<PAGE>
As Filed With the Securities and Exchange Commission on April 16, 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. 2 [X]
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) 354-818
-------------
Ms. Lorraine Truten
One Tower Bridge
West Conshohocken, PA 19428-0868
--------------------------------
(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
- - --------------------------------------------------------------------------------
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
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
April 16, 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;
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
<PAGE>
<CAPTION>
Information Required in a
Part B Statement of Additional Information
- - ------ -----------------------------------
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
<CAPTION>
Part C Other Information
- - ------ -----------------
Item 15. Indemnification Indemnification
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
</TABLE>
<PAGE>
, 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 June 4, 1998. If you were a Shareholder of record of either of
these Portfolios as of the close of business on April 24, 1998, you are entitled
to vote at the meeting and for any adjournment of the meeting.
The attached Proxy Statement/Prospectus gives 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 shares of the appropriate class of
the corresponding MAS Funds Portfolio equal in value to your MSIF Portfolio
shares. Miller Anderson & Sherrerd, LLP, the adviser to the MAS Funds family of
funds, is 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 shares of that MAS Funds
Portfolio. The MSIF Portfolios then would distribute those shares to
their shareholders in liquidation. MSIF shareholders who own Class A
shares will receive MAS Funds Institutional Class shares, while MSIF
Class B shareholders will receive MAS Funds Adviser Class shares. 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 JUNE 4, 1998
-------------
Notice is hereby given that a Special Meeting of Shareholders of the
Balanced and Small Cap Value Equity 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 June 4, 1998 at (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 April 24, 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 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
May 1, 1998
<PAGE>
PROXY STATEMENT/PROSPECTUS
DATED MAY 1, 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 June 4, 1998 at
(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:
<TABLE>
<CAPTION>
MAS ACQUIRING PORTFOLIOS MSIF ACQUIRED PORTFOLIOS
- - -------------------------------------------------- ------------------------------------
<S> <C>
Mid Cap Value Portfolio........................... Small Cap Value Equity Portfolio
Balanced Portfolio................................ Balanced Portfolio
</TABLE>
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 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 Class A shares. Holders of Class B shares of each
MSIF Portfolio will receive an amount of Adviser Class shares of the
corresponding MAS Portfolio equal in value to their MSIF Portfolio Class B
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
<PAGE>
defined in the Reorganization Agreement) will receive 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")
provides investment advisory services to 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 & 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 (SEC), are
incorporated in whole or in part by reference. A Statement of Additional
Information dated April 24, 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 September 26, 1997 and February
6, 1998, which has been filed with the 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 (i) the Institutional Class shares
of the MAS Portfolios, dated January 31, 1998, as supplemented through March 16,
1998, or (ii) the Adviser Class shares of the MAS Portfolios dated January 31,
1998, as revised March 6, 1998, which have been filed with the SEC and are
incorporated by reference into this Proxy Statement/Prospectus insofar as they
relate to the MAS Portfolios, and not to any other portfolio of MAS Funds
described therein. A copy of the applicable prospectus for the MAS Portfolios
accompanies this Proxy Statement/Prospectus. A Statement of Additional
Information for the MAS Portfolios dated January 31, 1998 has been filed 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 May 1, 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.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Synopsis........................................................................................... 4
The Reorganization............................................................................... 4
The Funds........................................................................................ 4
Risks.............................................................................................. 9
Reasons for the Reorganization..................................................................... 12
Information Relating to the Reorganization......................................................... 13
The Portfolios' Investment Objectives and Policies................................................. 16
The Portfolios' Purchase, Exchange and Redemption Procedures....................................... 17
Shareholder Rights................................................................................. 19
Information About the Portfolios................................................................... 21
Voting Matters..................................................................................... 22
Other Business..................................................................................... 28
Shareholder Inquiries.............................................................................. 28
Appendix A -- Performance of the Portfolios........................................................ A-1
Exhibit A -- Form of Agreement and Plan of Reorganization and Liquidation.......................... E-1
</TABLE>
3
<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 for 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.
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
4
<PAGE>
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 & 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 $68.4 billion of assets under management as of
February 28, 1998 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:
<TABLE>
<CAPTION>
PERCENTAGE
MAS PORTFOLIO RATE
- - ----------------------------------------------------------------------- -----------------
<S> <C>
Mid Cap Value Portfolio................................................ 0.750%
Balanced Portfolio..................................................... 0.450%
</TABLE>
For the fiscal year ending September 30, 1997, Miller Anderson received the
following as compensation for its services:
<TABLE>
<CAPTION>
FEES
(AS A PERCENTAGE
MAS PORTFOLIO OF NET ASSETS)
- - ----------------------------------------------------------------------- -----------------
<S> <C>
Mid Cap Value Portfolio................................................ 0.727%*
Balanced Portfolio..................................................... 0.450%
</TABLE>
- - --------------
* During part of the year, Miller Anderson voluntarily waived a portion of its
fee.
5
<PAGE>
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:
<TABLE>
<S> <C>
Mid Cap Value Portfolio: Bradley S. Daniels, William B. Gerlach,
Chris Leavy and Gary G. Schlarbaum
Balanced Portfolio: Thomas L. Bennett, Gary G. Schlarbaum,
Horacio A. Valeiras, and Richard B. Worley
</TABLE>
Morgan Stanley Asset Management Inc. ("MSAM"), wholly owned subsidiary of
Morgan Stanley Dean Witter & Co., serves as the investment adviser for MSIF.
MSAM supervises and manages all of the investment operations of MSIF. As of
February 28, 1998, MSAM, together with its affiliated institutional asset
management companies (excluding Miller Anderson), had approximately $88.1
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.
Under an agreement with MSIF, MSAM is entitled to receive a fee from each
MSIF Portfolio, payable quarterly, at the following annual percentage rates:
<TABLE>
<CAPTION>
PERCENTAGE
MSIF PORTFOLIO RATE
- - ----------------------------------------------------------------------- -----------------
<S> <C>
Small Cap Value Equity Portfolio....................................... 0.85%
Balanced Portfolio..................................................... 0.50%
</TABLE>
For the year ending December 31, 1997, MSAM received the following as
compensation for its services:
<TABLE>
<CAPTION>
FEES
(AS A PERCENTAGE
MSIF PORTFOLIO OF NET ASSETS)
- - ----------------------------------------------------------------------- -----------------
<S> <C>
Small Cap Value Equity Portfolio....................................... 0.54%
Balanced Portfolio..................................................... 0.00%
</TABLE>
- - --------------
* 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 Philip W. Friedman 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.
6
<PAGE>
ANNUAL OPERATING EXPENSES. A comparison of the annual operating expenses of
the Portfolios is set forth below.
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) --
NET OF FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
MANAGEMENT FEES TOTAL OPERATING EXPENSES
(NET OF FEE WAIVERS (NET OF FEE WAIVERS
AND EXPENSE 12B-1 OTHER AND EXPENSE
PORTFOLIO REIMBURSEMENTS) FEES EXPENSES REIMBURSEMENTS)(1)
- - ------------------------------------------------- ------------------- ---------- ----------- ---------------------------
<S> <C> <C> <C> <C>
MAS Mid Cap Value Institutional Class............ 0.75% None 0.13% 0.88%
MAS Mid Cap Value Adviser Class.................. 0.75% 0.25% 0.13% 1.13%
MSIF Small Cap Value Equity -- Class A........... 0.54% None 0.46 % 1.00 %
MSIF Small Cap Value Equity -- Class B........... 0.54 % 0.25 % 0.46 % 1.25 %
MAS Balanced Institutional Class................. 0.45 % None 0.13 % 0.58 %
MAS Balanced Adviser Class....................... 0.45 % 0.25 % 0.13 % 0.83 %
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 Expense ratios reflected in the table above may be
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 expenses that otherwise would be deducted from
portfolio assets. Amounts in the above table have been restated to reflect
current fees and expenses.
