economic policy measures would be enacted.
The new government secured technical and financial help from the IMF and the
World Bank and adopted a policy framework to facilitate the July 1st
introduction of a currency board monetary system. As prices of Bulgarian Brady
bonds rose, we reduced our exposure to the credit but remained overweight. We
expect continued outperformance next quarter from our Bulgarian positions albeit
at a more gradual pace.
Morocco benefited from an economic recovery following 1995's drought. The
prospect of favorable ratings also buoyed prices. We used the rally to reduce
our allocation to Morocco in the spring and will consider increasing them again
once valuations reach attractive levels again and are consistent with our
expectations for a BB rating. The other outperforming credit, Peru, reacted to
the release of above-consensus GDP growth numbers of over 7% for the first six
months of the year.
Our value-oriented investment style steered us away from the debt of the
Philippines and Poland which both trade at fully valued levels. Both countries
suffered from their proximity to the turbulence of neighboring currency markets
and both were forced to keep local interest rates high in a defensive move
against possible speculative attacks on their own currencies. We will monitor
both situations closely and may increase our exposure should valuations become
more attractive.
Deteriorating political dynamics caused us to avoid Nigerian debt which suffered
form its failed involvement in the unrest in neighboring Sierra Leone. The
Nigerian's inability to install the former civilian government has undermined
political stability in Nigeria. Also, lack of progress on economic reforms has
reduced the prospect of a new IMF agreement and consequently, debt forgiveness.
Our outlook remains cautiously positive. The benign U.S. rate environment,
improving economic fundamentals in the emerging countries and growing investor
interest in the emerging debt asset class should cause risk premiums on emerging
markets debt to come down and prices to rise over the medium term. Over the
short-term, however, we will be watching for signs of fatigue as spreads are
near historic lows and we expect some profit taking. Additionally, some emerging
countries in Asia and eastern Europe are experiencing considerable local
currency volatility and we will be monitoring the potential contagion effects on
emerging debt.
Paul Ghaffari
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
DEBT INSTRUMENTS (97.3%)
ARGENTINA (11.8%)
BONDS (11.8%)
U.S.$ 2,900 Republic of Argentina Global Bond 11.00%,
10/09/06........................................ $ 3,226
(n)2,500 Republic of Argentina Par Bonds, Series L, 5.50%,
3/31/23......................................... 1,734
ARP (e)1,200 Republic of Argentina, 11.75%, 2/12/07............ 1,338
U.S.$ (s)13,968 Republic of Argentina, Series L, "Euro" (Floating
Rate) 6.75%, 3/31/05............................ 13,139
----------
19,437
----------
BRAZIL (10.4%)
BONDS (10.4%)
3,250 Federative Republic of Brazil, C Bond, PIK, 8.00%,
4/15/04......................................... 2,613
12,500 Federative Republic of Brazil Debt Conversion
Bond, Series Z-L, (Floating Rate) 6.938%,
4/15/12......................................... 10,344
4,395 Federative Republic of Brazil Global Bond,
10.125%, 5/15/27................................ 4,237
----------
17,194
----------
BULGARIA (5.0%)
BONDS (5.0%)
4,450 Republic of Bulgaria Discount Bond, Series A,
"Euro", (Floating Rate) 6.563%, 7/28/24......... 3,282
(n)7,750 Republic of Bulgaria Front Loaded Interest
Reduction Bond, Series A, 2.25%, 7/28/12........ 4,427
900 Republic of Bulgaria Interest Arrears PDI Bond,
(Floating Rate) 6.563%, 7/28/11................. 651
----------
8,360
----------
ECUADOR (2.4%)
BONDS (2.4%)
(e)1,500 Conecel, 14.00%, 5/01/02.......................... 1,594
3,300 Republic of Ecuador Discount Bond, (Floating Rate)
6.438%, 2/28/25................................. 2,359
----------
3,953
----------
IVORY COAST (3.9%)
LOAN AGREEMENTS (3.9%)
FRF (b)3,100 Republic of Ivory Coast Syndicated Loan, zero
coupon, 12/31/00................................ 5,088
DEM (b)2,295 Republic of Ivory Coast Syndicated Loan, zero
coupon, 12/31/00................................ 553
U.S.$ (b)1,800 Republic of Ivory Coast Syndicated Loan, zero
coupon, 12/31/00................................ 756
----------
6,397
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
JAMAICA (5.0%)
BONDS (5.0%)
U.S.$ 4,000 Government of Jamaica, Series Regs, 9.625%,
7/02/02......................................... $ 4,025
(e)4,000 Mechala Group, Jamaica, 12.75%, 12/30/99.......... 4,230
----------
8,255
----------
MEXICO (16.5%)
BONDS (16.5%)
5,900 Bancomext Global Bond, 7.25%, 2/02/04............. 5,509
(e)3,000 Bufete Industrial, 11.375%, 7/15/99............... 3,133
4,500 Empresas ICA Sociedad Controladora, Series Regs,
11.875%, 5/30/01................................ 4,916
3,100 Mexico Discount Note, Series A, 6.867%,
12/31/19........................................ 2,885
ZAR 8,000 Nacional Financiera SNC, 17.00%, 2/26/99.......... 1,763
U.S.$ 4,800 United Mexican States 6.25%, 12/31/19............. 3,711
3,700 United Mexican States Global Bond, 11.50%,
5/15/26......................................... 4,229
1,400 United Mexican States Par Bonds, Series B, 6.25%,
12/31/19........................................ 1,083
----------
27,229
----------
MOROCCO (3.6%)
LOAN AGREEMENTS (3.6%)
(e,l)6,500 Kingdom of Morocco Restructuring and Consolidation
Agreement, Tranche A, (Floating Rate) 6.813%,
1/01/09 (Participation: J.P. Morgan)............ 5,960
----------
PANAMA (1.4%)
BONDS (1.4%)
140 Republic of Panama Interest Reduction Bond,
(Floating Rate) 3.50%, 7/17/14.................. 108
(n)1,962 Republic of Panama Interest Reduction Bond, 3.50%,
7/17/14......................................... 1,516
710 Republic of Panama PDI Bond, (Floating Rate) PIK
6.563%, 7/17/16................................. 624
----------
2,248
----------
PERU (2.6%)
BONDS (2.6%)
(e,n)7,198 Republic of Peru Front Loaded Interest Reduction
Bond, Series US, 3.25%, 3/07/17................. 4,301
----------
RUSSIA (19.7%)
BONDS (10.1%)
7 Ministry of Finance Tranche IV, 3.00%, 5/14/03.... 5
4,500 Ministry of Finance Tranche IV, Euro, GDR, 3.00%,
5/14/03......................................... 3,019
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
RUSSIA (CONT.)
BONDS (CONT.)
<TABLE>
<C> <S> <C>
U.S.$ 16,625 Ministry of Finance Tranche IV, GDR, 3.00%,
5/14/03......................................... $ 11,155
4,500 Ministry of Finance Tranche VI, GDR, 3.00%,
5/14/06......................................... 2,443
101 Ministry of Finance Tranche IV, (Letter of
Entitlement) 3.00%, 5/14/03..................... 68
----------
16,690
----------
LOAN AGREEMENTS (3.9%)
(b,k)2,150 Bank for Foreign Economic Affairs, 12/31/99....... 1,973
DEM (l)6,200 International Bank for Economic Cooperation
12/31/00 (Participation: Salomon Brothers,
Inc.)........................................... 2,223
U.S.$ (l)3,600 International Bank for Economic Cooperation
12/31/00 (Participation: Salomon Brothers,
Inc.)........................................... 2,250
----------
6,446
----------
NOTES (5.7%)
(e,v)10,800 Russia Principal Notes, 12/29/49.................. 7,206
(e,v)2,800 Russian Interest Arrears Note, 12/29/49........... 2,139
----------
9,345
----------
32,481
----------
SOUTH AFRICA (2.5%)
BONDS (2.5%)
ZAR 20,800 Republic of South Africa, Series 150, 12.00%,
2/28/05......................................... 4,092
----------
VENEZUELA (12.5%)
BONDS (12.5%)
U.S.$ 11,750 Republic of Venezuela Debt Conversion Bond, Series
DL, (Floating Rate) 6.75%, 12/18/07............. 10,905
3,450 Republic of Venezula Discount Bonds, Series A,
(Floating Rate) 6.813%, 3/31/20................. 3,058
2,100 Republic of Venezuela Discount Bonds, Series B,
(Floating Rate) 6.813%, 3/31/20................. 1,861
(n)238 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series A, (Floating Rate)
6.75%, 3/31/07.................................. 221
5,000 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series B, (Floating Rate)
6.75%, 3/31/07.................................. 4,652
----------
20,697
----------
TOTAL DEBT INSTRUMENTS (Cost $153,002)............................. 160,604
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
STRUCTURED INVESTMENTS (8.1%)
BRAZIL (4.5%)
U.S.$ 7,500 Salomon Brothers Federative Republic of Brazil
Credit Linked Enhanced Note 9.00%, 1/05/99...... $ 7,428
----------
MEXICO (3.6%)
8,300 Chase Manhattan Bank United Mexican States
Stripped Discount Bond 6.375%, 9/09/97.......... 6,014
----------
TOTAL STRUCTURED INVESTMENTS (Cost $13,285)........................ 13,442
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.0%)
MEXICO (0.0%)
(a)10,969 United Mexican States, expiring 6/30/03 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
VENEZUELA (0.0%)
(a)52,125 Republic of Venezuela Oil, expiring 3/31/20 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENTS (6.5%)
REPURCHASE AGREEMENT (6.2%)
U.S.$ 10,174 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $10,176,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $10,348.................. 10,174
----------
COMMERCIAL PAPER (0.3%)
ZAR 2,300 Eskom 15.50%, 8/12/97............................. 498
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $10,681)........................ 10,672
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- -------------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (111.9%) (Cost $176,968)............... $184,718
--------
OTHER ASSETS (18.7%)
Cash....................................... $ 270
Receivable for Investments Sold............ 27,314
Interest Receivable........................ 3,167
Receivable for Portfolio Shares Sold....... 187
Dividend Receivable........................ 6
Other...................................... 8 30,952
----------
LIABILITIES (-30.6%)
Payable for Investments Purchased.......... (39,107)
Payable for Reverse Repurchase Agreement... (7,054)
Payable for Closed Short Sales............. (2,979)
Interest Payable on Securities Sold Short.. (588)
Investment Advisory Fees Payable........... (395)
Payable for Closed Foreign Currency
Contracts................................ (263)
Custodian Fees Payable..................... (86)
Administrative Fees Payable................ (22)
Directors' Fees & Expenses Payable......... (7)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (35) (50,538)
---------- --------
NET ASSETS (100%)........................................ $165,132
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $123,054
Undistributed Net Investment Income............... 6,495
Accumulated Net Realized Gain..................... 27,869
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 7,714
--------
NET ASSETS........................................ $165,132
--------
--------
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $162,199
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 18,356,235 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $8.84
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $2,933
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 332,523 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $8.82
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing security-in default
(e) -- 144A Security -- certain conditions for public sale may exist.
(k) -- Under restructuring at June 30, 1997 -- See note A-7 to financial
statements.
(l) -- Participation interests were acquired through the financial
institutions listed parenthetically.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(s) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1997 -- See note A-4 to
Financial Statements.
(v) -- When-issued security -- See note A-7 to financial statements.
ARP -- Argentine Peso
DEM -- German Mark
FRF -- French Franc
GDR -- Global Depositary Receipt
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
PDI -- Past Due Interest
ZAR -- South African Rand
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect at June 30, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Securities 14.7%
Corporate Bonds & Notes 17.8%
Foreign Government & Agency Obligations 4.3%
U.S. Government & Agency Obligations 51.6%
Other 11.6%
</TABLE>
PERFORMANCE COMPARED TO THE LEHMAN
AGGREGATE BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 3.13% 8.89% 7.25% 8.19%
PORTFOLIO -- CLASS
B.................... 3.16 8.75 N/A 5.05
INDEX -- CLASS A..... 3.09 8.15 7.12 8.15
INDEX -- CLASS B..... 3.09 8.15 N/A 4.54
</TABLE>
1. The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Fixed Income Portfolio invests primarily in a diversified portfolio of U.S.
Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 3.13% and 8.89%, respectively, for the Class A shares; and
3.16% and 8.75%, respectively, for the Class B shares as compared to total
returns of 3.09% and 8.15%, respectively, for the Lehman Aggregate Bond Index
(the "Index"). For the five-year period ended June 30, 1997, the average annual
total return of Class A was 7.25% as compared to 7.12% for the Index. From
inception on May 15, 1991 to June 30, 1997, the average annual total return of
Class A was 8.19% as compared to 8.15% for the Index. From inception on January
2, 1996 to June 30, 1997, the average annual total return of Class B was 5.05%
as compared to 4.54% for the Index. As of June 30, 1997, the Portfolio had an
SEC 30-day yield of 6.31% for the Class A shares and 6.15% for the Class B
shares.
The fixed income markets rebounded from a weak first quarter to turn in a solid
performance in the second quarter of 1997. With bond yields falling by roughly
35 basis points over the quarter, the Lehman Aggregate Bond Index returned 3.67%
and the Lehman Government Corporate Index returned 3.64% for the quarter. This
represents the best returns for these indices since the fourth quarter of 1995.
Two key factors drove bond market returns during the second quarter. First,
economic growth slowed markedly from the very rapid pace of the first quarter.
As a result, concerns that too rapid a pace of economic growth would force
further preemptive tightening of monetary policy by the Federal Reserve were at
least temporarily put aside. Perhaps more importantly, though, the major
inflation measures remained exceptionally well behaved. The year-over-year
change in the core Consumer Price Index has declined to its lowest level in more
than 30 years, while the Producer Price Index has registered five straight
monthly negative readings for the first time in 40 years. Concerns over rising
labor costs were also moderated by a favorable release of the Employment Cost
Index in late April. With an economy slowing to
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
a more moderate growth pace and with no signs of inflation, the Federal Reserve
did not tighten monetary policy at either its May or July meetings.
The bond market, not surprisingly, responded quite favorably to these
developments, with interest rates falling between 30 and 40 basis points across
the yield curve. While the Fed remains watchful for signals of potential
inflation pressures, market participants, having previously believed that the
Fed would tighten in response to strong economic growth, have increasingly
concluded that given the exceptionally well behaved nature of inflation measures
to date, the Fed is unlikely to tighten further without a deterioration in these
measures.
From a sector standpoint, the non-Treasury sectors continued their trend of
strong relative performance. After widening further in April following some
softness in March, most corporate spreads recovered to close tighter on the
quarter as credit fundamentals remain broadly positive. The mortgage-backed
sector performed very well despite the market rally. Low volatility and a benign
prepayment environment have caused spreads on this sector to reach their
tightest levels in many years.
Relative to the U.S. bond market, foreign bond markets turned in a mixed
performance during the second quarter. Yields rose in Japan, for example, and
although they fell in Germany, they did not do so by a sufficient amount to
outperform the U.S. markets. Higher yielding European markets such as Italy and
Spain turned in the best performance.
SECOND QUARTER STRATEGY REVIEW
We made a number of adjustments to the Portfolio in the second quarter. First,
we extended our duration to roughly 0.4 years longer than our benchmark. Our
primary focus in determining an appropriate duration is market trend and market
valuation. While market valuation in terms of real interest rates had been at
attractive levels for some time, we were reluctant to add duration while the
interest rate trend was one of rising rates. When this trend changed in early
May, we viewed this as a favorable opportunity to add duration. We also reduced
our overweighted position in mortgage-backed securities during the quarter,
reflective of the rich historical valuations on the sector. Our remaining
holdings of mortgage pass-throughs are concentrated in those segments of the
market with more favorable convexity characteristics such as discount and
seasoned mortgage-backed securities. The Portfolio remains overweighted in
corporate bonds and changes to this sector during the quarter were relatively
minor.
THIRD QUARTER OUTLOOK
We begin the third quarter roughly 0.5 years longer in duration than our
benchmark. The falling interest rate trend and favorable market valuation
support this position. We would likely return to a neutral position if either of
these indicators becomes unfavorable. We anticipate maintaining an overweight
position in yield advantaged sectors primarily in the corporate and asset-backed
sectors and will continue to look for issue-specific opportunities in these
areas. We are less likely to increase our mortgage pass-through exposure absent
a change in valuation for this sector.
Warren Ackerman, III
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Fixed Income Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FIXED INCOME SECURITIES (88.4%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (51.6%)
U.S. TREASURY BOND (5.4%)
$ 7,000 7.25%, 8/15/22.................................... $ 7,307
----------
U.S. TREASURY NOTES (30.4%)
6,000 6.25%, 5/31/00.................................... 6,003
15,000 7.25%, 8/15/04.................................... 15,638
20,000 6.50%, 8/15/05.................................... 19,944
----------
41,585
----------
48,892
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
9 13.00%, 9/01/10................................... 11
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (15.8%)
4,404 6.00%, 9/01/10.................................... 4,276
5,365 6.00%, 2/01/11.................................... 5,190
3,730 6.00%, 5/01/11.................................... 3,609
8,850 6.50%, 4/01/24.................................... 8,532
----------
21,607
----------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS.................. 70,510
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATION (4.3%)
6,000 Republic of Poland, "Euro", (Floating Rate),
6.9375%, 10/27/24............................... 5,886
----------
CORPORATE BONDS AND NOTES (17.8%)
BROADCAST-RADIO & TELEVISION (1.0%)
1,500 News America Holdings,
7.75%, 12/01/45................................. 1,404
----------
FINANCE (14.0%)
2,000 First Chicago, 7.75%, 12/01/26.................... 1,915
5,000 General Motors Acceptance Corp., 7.375%,
6/22/00......................................... 5,099
3,000 Goldman Sachs Group, 6.25%, 2/01/03............... 2,906
3,500 Lehman Brothers Holdings, Inc., 7.375%, 5/15/04... 3,521
1,500 Liberty Mutual, 7.875%, 10/15/26.................. 1,497
(e)1,500 Lumbermens Mutual Casualty Co., 9.15%, 7/01/26.... 1,646
2,500 USF&G Capital Corp., I, 8.50%, 12/15/45........... 2,558
----------
19,142
----------
INDUSTRIAL (2.8%)
2,500 American General Institutional Capital, Series A,
7.57%, 12/01/45................................. 2,347
1,500 Hyundai Semiconductor, 8.25%, 5/15/04............. 1,513
----------
3,860
----------
TOTAL CORPORATE BONDS AND NOTES............................. 24,406
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ASSET BACKED SECURITIES (14.7%)
$ 2,500 BT Capital Trust, Series B1, 7.90%, 1/15/27....... $ 2,424
10 Federal National Mortgage Association, REMIC,
92-59F, (Floating Rate), 6.119%, 8/25/06........ 10
2,500 Florida Property & Casualty, Series A, 7.25%,
7/01/02......................................... 2,513
3,500 Ford Motor Credit Co., 7.20%, 6/15/07............. 3,519
1,500 FPLUS 1997-2 M 1, 7.60%, 4/10/23.................. 1,513
2,965 Resolution Trust Corp., Series 1991-M5, Class A,
9.00%, 3/25/17.................................. 2,991
4,000 Standard Credit Card Trust,
6.75%, 6/07/00.................................. 4,024
3,000 Team Fleet Financing Corp., 7.35%, 5/15/03........ 3,055
----------
TOTAL ASSET BACKED SECURITIES............................... 20,049
----------
TOTAL FIXED INCOME SECURITIES (Cost $120,349)................. 120,851
----------
SHORT-TERM INVESTMENT (8.1%)
REPURCHASE AGREEMENT (8.1%)
11,005 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $11,007,
collateralized by U.S. Treasury Notes, 5.625%
due 2/15/06, valued at $11,194 (Cost $11,005)... 11,005
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.5%) (Cost $131,354)..................... 131,856
----------
OTHER ASSETS (3.7%)
Cash............................................ $ 3,083
Interest Receivable............................. 1,880
Receivable for Portfolio Shares Sold............ 40
Net Unrealized Gain on Foreign Currency
Exchange Contracts............................ 8
Other........................................... 11 5,022
----------
LIABILITIES (-0.2%)
Payable for Portfolio Shares Redeemed......... (125)
Investment Advisory Fees Payable.............. (73)
Administrative Fees Payable................... (18)
Custodian Fees Payable........................ (11)
Directors' Fees & Expenses Payable............ (6)
Distribution Fees Payable..................... (1)
Other Liabilities............................. (22) (256)
---------- ----------
NET ASSETS (100.0%)........................................... $136,622
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $139,312
Undistributed Net Investment Income........................... 795
Accumulated Net Realized Loss................................. (3,995)
Unrealized Appreciation on Investments and Foreign
Currency Translations....................................... 510
----------
NET ASSETS.................................................... $136,622
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $ 133,959
NET ASSET VALUE, OFFERING REDEMPTION
PRICE PER SHARE
Applicable to 12,586,128 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $10.64
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,663
NET ASSET VALUE, OFFER AND REDEMPTION
PRICE PER SHARE
Applicable to 250,020 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $10.65
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ---------- ------- ----------- ------------ ------- ------------
DEM 1,160 $ 669 9/17/97 U.S.$ 675 $ 675 $ 6
DEM 3,953 2,281 9/17/97 U.S.$ 2,303 2,303 22
U.S.$ 674 674 9/17/97 DEM 1,160 669 (5)
U.S.$2,296 2,296 9/17/97 DEM 3,953 2,281 (15)
------- ------- -----
$ 5,920 $ 5,928 $ 8
------- ------- -----
------- ------- -----
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- Certain conditions for public sale may exist.
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are
those in effect on June 30, 1997.
DEM -- German Mark
REMIC -- Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 1.3%
British Pound 6.9%
Canadian Dollar 3.1%
Danish Krone 3.0%
Deutsche Mark 18.3%
Irish Punt 0.9%
Italian Lira 4.9%
Japanese Yen 13.9%
Spanish Peseta 3.1%
Swedish Krona 7.2%
United States Dollar 28.7%
Other 8.7%
</TABLE>
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A................... -1.07% 5.09% 6.38% 7.60%
PORTFOLIO -- CLASS
B................... -1.12 4.91 N/A 3.28
INDEX -- CLASS A.... -1.09 4.48 7.26 8.83
INDEX -- CLASS B.... -1.09 4.48 N/A 2.17
</TABLE>
1. The J.P. Morgan Traded Global Bond Index is an unmanaged Index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, the United Kingdom 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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC 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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Global Fixed Income Portfolio aims to produce an attractive real rate of
return by investing in fixed income securities issued by U.S. and foreign
issuers including governments, agencies, supranational entities and corporations
with varying maturities in various currencies.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of -1.07% and 5.09%, respectively, for the Class A shares; and
- -1.12% and 4.91%, respectively, for the Class B shares as compared to total
returns of -1.09% and 4.48%, respectively, for the J.P. Morgan Traded Global
Bond Index (the "Index"). For the five-year period ended June 30, 1997, the
average annual total return of Class A was 6.38% as compared to 7.26% for the
Index. From inception on May 1, 1991 to June 30, 1997, the average annual total
return of Class A was 7.60% as compared to 8.83% for the Index. From inception
on January 2, 1996 to June 30, 1997, the average annual total return of Class B
was 3.28% as compared to 2.17% for the Index. As of June 30, 1997, the Portfolio
had an SEC 30-day yield of 4.97% for the Class A shares and 4.82% for the Class
B shares.
Global fixed income markets rallied in every country except the United States
during the first half of the year. Ten-year bond yields fell the most in Italy,
about 70 basis points, while they rose fractionally in the United States. The
second quarter was particularly positive for bonds with yields falling
substantially in all countries except Japan. Rallies were lead by Australia
where 10-year yields fell 100 basis points. The continuation of relatively weak
growth triggered easings in central bank policy. U.S. rates fell about 40 basis
points as a pause in the U.S. economic recovery led markets to downgrade risks
of Fed tightening.
Differences in performance within Europe continued to depend on prospects for
European Monetary Union (EMU). The return of the Socialists to power in the
recent French elections increased the probability that Spain and Italy would be
included in the first stage of EMU, and ten-year yields in the high yielding
European countries fell 60-90 basis points. The increased prospects for a wide
EMU, however, also increased fears that the Euro would become a soft currency
and ten-year yields in core countries such as Germany only fell 20-30 basis
points. Japanese bond markets performed poorly in the second quarter
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
as government officials talked up prospects for the economy and fears of central
bank tightening increased.
Reflecting these concerns over a soft Euro, the Deutschemark continued to weaken
in the second quarter, falling 4% against the U.S. dollar, raising its
cumulative loss to 11.6% for the year. By contrast, the Japanese yen rose 8% in
the second quarter, 1.4% year-to-date, completely reversing its earlier in the
year weakness, as the current account surplus. soared and government officials
jawboned. In the first half of the year, the yen is the only currency up versus
the U.S. dollar.
These developments combined for a -1.1% return in the first half of the year for
the JP Morgan Global Government Bond Index. Losses were solely attributable to
the rise in the U.S. dollar as all bond markets generated positive returns in
local currency. During the year the Portfolio benefited from its overweighting
of U.K. and Australian bonds and underweighting of U.S. bonds. An overweighting
of the U.S. dollar versus. the European currencies also contributed to returns.
These benefits were offset in part by a small underweighting of the Japanese yen
and a small overweighting of the Australian dollar.
During the second quarter several changes were made to the Portfolio in response
to the shifts in interest and exchange rates. We drew down U.S. cash holdings to
fund an investment in Japanese bonds following a sharp sell-off in the Japanese
market. We also reduced our holdings of U.K. bonds as their surge immediately
after the granting of independence to the Bank of England eliminated much of the
remaining value in that market. Portfolio duration increased by 0.3 years,
reflecting the Japanese bond purchases. Currency adjustments consisted of a
partial hedging of Japanese yen exposures following its sharp appreciation to
year-high levels and a shift in European currency exposure from the Spanish
peseta to the Deutschemark after the former currency appreciated to well above
its ERM central parity.
Looking forward, we would expect many of the developments driving global fixed
income markets to continue. Increasingly, however, we do not believe that the
potential rewards are worth taking significant risks. Although European Monetary
Union including Spain and Italy is now probable, this possibility is now almost
fully priced in by the markets. Increasingly, traditional convergence trades
offer prospects of small additional gain offset by a small but significant
possibility of sizable loss should EMU not take place. Similarly, we expect the
U.S. dollar and U.K. currency to be supported by continued economic strength,
but are concerned that these currencies have already appreciated to levels where
sizable exposures would entail significant risks. Even duration trades now face
conflicting considerations. Although real interest rates are still at attractive
levels, U.S. and Continental European markets have now priced in little or no
monetary tightening over the next two years -- a situation that we find
worrisome given the tightness of the U.S. labor market and the growing signs of
economic recovery in Europe.
On balance, we now view most bond markets to be offering U.S. fair value with
the important exceptions of Sweden -- where we remain attracted by high real
interest rates -- and Japan -- where very low real interest rates continue to
suggest that a defensive stance is appropriate. The recent sell-off in the
United Kingdom has also resulted in it having one of the highest real interest
rates in the world and we are starting to shift interest rate exposure in that
direction. We are also partially hedging Japanese yen and European currencies,
resulting in about a 6% overweighting of dollar bloc currencies.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FIXED INCOME SECURITIES (91.3%)
AUSTRALIAN DOLLAR (1.3%)
GOVERNMENT BONDS (1.3%)
AUD 1,300 Government of Australia 9.75%, 3/15/02........... $ 1,113
--------
BRITISH POUND (6.9%)
EUROBONDS (0.9%)
GBP 370 Conversion 9.00%, 7/12/11........................ 716
--------
GOVERNMENT BONDS (6.0%)
900 United Kingdom Treasury Gilt
7.00%, 11/06/01................................ 1,495
930 United Kingdom Treasury Gilt
8.50%, 12/07/05................................ 1,686
1,100 United Kingdom Treasury Gilt
8.50%, 7/16/07................................. 2,010
--------
5,191
--------
5,907
--------
CANADIAN DOLLAR (3.1%)
GOVERNMENT BONDS (3.1%)
CAD 2,700 Government of Canada 7.50%, 3/01/01.............. 2,083
600 Government of Canada 9.75%, 6/01/21.............. 580
--------
2,663
--------
DANISH KRONE (3.0%)
GOVERNMENT BONDS (3.0%)
DKK 15,400 Kingdom of Denmark 8.00%, 5/15/03................ 2,626
--------
GERMAN MARK (18.3%)
EUROBONDS (5.0%)
DEM 1,300 KFW International Finance, Inc.
7.50%, 1/24/00................................. 810
5,600 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 3,460
--------
4,270
--------
GOVERNMENT BONDS (13.3%)
9,000 Bundesobligation, Series 113,
7.00%, 1/13/00................................. 5,563
5,150 German Unity Bond 8.00%, 1/21/02................. 3,367
600 Government of Germany 6.25%, 1/04/24............. 335
3,400 Treuhandanstalt 7.50%, 9/09/04................... 2,205
--------
11,470
--------
15,740
--------
IRISH PUNT (0.9%)
GOVERNMENT BONDS (0.9%)
IEP 480 Irish Government 8.00%, 8/18/06.................. 797
--------
ITALIAN LIRA (4.9%)
GOVERNMENT BONDS (4.9%)
ITL 3,000,000 BTPS 10.50%, 7/15/00............................. 1,973
700,000 BTPS 10.00%, 8/01/03............................. 481
1,450,000 BTPS 9.50%, 1/01/05.............................. 983
1,200,000 BTPS 9.50%, 2/01/06.............................. 825
--------
4,262
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
JAPANESE YEN (13.9%)
EUROBONDS (13.9%)
JPY 100,000 European Investment Bank
6.625%, 3/15/00................................ $ 997
180,000 Export Import Bank of Japan
4.375%, 10/01/03............................... 1,773
290,000 International Bank for Reconstruction &
Development 4.50%, 6/20/00..................... 2,767
100,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 1,021
150,000 Japan Development Bank 5.00%, 10/01/99........... 1,421
145,000 Republic of Austria 6.25%, 10/16/03.............. 1,567
240,000 Republic of Austria 4.50%, 9/28/05............... 2,419
--------
11,965
--------
SPANISH PESETA (3.1%)
GOVERNMENT BOND (3.1%)
ESP 380,000 Spanish Government 8.30%, 12/15/98............... 2,693
--------
SWEDISH KRONA (7.2%)
GOVERNMENT BONDS (7.2%)
SEK 19,300 Swedish Government 13.00%, 6/15/01............... 3,147
4,000 Swedish Government 10.25%, 5/05/03............... 624
19,500 Swedish Government 6.00%, 2/09/05................ 2,470
--------
6,241
--------
UNITED STATES DOLLAR (28.7%)
CORPORATE BONDS AND NOTES (8.0%)
U.S.$ (e)750 Asset Securitization Corp., CMO, 7.21%,
10/13/26....................................... 762
978 Asset Securitization Corp., CMO, 7.10%,
8/13/29........................................ 986
500 BankAmerica 7.70%, 12/31/26...................... 485
(e)150 First Chicago 7.75%, 12/01/26.................... 143
500 First Chicago 7.95%, 12/01/26.................... 487
(e)385 Goldman Sachs Group 6.25%, 2/01/03............... 373
866 LB Commercial Conduit Mortgage Trust (Floating
Rate), CMO,
7.14%, 8/25/04................................. 875
(e)400 Liberty Mutual 7.875%, 10/15/26.................. 399
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26........................................ 329
2,000 UCFC, CMO, Series 1995-C1,
Class A3, 6.775%, 9/10/17...................... 2,001
--------
6,840
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (19.2%)
U.S. TREASURY BONDS (6.6%)
4,345 8.125%, 8/15/19.................................. 4,955
800 6.25%, 8/15/23................................... 740
--------
5,695
--------
U.S. TREASURY NOTES (12.6%)
1,080 5.125%, 11/30/98................................. 1,068
6,360 6.375%, 3/31/01.................................. 6,372
3,290 7.25%, 5/15/04................................... 3,429
--------
10,869
--------
16,564
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
YANKEE BONDS (1.5%)
U.S.$ 765 Hydro-Quebec 7.50%, 4/01/16...................... $ 763
540 Industrial Finance Corp. 6.875%, 4/01/03......... 528
--------
1,291
--------
24,695
--------
TOTAL FIXED INCOME SECURITIES (91.3%) (Cost $79,635)............... 78,702
--------
SHORT-TERM INVESTMENT (5.1%)
REPURCHASE AGREEMENT (5.1%)
4,373 Chase Securities, Inc. 5.70% dated 6/30/97, due
7/01/97, to be repurchased at $4,374,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,448 (Cost $4,373).... 4,373
--------
FOREIGN CURRENCY (0.1%)
DEM 3 German Mark...................................... 2
JPY 8,909 Japanese Yen..................................... 78
ESP 624 Spanish Peseta................................... 4
--------
TOTAL FOREIGN CURRENCY (Cost $83).................................. 84
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.5%) (Cost $84,091)........................... 83,159
--------
OTHER ASSETS (3.7%)
Interest Receivable.................................. $ 1,837
Receivable for Investments Sold...................... 1,318
Foreign Withholding Tax Reclaim
Receivable......................................... 16
Other................................................ 7 3,178
----------
LIABILITIES (-0.2%)
Net Unrealized Loss on Foreign Currency
Exchange Contracts................................. (59)
Investment Advisory Fees Payable..................... (38)
Dividends Payable.................................... (21)
Custodian Fees Payable............................... (15)
Administrative Fees Payable.......................... (12)
Directors' Fees & Expenses Payable................... (4)
Other Liabilities.................................... (23) (172)
---------- --------
NET ASSETS (100%).................................................. $ 86,165
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 91,872
Undistributed Net Investment Income................................ 1,758
Accumulated Net Realized Loss...................................... (6,465)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................................ (1,000)
--------
NET ASSETS......................................................... $ 86,165
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
CLASS A:
- --------
NET ASSETS............................................... $ 85,760
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,788,862 outstanding $0.001 par
value shares (authorized 500,000,000 shares)............ $11.01
--------
--------
CLASS B:
- --------
NET ASSETS............................................... $405
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 36,828 outstanding $0.001 par value
shares (authorized 500,000,000 shares).................. $11.00
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- --------
DEM 5,912 $ 3,394 7/11/97 U.S.$ 3,421 $ 3,421 $ 27
ITL 560,000 329 7/11/97 U.S.$ 330 330 1
JPY 104,800 916 7/11/97 U.S.$ 948 948 32
JPY 402,896 3,523 7/11/97 U.S.$ 3,500 3,500 (23)
U.S.$ 1,154 1,154 7/11/97 JPY 130,540 1,141 (13)
U.S.$ 332 332 7/11/97 ITL 560,000 329 (3)
U.S.$ 3,500 3,500 7/11/97 DEM 5,912 3,394 (106)
DEM 3,225 1,852 7/18/97 U.S.$ 1,864 1,864 12
DEM 306 176 7/18/97 ITL 300,000 176 --
GBP 650 1,082 7/18/97 U.S.$ 1,080 1,080 (2)
ITL 465,300 274 7/18/97 U.S.$ 274 274 --
ITL 300,000 176 7/18/97 DEM 307 176 --
SEK 14,500 1,876 7/18/97 DEM 3,243 1,863 (13)
U.S.$ 276 276 7/18/97 ITL 465,300 274 (2)
U.S.$ 777 777 7/18/97 GBP 475 790 13
IEP 540 817 7/25/97 U.S.$ 819 819 2
SEK 20,600 2,667 7/25/97 U.S.$ 2,683 2,683 16
-------- -------- --------
$ 23,121 $ 23,062 $ (59)
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- certain conditions for public sale may exist
CMO -- Collateralized Mortgage Obligation
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those
in effect on June 30, 1997.
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Finance................................ $ 25,082 29.1%
Foreign Government and Agency
Obligations.......................... 37,056 43.0
U.S. Government and Agency
Obligations.......................... 16,564 19.2
-------- ---
$ 78,702 91.3%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 1.8%
Automotive 0.6%
Banking 1.2%
Broadcast - Radio & Television 7.5%
Building Materials & Components 0.6%
Chemicals 2.3%
Communications 0.8%
Computers 2.1%
Consumer Staples 1.3%
Electrical Equipment 0.1%
Energy 5.3%
Entertainment & Leisure 3.5%
Environmental Controls 2.2%
Financial Services 10.1%
Food Services & Lodging 1.4%
Forest Products & Paper 1.0%
Gaming & Lodging 3.6%
Health Care Supplies & Services 1.2%
Insurance 1.0%
Materials 2.7%
Metals 1.7%
Multi-Industry 1.5%
Packaging & Container 2.8%
Real Estate 1.1%
Retail - General 4.1%
Telecommunications 18.8%
Utilities 2.0%
Foreign Government Bonds & Loan Agreement 3.8%
Other 13.9%
</TABLE>
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ---------- ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A........... 7.55% 18.40% 13.21%
PORTFOLIO -- CLASS B........... 7.32 18.15 14.71
INDEX -- CLASS A............... 5.88 14.66 11.38
INDEX -- CLASS B............... 5.88 14.66 12.28
</TABLE>
1. The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
INVESTING IN HIGH YIELD FIXED INCOME SECURITIES, OTHERWISE KNOWN AS "JUNK
BONDS", IS SPECULATIVE AND INVOLVES GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST. 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.
YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a yield
above that generally available on debt securities in the four highest rating
categories.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 7.55% and 18.40%, respectively, for the Class A shares; and
7.32% and 18.15%, respectively, for the Class B shares as compared to total
returns of 5.88% and 14.66%, respectively, for the CS First Boston High Yield
Index (the "Index"). From inception on September 28, 1992 to June 30, 1997, the
average annual total return of Class A was 13.21% as compared to 11.38% for the
Index. From inception on January 2, 1996 to June 30, 1997, the average annual
total return of Class B was 14.71% as compared to 12.28% for the Index. As of
June 30, 1997, the Portfolio had an SEC 30-day yield of 8.20% for the Class A
shares and 7.95% for the Class B shares.
We have continued to emphasize the communications industry in our high yield
portfolio. We believe exceptional growth opportunities exist in the newly
deregulated local exchange sector, as well as in selected companies in the
wireless and long distance sectors. Securities which performed strongly included
Nextel Communications, Qwest Communications, and Occel, a cellular company based
in the Republic of Columbia. Microsoft's strategic investment in Comcast led to
strong gains for our holdings in the cable and telecommunications sectors,
particularly Telecommunications, Inc. and Cablevision Systems Corp. In the
emerging markets arena, our investments in U.S. dollar-dominated sovereign and
corporate bonds continued to outperform. We reduced both the cable and emerging
market sectors on strength in the second quarter.
Our overall portfolio structure continues to feature higher average credit
quality compared to market benchmarks. In terms of interest-rate sensitivity, we
have taken steps to reduce our exposure to no longer than that of market
benchmark. We believe that there
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
is fair value in the U.S. bond market, and that historically narrow high-yield
credit spreads are supported by strong fundamentals.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
High Yield Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (64.1%)
AUTOMOTIVE (0.6%)
$ (e)650 EES Coke Battery Co., Inc.,
9.382%, 4/15/07................................ $ 666
---------
BANKING (0.9%)
500 First Nationwide Holdings, Inc.,
9.125%, 1/15/03................................ 517
450 First Nationwide Holdings, Inc., 10.625%,
10/01/03....................................... 494
---------
1,011
---------
BROADCAST-RADIO & TELEVISION (7.5%)
2,370 Cablevision Systems Corp., 9.875%, 5/15/06....... 2,524
1,850 Paramount Communications, Inc., 8.25%, 8/01/22... 1,771
990 Rogers Cablesystems Ltd., Series B, 10.00%,
3/15/05........................................ 1,072
(e)645 TV Azteca S.A., 10.50%, 2/15/07.................. 662
2,880 Viacom, Inc., 8.00%, 7/07/06..................... 2,801
---------
8,830
---------
BUILDING MATERIALS AND COMPONENTS (0.6%)
(e)700 Outdoor Systems, Inc., 8.875%, 6/15/07........... 679
---------
CHEMICALS (2.3%)
2,670 ISP Holdings, Inc., Series B,
9.00%, 10/15/03................................ 2,760
---------
COMMUNICATIONS (0.8%)
(e)900 Comcast Cellular Corp., 9.50%, 5/01/07........... 911
---------
COMPUTERS (2.1%)
1,600 Advanced Micro Devices, Inc., 11.00%, 8/01/03.... 1,784
650 Digital Equipment Corp., 8.625%, 11/01/12........ 647
---------
2,431
---------
CONSUMER STAPLES (1.3%)
1,490 RJR Nabisco, Inc., 8.75%, 4/15/04................ 1,520
---------
ENERGY (5.3%)
1,200 Nuevo Energy Co., 9.50%, 4/15/06................. 1,254
1,250 Quezon Power Ltd., 8.86%, 6/15/17................ 1,250
1,325 Snyder Oil Corp., 8.75%, 6/15/07................. 1,318
(e,n)675 Transamerican Energy, 0.00%, 6/15/02............. 485
1,950 Vintage Petroleum, Inc., 8.625%, 2/01/09......... 1,943
---------
6,250
---------
ENVIRONMENTAL CONTROLS (2.2%)
(n)2,300 Norcal Waste Systems, Inc., Series B, 13.00%,
11/15/05....................................... 2,611
---------
FINANCIAL SERVICES (0.3%)
(e)415 Navistar Financial Corp., 9.00%, 6/01/02......... 425
---------
FOOD SERVICE & LODGING (1.4%)
1,475 Courtyard by Marriott, Series B, 10.75%,
2/01/08........................................ 1,597
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (1.0%)
$ 1,170 Asia Pulp & Paper, 12.00%, 12/29/49.............. $ 1,196
---------
GAMING & LODGING (3.6%)
1,740 Grand Casinos, Inc., 10.125%, 12/01/03........... 1,818
(e)450 Horseshoe Gaming, L.L.C.,
9.375%, 6/15/07................................ 456
496 Louisiana Casino Cruises,
11.50%, 12/01/98............................... 501
(e)1,440 Station Casinos, Inc., 10.125%, 3/15/06.......... 1,454
---------
4,229
---------
HEALTH CARE SUPPLIES & SERVICES (1.2%)
1,380 Tenet Healthcare Corp., 8.625%, 1/15/07.......... 1,407
---------
INSURANCE (1.0%)
(e)1,150 Anthem Insurance Cos., Inc.,
9.00%, 4/01/27................................. 1,184
---------
MATERIALS (2.7%)
(n)3,445 Brooks Fiber Properties, Inc.,
0.00%, 3/01/06................................. 2,347
(n)1,175 Brooks Fiber Properties, Inc.,
0.00%, 11/01/06................................ 765
---------
3,112
---------
MULTI-INDUSTRY (1.5%)
1,575 TLC Beatrice International Holdings, Inc.,
11.50%, 10/01/05............................... 1,770
---------
PACKAGING & CONTAINER (2.8%)
1,800 Gaylord Container Corp., 11.50%, 5/15/01......... 1,894
1,245 SD Warren Co., 12.00%, 12/15/04.................. 1,394
---------
3,288
---------
REAL ESTATE (1.1%)
1,250 HMC Acquisition Properties,
9.00%, 12/15/07................................ 1,270
---------
RETAIL-GENERAL (4.1%)
1,900 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ 1,983
650 Kmart Corp., 7.75%, 10/01/12..................... 596
2,710 Southland Corp., 5.00%, 12/15/03................. 2,303
---------
4,882
---------
TELECOMMUNICATIONS (17.8%)
(n)3,225 Dial Call Communications, 0.00%, 4/15/04......... 2,640
(n)290 Dial Call Communications, Series B, 0.00%,
12/15/05....................................... 228
(n)960 EchoStar Satellite Broadcasting, 0.00%,
3/15/04........................................ 684
(e)2,080 Globalstar, LP, 11.375%, 2/15/04................. 2,083
1,780 IXC Communications, Inc., Series B, 12.50%,
10/01/05....................................... 2,036
(n)2,385 Nextel Communications, Inc., 0.00%, 8/15/04...... 1,825
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TELECOMMUNICATIONS (CONT.)
<TABLE>
<C> <S> <C>
$ (e,n)1,075 Occidente y Caribe, 0.00%, 3/15/04 (Columbia).... $ 797
(e)1,430 Qwest Communications International, 10.875%,
4/01/07........................................ 1,553
690 Rogers Communications, Inc., 9.125%, 1/15/06..... 697
(e,n)3,000 TCI Satellite, 0.00%, 2/15/07.................... 1,785
3,175 Telecommunications, Inc., 9.25%, 1/15/23......... 3,306
(n)4,525 Teleport Communications Group, Inc., 0.00%,
7/01/07........................................ 3,269
---------
20,903
---------
UTILITIES (2.0%)
60 Cleveland Electric Illuminating Co., Series B,
8.375%, 12/01/11............................... 61
188 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 201
1,288 Midland Funding Corp. I, Series C-94, 10.33%,
7/23/02........................................ 1,378
650 Midland Funding II, Series A, 11.75%, 7/23/05.... 753
---------
2,393
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $73,727).................... 75,325
---------
ASSET BACKED SECURITIES (12.4%)
AEROSPACE & DEFENSE (1.8%)
1,945 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06..... 2,097
---------
BANKING (0.3%)
344 PNC Mortgage Securities Corp.,
Series 1995-2, Class B4, REMIC,
7.50%, 9/25/25................................. 302
---------
FINANCIAL SERVICES (8.6%)
(e)993 CA FM Lease Trust, 8.50%, 7/15/17................ 1,018
931 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 812
2,621 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 2,464
1,175 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................ 1,093
(e)900 FMAC Series 1996-B, Class C, 7.929%, 11/01/18.... 796
(e)308 GE Capital Mortgage Services, Inc., Series
1995-12, Class B3, REMIC, 7.911%, 8/25/25...... 278
(e)1,014 Long Beach Auto, 1997-1, Class B, 14.22%,
10/26/03....................................... 1,028
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
$ 875 Prudential Home Mortgage Securities, Inc., Series
1996-A, Class B1, REMIC, 7.963%, 4/15/25....... $ 702
(e)1,900 Riggs Capital Trust II, 8.875%, 3/15/27.......... 1,933
---------
10,124
---------
METALS (1.7%)
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14....................................... 654
(e)1,050 Jet Equipment Trust, Series C1, 11.79%,
6/15/13........................................ 1,310
---------
1,964
---------
TOTAL ASSET BACKED SECURITIES (Cost $12,528)...................... 14,487
---------
FOREIGN GOVERNMENT BONDS (3.3%)
BONDS (3.3%)
1,225 Federative Republic of Brazil, Series L, 4.50%,
4/15/09........................................ 960
(n)1,025 Republic of Argentina Par, Series L, "Euro",
5.50%, 3/31/23................................. 711
1,455 Republic of Argentina, Series L, "Euro",
(Floating Rate), 6.75%, 3/31/05................ 1,369
400 Republic of Colombia, 8.70%, 2/15/16............. 407
625 United Mexican States, Series A, 6.25%,
12/31/19....................................... 483
---------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $3,357)...................... 3,930
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- -------------
COMMON STOCKS (0.0%)
FINANCIAL SERVICES (0.0%)
(a)1,268 WestFed Holdings, Inc., Class B.................. --
---------
FOOD SERVICE & LODGING (0.0%)
(a,e)1,300 Motels of America, Inc........................... 14
---------
TOTAL COMMON STOCKS (Cost $85).................................... 14
---------
PREFERRED STOCKS (4.7%)
ENTERTAINMENT & LEISURE (3.5%)
3,722 Time Warner Inc., Series M, 10.25%, 7/01/16...... 4,085
---------
FINANCIAL SERVICES (1.2%)
(e)13,500 Sinclair Capital, 11.625%, 3/15/09............... 1,431
3,239 WestFed Holdings, Inc., Series A, PIK, Zero
Coupon, 1/01/01................................ --
---------
1,431
---------
TOTAL PREFERRED STOCKS (Cost $5,155).............................. 5,516
---------
CONVERTIBLE PREFERRED STOCKS (1.0%)
TELECOMMUNICATIONS (1.0%)
10,940 TCI Pacific Communications, 5.00%, 7/31/06 (Cost
$1,010)........................................ 1,132
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
(a)35,000 SpectraVision, Inc., expiring 10/08/97........... $ --
---------
FOREIGN GOVERNMENT (0.0%)
(a)625,000 United Mexican States, 6.25%, 12/31/19........... --
---------
TOTAL RIGHTS (Cost $133).......................................... --
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -------------
WARRANTS (0.1%)
AEROSPACE & DEFENSE (0.0%)
(a)500 Sabreliner Corp., expiring 4/15/03............... --
---------
ELECTRICAL EQUIPMENT (0.1%)
(a)28,000 Protection One Alarm, Inc., expiring 4/03/03..... 168
---------
GAMING & LODGING (0.0%)
(a)1,725 Louisiana Casino Cruises, expiring 12/01/98...... 7
---------
INSURANCE (0.0%)
(a)500 Horace Mann Educators Corp., expiring 4/03/99.... 7
---------
PACKAGING & CONTAINER (0.0%)
(a)1,000 Crown Packaging Holdings, expiring 11/01/03...... --
---------
TELECOMMUNICATIONS (0.0%)
(a)3,000 Nextel Communications, Inc., expiring 4/25/99.... --
(a)7,300 Occidente y Caribe, expiring 3/15/04............. --
---------
--
---------
TOTAL WARRANTS (Cost $154)........................................ 182
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -------------
FOREIGN LOAN AGREEMENTS (0.5%)
LOAN AGREEMENTS (0.5%)
$ 775 Russian Interest Arrears Note, Zero Coupon,
12/31/99 (Cost $556)........................... $ 592
---------
SHORT-TERM INVESTMENT (13.5%)
REPURCHASE AGREEMENT (13.5%)
15,827 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $15,830,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $16,096 (Cost
$15,827)....................................... 15,827
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%) (Cost $112,532)......................... $ 117,005
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.6%)
Cash............................................ $ 553
Receivable for Investments Sold................. 2,886
Interest Receivable............................. 1,778
Dividends Receivable............................ 90
Other........................................... 72 5,379
----------
LIABILITIES (-4.2%)
Payable for Investments Purchased............... (4,554)
Payable for Portfolio Shares Redeemed........... (203)
Investment Advisory Fees Payable................ (143)
Administrative Fees Payable..................... (15)
Custodian Fees Payable.......................... (10)
Dividends Payable............................... (6)
Directors' Fees & Expenses Payable.............. (4)
Distribution Fees Payable....................... (3)
Other Liabilities............................... (30) (4,968)
---------- --------
NET ASSETS (100%)............................................... $117,416
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSISTS OF:
Paid in Capital................................................. $114,928
Undistributed Net Investment Income............................. 1,097
Accumulated Net Realized Loss................................... (3,082)
Unrealized Appreciation on Investments.......................... 4,473
--------
NET ASSETS...................................................... $117,416
--------
--------
CLASS A:
- --------
NET ASSETS...................................................... $111,679
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,857,954 outstanding $0.001 par
value shares (authorized 500,000,000 shares).................. $11.33
--------
--------
CLASS B:
- --------
NET ASSETS...................................................... $5,737
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 507,117 outstanding $0.001 par
value shares (authorized 500,000,000 shares).................. $11.31
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(e) -- 144A Security -- Certain conditions for public sale may exist.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in effect
on June 30, 1997.