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
1.56% for Class B, and of the MSIF Balanced Portfolio would be 1.83% for
Class A and 2.05% 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:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - -------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MAS Mid Cap Value Institutional Class............................... $ 9 $ 28 $ 49 $ 108
MAS Mid Cap Value Adviser Class..................................... $ 12 $ 36 $ 62 $ 137
MSIF Small Cap Value -- Class A..................................... $ 10 $ 32 $ 55 $ 122
MSIF Small Cap Value -- Class B..................................... $ 13 $ 40 $ 69 $ 151
MAS Balanced Institutional Class.................................... $ 6 $ 19 $ 32 $ 73
MAS Balanced Adviser Class.......................................... $ 8 $ 26 $ 46 $ 103
MSIF Balanced -- Class A............................................ $ 7 $ 22 $ 39 $ 87
MSIF Balanced -- Class B............................................ $ 10 $ 30 $ 53 $ 117
</TABLE>
7
<PAGE>
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 another class of shares which varies 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 MSIF 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
MSIF Portfolio pursuant to Rule 12b-1 under the 1940 Act, under which Morgan
Stanley is entitled to receive a distribution fee from each MSIF Portfolio,
which is accrued daily and paid quarterly, of 0.25% of the average daily net
assets of the Class B shares of each MSIF 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 MSIF
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. MAS has adopted a Plan of Distribution with respect to its Adviser Class
shares of each MAS Portfolio pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan MASDI is entitled to receive a distribution fee from each MAS
Portfolio. The distribution fee, which is accrued daily and paid quarterly, is
equal to 0.25% of the average daily net assets of the Adviser Class shares of
each MAS Portfolio on an annualized basis. Each plan is designed to compensate
MASDI for its services and MASDI may retain any portion of the fee that it does
not expend. MASDI may, in its discretion, voluntarily waive from time to time
all or any portion of its distribution fee and each of MASDI and Miller Anderson
is free to make additional payments out of its own assets to promote the sale of
MAS Portfolio shares, including payments that compensate financial institutions
for distribution services or shareholder services.
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 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. However, there is a difference in the minimum investment
required to purchase shares of the MSIF and MAS Portfolios. The minimum initial
investment required is $5,000,000 to purchase MAS Institutional Class shares and
8
<PAGE>
$500,000 for MAS Adviser Class shares. The minimum initial investment required
to purchase shares of the MSIF Portfolios is $500,000 for Class A and $100,000
for Class B. The MAS minimums are waived with respect to the applicable
Portfolio(s) for MSIF shareholders acquiring shares in the merger. For all
Portfolios and all classes of shares, the minimum subsequent investment is
$1,000. MSAM and Miller Anderson, in their discretion, may waive the respective
Portfolios' minimum investment requirements.
RISKS
MAS MID CAP VALUE AND MSIF SMALL CAP VALUE EQUITY PORTFOLIOS. The MAS Mid
Cap Value Portfolio and the MSIF Small Cap Value Equity Portfolio each invest
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. The
principal investment risk associated with an investment in a Portfolio is market
risk which can cause the prices of their portfolio securities to fluctuate over
time. Changes in market prices of securities held in a Portfolio will affect the
Portfolio's net asset value. Both Portfolios may invest substantially in smaller
companies, which can result in greater price volatility than is typically
associated with investments in larger companies.
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 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
9
<PAGE>
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 must
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.
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. The MAS Balanced Portfolio generally invests 45-75% of its
assets in equity securities and 25-55% in fixed-income securities. The MSIF
Balanced Portfolio generally invests 35-65% of its assets in equity securities
and 35-65% of its
10
<PAGE>
assets in fixed-income securities and expects that over time its equity exposure
will average about 55% of its total assets. The principal investment risks
associated with an investment in the Portfolios are (a) market risk, which can
cause the prices of equity securities held by the Portfolios to fluctuate over
time, and (b) changes in interest rates, which affect the value of fixed income
securities held by the Portfolios. In addition, changes in currency exchange
rates can adversely affect the value of foreign securities held by the
Portfolios. Changes in market prices of securities held in a Portfolio will
affect the Portfolio's net asset value. 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 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
11
<PAGE>
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.
12
<PAGE>
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 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 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 $19 billion in assets.
Shareholders of the MSIF Portfolios, by becoming part of the MAS complex,
would be able to exchange their shares for shares of other MAS portfolios.
MSIF shareholders also would be able to exchange their shares for 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. As demonstrated in the pro forma
financial information included in the Statement of Additional Information
relating to this Proxy Statement/ Prospectus, these Portfolios have nearly
identical securities holdings. 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
13
<PAGE>
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.
- 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 for periods ending March 31, 1998 and
December 31, 1996 (shortly before the meeting of the MSIF Board).
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION*
- - ------------------------------------------------------------ ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
MSIF Balanced Class A....................................... 7.55% 17.33% 12.35% 11.89%
MAS Balanced Institutional Class............................ 28.28% 21.37% 14.86% 14.86%
MSIF Small Cap Value Equity Class A......................... 11.92% 29.55% 19.54% 20.06%
MAS Mid Cap Value Institutional Class....................... 56.04% 38.21% N/A 39.11%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS SINCE INCEPTION*
- - ------------------------------------------------------------ ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
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%
</TABLE>
- - --------------
* 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.
In addition, based on the factors described above, the Directors of MSIF and
Trustees of MAS who are not "interested persons" of MSIF or MAS, within the
meaning of Section 2(a)(19) of the 1940 Act, determined that (i) participation
in the Reorganization is in the best interests of MSIF and MAS, respectively,
and (ii) the interests of shareholders of MSIF and MAS, respectively, will not
be diluted as a result of the Reorganization.
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 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. Each MAS Portfolio will issue Institutional Class shares
14
<PAGE>
to the corresponding MSIF Portfolio equal in value to the net asset value of the
MSIF Portfolio's Class A shares. Similarly, each MAS Portfolio will issue
Adviser Class shares to the corresponding MSIF Portfolio equal in value to the
net asset value of the MSIF Portfolio's Class B shares.
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 MAS Portfolio shares of the appropriate class 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 or Adviser 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 or Adviser 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, as defined in the
Reorganization Agreement, 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.
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.
15
<PAGE>
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>
NET ASSET
VALUE PER SHARES
PORTFOLIO NET ASSETS SHARE OUTSTANDING
- - ----------------------------------------------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
MAS Mid Cap Value................................................
Institutional Class.............................................. $ 220,259,681 $ 21.80 10,103,104
Investment Class................................................. $ 1,238,516 $ 21.75 56,951
Adviser Class.................................................... $ 0 $21.80 0
-------------- ------------
Total.......................................................... $ 221,498,197 10,160,055
-------------- ------------
-------------- ------------
MSIF Small Cap Value Equity......................................
Class A.......................................................... $ 34,648,575 $ 14.65 2,364,674
Class B.......................................................... $ 8,043,615 $ 14.63 549,793
-------------- ------------
Total.......................................................... $ 42,692,190 2,914,467
-------------- ------------
-------------- ------------
Combined Portfolios..............................................
Institutional Class.............................................. $ 254,908,256 $ 21.80 11,692,488
Investment Class*................................................ $ 1,238,516 $ 21.75 56,951
-------------- ------------
Adviser Class.................................................... $ 8,043,615 $ 21.80 368,973
-------------- ------------
Total.......................................................... $ 264,190,387 12,118,412
-------------- ------------
-------------- ------------
MAS Balanced.....................................................
Institutional Class.............................................. $ 343,283,828 $ 15.30 22,722,402
Investment Class*................................................ $ 3,943,685 $ 15.30 257,760
Adviser Class.................................................... $ 27,366,384 $ 15.30 1,835,346
-------------- ------------
Total.......................................................... $ 374,593,897 22,722,402
-------------- ------------
-------------- ------------
MSIF Balanced....................................................
Class A.......................................................... $ 4,351,469 $ 8.85 491,933
Class B.......................................................... $ 707,025 $ 8.82 80,180
-------------- ------------
Total.......................................................... $ 5,058,494 572,113
-------------- ------------
-------------- ------------
Combined Portfolios..............................................