At June 30, 1997, approximately 94% of the Portfolio's net assets consisted of
high yield securities rated below investment grade. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Daily Variable Rate Bonds 3.9%
Fixed Rate Instruments 94.2%
Other 1.9%
</TABLE>
PERFORMANCE COMPARED TO THE LEHMAN
7-YEAR MUNICIPAL BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 2.42% 6.28% 6.07%
INDEX................... 2.63 7.03 7.73
</TABLE>
1. The Lehman 7-Year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better. All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Bond Portfolio seeks high current income consistent with
preservation of principal through investment in a portfolio consisting primarily
of intermediate and long-term investment grade municipal obligations, the
interest on which is exempt from Federal income tax.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 2.42% and 6.28%, respectively, for the Class A shares; as
compared to total returns of 2.63% and 7.03%, respectively, for the Lehman
7-Year Municipal Bond Index (the "Index"). From inception on January 18, 1995 to
June 30, 1997, the average annual total return of Class A was 6.07% as compared
to 7.73% for the Index. As of June 30, 1997, the Portfolio had an SEC 30-day
yield of 4.45% for the Class A shares.
The U.S. fixed income markets started off the year contemplating if, and when,
the Federal Reserve might decide a tightening of monetary policy would be
necessary. The answer came at the March 25th FOMC meeting when the Fed voted to
increase the Federal Funds rate by 25 basis points to 5.50%. Following the
Federal Reserve move, the bond market seemed to gain comfort in the current
economic climate and managed to turn in a solid performance in the second
quarter of 1997. Two key factors drove bond market returns during the second
quarter. First, economic growth slowed markedly from the very rapid pace of the
first quarter. As a result, concerns that too rapid a pace of economic growth
would force further preemptive tightening of monetary policy by the Federal
Reserve were at least temporarily put aside. Perhaps more importantly, though,
the major inflation measures remained exceptionally well behaved. The
year-over-year change in the core Consumer Price Index has declined to its
lowest level in more than thirty years, while the Producer Price Index has
registered five straight monthly negative readings for the first time in forty
years. With an economy slowing to a more moderate growth pace and with no signs
of inflation, the Federal Reserve did not tighten monetary policy at either its
May or July meetings. The bond market, not surprisingly, responded quite
favorably to these developments, with interest rates falling between 30 and 40
basis points across the yield curve.
Year-to-date, the municipal bond market has done a commendable job of keeping up
with the U.S. Treasury market. Municipals, historically known to lag the
Treasury market during market surges, were able
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
to put in a strong showing during the 2nd quarter due to a number of confluent
factors. An active but manageable new issue supply flow was met with strong
seasonal demand due to the large number of June and July bond redemptions and
coupon payments. Property and casualty insurance companies' healthy appetite
continued to fuel the new issue fire, with deals being underwritten at very
aggressive levels. Individual investors remained selectively active, buying on
the longer end of the yield curve during market weakness and sticking to the
shorter end when absolute yield levels did not look as enticing. As the quarter
came to a close, credit quality spreads became non-existent, with AAA, AA and
Insured paper virtually trading on top of each other versus a fifteen basis
point plus spread at the beginning of the year. Municipals, which earlier in the
year had been trading at very expensive levels relative to U.S. Treasuries,
ended the quarter slightly below their recent expensive ratios.
While the Fed remains watchful for signals of potential inflationary pressures,
market participants have increasingly concluded that given the exceptionally
well behaved nature of inflation measures to date, the Fed is unlikely to
tighten further without a deterioration in these measures. If interest rates
stay at or near their current levels, a steady stream of advanced refundings of
higher coupon outstanding bonds should keep supply and demand well balanced
during the third quarter. In this market environment, we have been focusing on
the high end of the quality spectrum, and carefully selecting those credits we
feel will differentiate themselves when quality spreads return to more normal
levels. During the quarter, our bond purchases were concentrated on premium
coupon AAA and AA-rated 15 year bonds trading to 5 and 6 year call dates. These
bonds were trading at attractive spreads to bullet maturities, and provide the
Portfolio with a high level of current income. The Portfolio remains heavily
weighted in premium coupon noncallable bonds, which have continued to perform
well. During the quarter, the average maturity of the Portfolio continued to
closely track the benchmark Lehman 7-Year Municipal Bond Index.
Lori A. Cohane
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (98.1%)
DAILY VARIABLE RATE BONDS (3.9%)
$ 300 New York City, New York, General Obligation
Bonds, Sub-Series B-2, 5.50%, 8/15/18.......... $ 300
300 New York City, New York, General Obligation
Bonds, Series B, 5.50%, 10/01/20............... 300
800 New York City, New York, Municipal Water Finance
Authority, Water & Sewer Systems, Revenue
Bonds, Series A, 5.50%, 6/15/25................ 800
400 Ohio State Air Quality Development Authority
Revenue Bonds, Series 95-B, 5.50%, 12/01/15.... 400
300 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
3.90%, 1/01/26................................. 300
--------
TOTAL DAILY VARIABLE RATE BONDS (Cost $2,100)............... 2,100
--------
FIXED RATE INSTRUMENTS (94.2%)
825 Albuquerque, New Mexico, General Obligation
Bonds, Series B, 4.70%, 7/01/98................ 832
1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05........................................ 1,611
1,000 California State, Department of Water Revenue
Bonds, Series Q, 6.00%, 12/01/10............... 1,094
1,920 City of Dallas, Texas, General Obligation Bonds,
6.00%, 2/15/06................................. 2,089
100 Connecticut State, General Obligation Bonds,
Series A, 4.75%, 11/15/01...................... 101
250 Connecticut State, General Obligation Bonds,
Series A, 9.875%, 3/01/01...................... 295
250 Connecticut State, General Obligation Bonds,
Series C, 5.50%, 3/15/03....................... 262
175 Connecticut State, General Obligation Bonds,
Series C, 6.15%, 11/15/03...................... 189
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12....................... 1,625
1,000 Connecticut State, Special Obligation, Tax
Revenue Bonds, Transportation, 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102..................... 1,063
1,000 De Kalb County, Georgia, Water & Sewer Revenue
Bonds, 7.00%, 10/01/06......................... 1,027
1,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102..................... 1,095
1,000 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 1,041
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,600
1,325 Fort Worth, Texas, Water & Sewer Revenue Bonds,
Series B, 5.875%, 2/15/00...................... 1,377
1,000 Georgia State, General Obligation Bonds, Series
A, 5.80%, 3/01/02.............................. 1,058
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 567
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
$ 1,000 Gwinnett County, Georgia, General Obligation
Bonds, 6.00%, 1/01/11.......................... $ 1,057
1,000 Hawaii State, General Obligation Bonds, Series
CJ, 6.20%, 1/01/12, Prerefunded 1/01/05 at
100............................................ 1,091
1,500 Intermountain Power Agency, Utah, Power Supply
Revenue Bonds, Series D, 8.375%, 7/01/12,
Prerefunded 7/01/97 at 102..................... 1,530
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,025
1,000 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.60%, 11/01/00................................ 1,059
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded 11/01/99 at 102... 1,244
1,000 Massachusetts State Consolidated Loan, Series A,
7.50%, 3/01/03 Prerefunded at 3/01/00 at 102... 1,098
500 Massachusetts State Consolidated Loan, Series A,
7.625%, 6/01/08 Prerefunded 6/01/01 at 102..... 566
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,711
1,590 Minnesota State Infrastructure Development,
General Obligation Bonds, 6.80%, 8/01/03,
Prerefunded at 8/01/00 at 100.................. 1,706
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09, Prerefunded 2/01/05 at 100..... 1,510
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13........................................ 1,545
2,000 Municipal Assistance Corp. for City of New York,
NY, Revenue Bonds, 6.00%, 7/01/04.............. 2,149
1,000 New Castle County, Delaware, General Obligation
Bonds, 6.25%, 10/15/01......................... 1,073
1,000 New Jersey State, General Obligation Bonds,
Series E, 5.50%, 7/15/02....................... 1,049
1,475 Ohio State, General Obligation Bonds, 6.65%,
8/01/05........................................ 1,668
1,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14........................................ 1,038
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds,
Series D, 6.75%, 10/01/17...................... 1,165
300 Puerto Rico Commonwealth Highway & Transportation
Authority, Revenue Bonds, Series T, 6.50%,
7/01/22, Prerefunded 7/01/02 at 101.50......... 333
1,000 Reedy Creek Improvement District, Florida,
Utility, Revenue Bonds, Series 91-1, 6.50%,
10/01/16, Prerefunded 10/01/01 at 101.......... 1,091
600 Salt Lake City, Utah, General Obligation Bonds,
6.375%, 6/15/11................................ 631
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14, Prerefunded 8/01/04 at 100..... $ 1,497
1,000 Shelby County, Tennessee, General Obligation
Bonds, Series A, 5.50%, 3/01/08................ 1,050
1,250 Texas A & M University, Revenue Bonds, Series B,
6.00%, 7/01/11................................. 1,291
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10.......................... 1,061
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 533
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,066
1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... 1,120
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102.................... 550
--------
TOTAL FIXED RATE INSTRUMENTS (Cost $49,280)................. 50,433
--------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $51,380)................. 52,533
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.1%) (Cost $51,380).................... 52,533
--------
OTHER ASSETS (2.0%)
Cash....................................... $ 85
Interest Receivable........................ 993 1,078
-----
LIABILITIES (-0.1%)
Investment Advisory Fees Payable........... (20)
Administrative Fees Payable................ (7)
Payable for Portfolio Shares Redeemed...... (6)
Custodian Fees Payable..................... (3)
Directors' Fees & Expenses Payable......... (2)
Other Liabilities.......................... (19) (57)
----- --------
NET ASSETS (100%)........................................ $ 53,554
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................. $ 52,206
Undistributed Net Investment Income......................... 197
Accumulated Net Realized Loss............................... (2)
Unrealized Appreciation on Investments...................... 1,153
--------
NET ASSETS.................................................. $ 53,554
--------
--------
CLASS A:
- --------
NET ASSETS.................................................. $ 53,554
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,193,787 outstanding $0.001 par
value shares (authorized 500,000,000 shares).............. $10.31
--------
--------
</TABLE>
- ------------------------------------------------------------
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the U.S. Treasury escrow.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
<TABLE>
<CAPTION>
AMORTIZED COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------------
California............................. $ 1,094 2.0%
Connecticut............................ 3,536 6.6
Delaware............................... 2,167 4.1
Florida................................ 4,156 7.8
Georgia................................ 3,709 6.9
Hawaii................................. 1,091 2.0
Kentucky............................... 1,025 1.9
Maryland............................... 3,914 7.3
Massachusetts.......................... 1,664 3.1
Minnesota.............................. 1,711 3.2
Michigan............................... 1,706 3.2
Mississippi............................ 1,510 2.8
Montana................................ 1,545 2.9
New Jersey............................. 1,049 2.0
New Mexico............................. 832 1.6
New York............................... 3,549 6.6
Ohio................................... 3,106 5.8
Puerto Rico............................ 333 0.6
Tennessee.............................. 1,050 2.0
Texas.................................. 6,254 11.7
Utah................................... 2,161 4.0
Virginia............................... 3,701 6.9
Washington............................. 1,670 3.1
------- ---
$ 52,533 98.1%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 49.6%
Corporate Floating Rate Notes 0.7%
Certificates of Deposit 15.7%
U.S. Government Agency Discount Notes 4.6%
U.S. Government Agency Floating Rate
Notes 11.7%
Other 17.7%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
IBC Money Fund Money Market Portfolio
Comparable Yields 30-Day Yields
Jan. 4.84% 4.95%
Feb. 4.82% 4.94%
Mar. 4.84% 4.95%
Apr. 4.94% 5.05%
May 4.98% 5.09%
Jun. 5.02% 5.11%
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Money Market Portfolio's investment objectives are to maximize current
income and preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments which have effective
maturities of one year or less. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only
securities having a remaining maturity of one year or less. The Portfolio is
expected to maintain a net asset value of $1.00 per share. There can be no
assurance, however, that the Portfolio will be successful in maintaining a net
asset value of $1.00 per share.
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of June 30, 1997 were 5.11% and 5.24%, respectively. As with all
money market portfolios, the seven day yields are not necessarily indicative of
future performance.
After 14 months of steady policy, the Federal Reserve increased the target for
the Federal Funds rate the last week of the first quarter. The increase of 25
basis points to a 5.50% Fed Funds target was expected and in fact was priced
into the market. Federal Reserve Chairman Alan Greenspan presented his view on
the economy during scheduled testimony to Congress earlier in the month of
March. Clearly at that time, he felt that the economy was continuing to
accelerate at a rapid pace and that a preemptive increase in the funds rate was
necessary to stave off inflation.
In the second quarter, interest rates reversed the trend of the first quarter by
declining 25 to 40 basis points across the yield curve. Following the March
increase in the funds rate, the market began to adjust to expectations of a
slower rate of growth in the economy. When the May FOMC meeting passed with no
change in rates, the market took it as a sign that further rate increases would
not be necessary, and the economy seemed to be slowing on its own.
We increased the weighted average maturity of the Portfolio in April when rates
were higher. We then took the opportunity to reduce the overall maturity later
in the second quarter when rates fell. The Portfolio has been positioned
defensively since this change and ended the first half of 1997 with a weighted
average maturity of 37 days.
With no protection against possible Federal Reserve tightening now built into
the front of the yield curve,
- --------------------------------------------------------------------------------
Money Market Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
we find less value than we did earlier in the year. While we agree that the
economy is growing more slowly, the unemployment rate is low and factory
utilization high. We remain concerned that tight labor markets could push
inflation higher and the economy could reaccelerate, either of which would
prompt further action from the Federal Reserve. Finally, anchored by a 5.50%
funds rate, the entire curve has flattened, offering less opportunity to enhance
returns by rolling down the curve.
We are pleased to report that the Portfolio continues to meet its goal of
providing as high a level of interest income as is consistent with maintaining
liquidity and stability of principal, and that the Portfolio still holds only
high quality securities with over 90% of assets invested in securities rated
A1+/P1.
Abigail Jones Feder
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (82.3%)
US GOVERNMENT & AGENCY OBLIGATIONS (16.3%)
AGENCY DISCOUNT NOTES (4.6%)
Federal Home Loan Mortgage Corp
$ 19,000 5.58%, 7/11/97................................. $ 18,971
15,000 5.99%, 4/08/98................................. 14,973
Federal National Mortgage Association
18,910 5.40%, 7/10/97................................. 18,885
5,920 5.39%, 7/24/97................................. 5,900
-----------
58,729
-----------
AGENCY FLOATING RATE NOTES (11.7%)
25,500 FCC National Bank 5.51%, 7/07/97................. 25,500
Federal National Mortgage Association
65,000 5.36%, 9/02/97................................. 65,000
13,000 5.38%, 7/26/99................................. 12,971
46,000 Student Loan Marketing Association 5.37%,
10/30/97....................................... 46,025
-----------
149,496
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost
$208,225)................................................... 208,225
-----------
COMMERCIAL PAPER (49.5%)
AUTOMOTIVE (2.7%)
15,000 Daimler Benz 5.41%, 7/21/97...................... 14,956
20,000 Daimler Benz 5.54%, 8/04/97...................... 19,897
-----------
34,853
-----------
CHEMICALS (3.3%)
42,000 Monsanto Company 5.69%, 7/09/97.................. 41,948
-----------
CONSUMER STAPLES (2.3%)
30,000 Colgate Palmolive 5.68%, 8/12/97................. 29,804
-----------
FINANCE (41.2%)
50,000 AIG Funding 6.25%, 7/01/97....................... 50,000
50,000 American Express, Inc. 5.57%, 7/25/97............ 49,816
25,000 Asset Backed Capital 5.62%, 7/08/97.............. 24,973
12,000 Asset Securitization Corp. 5.71%, 7/01/97........ 12,000
25,000 Atlantic Asset 5.61%, 7/14/97.................... 24,950
25,000 Atlantic Asset 5.60%, 7/15/97.................... 24,946
12,375 Case Equipment Loan Trust 5.61%, 7/23/97......... 12,333
25,000 CIT Group Holdings 5.68%, 8/14/97................ 24,829
45,000 Ford Motor Credit Corp. 5.69%, 8/18/97........... 44,664
10,000 General Electric Capital Corp. 5.50%, 7/08/97.... 9,989
35,000 General Electric Capital Corp. 5.68%, 8/20/97.... 34,728
50,000 Greenwich Funding 5.60%, 7/15/97................. 49,891
50,000 International Lease Finance 5.66%, 8/27/97....... 49,559
17,000 John Deere Capital 5.66%, 7/03/97................ 16,995
46,000 Private Export Funding Corp. 5.68%, 8/08/97...... 45,728
50,000 UBS Finance, Inc. 6.20%, 7/01/97................. 50,000
-----------
525,401
-----------
TOTAL COMMERCIAL PAPER (Cost $632,006)...................... 632,006
-----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
CORPORATE FLOATING RATE NOTES (0.7%)
BANK
$ 9,000 Societe Generale Bank (Yankee) 5.65%, 1/15/98
(Cost $8,998).................................. $ 8,998
-----------
CERTIFICATES OF DEPOSIT (15.8%)
12,000 ABN-AMRO Bank, New York 5.85%, 10/24/97.......... 12,000
23,000 ABN-AMRO Bank, New York (Yankee) 6.13%,
7/14/97........................................ 23,000
12,000 ANZ Inc. 5.86%, 10/28/97......................... 12,001
30,000 Canadian Imperial Bank (Yankee) 5.47%, 8/29/97... 30,000
30,000 Deutsche Bank (Yankee) 5.42%, 8/25/97............ 30,000
20,000 Deutsche Bank (Yankee) 5.88%, 3/13/98............ 19,996
12,000 National Westminster Bank (Yankee) 5.86%,
10/02/97....................................... 12,001
32,000 Societe Generale Bank (Yankee) 6.18%, 9/08/97.... 31,999
12,000 Suntrust Banks, Inc. 5.85%, 10/22/97............. 12,000
18,000 Swiss Bank 6.25%, 4/08/98........................ 18,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $200,997)................. 200,997
-----------
TOTAL MONEY MARKETS INSTRUMENTS (Cost $1,050,226)............. 1,050,226
-----------
SHORT-TERM INVESTMENTS (17.4%)
REPURCHASE AGREEMENTS (17.4%)
121,619 Goldman Sachs & Co. 5.82%, dated 6/30/97, due
7/01/97, to be repurchased at $121,639,
collateralized by U.S. Treasury Notes, 5.875%,
due 8/15/98, valued at $124,517................ 121,619
100,000 J.P. Morgan & Co. 5.90%, dated 6/30/97, due
7/01/97, to be repurchased at $100,016,
collateralized by various U.S. Government
Obligations, due 2/15/15-5/15/16, valued at
$117,868....................................... 100,000
-----------
TOTAL REPURCHASE AGREEMENTS (Cost $221,619)................... 221,619
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.7%) (Cost $1,271,845)................... 1,271,845
-----------
OTHER ASSETS (0.6%)
Interest Receivable........................ $ 7,353
Other...................................... 47 7,400
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (2,517)
Investment Advisory Fees Payable........... (921)
Administrative Fees Payable................ (165)
Directors' Fees & Expenses Payable......... (60)
Custodian Fees Payable..................... (59)
Other Liabilities.......................... (248) (3,970)
---------- -----------
NET ASSETS (100%)........................................ $ 1,275,275
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $1,275,685
Accumulated Net Realized Loss.......... (410)
----------
NET ASSETS (100%)...................... $1,275,275
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 1,275,689,254
outstanding $0.001 par value shares
(authorized 4,000,000,000 shares).... $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in effect
at June 30, 1997.
Maturity dates disclosed for Floating Rate Instruments are the ultimate maturity
dates. The effective maturity dates for such securities are the next interest
reset dates.
Interest rates disclosed for Commerical Paper and Agency Discount Notes
represent effective yields at June 30, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 37.4%
U.S. Government & Agency Obligations 5.4%
Variable/Floating Rate Instruments 57.3%
Other -0.1%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IBC MUNICIPAL MONEY MUNICIPAL MONEY MARKET
FUND COMPARABLE 30-DAY YIELDS PORTFOLIO YIELDS
<S> <C> <C>
Jan. 2.90% 2.92%
Feb. 2.87% 2.88%
Mar. 2.76% 2.70%
Apr. 3.12% 3.14%
May 3.37% 3.31%
Jun. 3.28% 3.36%
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Money Market Portfolio's investment objectives are to maximize
current income that is exempt from Federal income tax and preserve capital while
maintaining high levels of liquidity through investing in high quality municipal
money market instruments which earn interest exempt from Federal income tax in
the opinion of bond counsel for the issuer. The Portfolio will purchase only
securities having a remaining maturity of one year or less. Under normal
circumstances, the Portfolio will invest at least 80% of its assets in
tax-exempt municipal securities. Additionally, the Portfolio will not purchase
private activity bonds, the interest from which is subject to alternative
minimum tax. Interest on tax-exempt municipal securities may be subject to state
and local taxes. The Portfolio's average maturity (on a dollar-weighted basis)
will not exceed 90 days. The Portfolio is expected to maintain a net asset value
of $1.00 per share. There can be no assurance, however, that the Portfolio will
be successful in maintaining a net asset value of $1.00 per share.
The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Municipal Money Market
Portfolio as of June 30, 1997 were 3.67% and 3.74%, respectively. The seven day
yield and the seven day taxable equivalent effective yield for Municipal Money
Market Portfolio at June 30, 1997, assuming the Federal income tax rate of 39.6%
(maximum rate) were 6.08% and 6.19%, respectively. The seven day yields are not
necessarily indicative of future performance.
The municipal money market curve was very flat throughout much of the first half
of 1997. In general rates were much less volatile than is normally the case. The
municipal money market curve did not experience the curve steeping and
subsequent flattening that characterized the taxable money market sector. In
fact, except for a couple of dips and spikes in March and April, respectively,
rates fluctuated very little. The market's stability has been due to "crossover"
buyers which are primarily corporations that move their investments between the
taxable and tax-exempt sectors depending on relative value. Each time rates
declined due to decreased supply, the crossover buyers moved out of the
tax-exempt sector. This created a dramatic increase in supply forcing dealers to
increase rates which in turn brought the crossover buyers back into the
tax-exempt sector.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
The asset size of the Municipal Money Market Portfolio remained stable in the
first half of 1997 finishing June with assets of $712 million. Overall the asset
allocation throughout the first half of the year remained consistent with
commercial paper ranging from 30-40%, tax-exempt notes ranged from 3-6%, and
daily and weekly variable rate puttable issues fluctuated between 50% and 60% of
the Portfolio. Because of the relatively flat shape of the curve, the Portfolio
maintained a relatively short weighted average maturity throughout the first
half ranging from 15 to 40 days.