Institutional Class.............................................. $ 347,635,297 $ 15.30 22,722,402
Investment Class*................................................ $ 3,943,685 $ 15.30 257,760
Adviser Class.................................................... $ 28,073,409 $ 15.30 1,835,346
-------------- ------------
Total.......................................................... $ 379,652,391 24,815,508
-------------- ------------
-------------- ------------
</TABLE>
- - --------------
* Investment Class Shares of MAS Funds are not involved in the Reorganization.
They differ from Institutional and Adviser Class Shares in expenses charged
and purchase requirements.
16
<PAGE>
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. Appendix A to this Proxy
Statement/ Prospectus reproduces the discussion of the Portfolios' performance
contained in their most recent annual reports to shareholders.
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. 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
17
<PAGE>
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. Appendix A to
this Proxy Statement/Prospectus reproduces the discussion of the Portfolios'
performance contained in their most recent annual reports to shareholders.
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 and Adviser Class Shares are available to clients of Miller
Anderson with combined investments of $5 million and $500,000, respectively.
Shares of either class also are available to 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 and Adviser 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 and Adviser 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 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 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.
MAS reserves the right, in its sole discretion, to suspend the offering of
Institutional or Adviser 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.
18
<PAGE>
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 and Adviser Class
shares may be exchanged for the same class of shares of MAS' other portfolios
offering that class of 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 shares of the MAS Portfolios
for the shares of MSIF's other portfolios in accordance with the procedures
described in the MSIF portfolio's prospectus.
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 is
determined in the same manner as any other purchase of shares and is not based
on the class of shares surrendered for the exchange. Consequently, the 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 taxes and brokerage charges on the sale of portfolio
securities received in such payments of redemptions.
19
<PAGE>
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 minimum
investment requirements, and administrative and distribution costs, as set forth
in the MAS prospectus. As a result of the Reorganization, shareholders of MSIF
Class A shares will receive Institutional Class shares of the MAS Portfolios and
MSIF Class B shareholders will receive Adviser 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.
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 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. 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.
20
<PAGE>
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 40 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 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 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. 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.
21
<PAGE>
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, 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 PORTFOLIOS
Information concerning the operation and management of the MAS Portfolios is
incorporated herein by reference to the current prospectuses relating to the
Institutional and Adviser Classes of shares of those Portfolios dated January
31, 1998, as supplemented through March 16, 1998, in the case of the
Institutional Class shares, and as revised March 6, 1998, in the case of the
Adviser Class shares. A copy of the applicable MAS prospectus accompanies this
Proxy Statement/Prospectus. Additional information about the MAS Portfolios is
included in the Statement of Additional Information dated January 31, 1998,
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 September 26,
1997 and February 6, 1998, 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, 1997 have been audited by Price Waterhouse LLP, its independent
accountants. These financial statements and the unaudited pro forma financial
statements reflecting the MAS Mid Cap Value Portfolio after the Reorganization,
which are contained in the Statement of Additional Information dated April 24,
1998, relating to this Proxy Statement/Prospectus, 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 may be obtained on request without charge by contacting MAS at One Tower
Bridge, West Conshohocken,
22
<PAGE>
Pennsylvania 19428 or by calling 1-800-354-8185 and 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
and Adviser 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 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
23
<PAGE>
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 April 24, 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 , 1998, 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 ,
:
<TABLE>
<CAPTION>
MSIF SMALL CAP VALUE EQUITY
PORTFOLIO:
CLASS B
------------------------------------
PERCENTAGE OF
PERCENTAGE OF INSTITUTIONAL
CLASS B SHARES CLASS SHARES
OWNED BEFORE OWNED AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
MSIF BALANCED PORTFOLIO:
CLASS A
------------------------------------
PERCENTAGE OF
PERCENTAGE OF INSTITUTIONAL
CLASS B SHARES CLASS SHARES
OWNED BEFORE OWNED AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
MSIF BALANCED PORTFOLIO:
CLASS B
------------------------------------
PERCENTAGE OF
PERCENTAGE OF INSTITUTIONAL
CLASS B SHARES CLASS SHARES
OWNED BEFORE OWNED AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
</TABLE>
- - --------------
* Record and Beneficial Ownership.
+ Less than 1%.
As of , 1998, 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.
25
<PAGE>
MAS. As of , 1998, to MAS's knowledge, the following persons
owned of record or beneficially 5% or more of each class' outstanding shares:
<TABLE>
<CAPTION>
MAS FUNDS MID CAP VALUE PORTFOLIO:
INSTITUTIONAL CLASS
------------------------------------
PERCENTAGE OF PERCENTAGE OF
INSTITUTIONAL INSTITUTIONAL
CLASS SHARES CLASS SHARES
OWNED BEFORE OWNED AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
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
- - -------------------------------------------------------------------- ----------------- -----------------
MAS FUNDS BALANCED PORTFOLIO:
INSTITUTIONAL CLASS
------------------------------------
PERCENTAGE OF PERCENTAGE OF
INSTITUTIONAL INSTITUTIONAL
CLASS SHARES CLASS SHARES
OWNED BEFORE OWNED AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
MAS FUNDS BALANCED PORTFOLIO:
INVESTMENT CLASS
------------------------------------
PERCENTAGE OF PERCENTAGE OF
INVESTMENT CLASS INVESTMENT CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
MAS FUNDS BALANCED PORTFOLIO:
ADVISER CLASS
------------------------------------
PERCENTAGE OF PERCENTAGE OF
ADVISER CLASS ADVISER CLASS
SHARES OWNED SHARES OWNED
BEFORE AFTER
NAME & ADDRESS REORGANIZATION REORGANIZATION
- - -------------------------------------------------------------------- ----------------- -----------------
</TABLE>
- - --------------
* Record and Beneficial Ownership.
** Record Ownership Only.
+ Beneficial Owner Only.
As of , 1998, 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 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.
28
<PAGE>
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.
29
<PAGE>
APPENDIX A
PERFORMANCE OF THE PORTFOLIOS
MAS FUNDS/EQUITY
MID CAP VALUE PORTFOLIO
The Mid Cap Value Portfolio applies Miller Anderson & Sherrerd's value
investment philosophy to the medium-sized equity universe, combining fundamental
research with a disciplined, quantitative investment process. MAS generally
keeps sector weights within 5% of those of the S&P MidCap 400 Index, with
strategic over- and under-weightings assigned to different sectors based on
their relative investment attractiveness. Decisions about portfolio composition
and structure are made by a team of MAS equity professionals who specialize in
the small- and mid-cap market segments.
MAS's investment process is driven chiefly by bottom-up considerations, although
broad macroeconomic trends that influence the outlook for certain industries are
taken into account in the decision making process. As a value-oriented fund, the
Portfolio emphasizes stocks with below-average valuations. However, unlike many
value strategies, MAS's methodology also includes additional quality and growth
factors such as the expected future growth in earnings and dividends, the recent
pattern of earnings estimate revisions and subjective judgments regarding the
quality of a company's business franchise. As a result, the Portfolio will
generally look similar to the S&P MidCap 400 Index in the quality and growth
characteristics of its holdings, while the overall valuation of the Portfolio
will generally be lower.
Equity markets moved dramatically higher this year due to strong economic and
earnings growth coupled with declining levels of inflation and interest rates.
Although valuations, as measured by price-to-earnings multiples, are now in
record territory, the mid-cap market is still cheap compared to the large-cap
market. The Portfolio remains fully invested. This policy proved particularly
useful following the correction in April.
The Portfolio beat its benchmark in all quarters, including the difficult fiscal
second quarter. Stock selection was the primary determinant of performance this
year, with support from under-weighting electric utilities and over-weighting
energy and business service stocks relative to the benchmark. For the fiscal
year, top performing stocks came from a variety of industries: Herman Miller
(+166%), Sullivan Dental (+131%), Noble Drilling (+115%), Franklin Resources
(+111%),
EQUITY MARKETS MOVED DRAMATICALLY HIGHER
THIS YEAR DUE TO STRONG ECONOMIC AND
EARNINGS GROWTH COUPLED WITH DECLINING
LEVELS OF INFLATION AND INTEREST RATES.
Western Digital (+99%) and Air Express International (+94%). These securities
are not necessarily representative of the Portfolio's current or future
holdings.
A-1
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MID CAP VALUE
<S> <C> <C>
Growth of a $1 Million Investment
Since Inception
Dollars (000)
Fiscal years ending September 30 MAS Funds
S&P MidCap 400 Mid Cap Value
*12/30/1994 1,000 1,000
12/31/94 1,000 1,000
3/31/95 1,082 1,107
6/30/95 1,176 1,217
9/30/95 1,291 1,345
12/31/95 1,309 1,327
3/31/96 1,390 1,446
6/30/96 1,430 1,545
9/30/96 1,472 1,645
12/31/96 1,561 1,868
3/31/97 1,538 1,873
6/30/97 1,764 2,202
9/30/97 2,048 2,655
</TABLE>
AVERAGE ANNUAL RETURNS
ENDED 9/30/97*
<TABLE>
<CAPTION>
MAS MID CAP VALUE
-------------------------------- S&P MIDCAP
INSTITUTIONAL / / INVESTMENT- 400 INDEX
<S> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------
ONE YEAR 61.40% 61.05% 39.15%
SINCE INCEPTION 42.61% 42.46% 29.77%
</TABLE>
MAS Funds returns are net of all fees. Returns represent past performance and
are not indicative of future results.
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.
/ / Represents an investment in the Institutional Class.
- - - Represents an investment in the Investment Class which commenced operations
5/10/96. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating expenses
for the Institutional and Investment Classes of shares of the Mid Cap Value
Portfolio from exceeding 0.88% and 1.10% respectively, of average daily net
assets. Returns presented include the effects of these waivers and
reimbursements. If such waivers and reimbursements had not been made, the actual
returns would have been lower.
* The Mid Cap Value Portfolio commenced operations on 12/30/94. All returns are
compared to the S&P MidCap 400 Index, an unmanaged market index.
A-2
<PAGE>
MAS FUNDS/BALANCED
BALANCED PORTFOLIO
The Balanced Portfolio provides active asset allocation management of Miller
Anderson & Sherrerd's core equity and fixed-income strategies in a single
portfolio. MAS shifts assets as relative values change, using a 60% equity and
40% fixed-income allocation as a starting point, and manages diversification and
risk control across both asset classes.
Management of the Portfolio incorporates expertise from MAS's entire investment
team. Members of the domestic equity, international equity, domestic
fixed-income and international fixed-income teams comprise the MAS Asset
Allocation Committee, which also includes representatives from the
interest-rate, economic, and currency-management teams. The Asset Allocation
Committee evaluates the relative risks and returns of
MAS SHIFTS ASSETS AS RELATIVE VALUES
CHANGE, USING A 60% EQUITY AND 40%
FIXED-INCOME ALLOCATION AS A STARTING
POINT, AND MANAGES DIVERSIFICATION AND
RISK CONTROL ACROSS BOTH ASSET CLASSES.
the Portfolio's two asset classes and makes strategic asset allocation
decisions. The Portfolio's management team then makes decisions about portfolio
composition and structure, drawing on the strategies employed by MAS's equity
and fixed-income portfolio management teams.
The three key influences considered in determining asset allocation strategy are
relative real interest rates, the shape of the yield curve, and the equity risk
premium. To make the asset-allocation decision, MAS starts by calculating
expected returns on capital. The expected return on fixed-income investments
depends on the real interest rate and the steepness of the yield curve. MAS then
measures the risk-adjusted return an investor can expect to earn by investing in
the equity market versus the return he can expect to earn by investing in
fixed-income securities; the difference between these two expected returns
represents the equity risk premium. Measurement of the risk premium enables MAS
to determine whether the Portfolio should favor equities or fixed-income
securities; a higher premium would generally lead to a greater focus on
equities, while a lower premium would lead to an emphasis on fixed-income
securities. Asset-allocation decisions couple measures of value with economic
analysis. MAS's economic analysis focuses on fiscal and monetary policy and
prospective levels of inflation.
During fiscal 1997, the Portfolio returned slightly less than its custom
benchmark composed 60% of the S&P 500 and 40% of the Salomon Broad Index.
Value-added relative to the benchmark came from a higher-than-index exposure to
equities, but this was more than offset by security selection within the equity
portion of the fund. Security selection in the fixed-income portion of the
Portfolio added to relative performance.
The Portfolio started the fiscal year with a lower-than-benchmark position in
equities. Expected returns for stocks and bonds pointed to bonds offering better
value than equities, and high absolute valuations created concern about overall
stock market returns. However, after the brief market correction in the first
calendar quarter of 1997, equities became more attractive and in April stock
exposure was increased to 63%, which was maintained for the rest of the year.
At fiscal year-end, the Portfolio had higher-than-benchmark investments in
equity securities and slightly higher-than-index interest-rate exposure. The
Portfolio holds almost no cash, since all valuation measures indicate that
equity and bond markets will continue to perform well.
A-3
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED
<S> <C> <C> <C>
Growth of a $1 Million Investment
Since Inception
Dollars (000)
Fiscal years ending September 30
S&P 500 MAS Funds Balanced Salomon Broad
*12/31/1992 1,000 1,000 1,000
3/31/93 1,044 1,034 1,042
6/30/93 1,049 1,048 1,071
9/30/93 1,076 1,083 1,099
12/31/93 1,101 1,104 1,099
3/31/94 1,059 1,169 1,068
6/30/94 1,064 1,060 1,058
9/30/94 1,116 1,085 1,064
12/31/94 1,115 1,082 1,068
3/31/95 1,224 1,157 1,122
6/30/95 1,341 1,247 1,191
9/30/95 1,447 1,317 1,213
12/31/95 1,534 1,378 1,266
3/31/96 1,617 1,431 1,244
6/30/96 1,689 1,473 1,250
9/30/96 1,742 1,494 1,273
12/31/96 1,887 1,590 1,312
3/31/97 1,937 1,612 1,305
6/30/97 2,276 1,786 1,352
9/30/97 2,446 1,904 1,397
</TABLE>
AVERAGE ANNUAL RETURNS
ENDED 9/30/97*
<TABLE>
<CAPTION>
MAS BALANCED
---------------------------------------------- S&P 500 SALOMON BROAD
INSTITUTIONAL / / INVESTMENT- ADVISER TRIANGLE INDEX INDEX
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------------------
ONE YEAR 27.44% 27.35% 27.24% 40.46% 9.72%
SINCE INCEPTION 14.53% 14.51% 14.49% 20.73% 7.29%
</TABLE>
MAS Funds returns are net of all fees. Returns represent past performance and
are not indicative of future results.
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.
/ / Represents an investment in the Institutional Class.
- - - Represents an investment in the Investment Class which commenced operations
4/3/97. Returns for periods beginning prior to this date are based on the
performance of the Institutional Class and do not include the 0.15%
Shareholder Servicing Fee applicable to the Investment Class.
TRIANGLE Represents an investment in the Adviser Class which commenced
operations 11/1/96. Returns for periods beginning prior to this date
are based on the performance of the Institutional Class and do not
include the 0.25% 12b-1 fee applicable to the Adviser Class.
The Adviser has voluntarily agreed to waive its advisory fees and reimburse
certain expenses to the extent necessary to keep total annual operating expenses
for the Adviser Class of shares of the Balanced Portfolio from exceeding 0.90%
of average daily net assets. Returns presented include the effects of these
waivers and reimbursements. If such waivers and reimbursements had not been
made, the actual returns would have been lower.
* The Balanced Portfolio commenced operations on 12/31/92. All returns are
compared to the S&P 500 Index and the Salomon Broad Investment Grade Index,
both unmanaged market indices.