Gerald P. Barth
PORTFOLIO MANAGER
Abigail Jones Feder
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (94.7%)
FIXED RATE INSTRUMENTS (37.4%)
NOTES (5.2%)
$ 9,800 Michigan State Municipal Bond Authority Revenue,
Series A, 4.50%, 7/03/97....................... $ 9,800
1,140 Maryland State Department Transportation, Revenue
Bonds, 5.60%, 10/01/97......................... 1,146
3,000 Palm Beach County, Florida School District,
4.50%, 9/26/97................................. 3,005
1,000 South Carolina State, General Obligation Bonds,
Series A, 5.00%, 7/01/97....................... 1,000
20,200 Texas State, 4.75%, 8/29/97, TRANS............... 20,228
2,000 York County, South Carolina, Pollution Control
Revenue Bonds, Saluda River, Series E2, 3.50%,
8/15/97........................................ 2,000
----------
37,179
----------
COMMERCIAL PAPER (32.2%)
10,000 Baltimore County, Maryland, Series 95, 3.70%,
8/05/97........................................ 10,000
2,500 Burlington, Kansas, Pollution Control Revenue
Bonds, Series 87 A, 3.80%, 7/10/97............. 2,500
City of Honolulu, Hawaii,
1,000 3.95%, 8/01/97................................. 1,000
1,000 3.75%, 8/14/97................................. 1,000
2,500 City of Lincoln, Nebraska, 3.65%, 7/23/97........ 2,500
Connecticut State, Health & Education,
10,000 3.75%, 7/17/97................................. 10,000
2,700 3.80%, 7/18/97................................. 2,700
1,200 Converse County, Wyoming, 3.70%, 8/13/97......... 1,200
2,400 Delta County, Michigan, Mead Paper, 3.75%,
7/22/97........................................ 2,400
2,525 Gainsville, Florida, Series C, 3.80%, 8/12/97.... 2,525
4,100 Gillette Campbell, Wyoming, 3.80%, 7/17/97....... 4,100
2,148 Harris County, Texas, 3.85%, 7/18/97............. 2,148
2,500 Health & Educational Facilities, Vanderbilt
University, Tennessee, Series 89A, 3.80%,
8/15/97........................................ 2,500
Houston, Texas,
8,000 3.80%, 8/11/97, Series A....................... 8,000
10,100 3.75%, 8/14/97, Series A....................... 10,100
4,000 3.70%, 7/16/97, Series B....................... 4,000
1,500 3.80%, 7/16/97, Series B....................... 1,500
Illinois Health & Educational Facilities,
2,100 3.60%, 7/09/97................................. 2,100
9,000 3.90%, 7/30/97................................. 9,000
4,750 Independence, Missouri, Water Utility Revenue,
3.75%, 7/21/97................................. 4,750
Jacksonville, Florida, Electric Authority,
3,100 3.70%, 8/13/97, Series C....................... 3,100
5,000 3.75%, 8/08/97, Series D....................... 5,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Louisiana Public Facilities,
$ 3,000 3.60%, 8/11/97................................. $ 3,000
5,500 3.95%, 8/15/97, Series 90...................... 5,500
300 Louisiana State, General Obligation Bonds, 3.85%,
7/09/97........................................ 300
5,750 Louisiana State, Series 91A, 3.65%, 7/09/97...... 5,750
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.50%,
9/19/97........................................ 6,600
5,000 Massachusetts Port Authority, 3.90%, 7/10/97..... 5,000
3,000 Massachusetts State Water Resource Authority,
3.75%, 9/18/97................................. 3,000
5,900 Michigan State University, 3.90%, 7/14/97........ 5,900
Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
2,000 3.70%, 8/01/97................................. 2,000
6,380 3.75%, 9/18/97................................. 6,380
New York City, New York, Water Finance Authority,
5,900 3.60%, 7/15/97................................. 5,900
1,700 3.80%, 10/16/97................................ 1,700
4,200 3.65%, 9/12/97, Series 1....................... 4,200
10,000 3.65%, 9/16/97, Series 5B...................... 10,000
2,990 Omaha, Nebraska, Public Power District, 3.55%,
9/19/97........................................ 2,990
1,000 Pennsylvania Port Authority, Virginia, 3.75%,
8/08/97........................................ 1,000
4,000 Petersburg, Indiana, Indiana Power & Light,
Series 91, 3.55%, 9/19/97...................... 4,000
7,700 Platte River Authority, Colorado, 3.60%,
7/24/97........................................ 7,700
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
1,000 3.80%, 7/22/97, Series B....................... 1,000
1,565 3.90%, 8/21/97, Series B....................... 1,565
6,000 3.85%, 8/21/97, Series C....................... 6,000
1,500 3.65%, 7/09/97, Series F....................... 1,500
1,500 3.80%, 8/21/97, Series 92A..................... 1,500
Salt River, Arizona,
2,800 3.65%, 8/06/97................................. 2,800
11,006 3.75%, 8/18/97................................. 11,006
6,600 Salt River, Arizona, Agricultural and Power,
District Revenue Bonds, 3.70%, 8/15/97......... 6,600
San Antonio, Texas
1,500 3.65%, 7/14/97................................. 1,500
5,100 3.75%, 8/12/97, Series A....................... 5,100
Sunshine State, Florida, Government Finance
Authority,
3,750 3.90%, 7/17/97................................. 3,750
1,000 3.65%, 8/06/97................................. 1,000
4,470 3.85%, 8/13/97................................. 4,470
2,000 3.80%, 8/12/97, Series 86...................... 2,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
COMMERCIAL PAPER (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Texas State, Public Finance, Series B, 3.85%,
8/04/97........................................ $ 1,000
5,000 Wisconsin State, Series A, 3.70%, 7/11/97........ 5,000
----------
228,834
----------
TOTAL FIXED RATE INSTRUMENTS.............................. 266,013
----------
VARIABLE/FLOATING RATE INSTRUMENTS (57.3%)
DAILY VARIABLE RATE BONDS (30.7%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil, 4.05%, 9/01/23....... 1,500
1,900 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds, University of Alabama Hospital Services
Fund, Series 91, 4.15%, 12/01/26............... 1,900
Burke County, Georgia, Pollution Control Revenue
Bonds,
1,000 4.05%, 7/01/24................................. 1,000
3,200 4.05%, 4/01/25................................. 3,200
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center, 4.15%, 10/01/17........................ 4,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines Inc.,
4,200 4.15%, 12/01/17, Series A...................... 4,200
3,750 4.15%, 12/01/17, Series B...................... 3,750
3,500 4.15%, 12/01/17, Series C...................... 3,500
4,200 4.15%, 12/01/17, Series D...................... 4,200
4,500 City of Forsyth, Montana, Pollution Control
Revenue Bonds, 5.45%, 1/01/18.................. 4,500
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 4.15%,
12/01/09....................................... 2,800
5,100 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 4.05%,
3/01/22........................................ 5,100
3,200 Farmington, New Mexico, Pollution Control Revenue
Bonds, Series A, 4.05%, 5/01/24................ 3,200
5,200 Geisinger Authority, Pennsylvania Health System,
Series B, 4.05%, 7/01/22....................... 5,200
2,200 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
4.00%, 6/01/20................................. 2,200
4,900 Hapeville, Georgia, Industrial Development
Authority, Series 85, 4.15%, 11/01/15.......... 4,900
18,300 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, Series
94, 4.15%, 12/01/25............................ 18,300
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 3,800 Harris County, Texas, Health Facilities
Development Corp., St. Lukes Episcopal, Series
85B, 4.15%, 2/15/16............................ $ 3,800
8,100 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, 4.15%,
12/01/26....................................... 8,100
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
2,600 4.05%, 3/01/24, Series 84A..................... 2,600
2,600 4.05%, 3/01/24, Series 84B..................... 2,600
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85, 4.10%, 12/01/15............ 5,700
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 4.20%,
8/01/15........................................ 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 4.10%,
11/01/11....................................... 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project,
1,200 4.10%, 11/01/14, Series 84C.................... 1,200
2,500 4.10%, 11/01/14, Series 84D.................... 2,500
2,920 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 4.15%,
12/01/15....................................... 2,920
1,500 Martin County, Florida, Pollution Control Revenue
Bonds, Florida Power & Light Co., 3.90%,
9/01/24........................................ 1,500
1,700 Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
Series E, 5.50%, 5/01/29....................... 1,700
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 4.15%,
12/01/20....................................... 1,000
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
2,000 4.10%, 9/01/30, Series A....................... 2,000
3,500 4.10%, 9/01/30, Series B....................... 3,500
1,100 Mobile, Alabama, Industrial Development Board,
Pollution Control Board, Alabama Power Co.,
4.05%, 6/01/15................................. 1,100
Monroe County, Georgia, Pollution Control Revenue
Bonds, Gulf Power Co.
1,850 5.45%, 9/01/24, Series 2....................... 1,850
1,000 5.45%, 7/01/25, Series 95...................... 1,000
4,100 New York City, New York, Cultural Resources,
Revenue Bonds, Series B, 4.00%, 12/01/15....... 4,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
DAILY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
New York City, New York, General Obligation Bonds
$ 2,500 4.15%, 8/15/03, Series B, SubSeries B-2........ $ 2,500
2,300 4.15%, 8/15/04, Series B, SubSeries B3......... 2,300
400 3.90%, 8/01/98, Series C, SubSeries C4......... 400
3,400 3.90%, 8/01/22, SubSeries A4................... 3,400
2,950 3.90%, 8/01/23, SubSeries A4................... 2,950
1,500 4.15%, 8/01/15, SubSeries A5................... 1,500
1,000 5.50%, 8/01/16, Sub-Series A-10................ 1,000
5,700 New York City, New York, Municipal Water Finance
Authority, Water & Sewer Systems, Revenue
Bonds, 5.50%, 6/15/25.......................... 5,700
3,700 New York State Energy Research & Development
Authority, Pollution Control Revenue Bonds,
Niagara, 5.45%, 7/01/15........................ 3,700
2,100 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 4.00%,
7/01/25........................................ 2,100
900 New York State, Electric & Gas Revenue Bonds,
Series 94D, 5.40%, 10/01/29.................... 900
2,700 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 4.20%, 12/01/99...... 2,700
Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas and Electric,
4,000 5.50%, 12/01/15, Series 85A.................... 4,000
4,100 4.00%, 9/01/30, Series 95B..................... 4,100
2,800 Parrish, Alabama, Industrial Development Board,
Pollution Control Revenue Bonds, Alabama Power
Co., 4.05%, 6/01/15............................ 2,800
2,400 Peninsula Port Authority, Virginia, Coal Revenue
Bonds, 4.10%, 7/01/16.......................... 2,400
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
5,000 4.15%, 11/01/25, Series 95A.................... 5,000
3,500 4.15%, 11/01/27, Series 95B.................... 3,500
1,500 4.15%, 11/01/29, Series 95C.................... 1,500
2,600 4.15%, 11/01/30, Series 95D.................... 2,600
3,400 Pennsylvania State Higher Educational Facilities
Authority, Colleges & Universities Revenue
Bonds, 4.05%, 10/01/09......................... 3,400
6,700 Philadelphia, Pennsylvania, Childrens Hospital,
Series 96A, 4.05%, 3/01/27..................... 6,700
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,800 4.20%, 7/01/14, Series A....................... 3,800
1,000 4.20%, 7/01/14, Series B....................... 1,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 4,400 Port Authority of New York & New Jersey, Revenue
Bonds, 4.10%, 6/01/20.......................... $ 4,400
2,000 Port Authority of New York & New Jersey, Special
Obligation 3.95%, 8/01/24...................... 2,000
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
2,000 4.00%, 4/01/10, Series A....................... 2,000
1,600 4.05%, 6/01/10, Series B....................... 1,600
Raleigh-Durham, North Carolina, Airport
Authority,
3,200 4.10%, 11/01/15, Series A...................... 3,200
600 4.10%, 11/01/15, Series B...................... 600
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil, Series 92B,
4.00%, 10/01/22................................ 1,400
1,600 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
3.90%, 1/01/26................................. 1,600
700 Sweetwater County, Wyoming, Pacificorp, Series
88B, 5.45%, 1/01/14............................ 700
4,300 Texas State, Water Development Board Revenue
Bonds, Series A, 4.15%, 3/01/15................ 4,300
3,000 West Side Calhoun County, Texas, Pollution
Control Revenue Bonds, 4.15%, 12/01/15......... 3,000
----------
218,270
----------
WEEKLY VARIABLE RATE BONDS (26.6%)
2,100 Alberquerque, New Mexico, Revenue Bonds, Series
91A, 4.20%, 7/01/22............................ 2,100
2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 4.15%,
9/01/20........................................ 2,700
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc., 3.80%, 12/01/09... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 4.05%, 8/01/20, Series A....................... 1,000
1,000 4.05%, 8/01/09, Series B....................... 1,000
9,200 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 4.15%, 1/01/16......... 9,200
2,700 California Statewide Communities, Revenue Bonds,
Series A1 3.90%, 5/15/25....................... 2,700
5,700 Charlotte, North Carolina, Airport, Series 93A,
4.15%, 7/01/16................................. 5,700
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 3.60%,
2/01/00........................................ 1,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
WEEKLY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A, 4.20%, 6/01/08.............. $ 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 4.20%, 12/01/15..... 1,500
City of Forsyth, Montana, Pollution Control
Revenue Bonds,
300 4.15%, 6/01/13, Series B....................... 300
700 4.15%, 6/01/13, Series D....................... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds,
Box-Crow Cement Co., 4.25%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale, 4.20%, 9/15/25............... 1,000
1,500 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 4.20%,
4/01/04........................................ 1,500
1,900 City of Seattle, Washington, Municipal Light &
Power, Revenue Bonds, 4.15%, 6/01/21........... 1,900
Clark County, Nevada, Airport Revenue Bonds,
17,700 4.15%, 7/01/12, Series 93A..................... 17,700
2,600 4.15%, 7/01/25, Series 95-A1................... 2,600
4,000 Clark County, Nevada, Industrial Development
Revenue Bond, Nevada Power Co., Series C,
4.20%, 10/01/30................................ 4,000
3,000 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds, 4.15%, 12/01/00...... 3,000
55 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, Series 88,
4.20%, 6/01/98................................. 55
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
4.15%, 8/01/00................................. 600
5,000 Connecticut State, Revenue Bonds, Series B,
4.00%, 5/15/14................................. 5,000
5,500 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1, 4.10%, 12/01/10............... 5,500
2,600 Cook County, Illinois, General Obligation Ltd.,
4.15%, 12/01/01................................ 2,600
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital, 4.15%,
9/01/25........................................ 1,800
16,700 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94, 4.15%, 10/05/22.............. 16,700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 800 First Florida Government Fin Committee, Revenue
Bonds, 4.15%, 12/01/00......................... $ 800
3,000 Foothill/Eastern California Toll Road Revenue
Bonds, Series 95C, 3.90%, 1/02/35.............. 3,000
2,000 Franklin County, Ohio, Series 95, 3.00%,
6/01/16........................................ 2,000
2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 4.15%, 8/01/16...................... 2,500
Harris County, Texas, Toll Road Revenue Bonds,
900 4.05%, 8/01/15, Series 94D..................... 900
5,000 4.05%, 8/01/20, Series 94G..................... 5,000
5,000 4.05%, 8/01/20, Series 94H..................... 5,000
2,200 Huntsville, Alabama, Healthcare Facilities
Authority, Series B, 3.65%, 6/01/24............ 2,200
Illinois Development Finance Authority, Revenue
Bonds,
5,000 4.15%, 2/01/29................................. 5,000
3,500 4.15%, 6/01/31................................. 3,500
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 4.15%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 4.15%, 3/01/09............................ 5,000
3,000 Illinois State Toll Highway Authority, Series B,
4.15%, 1/01/10................................. 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center, 4.25%, 1/01/26................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 4.00%, 12/01/15................... 900
1,100 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 4.15%, 12/01/00...... 1,100
2,000 Maryland Health & Higher Education Facilities,
Series A, 4.00%, 7/01/27....................... 2,000
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 3.75%, 1/01/19.......... 1,000
2,000 Massachusetts Health & Education Facilities
Authority, Revenue Bonds, 4.00%, 2/01/16....... 2,000
2,600 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University, 4.15%, 9/01/09..................... 2,600
3,000 Municipal Electric Authority, Georgia, Revenue
Bonds, Series 85C, 4.15%, 3/01/20.............. 3,000
2,900 New York State Local Government Assistance Corp.,
Series D, 4.05%, 4/01/25....................... 2,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
WEEKLY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 4.20%, 7/01/15.......... $ 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 4.30%, 11/01/19......................... 1,500
Pinellas County, Florida, Health Facilities,
Bayfront Medical Center,
235 4.15%, 6/01/98................................. 235
1,000 4.15%, 6/01/09................................. 1,000
300 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 4.15%, 12/01/05......... 300
2,400 Port of Corpus Christi, Texas, Industrial
Development, Revenue Bonds, 4.20%, 6/01/27..... 2,400
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 4.00%, 9/01/14.... 1,500
600 Putnam County, Florida, Development Authority,
Seminole Electric, Series 84-H1, 4.20%,
3/15/14........................................ 600
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
4.15%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 4.00%, 8/01/14............................ 700
4,430 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 4.15%, 12/01/16..... 4,430
University of Alabama,
1,500 3.95%, 10/01/07, Series A...................... 1,500
2,000 3.95%, 10/01/07, Series B...................... 2,000
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 4.10%,
10/01/09....................................... 1,100
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 4.10%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds,
2,000 4.00%, 7/01/17, Series 93-1A3.................. 2,000
3,300 4.10%, 7/01/17, Series 1A-2.................... 3,300
----------
189,420
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................. 407,690
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $673,703)................ 673,703
----------
TAXABLE INSTRUMENTS (5.4%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (5.4%)
Federal Home Loan Bank Discount Notes
6,075 5.50%, 7/01/97................................. 6,075
32,745 5.40%, 7/14/97................................. 32,681
----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $38,756)............................................ 38,756
----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
COST
(000)
<S> <C> <C>
- ------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%) (Cost $712,459).................. $ 712,459
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
----------
OTHER ASSETS (0.6%)
Cash....................................... $ 62
Interest Receivable........................ 4,205
Other...................................... 50 4,317
----------
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (3,500)
Dividends Payable.......................... (831)
Investment Advisory Fees Payable........... (478)
Administrative Fees Payable................ (84)
Custodian Fees Payable..................... (45)
Directors' Fees & Expenses Payable......... (32)
Other Liabilities.......................... (150) (5,120)
---------- ----------
NET ASSETS (100%)........................................ $ 711,656
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.......................................... $ 711,687
Accumulated Net Realized Loss............................ (31)
----------
NET ASSETS............................................... $ 711,656
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 711,661,737 outstanding
$0.001 par value shares (authorized
4,000,000,000 shares).................................. $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
TRANS -- Tax & Revenue Anticipation Notes
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand.
Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the U.S. Treasury escrow.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at June 30, 1997.
At June 30, 1997, approximately 18% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of its
public bodies and municipalities may affect the ability of issuers to pay the
required principal and interest payments of the municipal securities.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
<TABLE>
<CAPTION>
AMORTIZED
COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Alabama................................ $ 17,880 2.5%
Arizona................................ 22,106 3.1
California............................. 5,700 0.8
Colorado............................... 8,355 1.2
Connecticut............................ 23,200 3.3
Florida................................ 49,085 6.9
Georgia................................ 26,650 3.7
Hawaii................................. 2,000 0.3
Illinois............................... 46,150 6.5
Indiana................................ 4,000 0.6
Iowa................................... 300 --
Kansas................................. 3,400 0.5
Louisiana.............................. 35,870 5.0
Maryland............................... 14,146 2.0
Massachusetts.......................... 17,600 2.5
Michigan............................... 18,100 2.5
Minnnesota............................. 12,565 1.8
Missouri............................... 16,850 2.4
Montana................................ 5,500 0.8
Nebraska............................... 5,490 0.8
Nevada................................. 24,300 3.4
New Mexico............................. 11,000 1.6
New York............................... 61,650 8.7
North Carolina......................... 12,100 1.7
Ohio................................... 10,100 1.4
Oregon................................. 3,600 0.5
Pennsylvania........................... 36,300 5.1
South Carolina......................... 3,000 0.4
Tennessee.............................. 9,500 1.3
Texas.................................. 130,406 18.3
Washington............................. 12,200 1.7
West Virginia.......................... 1,000 0.1
Wisconsin.............................. 5,700 0.8
Wyoming................................ 14,500 2.0
Virginia............................... 3,400 0.5
---------- ---
$ 673,703 94.7%
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN GLOBAL
ALLOCATION EQUITY MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,628 $ 3,070 $ 16,460 $ 5,275 $ 1,368
Interest 240 403 1,984 264 43
Less: Foreign Taxes Withheld (323) (325) (1,018) (723) (127)
----------- ---------- --------- --------- ----------
Total Income 2,545 3,148 17,426 4,816 1,284
----------- ---------- --------- --------- ----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 607 1,373 9,855 879 355
Less: Fees Waived (208) (282) -- (134) (61)
----------- ---------- --------- --------- ----------
Investment Advisory Fees --
Net 399 1,091 9,855 745 294
Administrative Fees 167 272 1,222 176 73
Sub-Administrative Fees -- -- 79 -- --
Custodian Fees 108 245 1,965 70 24
Filing and Registration Fees 20 44 59 64 20
Insurance 4 9 26 3 2
Directors' Fees and Expenses 5 9 27 5 3
Professional Fees 20 28 55 18 20
Shareholder Reports 24 17 61 10 6
Foreign Tax Expense 7 90 288 -- --
Distribution Fees on Class B
Shares -- 8 16 4 5
Other Expenses 4 73 27 7 2
----------- ---------- --------- --------- ----------
Total Expenses 758 1,886 13,680 1,102 449
----------- ---------- --------- --------- ----------
NET INVESTMENT INCOME 1,787 1,262 3,746 3,714 835
----------- ---------- --------- --------- ----------
NET REALIZED GAIN (LOSS):
Investments Sold 11,281 (6,046) 112,333 4,663 3,028
Foreign Currency Transactions 5,910 (279) (1,448) 13 449
----------- ---------- --------- --------- ----------
Total Net Realized Gain
(Loss) 17,191 (6,325) 110,885 4,676 3,477
----------- ---------- --------- --------- ----------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION):
Investments 6,085* 11,487** 243,615*** 23,285 9,640
Foreign Currency Translations (570) 83 (540) (42) 370
----------- ---------- --------- --------- ----------
Total Net Change in
Unrealized Appreciation
(Depreciation) 5,515 11,570 243,075 23,243 10,010
----------- ---------- --------- --------- ----------
TOTAL NET REALIZED GAIN (LOSS)
AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 22,706 5,245 353,960 27,919 13,487
----------- ---------- --------- --------- ----------
Net Increase in Net Assets
Resulting from Operations $ 24,493 $ 6,507 $ 357,706 $ 31,633 $ 14,322
----------- ---------- --------- --------- ----------
----------- ---------- --------- --------- ----------
</TABLE>
- ---------------
* Net of foreign taxes of $4,000 on unrealized appreciation.
** Net of foreign taxes of $94,000 on unrealized appreciation.
*** Net of foreign taxes of $6,023,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE LATIN
GOLD EQUITY MAGNUM SMALL CAP EQUITY AMERICAN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 236 $ 43,537 $ 2,055 $ 3,869 $ 751 $ 633
Interest 77 4,516 332 197 130 43
Less: Foreign Taxes Withheld (10) (5,624) (262) (451) (113) --
---------- -------------- ------- ------- --------- ---------
Total Income 303 42,429 2,125 3,615 768 676
---------- -------------- ------- ------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 94 9,927 544 1,146 629 318
Basic Fees -- Sub Adviser 62 -- -- -- -- --
Less: Fees Waived -- Adviser (34) (177) (179) (82) (67) (45)
Less: Fees Waived -- Sub
Adviser (23) -- -- -- -- --
---------- -------------- ------- ------- --------- ---------
Investment Advisory Fees -- Net 99 9,750 365 1,064 562 273
Administrative Fees 27 1,921 116 191 127 48
Sub-Administrative Fees -- -- -- -- -- 11
Custodian Fees 9 382 82 66 19 102
Filing and Registration Fees 20 84 56 15 39 25
Insurance 1 40 1 5 5 3
Directors' Fees and Expenses 2 46 3 6 5 2
Foreign Tax Expense -- -- -- -- -- 33
Professional Fees 15 51 26 24 18 22
Shareholder Reports 19 102 25 12 8 5
Distribution Fees on Class B
Shares 2 4 31 -- 3 3
Other Expenses 7 31 3 5 81 1
---------- -------------- ------- ------- --------- ---------
Total Expenses 201 12,411 708 1,388 867 528
---------- -------------- ------- ------- --------- ---------
NET INVESTMENT INCOME (LOSS) 102 30,018 1,417 2,227 (99) 148
---------- -------------- ------- ------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold (3,881) 119,544 358 7,644 (9,760) 10,124
Foreign Currency Transactions (50) 13,869 3,611 (981) 14,719 (6)
---------- -------------- ------- ------- --------- ---------
Total Net Realized Gain (Loss) (3,931) 133,413 3,969 6,663 4,959 10,118
---------- -------------- ------- ------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (6,386) 202,159 17,188 8,616 34,614 10,226*
Foreign Currency Translations 7 11,366 (308) 1,500 (6,332) 1
---------- -------------- ------- ------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) (6,379) 213,525 16,880 10,116 28,282 10,227
---------- -------------- ------- ------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (10,310) 346,938 20,849 16,779 33,241 20,345
---------- -------------- ------- ------- --------- ---------
Net Increase (Decrease) in Net
Assets Resulting from
Operations $ (10,208) $ 376,956 $ 22,266 $ 19,006 $ 33,142 $ 20,493
---------- -------------- ------- ------- --------- ---------
---------- -------------- ------- ------- --------- ---------
</TABLE>
- ---------------
* Net of foreign tax of $13,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
AGGRESSIVE EMERGING EQUITY VALUE U.S. REAL VALUE
EQUITY GROWTH GROWTH EQUITY TECHNOLOGY ESTATE EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 546 $ 34 $ 2,153 $ 309 $ 6 $ 4,303 $ 1,611 $ 54
Interest 191 75 667 24 12 453 48 114
Less: Foreign Taxes Withheld -- -- -- -- -- (6) -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total Income 737 109 2,820 333 18 4,750 1,659 168
----------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 491 296 1,353 122 45 1,015 266 18
Less: Fees Waived (47) (16) (88) (49) (45) (74) (62) (18)
----------- --------- --------- --------- --------- --------- --------- ---------
Investment Advisory Fees -- Net 444 280 1,265 73 -- 941 204 --
Administrative Fees 95 48 349 25 9 197 84 8
Custodian Fees 23 11 44 5 30 40 16 8
Filing and Registration Fees 24 12 87 14 53 32 18 13
Insurance 1 2 4 1 -- 2 2 --
Directors' Fees and Expenses 3 3 7 2 1 5 3 1
Professional Fees 12 12 16 10 21 13 12 10
Shareholder Reports 7 4 24 10 19 30 30 5
Distribution Fees on Class B
Shares 13 2 7 2 2 11 2 2
Other Expenses 4 6 6 3 2 5 6 1
Expenses Reimbursed by Adviser -- -- -- -- (81) -- -- (21)
----------- --------- --------- --------- --------- --------- --------- ---------
Total Expenses 626 380 1,809 145 56 1,276 377 27
----------- --------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) 111 (271) 1,011 188 (38) 3,474 1,282 141
----------- --------- --------- --------- --------- --------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 4,753 13,145 23,636 5,230 1,358 23,896 8,888 463
Written Options -- -- -- -- 11 -- -- --
Securities Sold Short -- -- -- -- (10) -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total Net Realized Gain 4,753 13,145 23,636 5,230 1,359 23,896 8,888 463
----------- --------- --------- --------- --------- --------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 10,286 (12,825) 32,704 (1,039) 1,324 1,309 3,470 (51)
Short Sales (416) -- -- -- -- -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 9,870 (12,825) 32,704 (1,039) 1,324 1,309 3,470 (51)
----------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NET REALIZED GAIN AND CHANGE
IN UNREALIZED APPRECIATION
(DEPRECIATION) 14,623 320 56,340 4,191 2,683 25,205 12,358 412
----------- --------- --------- --------- --------- --------- --------- ---------
Net Increase in Net Assets
Resulting from Operations $ 14,734 $ 49 $ 57,351 $ 4,379 $ 2,645 $ 28,679 $ 13,640 $ 553
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL
MARKETS FIXED FIXED HIGH MUNICIPAL MONEY MONEY
DEBT INCOME INCOME YIELD BOND MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 8 $ 16 $ -- $ 174 $ -- $ -- $ --
Interest 7,868 4,390 2,813 5,413 1,220 34,416 12,149
Less: Foreign Taxes Withheld -- -- (11) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Income 7,876 4,406 2,802 5,587 1,220 34,416 12,149
--------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 777 229 199 288 85 1,864 1,022
Less: Fees Waived -- (96) (105) (18) (54) -- --
--------- --------- --------- --------- --------- --------- ---------
Investment Advisory Fees -- Net 777 133 94 270 31 1,864 1,022
Administrative Fees 123 104 81 92 40 963 543
Custodian Fees 109 13 23 12 3 68 50
Filing and Registration Fees 19 16 21 30 16 78 87
Insurance 4 3 2 2 1 34 --
Interest Expense 218 -- -- -- -- -- --
Directors' Fees and Expenses 5 4 3 3 2 37 18
Professional Fees 28 12 16 14 10 45 15
Shareholder Reports 7 6 5 6 4 -- 2
Distribution Fees on Class B
shares 3 1 1 6 -- -- --
Other Expenses 12 4 6 3 2 37 14
--------- --------- --------- --------- --------- --------- ---------
Total Expenses 1,305 296 252 438 109 3,126 1,751
--------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME 6,571 4,110 2,550 5,149 1,111 31,290 10,398
--------- --------- --------- --------- --------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 17,578 1,282 274 958 4 72 --
Foreign Currency Transactions (583) 375 (2,001) -- -- -- --
Securities Sold Short (392) -- -- -- -- -- --
Written Options 35 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Net Realized Gain (Loss) 16,638 1,657 (1,727) 958 4 72 --
--------- --------- --------- --------- --------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 1,210 (1,337) (3,157) 1,804 204 -- --
Foreign Currency Translations 7 (95) 174 -- -- -- --
Short Sales 355 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 1,572 (1,432) (2,983) 1,804 204 -- --
--------- --------- --------- --------- --------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 18,210 225 (4,710) 2,762 208 72 --
--------- --------- --------- --------- --------- --------- ---------
Net Increase (Decrease) in Net
Assets Resulting from
Operations $ 24,781 $ 4,335 $ (2,160) $ 7,911 $ 1,319 $ 31,362 $ 10,398
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE ASIAN
COUNTRY ALLOCATION EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,787 $ 2,195 $ 1,262 $ 3,107
Net Realized Gain (Loss) 17,191 26,210 (6,325) 27,596
Change in Unrealized Appreciation
(Depreciation) 5,515 (11,503) 11,570 (23,998)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 24,493 16,902 6,507 6,705
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (11,942) -- (2,757)
In Excess of Net Investment Income -- (307) -- (5)
Net Realized Gain -- (6,994) -- (23,408)
CLASS B+:
Net Investment Income -- (46) -- (59)
In Excess of Net Investment Income -- (1) -- --
Net Realized Gain -- (28) -- (735)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions -- (19,318) -- (26,964)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 28,922 63,687 122,307 319,487
Distributions Reinvested -- 15,163 -- 22,963
Redeemed (94,374) (63,918) (173,315) (274,658)
CLASS B+:
Subscribed 52 1,042 1,106 19,937
Distributions Reinvested -- 76 -- 728
Redeemed (653) (471) (7,377) (8,582)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (66,053) 15,579 (57,279) 79,875
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (41,560) 13,163 (50,772) 59,616
NET ASSETS:
Beginning of Period 183,826 170,663 374,500 314,884
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 142,266 $ 183,826 $ 323,728 $ 374,500
- ---------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 1,479 $ (308) $ 1,258 $ (4)
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,491 5,277 6,679 15,774
Shares Issued on Distributions
Reinvested -- 1,321 -- 1,221
Shares Redeemed (7,549) (5,262) (9,448) (13,753)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (5,058) 1,336 (2,769) 3,242
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 5 87 60 979
Shares Issued on Distributions
Reinvested -- 7 -- 39
Shares Redeemed (58) (39) (392) (431)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (53) 55 (332) 587
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EUROPEAN
MARKETS EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,746 $ 8,495 $ 3,714 $ 2,360
Net Realized Gain 110,885 19,598 4,676 1,760
Change in Unrealized Appreciation
(Depreciation) 243,075 80,354 23,243 22,277
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 357,706 108,447 31,633 26,397
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (7,165) -- (2,463)
In Excess of Net Investment Income -- (197) -- (220)
Net Realized Gain -- -- -- (364)
CLASS B+:
Net Investment Income -- (51) -- (36)
In Excess of Net Investment Income -- (1) -- (3)
Net Realized Gain -- -- -- (6)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions -- (7,414) -- (3,092)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 287,337 550,412 77,949 128,948
Distributions Reinvested -- 5,513 -- 2,886
Redeemed (137,485) (229,242) (47,553) (46,075)
CLASS B+:
Subscribed 6,858 18,152 2,561 3,819
Distributions Reinvested -- 43 -- 39
Redeemed (9,712) (4,283) (1,517) (1,495)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 146,998 340,595 31,440 88,122
- ---------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 504,704 441,628 63,073 111,427
NET ASSETS:
Beginning of Period 1,318,219 876,591 181,010 69,583
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 1,822,923 $ 1,318,219 $ 244,083 $ 181,010
- ---------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 3,548 $ (198) $ 3,491 $ (223)
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 17,500 37,330 4,543 8,473
Shares Issued on Distributions
Reinvested -- 367 -- 177
Shares Redeemed (8,340) (15,483) (2,712) (2,969)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 9,160 22,214 1,831 5,681
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 412 1,254 143 254
Shares Issued on Distributions
Reinvested -- 3 -- 2
Shares Redeemed (594) (288) (87) (97)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (182) 969 56 159
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL
EQUITY GOLD
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 835 $ 1,086 $ 102 $ 153
Net Realized Gain (Loss) 3,477 7,313 (3,931) 493
Change in Unrealized Appreciation
(Depreciation) 10,010 7,828 (6,379) (4,498)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 14,322 16,227 (10,208) (3,852)
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (1,075) (78) (135)
In Excess of Net Investment Income -- -- -- (29)
Net Realized Gain -- (5,024) -- --
In Excess of Net Realized Gain -- -- -- (1,681)
CLASS B+:
Net Investment Income -- (45) (2) (4)
In Excess of Net Investment Income -- -- -- (1)
Net Realized Gain -- (223) -- --
In Excess of Net Realized Gain -- -- -- (89)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions -- (6,367) (80) (1,939)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 7,637 15,476 14,021 52,836
Distributions Reinvested -- 5,960 66 1,522
Redeemed (5,588) (42,500) (7,829) (28,491)
CLASS B+:
Subscribed 2,763 3,900 562 2,457
Distributions Reinvested -- 268 1 38
Redeemed (2,240) (414) (414) (800)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions 2,572 (17,310) 6,407 27,562
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets 16,894 (7,450) (3,881) 21,771
NET ASSETS:
Beginning of Period 84,225 91,675 29,180 7,409
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 101,119 $ 84,225 $ 25,299 $ 29,180
- --------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 854 $ 19 $ (8) $ (30)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 451 974 1,632 4,551
Shares Issued on Distributions
Reinvested -- 370 8 162
Shares Redeemed (331) (2,808) (966) (2,591)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding 120 (1,464) 674 2,122
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 161 252 69 216
Shares Issued on Distributions
Reinvested -- 17 -- 4
Shares Redeemed (135) (27) (47) (72)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 26 242 22 148
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY MAGNUM
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
MARCH 15,
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED 1996* TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 30,018 $ 32,405 $ 1,417 $ 455
Net Realized Gain 133,413 123,116 3,969 1,365
Change in Unrealized Appreciation
(Depreciation) 213,525 200,317 16,880 3,643
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 376,956 355,838 22,266 5,463
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (45,368) -- (1,037)
In Excess of Net Investment Income -- -- -- (169)
Net Realized Gain -- (101,435) -- (87)
CLASS B+:
Net Investment Income -- (97) -- (273)
In Excess of Net Investment Income -- -- -- (44)
Net Realized Gain -- (239) -- (23)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions -- (147,139) -- (1,633)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 280,618 508,163 40,308 82,326
Distributions Reinvested -- 131,405 -- 1,117
Redeemed (80,965) (181,971) (3,445) (1,247)
CLASS B+:
Subscribed 755 5,025 8,057 22,789
Distributions Reinvested -- 305 -- 311
Redeemed (3,484) (339) (4,866) (637)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 196,924 462,588 40,054 104,659
- --------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 573,880 671,287 62,320 108,489
NET ASSETS:
Beginning of Period 2,269,817 1,598,530 108,489 --
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 2,843,697 $ 2,269,817 $ 170,809 $ 108,489
- --------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 29,745 $ (273) $ 1,204 $ (213)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 15,945 31,209 3,649 8,015
Shares Issued on Distributions
Reinvested -- 7,837 -- 106
Shares Redeemed (4,532) (10,975) (295) (117)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 11,413 28,071 3,354 8,004
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 43 321 723 2,211
Shares Issued on Distributions
Reinvested -- 18 -- 29
Shares Redeemed (208) (20) (441) (60)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (165) 319 282 2,180
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
+ The International Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL JAPANESE
SMALL CAP EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 2,227 $ 2,830 $ (99) $ (98)
Net Realized Gain 6,663 6,819 4,959 11,861
Change in Unrealized Appreciation (Depreciation) 10,116 23,041 28,282 (17,205)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 19,006 32,690 33,142 (5,442)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (3,001) -- (11,178)
In Excess of Net Investment Income -- -- -- (8,826)
Net Realized Gain -- (5,327) -- --
CLASS B+:
Net Investment Income -- -- -- (277)
In Excess of Net Investment Income -- -- -- (218)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (8,328) -- (20,499)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 24,248 40,108 68,145 154,108
Distributions Reinvested -- 7,416 -- 16,337
Redeemed (11,470) (35,812) (80,924) (112,210)
CLASS B+:
Subscribed -- -- 1,127 7,701
Distributions Reinvested -- -- -- 435
Redeemed -- -- (2,601) (4,048)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 12,778 11,712 (14,253) 62,323
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 31,784 36,074 18,889 36,382
NET ASSETS:
Beginning of Period 234,743 198,669 155,660 119,278
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 266,527 $ 234,743 $ 174,549 $ 155,660
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income/ accumulated net investment loss
included in end of period net assets $ 2,550 $ 323 $ (9,142) $ (9,043)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,361 2,406 8,555 16,432
Shares Issued on Distributions Reinvested -- 444 -- 2,042
Shares Redeemed (669) (2,199) (10,142) (12,218)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 692 651 (1,587) 6,256
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- -- 138 812
Shares Issued on Distributions Reinvested -- -- -- 55
Shares Redeemed -- -- (323) (435)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding -- -- (185) 432
</TABLE>
- --------------------------------------------------------------------------------
+ The Japanese Equity Portfolio began offering Class B shares on January
2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AGGRESSIVE
AMERICAN EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 148 $ 313 $ 111 $ 614
Net Realized Gain 10,118 6,257 4,753 15,730
Change in Unrealized Appreciation
(Depreciation) 10,227 2,592 9,870 4
- --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 20,493 9,162 14,734 16,348
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (273) (110) (549)
In Excess of Net Realized Income -- (5) -- --
Net Realized Gain -- (4,475) -- (9,877)
CLASS B+:
Net Investment Income -- (8) (4) (62)
Net Realized Gain -- (164) -- (1,265)
- --------------------------------------------------------------------------------------------------------------
Total Distributions -- (4,925) (114) (11,753)
- --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 41,581 18,267 75,591 40,946
Distributions Reinvested -- 4,324 97 9,531
Redeemed (15,887) (11,766) (23,634) (14,822)
CLASS B+:
Subscribed 3,338 1,308 10,458 9,581
Distributions Reinvested -- 147 4 1,315
Redeemed (2,127) (151) (6,122) (2,409)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 26,905 12,129 56,394 44,142
- --------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 47,398 16,366 71,014 48,737
NET ASSETS:
Beginning of Period 31,742 15,376 77,285 28,548
- --------------------------------------------------------------------------------------------------------------
End of Period $ 79,140 $ 31,742 $ 148,299 $ 77,285
- --------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end
of period net assets $ 143 $ (5) $ 29 $ 32
- --------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,120 1,557 4,941 2,748
Shares Issued on Distributions
Reinvested -- 384 7 665
Shares Redeemed (1,161) (953) (1,531) (1,012)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 1,959 988 3,417 2,401
- --------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 246 118 674 672
Shares Issued on Distributions
Reinvested -- 13 -- 92
Shares Redeemed (156) (13) (406) (153)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 90 118 268 611
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EQUITY
GROWTH GROWTH
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (271) $ (904) $ 1,011 $ 2,212
Net Realized Gain 13,145 36,369 23,636 40,528
Change in Unrealized Appreciation
(Depreciation) (12,825) (31,141) 32,704 10,734
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 49 4,324 57,351 53,474
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- (584) (2,164)
Net Realized Gain -- (24,810) -- (42,560)
CLASS B+:
Net Investment Income -- -- (3) (46)
Net Realized Gain -- (1,588) -- (1,031)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions -- (26,398) (587) (45,801)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 19,762 26,575 155,730 223,237
Distributions Reinvested -- 24,750 534 41,770
Redeemed (23,970) (87,418) (64,124) (78,208)
CLASS B+:
Subscribed 253 5,462 5,993 6,515
Distributions Reinvested -- 1,540 2 993
Redeemed (3,191) (1,423) (3,843) (1,891)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (7,146) (30,514) 94,292 192,416
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (7,097) (52,588) 151,056 200,089
NET ASSETS:
Beginning of Period 66,790 119,378 358,201 158,112
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 59,693 $ 66,790 $ 509,257 $ 358,201
- ---------------------------------------------------------------------------------------------------------------------
Undistributed net investment
income/accumulated net investment
loss included in end of period net
assets $ (274) $ (3) $ 426 $ 2
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,529 1,202 9,882 14,718
Shares Issued on Distributions
Reinvested -- 1,845 36 2,776
Shares Redeemed (1,869) (3,952) (4,009) (5,067)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (340) (905) 5,909 12,427
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 20 246 377 418
Shares Issued on Distributions
Reinvested -- 115 -- 66
Shares Redeemed (236) (64) (247) (116)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (216) 297 130 368
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY TECHNOLOGY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
SEPTEMBER 16,
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED 1996* TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 188 $ 888 $ (38) $ (11)
Net Realized Gain (Loss) 5,230 6,620 1,359 (11)
Change in Unrealized Appreciation
(Depreciation) (1,039) (902) 1,324 296
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 4,379 6,606 2,645 274
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (125) (851) -- --
Net Realized Gain -- (5,696) -- --
CLASS B+:
Net Investment Income (5) (34) -- --
Net Realized Gain -- (413) -- --
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (130) (6,994) -- --
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 10,442 14,319 11,969 3,375
Distributions Reinvested 116 5,982 -- --
Redeemed (11,377) (48,028) (1,644) --
CLASS B+:
Subscribed 2,951 1,899 150 1,485
Distributions Reinvested 4 376 -- --
Redeemed (828) (420) (654) (52)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions 1,308 (25,872) 9,821 4,808
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets 5,557 (26,260) 12,466 5,082
NET ASSETS:
Beginning of Period 25,659 51,919 5,082 --
- -------------------------------------------------------------------------------------------------------------------------
End of Period $ 31,216 $ 25,659 $ 17,548 $5,082
- -------------------------------------------------------------------------------------------------------------------------
Undistributed net investment
income/accumulated net investment
loss included in end of period net
assets $ 61 $ 3 $ (38) $ --
- -------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 926 1,157 994 336
Shares Issued on Distributions
Reinvested 10 537 -- --
Shares Redeemed (984) (3,850) (141) --
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (48) (2,156) 853 336
- -------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 242 153 12 144
Shares Issued on Distributions
Reinvested 1 34 -- --
Shares Redeemed (75) (32) (53) (5)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding 168 155 (41) 139
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
+ The Small Cap Value Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. VALUE
REAL ESTATE EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,474 $ 3,916 $ 1,282 $ 3,431
Net Realized Gain 23,896 17,097 8,888 15,759
Change in Unrealized Appreciation (Depreciation) 1,309 28,458 3,470 2,404
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 28,679 49,471 13,640 21,594
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (1,187) (3,888) (672) (3,374)
In Excess of Net Investment Income -- (2) -- --
Net Realized Gain -- (12,504) -- (17,256)
CLASS B+:
Net Investment Income (30) (148) (10) (58)
Net Realized Gain -- (559) -- (357)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,217) (17,101) (682) (21,045)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 136,202 119,585 12,870 38,132
Distributions Reinvested 771 14,340 570 19,004
Redeemed (74,167) (24,190) (34,796) (99,013)
CLASS B+:
Subscribed 9,260 8,149 1,084 2,992
Distributions Reinvested 19 514 10 401
Redeemed (6,962) (1,175) (1,904) (747)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 65,123 117,223 (22,166) (39,231)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 92,585 149,593 (9,208) (38,682)
NET ASSETS:
Beginning of Period 219,102 69,509 108,683 147,365
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 311,687 $ 219,102 $ 99,475 $ 108,683
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 2,255 $ (2) $ 607 $ 7
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 9,053 9,313 899 2,649
Shares Issued on Distributions Reinvested 52 1,047 41 1,340
Shares Redeemed (4,961) (1,849) (2,351) (6,919)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 4,144 8,511 (1,411) (2,930)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 624 662 74 207
Shares Issued on Distributions Reinvested 1 37 1 28
Shares Redeemed (463) (92) (132) (51)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 162 607 (57) 184
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
BALANCED MARKETS DEBT
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 141 $ 584 $ 6,571 $ 21,910
Net Realized Gain 463 1,846 16,638 57,165
Change in Unrealized Appreciation (Depreciation) (51) (1,083) 1,572 309
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 553 1,347 24,781 79,384
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (61) (477) -- (14,104)
In Excess of Net Investment Income -- (1) -- (74)
Net Realized Gain -- (1,690) -- (51,244)
CLASS B+:
Net Investment Income (12) (108) -- (381)
In Excess of Net Investment Income -- -- -- (2)
Net Realized Gain -- (548) -- (1,391)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (73) (2,824) -- (67,196)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 984 1,205 45,330 79,712
Distributions Reinvested 45 1,898 -- 51,784
Redeemed (1,965) (18,709) (59,614) (173,915)
CLASS B+:
Subscribed -- 3,269 1,399 4,437
Distributions Reinvested 12 607 -- 1,522
Redeemed (1,060) (1,246) (3,159) (1,211)
- ------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Capital Share Transactions (1,984) (12,976) (16,044) (37,671)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (1,504) (14,453) 8,737 (25,483)
NET ASSETS:
Beginning of Period 8,189 22,642 156,395 181,878
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 6,685 $ 8,189 $ 165,132 $ 156,395
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 67 $ (1) $ 6,495 $ (76)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 118 121 5,628 8,356
Shares Issued on Distributions Reinvested 5 215 -- 6,805
Shares Redeemed (233) (1,872) (7,464) (16,141)
- ------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Class A Shares Outstanding (110) (1,536) (1,836) (980)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- 327 172 467
Shares Issued on Distributions Reinvested 1 71 -- 201
Shares Redeemed (127) (129) (404) (103)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) Class B Shares
Outstanding (126) 269 (232) 565
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED GLOBAL
INCOME FIXED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,110 $ 10,061 $ 2,550 $ 6,007
Net Realized Gain (Loss) 1,657 3,047 (1,727) 2,742
Change in Unrealized Appreciation (Depreciation) (1,432) (6,343) (2,983) (1,546)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 4,335 6,765 (2,160) 7,203
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,267) (10,366) (1,395) (5,986)
In Excess of Net Investment Income -- (14) -- --
CLASS B+:
Net Investment Income (34) (73) (9) (88)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (3,301) (10,453) (1,404) (6,074)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 30,562 43,737 14,253 53,391
Distributions Reinvested 2,806 8,559 1,139 5,288
Redeemed (31,153) (83,396) (38,992) (49,742)
CLASS B+:
Subscribed 2,317 2,038 257 2,353
Distributions Reinvested 19 64 8 78
Redeemed (1,158) (646) (1,383) (902)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 3,393 (29,644) (24,718) 10,466
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 4,427 (33,332) (28,282) 11,595
NET ASSETS:
Beginning of Period 132,195 165,527 114,447 102,852
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 136,622 $ 132,195 $ 86,165 $ 114,447
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 795 $ (14) $ 1,758 $ 612
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,904 4,156 1,295 4,846
Shares Issued on Distributions Reinvested 267 812 106 480
Shares Redeemed (2,946) (7,913) (3,599) (4,503)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 225 (2,945) (2,198) 823
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 220 194 23 213
Shares Issued on Distributions Reinvested 2 6 1 7
Shares Redeemed (110) (62) (125) (82)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 112 138 (101) 138
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH MUNICIPAL
YIELD BOND
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,149 $ 8,522 $ 1,111 $ 1,840
Net Realized Gain (Loss) 958 687 4 (6)
Change in Unrealized Appreciation (Depreciation) 1,804 3,436 204 (686)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 7,911 12,645 1,319 1,148
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,891) (8,340) (898) (1,821)
In Excess of Net Investment Income -- (4) -- (16)
Net Realized Gain -- -- -- --
CLASS B+:
Net Investment Income (157) (333) -- (4)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (4,048) (8,677) (898) (1,841)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 42,457 48,672 22,597 18,758