A-4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 0.3 %
Banking 13.1 %
Building 2.5 %
Capital Goods 3.3 %
Chemicals 1.3 %
Communications 4.8 %
Computers 5.4 %
Consumer--Durables 2.9 %
Consumer--Retail 7.2 %
Consumer--Service & Growth 0.9 %
Consumer--Staples 4.3 %
Electric 1.3 %
Energy 5.9 %
Entertainment 3.2 %
Financial--Diversified 3.0 %
Health Care 3.1 %
Industrial 7.5 %
Insurance 2.7 %
Metals 2.0 %
Paper & Packaging 1.0 %
Restaurants 0.7 %
Services 3.2 %
Technology 4.5 %
Tobacco 0.6 %
Transportation 5.4 %
Utilities 5.3 %
Other 4.6
%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY RUSSELL 2500
PORTFOLIO--CLASS A INDEX(1)
<S> <C> <C>
12/17/92* $500,000 $500,000
12/31/92 $507,000 $515,665
12/31/93 $564,420 $601,000
12/31/94 $578,700 $595,350
12/31/95 $698,086 $784,076
12/31/96 $858,576 $933,443
12/31/97 $1,174,532 $1,160,736
* 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 INDEX
AND S&P 500 INDEX(1)
- - -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 36.80% 18.30% 18.46%
PORTFOLIO -- CLASS
B..................... 36.51 N/A 29.27
RUSSELL 2500 -- CLASS
A..................... 24.35 17.59 18.16
RUSSELL 2500 -- CLASS
B..................... 24.35 N/A 21.55
S&P 500 -- CLASS A.... 33.36 20.27 20.13
S&P 500 -- CLASS B.... 33.36 N/A 27.63
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 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 year ended December 31, 1997, the Portfolio had a total return of 36.80%
for the Class A shares and 36.51% for the Class B shares, compared to a total
return of 24.35% and 33.36% for the Russell 2500 Index and the S&P 500 Index,
respectively. For the five year period ended December 31, 1997, the average
annual total return of Class A was 18.30% compared to 17.59% for the Russell
2500 Index and 20.27% for the S&P 500 Index. From inception on December 17, 1992
through December 31, 1997, the average annual total return of Class A was 18.46%
compared to 18.16% for the Russell 2500 Index and 20.13% for the S&P 500 Index.
From inception on January 2, 1996 through December 31, 1997, the average annual
total return of Class B was 29.27% compared to 21.55% for the Russell 2500 Index
and 27.63% for the S&P 500 Index.
- - --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
A-5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
For the three months ended December 31, 1997, the Portfolio had a total return
of -2.30% for Class A and -2.37% for Class B compared to -2.25% for the Russell
2500 Index and 2.87% for the S&P 500 Index.
Both stock and sector selection played roles in the slight underperformance for
the fourth quarter. Asian worries led to unusual market and economic events.
Electric utilities, despite high valuations, competitive risk, strict regulation
and anemic long-term growth, provided average returns of over 20% in the fourth
quarter, due to their credit sensitivity and perceived safety. Meanwhile, long
interest rates fell despite surging economic growth. Under normal circumstances
the Federal Reserve would likely have tightened rates but could not risk
draining liquidity from the market. In general, companies with stable, domestic
earnings exposure were rewarded, regardless of valuation or long-term growth
prospects. As such, food, beverage, consumer service and utility stocks faired
well. Our underweighted positions in utility and beverage stocks hurt
performance, while our overweighting in financial stocks and under weighting of
energy stocks aided performance. As value investors we continue to search for
companies with low valuations and better than average growth prospects.
Individual stocks which boosted performance included, First of America Bank
(+44.6%), Nationwide Financial Services (+29.8%) and Storage Technology
(+29.0%). Underperforming stocks included Danka Business Systems (-63.9%),
Microage (-48.1%), and Teradyne (-40.5%) .
Asian turmoil has simultaneously raised the possibility of deflation and
inflation. In the event of a worldwide financial crisis/recession commodity
prices will fall, demand will slow and interest rates and profits will decline.
Conversely, if Asian problems remain localized, the current state of low
inflation, low unemployment, falling interest rates and strong economic growth
is unsustainable. Inflation and interest rates are likely to rise. This
uncertainty has led us to increase holdings in utilities, REITs and food stocks,
while reducing Asian-exposed cyclicals and technology stocks.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
A-6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 5.5%
Banking 9.4%
Capital Goods 3.0%
Chemicals 0.9%
Communications 3.6%
Consumer--Durables 1.1%
Consumer--Retail 3.4%
Consumer--Staples 2.9%
Energy 4.2%
Financial-Diversified 1.5%
Health Care 0.9%
Insurance 3.5%
Metals 0.8%
Paper & Packaging 1.2%
Services 0.8%
Technology 2.5%
Transportation 1.9%
Utilities 4.3%
U.S. Treasury Notes 40.2%
Other 8.4%
</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 $500,000
10/31/91 601,750 582,845
10/31/92 659,000 638,635
12/31/92 680,250 656,635
12/31/93 747,350 736,015
12/31/94 743,800 718,950
12/31/95 929,081 888,838
12/31/96 1,062,776 985,988
12/31/97 1,256,414 1,156,564
*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..................... 17.30% 11.98% 11.25%
PORTFOLIO -- CLASS
B..................... 16.94 N/A 13.56
INDEX -- CLASS A...... 18.22 13.06 12.44
INDEX -- CLASS B...... 18.22 N/A 16.34
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 0.5% cash, 37.9% bonds and 61.6% equity based on $52.5 billion
in assets among 431 portfolios for the period ended December 31, 1997
(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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 objective is to seek high total return
while preserving capital by investing in a combination of undervalued equity
securities and fixed income securities.
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, 1997, the Portfolio had a total return of 17.30%
for the Class A shares and 16.94% for the Class B shares, as compared to a total
return of 18.22% for the Indata Balanced-Median Index (the "Index"). For the
five year period ended December 31, 1997, the average annual total return of
Class A was 11.98% compared to 13.06% for the Index. From inception on February
20, 1990 through December 31, 1997, the average annual total return of Class A
was 11.25% compared to 12.44% for the Index. From inception on January 2, 1996
through December 31, 1997, the average annual total return of Class B was 13.56%
compared to 16.34% for the Index.
According to LIPPER MUTUAL FUNDS QUARTERLY, the average Balanced mutual fund
returned 19.00% for the year ended December 31, 1997.
Our asset allocation, based on market value at December 31, 1997, is as follows:
<TABLE>
<S> <C>
Equities................................. 51.4%
Fixed Income............................. 40.1
Cash..................................... 8.5
---
100%
---
---
</TABLE>
EQUITIES
For the quarter ended December 31, 1997, the equity component of the Balanced
Portfolio had a gross return of 2.80% and for year ended December 31, 1997
returned 30.23%. The S&P 500 returned 2.87% for the quarter ended December 31,
1997 and 33.36% for the year ended December 31, 1997.
In 1997, major market indices achieved strong double digit returns for the third
consecutive year. Large cap stocks once again significantly outperformed small
cap stocks as investors sought relative safety, liquidity and earnings
certainty. The larger cap Russell 1000 returned 32.86% compared to the smaller
cap Russell 2000 return of 22.28%. Growth stocks outperformed value, with the
S&P/ Barra Growth Index up 36.42% for the year compared to 29.96% for the
S&P/Barra Value Index.
- - --------------------------------------------------------------------------------
Balanced Portfolio
A-7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
A progressively weak first quarter, followed by a solid rebound in the second
quarter resulted in an overall very strong first half. Major market indices
bottomed in April and then advanced to new highs through June. Sentiment in the
first quarter, including escalating fears of interest rate increases, and strong
economic growth of 4.9%, contrasted with subsiding fears of rate increases and a
moderating economy in the second quarter. The market continued to advance in the
third quarter, although it declined in August as concerns mounted about the
potential impact of the growing Southeast Asian financial crisis and currency
devaluations. These concerns intensified during the fourth quarter, as the
Southeast Asian turmoil spread to Hong Kong. As a result, the market declined
again in October, a month that saw the largest point decline ever in the Dow
Jones Industrial Average and a record volume day of 1.2 billion shares traded on
the NYSE. The market decline reflected investor concern that slowing economic
growth in Asia and imported Asian deflation would weaken U.S. economic and
earnings growth. Although the market recovered in November and December, profit
concerns overshadowed the very positive declining interest rate environment,
continued benign inflation and a moderating but growing economy.