Distributions Reinvested 3,074 6,490 873 1,724
Redeemed (33,184) (25,529) (10,564) (25,432)
CLASS B+:
Subscribed 3,460 6,981 -- 171
Distributions Reinvested 115 244 -- 4
Redeemed (3,697) (1,743) (69) (105)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 12,225 35,115 12,837 (4,880)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 16,088 39,083 13,258 (5,573)
NET ASSETS:
Beginning of Period 101,328 62,245 40,296 45,869
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 117,416 $ 101,328 $ 53,554 $ 40,296
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 1,097 $ (4) $ 197 $ (16)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,832 4,604 2,215 1,830
Shares Issued on Distributions Reinvested 279 610 86 169
Shares Redeemed (3,018) (2,400) (1,032) (2,496)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 1,093 2,814 1,269 (497)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 312 662 -- 17
Shares Issued on Distributions Reinvested 10 23 -- --
Shares Redeemed (335) (165) (7) (10)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (13) 520 (7) 7
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MUNICIPAL
MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 31,290 $ 54,883 $ 10,398 $ 19,261
Net Realized Gain (Loss) 72 (469) -- (22)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 31,362 54,414 10,398 19,239
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (31,290) (54,883) (10,398) (19,261)
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 6,381,357 13,167,615 2,668,803 5,869,663
Distributions Reinvested 28,800 51,181 10,449 18,242
Redeemed (6,419,587) (12,770,387) (2,689,006) (5,617,992)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (9,430) 448,409 (9,754) 269,913
- ----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (9,358) 447,940 (9,754) 269,891
NET ASSETS:
Beginning of Period 1,284,633 836,693 721,410 451,519
- ----------------------------------------------------------------------------------------------------------------------
End of Period $ 1,275,275 $ 1,284,633 $ 711,656 $ 721,410
- ----------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 6,381,357 13,167,615 2,668,803 5,869,663
Shares Issued on Distributions Reinvested 28,800 51,181 10,449 18,242
Shares Redeemed (6,419,587) (12,770,387) (2,689,006) (5,617,992)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (9,430) 448,409 (9,754) 269,913
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS PERIOD FROM
ENDED ENDED JANUARY 17,
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1992* TO
1997++ --------------------------------------------- 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------ --------- --------- --------- --------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.11 0.24 0.17 0.19 0.13 0.02 0.11
Net Realized and Unrealized
Gain (Loss) on Investments 1.44 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------ --------- --------- --------- --------- ----------- -----------
Total from Investment
Operations 1.55 1.12 1.17 (0.06) 2.88 0.22 (0.63)
------ --------- --------- --------- --------- ----------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.81) (0.25) (0.14) (0.09) -- --
In Excess of Net Investment
Income -- (0.02) (0.10) -- (0.08) -- --
Net Realized Gain -- (0.48) (0.84) (0.36) -- -- --
In Excess of Net Realized
Gain -- -- -- -- (0.09) -- --
------ --------- --------- --------- --------- ----------- -----------
Total Distributions -- (1.31) (1.19) (0.50) (0.26) -- --
------ --------- --------- --------- --------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 12.99 $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------ --------- --------- --------- --------- ----------- -----------
------ --------- --------- --------- --------- ----------- -----------
TOTAL RETURN 13.55% 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------ --------- --------- --------- --------- ----------- -----------
------ --------- --------- --------- --------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $142,237 $183,193 $170,663 $182,977 $150,854 $50,234 $47,534
Ratio of Expenses to Average
Net Assets (1) 0.80%** 0.80% 0.80% 0.80% 0.80% 0.80%** 0.88%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.91%** 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio Turnover Rate 32% 65% 72% 51% 53% 2% 62%
Average Commission Rate:#
Per Share $0.0080 $0.0028 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.08% 0.11% N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.07%** 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net Investment Income to
Average Net Assets 1.69%** 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.44 $ 11.66
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.06
Net Realized and Unrealized Gain on
Investments 1.49 1.00
------ ------
Total from Investment Operations 1.53 1.06
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.78)
In Excess of Net Investment Income -- (0.02)
Net Realized Gain -- (0.48)
------ ------
Total Distributions -- (1.28)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.97 $ 11.44
------ ------
------ ------
TOTAL RETURN 13.37% 9.22%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 29 $ 633
Ratio of Expenses to Average Net Assets
(2) 1.05%** 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.79%** 1.09%**
Portfolio Turnover Rate 32% 65%
Average Commission Rate:
Per Share $0.0080 $0.0028
As a Percentage of Trade Amount 0.08% 0.11%
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.34%** 1.33%**
Net Investment Income to Average
Net Assets 0.52%** 0.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
++ Per share amounts for the period ended June 30, 1997 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 ----------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 9.67
------ ----------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.08 0.17 0.18 0.11 0.10 0.01 0.14
Net Realized and Unrealized
Gain (Loss) on Investments 0.35 0.50 1.11 (4.15) 13.38 (0.53) 3.86
------ ----------- --------- --------- --------- --------- ---------
Total from Investment
Operations 0.43 0.67 1.29 (4.04) 13.48 (0.52) 4.00
------ ----------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income -- (0.15) (0.34) (0.09) (0.01) -- (0.04)
In Excess of Net Investment
Income -- (0.00)+ (0.00)+ -- (0.13) -- --
Net Realized Gain -- (1.27) (3.01) (0.53) (0.12) -- --
In Excess of Net Realized
Gain -- -- -- -- (0.13) -- --
------ ----------- --------- --------- --------- --------- ---------
Total Distributions -- (1.42) (3.35) (0.62) (0.39) -- (0.04)
------ ----------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 19.16 $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63
------ ----------- --------- --------- --------- --------- ---------
------ ----------- --------- --------- --------- --------- ---------
TOTAL RETURN 2.30% 3.49% 6.87% (15.81)% 105.71% (3.82)% 41.50%
------ ----------- --------- --------- --------- --------- ---------
------ ----------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $318,844 $363,498 $314,884 $276,906 $287,136 $41,978 $41,017
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment Income
to Average Net Assets (1) 0.74%** 0.74% 0.97% 0.52% 0.83% 0.61%** 1.53%
Portfolio Turnover Rate 48% 69% 42% 47% 18% 10% 33%
Average Commission Rate:#
Per Share $0.0111 $0.0111 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.50% 0.52% N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.05 $0.03 $0.04 $0.05 $0.02 $0.06
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.25%** 1.25% 1.18% 1.20% 1.38% 2.02%** 1.63%
Net Investment Income
(Loss) to Average Net
Assets 0.58%** 0.54% 0.79% 0.32% 0.45% (0.41)%** 0.90%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.74 $ 19.55
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.11
Net Realized and Unrealized Gain on
Investments 0.37 0.46
------ ------
Total from Investment Operations 0.41 0.57
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.11)
Net Realized Gain -- (1.27)
------ ------
Total Distributions -- (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 19.15 $ 18.74
------ ------
------ ------
TOTAL RETURN 2.19% 2.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $4,884 $11,002
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.41%** 0.58%**
Portfolio Turnover Rate 48% 69%
Average Commission Rate:
Per Share $0.0111 $0.0111
As a Percentage of Trade Amount 0.50% 0.52%
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.51%** 1.52%**
Net Investment Income to Average
Net Assets 0.24%** 0.37%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------
PERIOD FROM
SIX MONTHS TWO MONTHS SEPTEMBER
ENDED ENDED 25,
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1992* TO
1997 ------------------------------------------------- 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
------ ----------- --------- ---------- ---------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) 0.04 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized
Gain (Loss) on Investments 3.74 1.51 (2.05) (1.69) 8.79 0.11 0.11
------ ----------- --------- ---------- ---------- ----------- -----------
Total from Investment
Operations 3.78 1.60 (1.97) (1.73) 8.78 0.11 0.11
------ ----------- --------- ---------- ---------- ----------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.08) (0.06) -- -- -- --
Net Realized Gain -- -- (1.13) (0.97) -- -- --
------ ----------- --------- ---------- ---------- ----------- -----------
Total Distributions -- (0.08) (1.19) (0.97) -- -- --
------ ----------- --------- ---------- ---------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 18.44 $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ----------- --------- ---------- ---------- ----------- -----------
------ ----------- --------- ---------- ---------- ----------- -----------
TOTAL RETURN 25.78% 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
------ ----------- --------- ---------- ---------- ----------- -----------
------ ----------- --------- ---------- ---------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,808,434 $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average
Net Assets (1) 1.69%** 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) 0.48%** 0.69% 0.60% (0.26)% (0.06)% (0.33)%** (0.53)%**
Portfolio Turnover Rate 40% 55% 54% 32% 52% 2% 0%
Average Commission Rate:#
Per Share $0.0013 $0.0006 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.39% 0.42% N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income N/A N/A N/A N/A $0.01 $0.00 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets N/A N/A N/A N/A 1.79% 2.48%** 4.82%**
Net Investment Loss to
Average Net Assets N/A N/A N/A N/A (0.10)% (1.06)%** (3.60)%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.66 $ 13.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.01 0.04
Net Realized and Unrealized Gain on
Investments 3.75 1.42
------ ------
Total from Investment Operations 3.76 1.46
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.05)
------ ------
Total Distributions -- (0.05)
------ ------
NET ASSET VALUE, END OF PERIOD $ 18.42 $ 14.66
------ ------
------ ------
TOTAL RETURN 25.65% 11.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,489 $14,213
Ratio of Expenses to Average Net Assets 1.94%** 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.16%** 0.33%**
Portfolio Turnover Rate 40% 55%
Average Commission Rate:
Per Share $0.0013 $0.0006
As a Percentage of Trade Amount 0.39% 0.42%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
PERIOD FROM
SIX MONTHS APRIL 2,
ENDED YEAR ENDED DECEMBER 31, 1993* TO
JUNE 30, 1997 --------------------------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.70 $ 13.92 $ 13.94 $ 12.91 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.30 0.24 0.14 0.08 0.08
Net Realized and Unrealized
Gain on Investments 2.18 2.85 1.37 1.29 2.83
------ ------ ------ ------ ------
Total from Investment
Operations 2.48 3.09 1.51 1.37 2.91
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.25) (0.15) (0.09) --
In Excess of Net Investment
Income -- (0.02) -- -- --
Net Realized Gain -- (0.04) (1.38) (0.25) --
------ ------ ------ ------ ------
Total Distributions -- (0.31) (1.53) (0.34) --
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 19.18 $ 16.70 $ 13.92 $ 13.94 $ 12.91
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 14.85% 22.29% 11.85% 10.88% 29.10%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $239,958 $178,356 $69,583 $27,634 $12,681
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 3.38%** 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 14% 24% 13% 79% 15%
Average Commission Rate:#
Per Share $0.0201 $0.0212 N/A N/A N/A
As a Percentage of Trade
Amount 0.18% 0.23% N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.03 $0.06 $0.09
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.12%** 1.16% 1.25% 1.62% 2.43%**
Net Investment Income
(Loss) to Average Net
Assets 3.26%** 1.67% 1.12% 0.25% (0.21)%**
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED 1996*** TO
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.67 $ 14.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.24 0.18
Net Realized and Unrealized Gain on
Investments 2.23 2.73
------ ------
Total from Investment Operations 2.47 2.91
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.23)
In Excess of Net Investment Income -- (0.02)
Net Realized Gain -- (0.04)
------ ------
Total Distributions -- (0.29)
------ ------
NET ASSET VALUE, END OF PERIOD $ 19.14 $ 16.67
------ ------
------ ------
TOTAL RETURN 14.82% 20.76%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 4,125 $ 2,654
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.28%** 1.67%**
Portfolio Turnover Rate 14% 24%
Average Commission Rate:
Per Share $0.0201 $0.0212
As a Percentage of Trade Amount 0.18% 0.23%
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%** 1.40%**
Net Investment Income to Average
Net Assets 3.16%** 1.52%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
SIX PERIOD FROM
MONTHS TWO MONTHS JULY 15,
ENDED ENDED 1992*
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER TO OCTOBER
1997 ----------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00
-------- -------- -------- -------- -------- ---------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.16 0.23 0.18 0.08 0.08 0.01 0.02
Net Realized and Unrealized
Gain (Loss) on Investments 2.57 3.02 2.26 0.79 4.18 0.39 (0.67)
-------- -------- -------- -------- -------- ---------- -----------
Total from Investment
Operations 2.73 3.25 2.44 0.87 4.26 0.40 (0.65)
-------- -------- -------- -------- -------- ---------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.23) (0.22) (0.12) (0.02) -- --
In Excess of Net Investment
Income -- -- -- -- (0.03) -- --
Net Realized Gain -- (1.09) (1.31) (1.22) (0.09) -- --
-------- -------- -------- -------- -------- ---------- -----------
Total Distributions -- (1.32) (1.53) (1.34) (0.14) -- --
-------- -------- -------- -------- -------- ---------- -----------
NET ASSET VALUE, END OF PERIOD $ 18.97 $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35
-------- -------- -------- -------- -------- ---------- -----------
-------- -------- -------- -------- -------- ---------- -----------
TOTAL RETURN 16.81% 22.83% 18.66% 6.95% 44.24% 4.28% (6.50)%
-------- -------- -------- -------- -------- ---------- -----------
-------- -------- -------- -------- -------- ---------- -----------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $96,056 $80,297 $91,675 $78,935 $19,918 $11,739 $11,257
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.89%** 1.38% 1.17% 0.87% 0.84% 0.69%** 1.00%**
Portfolio Turnover Rate 14% 26% 28% 12% 42% 5% 10%
Average Commission Rate:#
Per Share $0.0298 $0.0299 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.27% 0.25% N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.03 $0.02 $0.02 $0.01 $0.02 $0.08
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.14%** 1.15% 1.13% 1.24% 1.66% 2.49%** 5.22%**
Net Investment Income
(Loss) to Average Net
Assets 1.75%** 1.23% 1.04% 0.63% 0.18% (0.80)%** (3.22)%**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED JUNE 1996*** TO
30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.21 $ 14.36
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.12 0.13
Net Realized and Unrealized
Gain on Investments 2.57 3.02
------ ------
Total from Investment
Operations 2.69 3.15
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.21)
Net Realized Gain -- (1.09)
------ ------
Total Distributions -- (1.30)
------ ------
NET ASSET VALUE, END OF PERIOD $ 18.90 $ 16.21
------ ------
------ ------
TOTAL RETURN 16.60% 22.04%
------ ------
------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 5,063 $ 3,928
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.67%** 1.29%**
Portfolio Turnover Rate 14% 26%
Average Commission Rate:
Per Share $0.0298 $0.0299
As a Percentage of Trade
Amount 0.27% 0.25%
- -----------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.38%** 1.39%**
Net Investment Income to
Average Net Assets 1.54%** 1.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
PERIOD FROM
SIX MONTHS FEBRUARY 1,
ENDED JUNE YEAR ENDED DECEMBER 31, 1994*
30, 1997 ----------------------------- TO DECEMBER 31,
(UNAUDITED) 1996 1995 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.30 $ 8.55 $ 9.13 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) 0.03 0.05 (0.07) 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (2.71) 1.41 1.22 (0.88)
------ ------ ------ ------
Total from Investment
Operations (2.68) 1.46 1.15 (0.85)
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.02) (0.05) (0.01) (0.02)
In Excess of Net Investment
Income -- (0.01) -- --
Net Realized Gain -- -- (1.72) --
In Excess of Net Realized
Gain -- (0.65) -- --
------ ------ ------ ------
Total Distributions (0.02) (0.71) (1.73) (0.02)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 6.60 $ 9.30 $ 8.55 $ 9.13
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (28.86)% 16.94% 13.21% (8.49)%
------ ------ ------ ------
------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $24,180 $27,810 $7,409 $30,243
Ratio of Expenses to Average
Net Assets (1) 1.25%** 1.25% 1.25% 1.25%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) 0.66%** 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate 11% 94% 47% 56%
Average Commission Rate:#
Per Share $0.0120 $0.0246 N/A N/A
As a Percentage of Trade
Amount 0.45% 0.47% N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.04 $0.11 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.64%** 1.73% 1.76% 1.72%**
Net Investment Income
(Loss) to Average Net
Assets 0.29%** 0.10% (0.82)% (0.06)%**
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED JUNE 1996*** TO
30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.28 $ 8.81
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.02 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (2.68) 1.14
------ ------
Total from Investment
Operations (2.66) 1.17
------ ------
DISTRIBUTIONS
Net Investment Income (0.02) (0.04)
In Excess of Net Investment
Income -- (0.01)
Net Realized Gain -- (0.65)
------ ------
Total Distributions (0.02) (0.70)
------ ------
NET ASSET VALUE, END OF PERIOD $ 6.60 $ 9.28
------ ------
------ ------
TOTAL RETURN (28.75)% 13.21%
------ ------
------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,119 $ 1,370
Ratio of Expenses to Average
Net Assets (2) 1.50%** 1.50%**
Ratio of Net Investment Income
to Average Net Assets (2) 0.43%** 0.30%**
Portfolio Turnover Rate 11% 94%
Average Commission Rate:
Per Share $0.0120 $0.0246
As a Percentage of Trade
Amount 0.45% 0.47%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net
investment income $0.02 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.90%** 1.94%**
Net Investment Income
(Loss) to Average Net
Assets 0.06%** (0.13)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
++ The amounts shown for the year ended December 31, 1996 for a share
outstanding throughout the year does not accord with aggregate net
losses on investments for the year because of the timing of sales and
repurchases of the portfolio shares in relation to fluctuating market
value of the investments in the Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 --------------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 10.52
----------- ----------- ----------- ----------- --------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.21 0.25 0.16 0.16 0.15 0.01 0.12
Net Realized and
Unrealized Gain
(Loss) on Investments 2.43 2.71 1.55 1.54 4.36 0.14 (0.59)
----------- ----------- ----------- ----------- --------- ------ ------
Total from Investment
Operations 2.64 2.96 1.71 1.70 4.51 0.15 (0.47)
----------- ----------- ----------- ----------- --------- ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.36) (0.06) (0.18) (0.01) -- (0.17)
In Excess of Net
Investment Income -- -- -- -- (0.13) -- --
Net Realized Gain -- (0.80) (1.84) (0.27) (0.26) -- (0.05)
----------- ----------- ----------- ----------- --------- ------ ------
Total Distributions -- (1.16) (1.90) (0.45) (0.40) -- (0.22)
----------- ----------- ----------- ----------- --------- ------ ------
NET ASSET VALUE, END OF
PERIOD $ 19.59 $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
----------- ----------- ----------- ----------- --------- ------ ------
----------- ----------- ----------- ----------- --------- ------ ------
TOTAL RETURN 15.58% 19.64% 11.77% 12.39% 46.50% 1.53% (4.56)%
----------- ----------- ----------- ----------- --------- ------ ------
----------- ----------- ----------- ----------- --------- ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $2,840,689 $2,264,424 $1,598,530 $1,304,770 $947,045 $510,727 $486,836
Ratio of Expenses to
Average Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment
Income to Average Net
Assets (1) 2.47%** 1.64% 1.38% 1.12% 1.25% 0.68%** 1.46%
Portfolio Turnover Rate 16% 18% 27% 16% 23% 5% 12%
Average Commission Rate:#
Per Share $0.0186 $0.0238 N/A N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.21% 0.26% N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to
net investment
income $0.00+ $0.00 $0.003 $0.004 $0.01 $0.00 $0.00
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.03%** 1.02% 1.03% 1.03% 1.06% 1.14%** 1.02%
Net Investment
Income to Average
Net Assets 2.45%** 1.61% 1.35% 1.09% 1.19% 0.54%** 1.44%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.93 $ 15.24
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.17 0.23
Net Realized and Unrealized Gain
on Investments 2.44 2.59
------ ------
Total from Investment
Operations 2.61 2.82
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.33)
Net Realized Gain -- (0.80)
------ ------
Total Distributions -- (1.13)
------ ------
NET ASSET VALUE, END OF PERIOD $ 19.54 $ 16.93
------ ------
------ ------
TOTAL RETURN 15.42% 18.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 3,008 $ 5,393
Ratio of Expenses to Average Net
Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.09%** 1.68%**
Portfolio Turnover Rate 16% 18%
Average Commission Rate:
Per Share $0.0186 $0.0238
As a Percentage of Trade Amount 0.21% 0.26%
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.00
Ratios before expense
limitation:
Expenses to Average Net Assets 1.26%** 1.27%**
Net Investment Income to
Average Net Assets 2.08%** 1.66%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------
SIX MONTHS
ENDED
JUNE 30, PERIOD FROM
1997 MARCH 15, 1996* TO
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.66 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.06
Net Realized and Unrealized Gain
on Investments 1.60 0.76
------ ------
Total from Investment
Operations 1.71 0.82
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.13)
In Excess of Net Investment
Income -- (0.02)
Net Realized Gain -- (0.01)
------ ------
Total Distributions -- (0.16)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.37 $ 10.66
------ ------
------ ------
TOTAL RETURN 16.04% 8.25%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $140,458 $85,316
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.15%** 0.99%**
Portfolio Turnover Rate 16% 18%
Average Commission Rate:
Per Share $0.0214 $0.0211
As a Percentage of Trade Amount 0.29% 0.25%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net Assets 1.26%** 1.54%**
Net Investment Income to
Average Net Assets 1.88%** 0.44%**
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------
SIX MONTHS
ENDED
JUNE 30, PERIOD FROM
1997 MARCH 15, 1996* TO
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.63 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.10 0.01
Net Realized and Unrealized Gain
on Investments 1.60 0.78
------ ------
Total from Investment
Operations 1.70 0.79
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.13)
In Excess of Net Investment
Income -- (0.02)
Net Realized Gain -- (0.01)
------ ------
Total Distributions -- (0.16)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.33 $ 10.63
------ ------
------ ------
TOTAL RETURN 15.99% 7.90%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $30,351 $23,173
Ratio of Expenses to Average Net
Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.82%** 0.60%**
Portfolio Turnover Rate 16% 18%
Average Commission Rate:
Per Share $0.0214 $0.0211
As a Percentage of Trade Amount 0.29% 0.25%
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.51%** 1.69%**
Net Investment Income to
Average Net Assets 1.56%** 0.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED DECEMBER 15,
JUNE 30, YEAR ENDED DECEMBER 31, 1992* TO
1997 ------------------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993++ 1992
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.15 0.21 0.24 0.14 0.09 0.01
Net Realized and Unrealized
Gain on Investments (2) 1.22 2.29 0.15 0.62 4.48 0.08
------ ------ ------ ------ ------ ------
Total from Investment
Operations 1.37 2.50 0.39 0.76 4.57 0.09
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.22) (0.23) (0.03) 0.00 --
In Excess of Net Investment
Income -- -- -- -- (0.02) --
Net Realized Gain -- (0.39) (0.37) (0.22) -- --
------ ------ ------ ------ ------ ------
Total Distributions -- (0.61) (0.60) (0.25) (0.02) --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 18.20 $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 8.14% 16.82% 2.60% 5.25% 45.34% 0.90%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $266,527 $234,743 $198,669 $160,101 $52,834 $3,824
Ratio of Expenses to Average
Net Assets (1) 1.15%** 1.15% 1.15% 1.15% 1.15% 1.15%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.84%** 1.29% 1.72% 1.18% 0.66% 1.37%**
Portfolio Turnover Rate 16% 35% 24% 8% 14% 0%
Average Commission Rate:#
Per Share $0.0127 $0.0159 N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.33% 0.30% N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.01 $0.02 $0.10 $0.16
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.22%** 1.23% 1.24% 1.29% 1.86% 21.67%**
Net Investment Income
(Loss) to Average Net
Assets 1.78%** 1.20% 1.63% 1.04% (0.05)% (19.15)%**
(2) Reflects a 1% transaction fee on purchases
and redemptions of capital shares.
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
++ Per share amounts for the year ended December 31, 1993 are based on
average outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED APRIL 25,
JUNE 30, YEAR ENDED DECEMBER 31, 1994* TO
1997++ -------------------------------- DECEMBER 31,
(UNAUDITED) 1996++ 1995 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.96 $ 9.27 $ 9.83 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) -- -- 0.04 (0.01)
Net Realized and Unrealized
Gain (Loss) on
Investments+ 1.86 (0.13) (0.40) (0.16)
------ ------ ------ ------
Total from Investment
Operations 1.86 (0.13) (0.36) (0.17)
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.66) -- --
In Excess of Net Investment
Income -- (0.52) (0.20) --
------ ------ ------ ------
Total Distributions -- (1.18) (0.20) --
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.82 $ 7.96 $ 9.27 $ 9.83
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 23.37% (1.40)% (3.64)% (1.70)%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $172,141 $152,229 $119,278 $50,332
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.12)%** (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 28% 38% 52% 1%
Average Commission Rate:#
Per Share $0.0418 $0.0561 N/A N/A
As a Percentage of Trade
Amount 0.40% 0.43% N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.00 $0.01 $0.06 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.18%** 1.07% 1.20% 1.27%**
Net Investment Loss to
Average Net Assets (0.20)%** (0.11)% (0.05)% (0.37)%**
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996++
<S> <C> <C>
- -----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.94 $ 9.25
----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (2) (0.02) (0.02)
Net Realized and Unrealized
Gain (Loss) on
Investments+ 1.85 (0.14)
----------- ------
Total from Investment
Operations 1.83 (0.16)
----------- ------
DISTRIBUTIONS
Net Investment Income -- (0.64)
In Excess of Net Investment
Income -- (0.51)
----------- ------
Total Distributions -- (1.15)
----------- ------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 7.94
----------- ------
----------- ------
TOTAL RETURN 23.05% (1.67)%
----------- ------
----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $2,408 $3,431
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Loss
to Average Net Assets (2) (0.50)%** (0.26)%**
Portfolio Turnover Rate 28% 38%
Average Commission Rate:
Per Share $0.0418 $0.0561
As a Percentage of Trade
Amount 0.40% 0.43%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net
investment income $0.00 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.41%** 1.31%**
Net Investment Loss to
Average Net Assets (0.58)%** (0.32)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ The amount shown for the year ended December 31, 1996 for a share
outstanding throughout the year does not agree with the amount of
aggregate net gains on investments for the year because of the timing
of sales and repurchases of the Portfolio shares in relation to
fluctuating market value of the investments in the Portfolio.