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>
PRICE PRICE
EARNINGS BREAK
------------ ------------
<S> <C> <C>
Portfolio -- equity portion............. 17.7x 3.3x
S&P 500................................. 23.9x 5.5x
</TABLE>
The best performing sectors in the equity portion of the Portfolio for the year
on an absolute basis were financial services, up 54%, transportation, up 47%,
and capital goods, up 46%. Underperforming sectors included shelter, down 8%,
raw materials, up 1%, and consumer non-durables, up 6%. Relative to the S&P 500,
the equity portion of the Portfolio benefited from being overweight in financial
services and underweight in consumer non-durables, while the underweight
position in healthcare and in consumer services hurt the equity portion of the
Portfolio. The best performing stocks in 1997 were First of America, up 98%,
Mellon Bank, up 76%, Wal Mart, up 75%, Ogden, up 57%, and PNC Financial, also up
57%. Underperforming stocks included Fleming, down 22%, Louisiana-Pacific, down
8%, Woolworth, down 7%, and Phelps Dodge, down 5%.
The overweight position in financial services and stock selection within the
sector meaningfully contributed to performance in 1997. Banking stocks continued
to benefit from industry consolidation activity and the declining interest rate
environment, which more than offset concerns about the Asian crisis that arose
in the second half of the year. We pared back First of America after the company
agreed to be acquired by National City Corp. for a 30% premium. To maintain an
overweight position in banking, we added Fleet Financial and Banc One during the
year. We also increased our weighting in Sallie Mae. Shareholders of Sallie Mae
voted in new management during the year, and approved a reorganization plan to
restructure the company as a fully privatized corporation and eventually
eliminate its government charter. The company continues to generate strong
earnings growth, repurchase stock, and cut costs, and is well positioned to gain
market share in the education finance market.
We increased exposure in the transportation and aerospace/defense due to
favorable industry trends and attractive valuations. The commercial airline
cycle has maintained its strength during the year, supported by the strong
economy, higher business and consumer travel spending and more rational fare
pricing. The commercial aircraft manufacturing cycle is also very favorable. To
participate, we added to the United Technologies position, and established
positions in Parker Hannifin and Continental Airlines. The aerospace/defense
sector is seeing the benefits from past industry consolidation. During the year,
we added Lockheed Martin and Litton Industries to the portfolio. We also added
Gulfstream Aerospace, which is benefiting from a strong backlog in its business
jet aircraft manufacturing operations and a healthy annual repurchase program.
In the capital goods sector, another strong performer in 1997, we added Case
Corp. in addition to holding Deere & Co. Strong farm income and secular
worldwide growth in agricultural spending have been the major themes supporting
the industry. Deere continues to generate strong cash flow and repurchase stock.
Case possesses significant margin expansion opportunities, and trades at
attractive valuation levels. We adjusted the consumer durable sector by selling
Chrysler and adding Meritor Automotive and Borg Warner Automotive. Both of these
stocks are trading below 11 times 1998 estimated earnings. We expect them to
benefit from the continued globalization and consolidation in the auto and truck
supplier market.
We pared back on consumer staples, primarily tobacco stocks, as a preliminary
industry litigation settlement was reached mid-year. While the settlement would
provide protection from certain lawsuits, the industry still faces a lengthy
government approval process for the agreement during 1998. Until a settlement
nears approval, the stocks will most likely remain at attractive valuations of
12-14 times 1998 expected earnings. In the retail sector, we
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
A-8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
added Wal Mart at the start of 1997, which finished the year as one of the top
performers in the Portfolio. Wal Mart began generating positive free cash flow
in 1996, and subsequently announced a 30% dividend increase and a stock buyback
program in early 1997. The company then delivered both sales and earnings growth
and consistency throughout the year. In the services and growth sector, we sold
the remaining position in Eastman Kodak. The company continues to struggle with
intensified film price competition, continuing losses from new business
initiatives and an inflated cost structure. We also sold McGraw Hill and pared
back on Ogden Corp. due to strong price appreciation.
Our exposure to the telecommunications industry increased throughout the year,
as we added to US West Communications, and as consolidation activity and
improved investor sentiment toward the group drove the stocks higher. AT&T
announced the appointment of a new CEO, and undertook several steps to improve
earnings, including cutting costs and selling non core businesses. In utilities,
we decreased the exposure to the sector by paring back on GPU, Nipsco Industries
and Texas Utilities. Regulatory concerns related to the resolution of stranded
asset costs and continued rate reductions remain a risk within the industry.
However, the sector benefited in the fourth quarter due to the extremely
favorable interest rate environment and improved investor sentiment toward the
group.
Within the commodity industry sectors, we lowered the exposure to energy and
paper and forest products, as oil prices weakened throughout the year, and as
the Asian turmoil hurt the paper cycle recovery. Within energy, we sold Exxon
and added USX-Marathon Group. Exxon, which had outperformed other integrated oil
stocks, had begun trading at a premium to the industry group and the market,
whereas Marathon traded at a more attractive valuation level. We also sold
Occidental Petroleum which had seen strong price appreciation throughout the
year, but which also has a large commodity chemical exposure. In the paper and
forest products sector, we swapped Willamette Industries for a partial position
in Georgia-Pacific. Management at Georgia-Pacific has taken aggressive steps
toward improving shareholder value, including cutting costs, reducing capital
spending, and repurchasing stock. We adjusted the composition of the chemicals
sector by selling Eastman Chemical and Olin, and adding DuPont. DuPont appears
to be better positioned to deliver earnings growth as it has strengthened key
areas of its business portfolio with acquisitions and has begun to build the
higher growth, higher margin life sciences business.
We maintain a cautious view going into 1998 as valuations levels remain at
fairly high levels, and as uncertainty to the earnings cycle has increased with
the Asian financial crisis. We continue to overweight financial services and
utilities, and underweight technology and healthcare.
FIXED INCOME
The fixed income portion of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the quarter ended
December 31, 1997, the fixed income portion of the Balanced Portfolio had a
gross return of 2.33% and for the year ended December 31, 1997, returned 7.93%.
The Lehman Intermediate-Government/Corporate Index returned 2.14% for the
quarter ended December 31, 1997, and 7.87% for the year.
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.3 years and average duration of 3.0. During the first quarter,
rates increased across all maturity spectrums, as investors anticipated the
Federal Reserve Bank's raising of the fed funds rate in late March by 25 basis
points. However, for the year, interest rates ended lower across maturity
spectrums of one year and greater. The largest decrease in rates occurred in the
five, ten and thirty year bonds, as investors anticipated the prospect of
deflation from the Asian crisis. This downward shift in long rates flattened the
yield curve. During the third quarter, when long bond rates approached 6.7%, we
lengthened the weighted average maturity and average duration of the portfolio
to take advantage of a temporary increase in rates. The moderation in interest
rates later in the year and the decline in long bond rates below the 6% level
helped performance. At year-end, the weighted average maturity was 3.6 years,
and average duration was 3.2.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Balanced Portfolio
A-9
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN
OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of April 13,
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 40,000,000,000 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 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
E-1
<PAGE>
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 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.
E-2
<PAGE>
(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.
(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.
E-3
<PAGE>
(c) FINANCIAL STATEMENTS. The audited financial statements of MSIF
relating to the Acquired Funds as of December 31, 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 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
E-4
<PAGE>
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 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 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
E-5
<PAGE>
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;
(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;
E-6
<PAGE>
(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 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 , 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.
E-7
<PAGE>
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.
Washington, D.C. 20036
if to the Acquired Funds:
Harold J. Schaaff, Jr., Esq.
Morgan Stanley Institutional Fund, Inc.
1221 Avenue of the Americas
New York, NY 10020
with a copy to:
John H. Grady, Jr., Esq.
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.
E-8
<PAGE>
(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 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:
MAS Funds, on behalf of its series, Mid Cap Value Portfolio and Balanced
Portfolio
By
-------------------------------------
Name:
Title:
E-9
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY PORTFOLIO
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS, ________ 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 ________ 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.
<PAGE>
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.
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.
Dated: __________________________, 1998
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.
---------------------------------------
Signature
---------------------------------------
Signature
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
BALANCED PORTFOLIO
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS, ________ 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 ________ 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.
<PAGE>
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.
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.
Dated: __________________________, 1998
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.
---------------------------------------
Signature
---------------------------------------
Signature
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
, 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
, 1998 for the Special Meeting of Shareholders of Morgan Stanley
Institutional Fund, Inc. ("MSIF"), to be held on June 4, 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, 1998, 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 September 26, 1997 and February
6, 1998, 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 1997 Annual Report to Shareholders dated December 31, 1997 are
hereby incorporated herein by reference. No other parts of the Annual Report are
incorporated by reference herein.
The date of this Statement of Additional Information is , 1998.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information.....................
Pro Forma Financial Statements.......... 2
</TABLE>
1
<PAGE>
MAS FUNDS
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE (000)
- - --------------------------------------- ------------------------------------------
MSIF MSIF
MAS SMALL CAP SMALL CAP
MID CAP VALUE PRO FORMA SECURITY DESCRIPTION MAS VALUE PRO FORMA
VALUE EQUITY COMBINED ----------------------------------- MID CAP VALUE EQUITY COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO SEPTEMBER 30, 1997 PORTFOLIO PORTFOLIO PORTFOLIO
- - ------------ ------------- --------- ----------------------------------- ------------- -------------- ---------
<C> <C> <C> <S> <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 ArchCoal, 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/FrostBankers, Inc. 1,184 237 1,421
23,200 4,900 28,100 Culp, Inc. 481 102 583
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
</TABLE>
2
<PAGE>
MAS FUNDS
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE (000)
- - --------------------------------------- ------------------------------------------
MSIF MSIF
MAS SMALL CAP SMALL CAP
MID CAP VALUE PRO FORMA SECURITY DESCRIPTION MAS VALUE PRO FORMA
VALUE EQUITY COMBINED ----------------------------------- MID CAP VALUE EQUITY COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO SEPTEMBER 30, 1997 PORTFOLIO PORTFOLIO PORTFOLIO
- - ------------ ------------- --------- ----------------------------------- ------------- -------------- ---------
<C> <C> <C> <S> <C> <C> <C>
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
24,700 5,000 29,700 Expeditors International of
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
10,800 -- 10,800 Ivex Packaging Corp. 173 -- 173
67,600 25,200 92,800 Journal Register Co. 1,327 495 1,822
</TABLE>
3
<PAGE>
MAS FUNDS
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE (000)
- - --------------------------------------- ------------------------------------------
MSIF MSIF
MAS SMALL CAP SMALL CAP
MID CAP VALUE PRO FORMA SECURITY DESCRIPTION MAS VALUE PRO FORMA
VALUE EQUITY COMBINED ----------------------------------- MID CAP VALUE EQUITY COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO SEPTEMBER 30, 1997 PORTFOLIO PORTFOLIO PORTFOLIO
- - ------------ ------------- --------- ----------------------------------- ------------- -------------- ---------
<C> <C> <C> <S> <C> <C> <C>
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
92,600 17,500 110,100 Nationwide Financial Services,
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[nb]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>
4
<PAGE>
MAS FUNDS
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE (000)
- - --------------------------------------- ------------------------------------------
MSIF MSIF
MAS SMALL CAP SMALL CAP
MID CAP VALUE PRO FORMA SECURITY DESCRIPTION MAS VALUE PRO FORMA
VALUE EQUITY COMBINED ----------------------------------- MID CAP VALUE EQUITY COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO SEPTEMBER 30, 1997 PORTFOLIO PORTFOLIO PORTFOLIO
- - ------------ ------------- --------- ----------------------------------- ------------- -------------- ---------
<C> <C> <C> <S> <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
25,600 4,500 30,100 Universal Health Services, Inc.,
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
</TABLE>
5
<PAGE>
MAS FUNDS
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE (000)
- - --------------------------------------- ------------------------------------------
MSIF MSIF
MAS SMALL CAP SMALL CAP
MID CAP VALUE PRO FORMA SECURITY DESCRIPTION MAS VALUE PRO FORMA
VALUE EQUITY COMBINED ----------------------------------- MID CAP VALUE EQUITY COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO SEPTEMBER 30, 1997 PORTFOLIO PORTFOLIO PORTFOLIO
- - ------------ ------------- --------- ----------------------------------- ------------- -------------- ---------
<C> <C> <C> <S> <C> <C> <C>
13,800 2,800 16,600 Veritas DGC, Inc. $ 587 $ 119 $ 706
12,800 2,400 15,200 Vintage Petroleum, Inc. 630 118 748
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
<CAPTION>
PAR VALUE
- - ---------------------------------------
<C> <C> <C> <S> <C> <C> <C>
-- $ 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>
6
<PAGE>
MAS FUNDS
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MAS MSIF
MID CAP SMALL CAP
VALUE VALUE EQUITY PRO FORMA
PORTFOLIO PORTFOLIO COMBINED
(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........... $220,259 $34,649 $254,908
Shares of Common Stock Outstanding........................... 10,103 2,365 11,692
Net Asset Value Per Share...................................... $ 21.80 $ 14.65 $ 21.80
---------- ------------ ---------
ADVISER CLASS
(MSIF Class B, MAS Adviser Class) Net Assets................. -- $ 8,044 $ 8,044
Shares of Common Stock Outstanding........................... -- 550 369
Net Asset Value Per Share...................................... -- $ 14.63 $ 21.80
INVESTMENT CLASS
Net Assets..................................................... $ 1,239 -- $ 1,239
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
7
<PAGE>
MAS FUNDS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDING SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
MAS MSIF
MID CAP SMALL CAP
VALUE VALUE EQUITY PRO FORMA
PORTFOLIO PORTFOLIO COMBINED
(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, MAS Adviser Class (Pro
Forma)........................................................ -- 7 7
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 (68) 1,355
Expense Offset................................................. (30) -- 3 (27)
---------- ------------ --- ---------
NET EXPENSES................................................. 1,086 307 (65) 1,328
---------- ------------ --- ---------
NET INVESTMENT INCOME (LOSS)..................................... 344 295 65 704
---------- ------------ --- ---------
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) $ 65 $58,829
---------- ------------ --- ---------
---------- ------------ --- ---------
</TABLE>
SEE NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
8
<PAGE>
MAS FUNDS
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
Pro Forma Financial information is intended to provide shareholders of MAS
Mid Cap Value Portfolio and MSIF Small Cap Value Equity Portfolio 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 Portfolio and MSIF Small Cap Value Equity Portfolio after
giving effect to pro forma adjustments described in the notes below.
(a) Acquisition by MAS Mid Cap Value Portfolio of MSIF Small Cap Value
Equity Portfolio and issuance of MAS Mid Cap Value Portfolio, Institutional and
Adviser Class shares in exchange for all of the outstanding shares of MSIF Small
Cap Value Equity Portfolio Class A and B shares, respectively.
(b) Investment advisory fees were adjusted to reflect the application of the
fee structure for MAS Mid Cap Value Portfolio (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 Portfolio
(0.08% of average net assets).
(d) Waiver of investment advisory fees was adjusted to reflect the advisor's
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. The Adviser Class shares were unfunded as of September 30, 1997.
(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.
9
<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.
(9)(d) Amendment dated July 22, 1994 to the Custody Agreement
between the Registrant and United States Trust Company of
New York is incorporated by reference to Exhibit (8)(e) of
Post-
C-2
<PAGE>
Effective Amendment No. 46 on Form N-1A, as filed on January
29, 1998.
(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 18, 1993 is
incorporated by reference to Exhibit (9)(b) of the
Registrant's Post-Effective Amendment No. 46 on Form N-1A as
filed on January 29, 1998.
(13)(b) Transfer Agency Agreement with United States Trust Company
of New York dated November 13, 1993 is incorporated by
reference to Exhibit (9)(c) of the Registrant's
Post-Effective Amendment No. 46 on Form N-1A as filed on
Janaury 29, 1998.