++ Per share amounts for the six months ended June 30, 1997 and the year
ended December 31, 1996 are based on average outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
PERIOD FROM
SIX MONTHS JANUARY 18,
ENDED JUNE 30, YEAR ENDED 1995* TO
1997 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.32 $ 9.06 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 4.96 4.27 (0.92)
------ ------ ------
Total from Investment Operations 4.99 4.41 (0.87)
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.13) (0.04)
Net Realized Gain -- (2.02) --
Return of Capital -- -- (0.03)
------ ------ ------
Total Distributions -- (2.15) (0.07)
------ ------ ------
Net Asset Value, End of Period $ 16.31 $ 11.32 $ 9.06
------ ------ ------
------ ------ ------
Total Return 44.08% 48.77% (8.68)%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $75,766 $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.70%** 1.70% 1.70%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.53%** 1.21% 1.62%**
Portfolio Turnover Rate 114% 192% 137%
Average Commission Rate:#
Per Share $0.0065 $0.0004 N/A
As a Percentage of Trade Amount 0.35% 0.30% N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.05 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 1.97%** 2.18% 3.13%**
Net Investment Income (Loss) to
Average Net Assets 0.37%** 0.75% (0.48)%**
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------
SIX MONTHS PERIOD FROM
ENDED JUNE 30, JANUARY 2, 1996***
1997 TO DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.31 $ 9.44
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.02 0.09
Net Realized and Unrealized Gain on
Investments 4.95 3.90
------ ------
Total from Investment Operations 4.97 3.99
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.10)
Net Realized Gain -- (2.02)
------ ------
Total Distributions -- (2.12)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.28 $ 11.31
------ ------
------ ------
TOTAL RETURN 43.94% 42.44%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,374 $ 1,333
Ratio of Expenses to Average Net Assets
(2) 1.95%** 1.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.11%** 0.89%**
Portfolio Turnover Rate 114% 192%
Average Commission Rate:
Per Share $0.0065 $0.0004
As a Percentage of Trade Amount 0.35% 0.30%
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 2.20%** 2.43%**
Net Investment Income (Loss) to
Average Net Assets (0.03)%** 0.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
168
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
SIX MONTHS PERIOD FROM
ENDED MARCH 8,
JUNE 30, YEAR ENDED 1995*
1997 DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.43 $ 12.17 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.18 0.15
Net Realized and Unrealized Gain on
Investments 1.97 4.73 3.95
------ ------ ------
Total from Investment Operations 1.98 4.91 4.10
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.17) (0.15)
Net Realized Gain -- (2.48) (1.78)
------ ------ ------
Total Distributions (0.01) (2.65) (1.93)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.40 $ 14.43 $ 12.17
------ ------ ------
------ ------ ------
TOTAL RETURN 13.76% 40.90% 41.25%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $133,897 $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.20%** 1.26% 1.64%**
Portfolio Turnover Rate 126% 380% 309%
Average Commission Rate Per Share# $0.0564 $0.0484 N/A
- -----------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.00+ $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.07%** 1.24% 1.59%**
Net Investment Income to Average
Net Assets 0.12%** 1.02% 1.05%**
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.42 $ 12.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.01 0.13
Net Realized and Unrealized Gain on
Investments 1.97 4.67
------ ------
Total from Investment Operations 1.98 4.80
------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.15)
Net Realized Gain -- (2.48)
------ ------
Total Distributions (0.01) (2.63)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 14.42
------ ------
------ ------
TOTAL RETURN 13.71% 39.72%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,402 $8,805
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.03)%** 0.95%**
Portfolio Turnover Rate 126% 380%
Average Commission Rate Per Share $0.0564 $0.0484
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.32%** 1.47%**
Net Investment Income (Loss) to
Average Net Assets (0.11)%** 0.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
SIX TWO
MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 ----------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97 $ 16.18
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.06) (0.19) (0.18) (0.09) (0.11) (0.01) (0.09)
Net Realized and Unrealized Gain
(Loss) on Investments 0.16 0.89 5.55 (0.01) 0.11 1.26 (1.12)
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.10 0.70 5.37 (0.10) 0.00 1.25 (1.21)
-------- -------- -------- -------- -------- -------- --------
DISTRIBUTIONS
Net Realized Gain -- (8.69) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions -- (8.69) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.60 $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
TOTAL RETURN 0.74% 3.72% 33.31% (0.62)% 0.00% 8.35% (7.48)%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $58,596 $62,793 $119,378 $117,669 $103,621 $94,161 $80,156
Ratio of Expenses to Average Net
Assets (1) 1.25%** 1.25% 1.25% 1.25% 1.25% 1.25%** 1.25%
Ratio of Net Investment Loss to
Average Net Assets (1) (0.90)%** (0.88)% (0.76)% (0.61)% (0.77)% (0.68)%** (0.66)%
Portfolio Turnover Rate 112% 33% 25% 24% 25% 1% 17%
Average Commission Rate Per Share# $0.0500 $0.0507 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment loss $0.00+ $0.01 $0.003 $0.002 $0.01 $0.00 $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.32%** 1.30% 1.26% 1.26% 1.31% 1.36%** 1.29%
Net Investment Loss to Average
Net Assets (0.95)%** (0.92)% (0.77)% (0.62)% (0.83)% (0.79)%** (0.71)%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.45 $ 21.47
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) -- (0.15)
Net Realized and Unrealized Gain
on Investments 0.08 0.82
------ ------
Total From Operations 0.08 0.67
------ ------
DISTRIBUTIONS
Net Realized Gain -- (8.69)
------ ------
Total Distributions -- (8.69)
------ ------
NET ASSET VALUE, END OF PERIOD $ 13.53 $ 13.45
------ ------
------ ------
TOTAL RETURN 0.60% 3.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,097 $ 3,997
Ratio of Expenses to Average Net
Assets (2) 1.50%** 1.50%**
Ratio of Net Investment Loss to
Average Net Assets (2) (1.15)%** (1.09)%**
Portfolio Turnover Rate 112% 33%
Average Commission Rate Per Share $0.0500 $0.0507
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment loss $0.00+ $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.56%** 1.54%**
Net Investment Loss to Average
Net Assets (1.23)%** (1.14)%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
SIX TWO
MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 --------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
--------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.17 0.22 0.17 0.22 0.03 0.16
Net Realized and Unrealized Gain
on Investments 2.02 4.07 4.93 0.21 0.28 0.41 0.82
--------- --------- --------- --------- --------- --------- ---------
Total from Investment
Operations 2.05 4.24 5.15 0.38 0.50 0.44 0.98
--------- --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.02) (0.17) (0.28) (0.13) (0.23) -- (0.20)
In Excess of Net Investment
Income -- -- -- -- (0.01) -- --
Net Realized Gain -- (3.27) (2.75) (0.37) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Distributions (0.02) (3.44) (3.03) (0.50) (0.24) -- (0.20)
--------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 16.97 $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN 13.74% 30.97% 45.02% 3.26% 4.33% 3.85% 9.26%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $500,808 $352,703 $158,112 $97,259 $73,789 $45,985 $36,558
Ratio of Expenses to Average Net
Assets (1) 0.80%** 0.80% 0.80% 0.80% 0.80% 0.80%** 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 0.45%** 1.12% 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate 88% 186% 186% 146% 172% 1% 38%
Average Commission Rate Per Share# $0.0555 $0.0535 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.00+ $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average Net Assets 0.84%** 0.88% 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income to
Average Net Assets 0.41%** 1.04% 1.49% 1.35% 1.46% 1.62%** 1.52%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.92 $ 14.22
------ ------
Net Investment Income (2) 0.02 0.13
Net Realized and Unrealized Gain on
Investments 2.01 3.99
------ ------
Total from Investment
Operations 2.03 4.12
------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.15)
Net Realized Gain -- (3.27)
------ ------
Total Distributions (0.01) (3.42)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.94 $ 14.92
------ ------
------ ------
TOTAL RETURN 13.62% 29.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $8,449 $ 5,498
Ratio of Expenses to Average Net
Assets (2) 1.05%** 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.19%** 0.91%**
Portfolio Turnover Rate 88% 186%
Average Commission Rate Per Share $0.0555 $0.0535
- -----------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net
investment income $0.00+ $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.08%** 1.12%**
Net Investment Income to
Average Net Assets 0.16%** 0.84%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
PERIOD FROM
DECEMBER
SIX MONTHS 17,
ENDED 1992* TO
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER
1997 ----------------------------------------------------- 31,
(UNAUDITED) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00
------ ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.08 0.32 0.30 0.28 0.24 0.01
Net Realized and Unrealized
Gain (Loss) on Investments 1.68 2.36 1.82 (0.01) 0.90 0.13
------ ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations 1.76 2.68 2.12 0.27 1.14 0.14
------ ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.05) (0.32) (0.38) (0.27) (0.18) --
Net Realized Gain -- (3.38) (0.63) (0.30) -- --
------ ----------- ----------- ----------- ----------- -----------
Total Distributions (0.05) (3.70) (1.01) (0.57) (0.18) --
------ ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $12.60 $10.89 $11.91 $10.80 $11.10 $10.14
------ ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 16.23% 22.99% 20.63% 2.53% 11.33% 1.40%
------ ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $27,149 $23,970 $51,919 $40,033 $26,775 $5,974
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.32%** 2.20% 2.60% 2.67% 2.56% 1.64%**
Portfolio Turnover Rate 98% 32% 36% 22% 29% 0%
Average Commission Rate Per
Share# $0.0476 $0.0402 N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.04 $0.02 $0.03 $0.06 $0.13
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.34%** 1.32% 1.21% 1.26% 1.68% 23.14%**
Net Investment Income
(Loss) to Average Net
Assets 0.98%** 1.89% 2.39% 2.41% 1.88% (20.50)%**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 30,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.88 $11.95
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.09 0.23
Net Realized and Unrealized
Gain on Investments 1.66 2.38
------ ------
Total from Investment
Operations 1.75 2.61
------ ------
DISTRIBUTIONS
Net Investment Income (0.04) (0.30)
Net Realized Gain -- (3.38)
------ ------
Total Distributions (0.04) (3.68)
------ ------
NET ASSET VALUE, END OF PERIOD $12.59 $10.88
------ ------
------ ------
TOTAL RETURN 16.17% 22.33%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,067 $1,689
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.24%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.04%** 1.93%**
Portfolio Turnover Rate 98% 32%
Average Commission Rate Per
Share $0.0476 $0.0402
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03 $0.05
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.57%** 1.69%**
Net Investment Income to
Average Net Assets 0.70%** 1.50%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
SIX MONTHS PERIOD FROM
ENDED SEPTEMBER 16,
JUNE 30, 1996* TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.71 $ 10.00
------------ -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (1) (0.03) (0.02)
Net Realized and Unrealized
Gain on Investments 2.97 0.73
------------ -------
Total from Investment
Operations 2.94 0.71
------------ -------
NET ASSET VALUE, END OF PERIOD $13.65 $10.71
------------ -------
------------ -------
TOTAL RETURN 27.45% 7.10%
------------ -------
------------ -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 16,214 $3,595
Ratio of Expenses to Average
Net Assets (1) 1.25%** 1.25%**
Ratio of Net Investment Loss
to Average Net Assets (1) (0.84)%** (0.70)%**
Portfolio Turnover Rate 324% 77%
Average Commission Rate Per
Share $0.0356 $0.0374
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss $ 0.09 $ 0.22
Ratios before expense
limitation:
Expenses to Average Net
Assets 3.91%** 8.51%**
Net Investment Loss to
Average Net Assets (3.51)%** (7.96)%**
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
SIX MONTHS SEPTEMBER 16,
ENDED JUNE 30, 1996* TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.71 $10.00
------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (2) (0.07) (0.02)
Net Realized and Unrealized
Gain on Investments 2.98 0.73
------- -------
Total from Investment
Operations 2.91 0.71
------- -------
NET ASSET VALUE, END OF PERIOD $13.62 $10.71
------- -------
TOTAL RETURN 27.17% 7.10%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,334 $1,487
Ratio of Expenses to Average
Net Assets (2) 1.50%** 1.50%**
Ratio of Net Investment Loss
to Average Net Assets (2) (1.04)%** (1.00)%**
Portfolio Turnover Rate 324% 77%
Average Commission Rate Per
Share $0.0356 $0.0374
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss $0.26 $0.19
Ratios before expense
limitation:
Expenses to Average Net
Assets 5.31%** 9.14%**
Net Investment Loss to
Average Net Assets (4.92)%** (8.65)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------
SIX MONTHS PERIOD FROM
ENDED FEBRUARY 24,
JUNE 30, YEAR ENDED 1995* TO
1997 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.41 $ 11.42 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.19 0.37 0.26
Net Realized and Unrealized Gain on
Investments 1.46 4.02 1.84
------ ------ ------
Total from Investment Operations 1.65 4.39 2.10
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.39) (0.24)
Net Realized Gain -- (1.01) (0.44)
------ ------ ------
Total Distributions (0.08) (1.40) (0.68)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 15.98 $ 14.41 $ 11.42
------ ------ ------
------ ------ ------
TOTAL RETURN 11.46% 39.56% 21.07%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $299,436 $210,368 $69,509
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.76%** 3.08% 4.04%**
Portfolio Turnover Rate 67% 171% 158%
Average Commission Rate Per Share# $0.0590 $0.0568 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.06%** 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.70%** 2.93% 3.71%**
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.39 $ 11.50
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.15 0.35
Net Realized and Unrealized Gain on
Investments 1.46 3.92
------ ------
Total from Investment Operations 1.61 4.27
------ ------
DISTRIBUTIONS
Net Investment Income (0.07) (0.37)
Net Realized Gain -- (1.01)
------ ------
Total Distributions (0.07) (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 15.93 $ 14.39
------ ------
------ ------
TOTAL RETURN 11.20% 38.23%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,251 $8,734
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.20%** 2.91%**
Portfolio Turnover Rate 67% 171%
Average Commission Rate Per Share $0.0590 $0.0568
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.30%** 1.37%**
Net Investment Income to Average
Net Assets 2.15%** 2.79%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commisions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 ---------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71 $ 10.24
------ --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.19 0.41 0.38 0.40 0.37 0.08 0.38
Net Realized and Unrealized
Gain (Loss) on Investments 1.67 2.27 3.30 (0.55) 1.31 0.52 0.48
------ --------- --------- --------- --------- --------- ---------
Total from Investment
Operations 1.86 2.68 3.68 (0.15) 1.68 0.60 0.86
------ --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.09) (0.41) (0.47) (0.40) (0.36) -- (0.39)
Net Realized Gain -- (2.32) (0.77) (0.58) -- -- --
------ --------- --------- --------- --------- --------- ---------
Total Distributions (0.09) (2.73) (1.24) (0.98) (0.36) -- (0.39)
------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 15.66 $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN 13.49% 19.73% 33.69% (1.29)% 15.14% 5.60% 8.51%
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $97,500 $106,128 $147,365 $73,406 $54,598 $27,541 $25,013
Ratio of Expenses to Average
Net Assets (1) 0.70%** 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment Income
to Average Net Assets (1) 2.41%** 2.62% 3.01% 3.37% 3.23% 4.41%** 3.72%
Portfolio Turnover Rate 13% 42% 43% 33% 51% 9% 56%
Average Commission Rate Per
Share# $0.0408 $0.0434 N/A N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.01 $0.01 $0.01 $0.03 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.82%** 0.78% 0.77% 0.80% 0.95% 1.20%** 0.84%
Net Investment Income to
Average Net Assets 2.30%** 2.55% 2.94% 3.27% 2.98% 3.91%** 3.58%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.89 $ 14.06
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.11 0.29
Net Realized and Unrealized
Gain on Investments 1.70 2.25
------ ------
Total from Investment
Operations 1.81 2.54
------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.39)
Net Realized Gain -- (2.32)
------ ------
Total Distributions (0.08) (2.71)
------ ------
Net Asset Value, End of Period $ 15.62 $ 13.89
------ ------
------ ------
TOTAL RETURN 13.13% 18.57%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,975 $ 2,555
Ratio of Expenses to Average
Net Assets (2) 0.95%** 0.95%**
Ratio of Net Investment Income
to Average Net Assets (2) 2.14%** 2.33%**
Portfolio Turnover Rate 13% 42%
Average Commission Rate Per
Share $0.0408 $0.0434
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.06%** 1.03%**
Net Investment Income to
Average Net Assets 2.03%** 2.26%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were paid, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 --------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61
------ --------- --------- --------- --------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.19 0.52 0.39 0.42 0.44 0.10 0.58
Net Realized and Unrealized
Gain (Loss) on Investments 0.46 0.54 1.62 (0.64) 0.79 0.21 0.42
------ --------- --------- --------- --------- ------ ------
Total from Investment
Operations 0.65 1.06 2.01 (0.22) 1.23 0.31 1.00
------ --------- --------- --------- --------- ------ ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.48) (0.50) (0.49) (0.41) -- (0.58)
In Excess of Net Investment
Income -- 0.00+ -- -- (0.08) -- --
Net Realized Gain -- (2.37) (0.49) (1.46) (0.06) -- (0.03)
In Excess of Net Realized
Gain -- -- -- -- (0.86) -- --
------ --------- --------- --------- --------- ------ ------
Total Distributions (0.09) (2.85) (0.99) (1.95) (1.41) -- (0.61)
------ --------- --------- --------- --------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 8.75 $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------ --------- --------- --------- --------- ------ ------
------ --------- --------- --------- --------- ------ ------
TOTAL RETURN 8.01% 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57%
------ --------- --------- --------- --------- ------ ------
------ --------- --------- --------- --------- ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $5,439 $5,992 $22,642 $18,492 $29,684 $39,984 $40,332
Ratio of Expenses to Average
Net Assets (1) 0.70%** 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment Income
to Average Net Assets (1) 4.00%** 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21%
Portfolio Turnover Rate 6% 22% 26% 44% 136% 4% 40%
Average Commission Rate Per
Share# $0.0439 $0.0397 N/A N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.05 $0.08 $0.03 $0.03 $0.04 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.79%** 1.32% 1.02% 0.95% 1.02% 1.00%** 0.79%
Net Investment Income to
Average Net Assets 2.91%** 3.31% 3.78% 3.88% 3.56% 4.99%** 5.12%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.18 $ 10.02
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.07 0.34
Net Realized and Unrealized
Gain on Investments 0.55 0.65
------ ------
Total from Investment
Operations 0.62 0.99
------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.46)
Net Realized Gain -- (2.37)
------ ------
Total Distributions (0.08) (2.83)
------ ------
NET ASSET VALUE, END OF PERIOD $ 8.72 $ 8.18
------ ------
------ ------
TOTAL RETURN 7.70% 10.24%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,246 $ 2,197
Ratio of Expenses to Average
Net Assets (2) 0.95%** 0.95%**
Ratio of Net Investment Income
to Average Net Assets (2) 3.74%** 3.73%**
Portfolio Turnover Rate 6% 22%
Average Commission Rate Per
Share $0.0439 $0.0397
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.05 $0.07
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.01%** 1.68%**
Net Investment Income to
Average Net Assets 2.67%** 3.00%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
PERIOD FROM
SIX MONTHS FEBRUARY 1,
ENDED YEAR ENDED DECEMBER 31, 1994* TO
JUNE 30, 1997 ----------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.54 $ 8.59 $ 8.59 $ 10.00
------ ------ ------ -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.35 1.54 1.36 0.50
Net Realized and Unrealized
Gain (Loss) on Investments 0.95 2.79 0.91 (1.91)
------ ------ ------ -------------
Total from Investment
Operations 1.30 4.33 2.27 (1.41)
------ ------ ------ -------------
DISTRIBUTIONS
Net Investment Income -- (1.17) (1.86) --
In Excess of Net Investment
Income -- (0.01) -- --
Net Realized Gain -- (4.20) (0.41) --
------ ------ ------ -------------
Total Distributions -- (5.38) (2.27) --
------ ------ ------ -------------
NET ASSET VALUE, END OF PERIOD $ 8.84 $ 7.54 $ 8.59 $ 8.59
------ ------ ------ -------------
------ ------ ------ -------------
TOTAL RETURN 17.24% 50.52% 28.23% (14.10)%
------ ------ ------ -------------
------ ------ ------ -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $162,199 $152,142 $181,878 $144,949
Ratio of Expenses to Average
Net Assets 1.66%** 2.70% 1.75% 1.49%**
Ratio of Expenses to Average
Net Assets (Excluding
Dividend and Interest
Expense) 1.33%** 1.42% N/A N/A
Ratio of Net Investment Income
to Average Net Assets 8.39%** 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 241% 560% 406% 273%
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED 1996*** TO
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- --------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.53 $ 8.68
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.15 1.01
Net Realized and Unrealized
Gain on Investments 1.14 3.20
------ ------
Total from Investment
Operations 1.29 4.21
------ ------
DISTRIBUTIONS
Net Investment Income -- (1.15)
In Excess of Net Investment
Income -- (0.01)
Net Realized Gain -- (4.20)
------ ------
Total Distributions -- (5.36)
------ ------
NET ASSET VALUE, END OF PERIOD $ 8.82 $ 7.53
------ ------
------ ------
TOTAL RETURN 17.13% 48.52%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 2,933 $ 4,253
Ratio of Expenses to Average
Net Assets 2.06%** 2.81%**
Ratio of Expenses to Average
Net Assets (Excluding
Dividend and
Interest Expense) 1.58%** 1.65%**
Ratio of Net Investment Income
to Average Net Assets 8.37%** 11.09%**
Portfolio Turnover Rate 241% 560%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
177
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 --------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.58 $10.81 $9.82 $11.05 $10.93 $10.92 $10.55
------ --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.33 0.67 0.72 0.59 0.54 0.10 0.69
Net Realized and Unrealized
Gain (Loss) on Investments -- (0.20) 1.06 (0.92) 0.41 0.01 0.39
------ --------- --------- --------- --------- --------- ---------
Total from Investment
Operations 0.33 0.47 1.78 (0.33) 0.95 0.11 1.08
------ --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.27) (0.70) (0.79) (0.53) (0.56) (0.10) (0.69)
In Excess of Net Investment
Income -- (0.00)+ -- -- (0.01) -- --
Net Realized Gain -- -- -- (0.37) (0.26) -- (0.02)
In Excess of Net Realized
Gain -- -- -- (0.00)+ -- -- --
------ --------- --------- --------- --------- --------- ---------
Total Distributions (0.27) (0.70) (0.79) (0.90) (0.83) (0.10) (0.71)
------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.64 $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN 3.13% 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61%
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $133,959 $130,733 $165,527 $209,331 $240,668 $154,210 $146,546
Ratio of Expenses to Average
Net Assets (1) 0.45%** 0.45% 0.45% 0.45% 0.45% 0.45%** 0.45%
Ratio of Net Investment Income
to Average Net Assets (1) 6.27%** 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59%
Portfolio Turnover Rate 109% 183% 172% 388% 240% 15% 105%
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.60%** 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59%
Net Investment Income to
Average Net Assets 6.12%** 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.58 $ 10.81
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.32 0.64
Net Realized and Unrealized
Gain (Loss) on Investments 0.01 (0.19)
------ ------
Total from Investment
Operations 0.33 0.45
------ ------
DISTRIBUTIONS
Net Investment Income (0.26) (0.68)
------ ------
Total Distributions (0.26) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.65 $ 10.58
------ ------
------ ------
TOTAL RETURN 3.16% 4.35%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 2,663 $ 1,462
Ratio of Expenses to Average
Net Assets (2) 0.60%** 0.60%**
Ratio of Net Investment Income
to Average Net Assets (2) 6.10%** 6.15%**
Portfolio Turnover Rate 109% 183%
- ---------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.74%** 0.74%**
Net Investment Income to
Average Net Assets 5.96%** 6.01%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997++ --------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61
------ --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.28 0.61 0.76 0.70 0.69 0.14 0.53
Net Realized and Unrealized
Gain (Loss) on Investments (0.41) 0.08 1.15 (1.38) 0.90 (0.29) 0.55
------ --------- --------- --------- --------- --------- ---------
Total from Investment
Operations (0.13) 0.69 1.91 (0.68) 1.59 (0.15) 1.08
------ --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.16) (0.61) (0.98) (0.40) (0.79) -- (0.27)
In Excess of Net Investment
Income -- -- -- -- (0.22) -- --
Net Realized Gain -- -- -- (0.31) (0.16) -- (0.01)
------ --------- --------- --------- --------- --------- ---------
Total Distributions (0.16) (0.61) (0.98) (0.71) (1.17) -- (0.28)
------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.01 $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN (1.07)% 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29%
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $85,760 $112,888 $102,852 $130,675 $172,468 $92,897 $94,847
Ratio of Expenses to Average
Net Assets (1) 0.50%** 0.50% 0.50% 0.50% 0.50% 0.50%** 0.50%
Ratio of Net Investment Income
to Average Net Assets (1) 5.13%** 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92%
Portfolio Turnover Rate 73% 258% 207% 171% 108% 9% 144%
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02 $0.02 $0.02 $0.02 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.72%** 0.72% 0.71% 0.66% 0.70% 0.90%** 0.86%
Net Investment Income to
Average Net Assets 4.92%** 5.29% 6.58% 6.18% 5.79% 6.59%** 6.56%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.29 $ 11.23
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.27 0.48
Net Realized and Unrealized
Gain (Loss) on Investments (0.40) 0.18
------ ------
Total from Investment
Operations (0.13) 0.66
------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.60)
------ ------
Total Distributions (0.16) (0.60)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.00 $ 11.29
------ ------
------ ------
TOTAL RETURN (1.12)% 6.12%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 405 $ 1,559
Ratio of Expenses to Average
Net Assets (2) 0.65%** 0.65%**
Ratio of Net Investment Income
to Average Net Assets (2) 4.94%** 5.28%**
Portfolio Turnover Rate 73% 258%
- ---------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.86%** 0.86%**
Net Investment Income to
Average Net Assets 4.73%** 5.08%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts for the six months ended June 30, 1997 are based on
average outstanding shares.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS PERIOD FROM
ENDED ENDED SEPTEMBER 28,
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1992*
1997 --------------------------------------------- 31, TO OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00
------ --------- --------- --------- --------- --------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.49 1.03 1.14 0.97 0.90 0.14 0.08
Net Realized and Unrealized
Gain (Loss) on Investments 0.32 0.47 0.97 (1.40) 1.21 0.19 (0.31)
------ --------- --------- --------- --------- --------- ------
Total from Investment
Operations 0.81 1.50 2.11 (0.43) 2.11 0.33 (0.23)
------ --------- --------- --------- --------- --------- ------
DISTRIBUTIONS
Net Investment Income (0.39) (1.05) (1.20) (0.97) (0.90) (0.15) --
In Excess of Net Investment
Income -- (0.00)+ -- -- -- -- --
Net Realized Gain -- -- -- (0.21) -- -- --
------ --------- --------- --------- --------- --------- ------
Total Distributions (0.39) (1.05) (1.20) (1.18) (0.90) (0.15) --
------ --------- --------- --------- --------- --------- ------
NET ASSET VALUE, END OF PERIOD $ 11.33 $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77
------ --------- --------- --------- --------- --------- ------
------ --------- --------- --------- --------- --------- ------
TOTAL RETURN 7.55% 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)%
------ --------- --------- --------- --------- --------- ------
------ --------- --------- --------- --------- --------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $111,679 $95,663 $62,245 $97,223 $74,500 $20,194 $16,950
Ratio of Expenses to Average
Net Assets (1) 0.75%** 0.75% 0.75% 0.75% 0.75% 0.75%** 0.75%**
Ratio of Net Investment Income
to Average Net Assets (1) 8.96%** 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%**
Portfolio Turnover Rate 63% 117% 90% 74% 104% 24% 9%
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.00+ $0.01 $0.01 $0.001 $0.02 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.78%** 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%**
Net Investment Income to
Average Net Assets 8.93%** 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.90 $ 10.49
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.48 0.98
Net Realized and Unrealized
Gain on Investments 0.30 0.45
------ ------
Total from Investment
Operations 0.78 1.43
------ ------
DISTRIBUTIONS
Net Investment Income (0.37) (1.02)
------ ------
Total Distributions (0.37) (1.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.31 $ 10.90
------ ------
------ ------
TOTAL RETURN 7.32% 14.37%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 5,737 $ 5,665
Ratio of Expenses to Average
Net Assets (2) 1.00%** 1.00%**
Ratio of Net Investment Income
to Average Net Assets (2) 8.77%** 9.49%**
Portfolio Turnover Rate 63% 117%
- -----------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.00+ $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.03%** 1.05%**
Net Investment Income to
Average Net Assets 8.74%** 9.44%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
180
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
PERIOD FROM
JANUARY 18,
SIX MONTHS ENDED YEAR ENDED 1995* TO
JUNE 30, 1997 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.25 $ 10.37 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.23 0.49 0.44
Net Realized and Unrealized
Gain (Loss) on Investments 0.02 (0.12) 0.42
------ ------ ------
Total from Investment
Operations 0.25 0.37 0.86
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.19) (0.49) (0.45)
In Excess of Net Investment
Income -- -- (0.00)+
Net Realized Gain -- -- (0.04)
------ ------ ------
Total Distributions (0.19) (0.49) (0.49)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.31 $ 10.25 $ 10.37
------ ------ ------
------ ------ ------
TOTAL RETURN 2.42% 3.67% 8.80%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $53,554 $40,227 $45,869
Ratio of Expenses to Average
Net Assets (1) 0.45%** 0.45% 0.45%**
Ratio of Net Investment Income
to Average Net Assets (1) 4.60%** 4.77% 4.61%**
Portfolio Turnover Rate 13% 45% 180%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.03 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.68%** 0.73% 0.73%**
Net Investment Income to
Average Net Assets 4.38%** 4.50% 4.33%**
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------
PERIOD FROM
PERIOD ENDED JANUARY 2,
MARCH 19, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.24 $ 10.37
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.08 0.44
Net Realized and Unrealized
Loss on Investments (0.06) (0.08)
------ ------
Total from Investment
Operations 0.02 0.36
------ ------
DISTRIBUTIONS
Net Investment Income (0.04) (0.49)
------ ------
Total Distributions (0.04) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.22 $ 10.24
------ ------
------ ------
TOTAL RETURN N/A 3.55%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $0 $69
Ratio of Expenses to Average
Net Assets (2) 0.70%** 0.70%**
Ratio of Net Investment Income
to Average Net Assets (2) 4.46%** 4.56%**
Portfolio Turnover Rate N/A 45%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net
investment income $0.00+ $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.87%** 0.98%**
Net Investment Income to
Average Net Assets 4.26%** 4.28%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
++ As of March 19, 1997, there are no outstanding Class B shares for the
Municipal Bond Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
181
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 ----------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ----------- --------- --------- --------- ------------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.025 0.049 0.054 0.040 0.027 0.005 0.039
------------ ----------- --------- --------- --------- ------------- ------------
DISTRIBUTIONS
Net Investment Income (0.025) (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
In Excess of Net Investment
Income -- -- -- -- 0.000+ -- --
------------ ----------- --------- --------- --------- ------------- ------------
Total Distributions (0.025) (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
------------ ----------- --------- --------- --------- ------------- ------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ----------- --------- --------- --------- ------------- ------------
------------ ----------- --------- --------- --------- ------------- ------------
TOTAL RETURN 2.50% 5.03% 5.51% 3.84% 2.76% 0.50% 3.77%
------------ ----------- --------- --------- --------- ------------- ------------
------------ ----------- --------- --------- --------- ------------- ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,275,275 $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968
Ratio of Expenses to Average
Net Assets (1) 0.50%** 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52%
Ratio of Net Investment Income
to Average Net Assets (1) 5.04%** 4.92% 5.37% 3.77% 2.71% 3.11%** 3.74%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before expense
limitation:
Expenses to Average Net
Assets N/A N/A N/A N/A 0.54% 0.59%** N/A
Net Investment Income to
Average Net Assets N/A N/A N/A N/A 2.70% 3.07%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 --------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ --------- --------- --------- --------- ------------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.020 0.030 0.034 0.020 0.019 0.004 0.026
------------ --------- --------- --------- --------- ------------- ------------
DISTRIBUTIONS
Net Investment Income (0.020) (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
In Excess of Net Investment
Income -- -- -- -- (0.000)+ -- --
------------ --------- --------- --------- --------- ------------- ------------
Total Distributions (0.020) (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
------------ --------- --------- --------- --------- ------------- ------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ --------- --------- --------- --------- ------------- ------------
------------ --------- --------- --------- --------- ------------- ------------
TOTAL RETURN 1.52% 3.02% 3.44% 2.44% 1.91% 0.37% 2.74%
------------ --------- --------- --------- --------- ------------- ------------
------------ --------- --------- --------- --------- ------------- ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $711,656 $721,410 $451,519 $359,444 $266,524 $208,866 $206,691
Ratio of Expenses to Average
Net Assets (1) 0.52%** 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55%
Ratio of Net Investment Income
to Average Net Assets (1) 3.06%** 2.98% 3.38% 2.42% 1.89% 2.31%** 2.66%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before expense
limitation:
Expenses to Average Net
Assets N/A N/A N/A N/A 0.56% 0.67%** N/A
Net Investment Income to
Average Net Assets N/A N/A N/A N/A 1.87% 2.21%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of June 30, 1997, the Fund was comprised of 26 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). Each Portfolio (with the
exception of the International Small Cap, Money Market and Municipal Money
Market Portfolios) offers two classes of shares -- Class A and Class B. Both
classes of shares have identical voting rights (except shareholders of a Class
have exclusive voting rights regarding any matter relating solely to that Class
of shares), dividend, liquidation and other rights. The Equity Plus Portfolio
commenced operations on July 31, 1997. Please refer to the manager's reports
included elsewhere in this report for a description of each Portfolio's
investment objectives.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. Securities owned by the Money Market and Municipal Money Market
Portfolios are stated at amortized cost which 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 income and/or capital gains
are earned.
3. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements
under which a 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. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter
into reverse repurchase agreements with institutions that the Portfolio's
investment adviser has determined are creditworthy. Under a reverse repurchase
agreement, the Portfolio receives cash from the sale of securities and agrees to
repurchase the securities at a mutually agreed upon date and price. Reverse
repurchase agreements involve market risk that the value of the securities
purchased with the proceeds from the sale of securities received by the
Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase. The Portfolio is also subject to credit risk equal to
the amount by which the value of securities
- --------------------------------------------------------------------------------
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
subject to repurchase exceeds the Portfolio's liability under the reverse
repurchase agreement. Securities subject to repurchase under reverse repurchase
agreements are designated as such in the Statements of Net Assets.
At June 30, 1997, the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Value of securities subject to repurchase..... $7,755,453
------------
Liability for Reverse Repurchase Agreement.... 7,054,000
Weighted Average Interest Rate................ 5.625%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the six months ended June 30, 1997 was
approximately $5,964,000, at a weighted average interest rate of 5.668%.
5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities are treated as ordinary income
for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized between the
trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are reflected as
a component of unrealized appreciation (depreciation) on the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period is
reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
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 at June 30, 1997, the Portfolios
value the foreign shares at the closing exchange price of the local shares. Such
securities are reflected as fair valued in the Statements of Net Assets.
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A foreign currency exchange contract is an agreement between two parties
to buy or sell currency at a set price on a
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- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
future date. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is marked-to-market daily and the change
in market value is recorded by the Portfolios as unrealized gain or loss. The
Portfolios record realized gains or losses when the contract is closed equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and is generally limited to the amount of the unrealized gain on
the contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, certain Portfolios may purchase
securities on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
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.
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.
8. 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. The Portfolios have the right to receive payments of principal,
interest and any fees to which it is entitled only upon receipt by the Lender of
the payments from the borrower. The Portfolios generally have 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. SHORT SALES: The Aggressive Equity, Technology and Emerging Markets Debt
Portfolios may sell securities short. A short sale is a transaction in which the
Portfolios sell securities it may or may not own, but has borrowed, in
anticipation of a decline in the market price of the securities. The Portfolios
are 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. A 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 Portfolios will 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 at the time they
were sold short 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 Portfolios involve certain
risks and special considerations. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases cannot exceed the
total amount invested.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their portfolio securities and other financial instruments.
Premiums are received and are recorded as liabilities. The liabilities are
subsequently adjusted to reflect the
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NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
current value of the options written. Premiums received from writing options
which expire are treated as realized gains. Premiums received from writing
options which are exercised or are canceled in closing purchase transactions are
added to the proceeds or netted against the amount paid on the transaction to
determine the realized gain or loss. By writing a covered call option, a
Portfolio, in exchange for the premium, foregoes the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase. By writing a covered put option, a Portfolio, in exchange for
the premium, accepts the risk of a decline in the market value of the underlying
security below the exercise price.
Certain Portfolios may purchase call and put options on their portfolio
securities or other financial instruments. Each 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.
11. SECURITY LENDING: Certain Portfolios may lend investment securities to
certain qualified institutional investors who borrow securities in order to
complete certain transactions. By lending investment securities, a Portfolio
attempts to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur and any interest earned or dividends declared during the term of the
loan would be for the account of the Portfolio. Risks of delay in recovery of
the securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the securities loaned increases above the value of the
collateral received.
Portfolios that lend securities receive cash as collateral in an amount equal to
or exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in U.S. Government securities or interest
bearing repurchase agreements with approved counterparties. A portion of the
interest received on the repurchase agreements is retained by the Fund and the
remainder is rebated to the borrower of the securities. The net amount of
interest earned, after the interest rebate, is included in the Statement of
Operations as interest income. The value of loaned securities and related
collateral outstanding at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 39,355 $ 41,808
Asian Equity.................... 34,808 37,586
International Equity............ 444,685 472,104
</TABLE>
Morgan Stanley Trust Company, an affiliate of the investment adviser,
administers the security lending program and has earned fees for its services in
the amount of approximately $253,000 during the six months ended June 30, 1997.
12. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks of the underlying instruments as well as of the issuer
of the structured security. Structured securities are typically sold in private
placement transactions with no active trading market. Investments in Structured
Securities may be more volatile than their underlying instruments, however, any
loss is limited to the amount of the original investment.
13. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date (except for certain foreign dividends which may
be recorded as soon as the Fund is informed of such dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on
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Institutional Fund, Inc.
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NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Dividends to the
shareholders of the Money Market and the Municipal Money Market Portfolios are
accrued daily and are distributed on or about the 15th of each month.
Distributions for the remaining Portfolios are recorded on the ex-distribution
date.
The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
The amount and character of income and capital gain distributions to be paid by
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 forward 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.
A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio and are included in paid
in capital. During the six months ended June 30, 1997, such transaction fees
totaled approximately $285,000.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., provides
the Fund with investment advisory services under the terms of an Investment
Advisory and Management Agreement (the "Agreement") at the annual rates of
average daily net assets indicated below. MSAM has agreed to reduce fees payable
to it and to reimburse the Portfolios, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
MAXIMUM
EXPENSE RATIO
--------------------------
PORTFOLIO ADVISORY FEE CLASS A CLASS B
- ------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Active Country Allocation...... .65% .80% 1.05%
Asian Equity................... .80 1.00 1.25
Emerging Markets............... 1.25 1.75 2.00
European Equity................ .80 1.00 1.25
Global Equity.................. .80 1.00 1.25
Gold........................... 1.00 1.25 1.50
International Equity........... .80 1.00 1.25
International Magnum........... .80 1.00 1.25
International Small Cap........ .95 1.15 N/A
Japanese Equity................ .80 1.00 1.25
Latin American................. 1.10 1.70 1.95
Aggressive Equity.............. .80 1.00 1.25
Emerging Growth................ 1.00 1.25 1.50
Equity Growth.................. .60 .80 1.05
Small Cap Value Equity......... .85 1.00 1.25
Technology..................... 1.00 1.25 1.50
U.S. Real Estate............... .80 1.00 1.25
Value Equity................... .50 .70 .95
Balanced....................... .50 .70 .95
Emerging Markets Debt.......... 1.00 1.75 2.00
Fixed Income................... .35 .45 .60
Global Fixed Income............ .40 .50 .65
High Yield..................... .50 .75 1.00
Municipal Bond................. .35 .45 .70
Money Markets.................. .30 .55 N/A
Municipal Money Market......... .30 .57 N/A
</TABLE>
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to 0.40% of the average daily net assets of the Gold Portfolio.
The Sub-Adviser has agreed to a proportionate reduction in its fees if the
Adviser is required to waive its fees or to reimburse the Gold Portfolio.
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.15% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. For such services, MSAM pays Chase a portion of the fee MSAM receives
from the Fund. Certain employees of CGFSC are officers of the Fund. In addition,
the Fund incurs local administration fees in connection with doing business with
certain emerging market countries.
D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., and an
affiliate of MSAM, serves as the distributor of the Fund and provides Class B
shareholders of the applicable Portfolios with distribution services pursuant to
a Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the
Investment Company Act of 1940. Under the Plan, the Distributor is entitled to
receive from each Portfolio, except the International Small Cap, Money Market
and Municipal Money Market Portfolios, a distribution fee, which is accrued
daily and paid quarterly, at an annual rate of 0.25% of the Class B shares'
average daily net assets. The Distributor may voluntarily waive from time to
time all or any portion of its distribution fee. The Distributor has agreed to
reduce its fees to 0.15% of the Class B shares' average daily net assets for the
Fixed Income and Global Fixed Income Portfolios.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., acts as custodian for the Fund's
assets held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on assets held, investment
purchases and sales activity, an account maintenance fee, plus reimbursement for
certain out-of-pocket expenses.
For the six months ended June 30, 1997, the following Portfolios incurred
custody fees and had amounts payable to MSTC at June 30, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 104 $ 41
Asian Equity................. 243 105
Emerging Markets............. 1,960 1,089
European Equity.............. 65 33
Global Equity................ 20 8
Gold......................... 5 1
International Equity......... 377 155
International Magnum......... 77 36
International Small Cap...... 62 30
Japanese Equity.............. 17 9
Latin American............... 99 48
Emerging Markets Debt........ 60 82
Global Fixed Income.......... 16 9
</TABLE>
In addition, for the six months ended June 30, 1997, the following Portfolios
have earned interest income and incurred interest expense on balances with MSTC
as follows:
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
------------------- -------------------
<S> <C> <C>
Active Country............ $ 1 $ 1
Asian Equity.............. 6 9
Emerging Markets.......... 7 15
European Equity........... 1 2
Global Equity............. -- 1
International Equity...... -- 12
International Small Cap... 0 2
Japanese Equity........... -- 1
Latin American............ -- 2
Emerging Markets Debt..... 20 31
Global Fixed Income....... 1 --
</TABLE>
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<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
F. PURCHASES AND SALES: During the six months ended June 30, 1997, purchases and
sales of investment securities, other than long-term U.S. Government securities
and short-term investments, were:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ------------------------------------ --------- ---------
<S> <C> <C>
Active Country Allocation........... $ 55,467 $ 102,669
Asian Equity........................ 164,330 217,209
Emerging Markets.................... 729,016 613,359
European Equity..................... 82,570 29,934
Global Equity....................... 16,925 11,908
Gold................................ 11,508 3,020
International Equity................ 559,665 365,675
International Magnum................ 71,647 19,164
International Small Cap............. 44,285 35,698
Japanese Equity..................... 43,004 42,396
Latin American...................... 89,420 64,027
Aggressive Equity................... 201,112 146,802
Emerging Growth..................... 65,100 70,861
Equity Growth....................... 482,815 376,150
Small Cap Value Equity.............. 28,681 27,443
Technology.......................... 37,345 27,606
U.S. Real Estate.................... 216,271 160,018
Value Equity........................ 13,989 35,454
Balanced............................ 445 1,674
Emerging Markets Debt............... 405,816 440,501
Fixed Income........................ 32,591 64,118
Global Fixed Income................. 40,280 55,339
High Yield.......................... 66,326 65,175
Municipal Bond...................... 19,805 5,684
</TABLE>
Purchases and sales during the six months ended June 30, 1997 of long-term U.S.
Government securities occurred in the Balanced, Fixed Income and Global Fixed
Income Portfolios only and totaled:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- -------------------------------------- ----------- ---------
<S> <C> <C>
Balanced.............................. $ -- $ 293
Fixed Income.......................... 99,671 73,670
Global Fixed Income................... 22,741 26,806
</TABLE>
During the six months ended June 30, 1997, the following Portfolios paid
brokerage commissions to Morgan Stanley & Co., Incorporated, an affiliated
broker/dealer, of approximately:
<TABLE>
<CAPTION>
BROKERAGE
COMMISSION
PORTFOLIO (000)
- ----------------------------------------------- ---------------
<S> <C>
Asian Equity................................... $ 92
Emerging Markets............................... 170
Global Equity.................................. 3
International Equity........................... 1
International Magnum........................... 3
Japanese Equity................................ 34
Latin American................................. 26
</TABLE>
In addition, during the six months ended June 30, 1997, the Equity Growth and
U.S. Real Estate Portfolios paid approximately $2,000 and $5,000, respectively,
of brokerage commissions to Dean Witter Reynolds, Inc., an affiliated
broker/dealer.
G. OTHER: At June 30, 1997, cost, unrealized appreciation, unrealized
depreciation, and net unrealized appreciation (depreciation) for U.S. Federal
income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET APPREC.
COST APPREC. DEPREC. (DEPREC.)
PORTFOLIO (000) (000) (000) (000)
- -------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active Country
Allocation............... $ 128,748 $ 20,576 $ (6,860) $ 13,716
Asian Equity.............. 297,193 57,990 (27,312) 30,678
Emerging Markets.......... 1,516,437 439,250 (159,254) 279,996
European Equity........... 195,259 50,618 (2,235) 48,383
Global Equity............. 72,807 29,258 (3,264) 25,994
Gold...................... 36,641 354 (11,617) (11,263)
International Equity...... 2,000,541 712,174 (36,172) 676,002
International Magnum...... 154,360 23,001 (3,029) 19,972
International Small Cap... 235,162 44,504 (21,327) 23,177
Japanese Equity........... 157,897 21,911 (8,237) 13,674
Latin American............ 64,274 13,719 (676) 13,043
Aggressive Equity......... 139,433 14,225 (1,904) 12,321
Emerging Growth........... 51,583 9,480 (507) 8,973
Equity Growth............. 453,375 64,247 (4,369) 59,878
Small Cap Value Equity.... 28,814 3,573 (560) 3,013
Technology................ 15,538 1,715 (94) 1,621
U.S. Real Estate.......... 258,562 34,179 (516) 33,663
Value Equity.............. 77,236 22,009 (1,314) 20,695
Balanced.................. 5,867 830 (47) 783
Emerging Markets Debt..... 176,968 8,328 (578) 7,750
Fixed Income.............. 131,354 1,033 (531) 502
Global Fixed Income....... 84,008 692 (1,625) (933)
High Yield................ 112,532 4,961 (488) 4,473
Municipal Bond............ 51,380 1,195 (42) 1,153
Money Markets............. 1,271,845 -- -- --
Municipal Money Market.... 712,459 -- -- --
</TABLE>
During the six months ended June 30, 1997, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $217,000.
At June 30, 1997, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
--------------------------------------------
PORTFOLIO 2001 2002 2003 2004 TOTAL
- -------------------------- ----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Emerging Markets.......... $ -- $ -- $ 11,112 $ -- $ 11,112
Japanese Equity........... -- -- 1,668 -- 1,668
Technology................ -- -- -- 4 4
Fixed Income.............. -- 5,532 -- -- 5,532
Global Fixed Income....... -- 2,720 1,780 -- 4,500
High Yield................ -- -- 3,604 -- 3,604
Municipal Bond............ -- -- -- 6 6
Money Market.............. -- 13 -- 469 482
Municipal Money Market.... 1 7 1 23 32
</TABLE>
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189
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended December 31, 1996, the Japanese Equity, Latin American,
Fixed Income, Global Fixed Income and High Yield Portfolios utilized capital
loss carryforwards for U.S. Federal income tax purposes of approximately
$998,000, $224,000, $2,759,000, $2,572,00, and $1,435,000, respectively.
To the extent that capital loss carryovers are used to offset any future capital
gains realized during the carryover period as provided by U.S. Federal income
tax regulations, no capital gains tax liability will be incurred by a Portfolio
for gains realized and not distributed. To the extent that capital gains are
offset, such gains will not be distributed to the shareholders.
During the six months ended June 30, 1997, the following Portfolio wrote covered
call options as follows:
COVERED CALL OPTIONS:
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- ------------------------------------ ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1996............................... $ -- $ --
Options written during the period... 45,414 1,037
Options closed during the period.... (38,314) (909)
Options exercised during the
period............................. (7,100) (128)
------------- -----------
Options outstanding at June 30,
1997............................... -- --
------------- -----------
------------- -----------
</TABLE>
At June 30, 1997, 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.
Assets and liabilities, including Portfolio securities and foreign currency
holdings were translated at the following exchange rates as of June 30, 1997:
<TABLE>
<S> <C> <C> <C>
Argentine Peso....................... 0.99985 = $1.00
Australian Dollar.................... 1.32406 = $1.00
Austrian Schilling................... 12.26350 = $1.00
Belgian Franc........................ 35.95000 = $1.00
Brazilian Real....................... 1.07660 = $1.00
British Pound........................ 1.65126 = $1.00
Canadian Dollar...................... 1.38075 = $1.00
Colombian Peso....................... 1091.00000 = $1.00
Danish Krone......................... 6.63690 = $1.00
French Franc......................... 5.87470 = $1.00
German Mark.......................... 1.74335 = $1.00
Hong Kong Dollar..................... 7.74730 = $1.00
Hungarian Forint..................... 187.23500 = $1.00
Indian Rupee......................... 35.80000 = $1.00
Indonesian Rupiah.................... 2432.00000 = $1.00
Irish Punt........................... 0.66050 = $1.00
Italian Lira......................... 1699.70000 = $1.00
Japanese Yen......................... 114.56500 = $1.00
Malaysian Ringgit.................... 2.52400 = $1.00
Mexican Peso......................... 7.93200 = $1.00
Netherlands Guilder.................. 1.96130 = $1.00
New Zealand Dollar................... 1.47221 = $1.00
Norwegian Krone...................... 7.32710 = $1.00
Pakistani Rupee...................... 40.41950 = $1.00
Peruvian New Sol..................... 2.65200 = $1.00
Philippines Peso..................... 26.37600 = $1.00
Polish Zloty......................... 3.28650 = $1.00
Singapore Dollar..................... 1.42970 = $1.00
South African Rand................... 4.53700 = $1.00
South Korean Won..................... 888.00000 = $1.00
Spanish Peseta....................... 147.25000 = $1.00
Sri Lankan Rupee..................... 58.49000 = $1.00
Swedish Krona........................ 7.73330 = $1.00
Swiss Franc.......................... 1.46000 = $1.00
Taiwan Dollar........................ 27.80000 = $1.00
Thai Baht............................ 25.90500 = $1.00
Turkish Lira......................... 148525.00000 = $1.00
Venezuelan Bolivar................... 486.80500 = $1.00
</TABLE>
From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
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190
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
H. SUPPLEMENTAL PROXY INFORMATION:
On May 1, 1997, a special meeting of the stockholders of Morgan Stanley
Institutional Fund, Inc. (the "Fund") was held for the purpose of voting on the
following matter:
1. Approval of the investment advisory agreement by and between the Fund and
Morgan Stanley Asset Management Inc.
<TABLE>
<CAPTION>
TOTAL SHARES
PORTFOLIO VOTED FOR VOTED AGAINST ABSTENTIONS VOTED
- -------------------------------------------------------------- ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Active Country Allocation..................................... 8,890,283 -- -- 8,890,283
Asian Equity.................................................. 10,258,100 76,438 268,592 10,603,130
European Equity............................................... 6,589,595 86,350 222,853 6,898,798
Gold.......................................................... 1,973,015 41,909 14,384 2,029,308
Japanese Equity............................................... 10,300,071 132,932 364,978 10,797,981
Latin American................................................ 2,261,411 8,179 60,493 2,330,083
Aggressive Equity............................................. 4,051,445 -- 37,431 4,088,876
Emerging Growth............................................... 3,837,840 -- 1,646 3,839,486
Equity Growth................................................. 18,912,633 149,402 95,439 19,157,474
Small Cap Value Equity........................................ 1,450,173 22,891 10,081 1,483,145
Technology.................................................... 274,583 -- -- 274,583
U.S. Real Estate.............................................. 9,036,110 10,829 44,071 9,091,010
Fixed Income.................................................. 6,372,373 -- -- 6,372,373
Global Fixed Income........................................... 5,673,179 -- 67,289 5,740,468
High Yield.................................................... 5,897,556 9,337 19,448 5,926,341
Municipal Bond................................................ 2,389,370 -- 20,650 2,410,020
Money Market.................................................. 610,734,143 11,211,336 20,496,210 642,441,689
Municipal Money Market........................................ 355,324,086 2,168,594 10,663,082 368,155,762
</TABLE>
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191
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
- -----------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley
Asset Management Inc. and Morgan Stanley Asset
Management Limited; Managing Director,
Morgan Stanley & Co. Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director, Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally
Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation
Frederick O. Robertshaw
Of Counsel, Bryan, Cave
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
DISTRIBUTOR
Morgan Stanley & Co., Incorporated
1251 Avenue of the Americas
New York, New York 10020
CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, NY 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
OFFICERS
James W. Grisham
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Karl O. Hartmann
ASSISTANT SECRETARY
Joanna M. Haigney
TREASURER
Rene J. Feuerman
ASSISTANT TREASURER
FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.
- --------------------------------------------------------------------------------
192