(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.
C-3
<PAGE>
(16)(a) 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. 46 on
Form N-1A, as filed January 29, 1998.
(16)(b) Power of Attorney for Michael Leary is incorporated by
reference to Exhibit (24)(a) of the Registrant's
Pot-Effective Amendment No. 47 on Form N-1A, as filed on
February 13, 1998.
(17)(a) Prospectus for MAS Funds' Institutional Class Shares dated
January 31, 1998, as supplemented March 16, 1998 is filed
herewith.
(17)(b) Prospectus for MAS Funds' Adviser Class Shares dated January
31, 1998, as revised March 6, 1998 is filed herewith.
(17)(c) Statement of Additional Information for MAS Funds dated
January 31, 1998 is filed herewith.
(17)(d) 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 and February 6, 1998 is
filed herewith.
(17)(e) Statement of Additional Information for Morgan Stanley
Institutional Fund, Inc. dated May 1, 1997, as supplemented
September 26, 1997 and January 30, 1998 is filed herewith.
(17)(f) Audited Financial Statements dated September 30, 1997 for
the MAS Funds is filed herewith.
(17)(g) Audited Financial Statements dated December 31, 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.
C-4
<PAGE>
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-5
<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
16 day of April, 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 April 16, 1998
- - -------------------------
Thomas L. Bennett
* Trustee April 16, 1998
- - -------------------------
Thomas P. Gerrity
* Trustee April 16, 1998
- - -------------------------
Joseph P. Healey
* Trustee April 16, 1998
- - -------------------------
Joseph J. Kearns
* Trustee April 16, 1998
- - -------------------------
Vincent R. McLean
* Trustee April 16, 1998
- - -------------------------
C. Oscar Morong, Jr.
* President April 16, 1998
- - -------------------------
James D. Schmid
* Principal Financial April 16, 1998
- - ------------------------- Officer
Michael Leary
*By: /s/ John H. Grady, Jr.
-----------------------
John H. Grady, Jr.
Attorney-in-Fact
C-6
<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-7
<PAGE>
9(d) Amendment dated July 22, 1994 to the Custody Agreement between
the Registrant and United States Trust Company of New York is
incorporated by reference to Exhibit (8)(e) of Post-Effective
Amendment No. 46 on Form N-1A, as filed on January 29, 1998.
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 18, 1993 is incorporated
by reference to Exhibit (9)(b) of the Registrant's Post-Effective
Amendment No. 46 on Form N-1A as filed on January 29, 1998.
13(b) Transfer Agency Agreement with United States Trust Company of New
York dated November 13, 1993 is incorporated by reference to
Exhibit (9)(c) of the Registrant's Post-Effective Amendment No.
46 on Form N-1A as filed on Janaury 29, 1998.
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
C-8
<PAGE>
16(a) 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.
16(b) Power of Attorney for Michael Leary is incorporated by reference
to Exhibit (24)(a) of the Registrant's Post-Effective Amendment
No. 47 on Form N-1A, as filed on February 9, 1998
17(a) Prospectus for MAS Funds' Institutional Class Shares dated
January 31, 1998, as supplemented March 16, 1998, is filed
herewith.
17(b) Prospectus for MAS Funds' Adviser Class Shares dated January 31,
1998, as revised March 6, 1998, is filed herewith.
17(c) Statement of Additional Information for MAS Funds dated January
31, 1998, is filed herewith.
17(d) 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 and February 6, 1998, is filed herewith.
17(e) Statement of Additional Information for Morgan Stanley
Institutional Fund, Inc. dated May 1, 1997, as supplemented
September 26, 1997 and January 30, 1998, is filed herewith.
17(f) Audited Financial Statements dated September 30, 1997 for the MAS
Funds is filed herewith.
17(g) Audited Financial Statements dated December 31, 1997 for the
Morgan Stanley Institutional Fund, Inc. is filed herewith.
C-9
<PAGE>
AGREEMENT AND PLAN
OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of April 13,
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 40,000,000,000 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 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
E-1
<PAGE>
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 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.
E-2
<PAGE>
(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.
(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.
E-3
<PAGE>
(c) FINANCIAL STATEMENTS. The audited financial statements of MSIF
relating to the Acquired Funds as of December 31, 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 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
E-4
<PAGE>
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 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 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
E-5
<PAGE>
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;
(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;
E-6
<PAGE>
(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 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 , 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.
E-7
<PAGE>
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.
Washington, D.C. 20036
if to the Acquired Funds:
Harold J. Schaaff, Jr., Esq.
Morgan Stanley Institutional Fund, Inc.
1221 Avenue of the Americas
New York, NY 10020
with a copy to:
John H. Grady, Jr., Esq.
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.
E-8
<PAGE>
(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 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:
MAS Funds, on behalf of its series, Mid Cap Value Portfolio and Balanced
Portfolio
By
-------------------------------------
Name:
Title:
E-9
<PAGE>
April 13, 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
April 13, 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
<PAGE>
April 13, 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 April 13, 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.
April 13, 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.
April 13, 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.
April 13, 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;
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.
<PAGE>
Morgan Stanley Institutional Fund, Inc.
April 13, 1998
Page 5
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 Acquired 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 the Shareholders of twenty-two of the twenty-four portfolios of
MAS Funds, which financial statements and financial highlights are also
incorporated by reference into this Registration Statement. We also consent to
the references to us in relation to MAS Funds appearing under the heading
"Information About the MAS and MSIF Portfolios - Financial Statements" in the
Prospectus/Proxy Statement which is part of this Registration Statement. We
also consent to the references to us under the headings "Financial Highlights"
included in the Prospectuses (Institutional Class Shares, dated January 31, 1998
as supplemented through March 16, 1998 and Adviser Class Shares dated January
31, 1998 as supplemented through March 6, 1998) of MAS Funds, under the heading
"Financial Statements" included in the Statement of Additional Information of
MAS Funds dated January 31, 1998, all of which are incorporated by reference
into the Registration Statement.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 13, 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 11, 1998,
relating to the financial statements and financial highlights of the Small
Cap Value Equity and Balanced Portfolios appearing in the December 31, 1997
Annual Report to Shareholders of Morgan Stanley Institutional Fund, Inc.,
which are 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
April 13, 1998
<PAGE>
MAS FUNDS
SUPPLEMENT DATED MARCH 16, 1998 TO THE MAS FUNDS' INSTITUTIONAL CLASS PROSPECTUS
DATED JANUARY 31, 1998
This supplement provides new and additional information beyond that contained in
the Prospectus and should be read in conjunction with the Prospectus.
- - --------------------------------------------------------------------------------
Page 18 of the Prospectus is hereby amended to include David P. Chu as a
member of the Portfolio Management Team of the Mid Cap Growth Portfolio.
Page 61 of the Prospectus is hereby amended to include the following
description of David P. Chu's business experience during the last five years:
David P. Chu, Vice President, Morgan Stanley, joined MAS in 1998. He served as
Senior Equity Analyst from 1992 to 1997 and as Co-Portfolio Manager in 1997 for
NationsBank and its subsidiary, TradeStreet Investment Associates. He assumed
responsibility for the Mid Cap Growth Portfolio in 1998.
- - --------------------------------------------------------------------------------
The Portfolio Management section beginning on page 60 of the Prospectus is
hereby amended to reflect the following title changes for these Portfolio
Managers:
William B. Gerlach, Principal, Morgan Stanley
James J. Jolinger, Principal, Morgan Stanley
Horacio A. Valeiras, Managing Director, Morgan Stanley
- - --------------------------------------------------------------------------------
The following portion of the Trustees and Officers section on page 65 of
the Prospectus is hereby amended to read:
Joseph J. Kearns, Trustee; investment consultant; Chief Investment Officer, the
J. Paul Getty Trust; Director, Electro Rent Corporation; Trustee, Southern
California Edison Nuclear Decommissioning Trust; Director, the Ford Family
Foundation.
PLEASE RETAIN FOR FUTURE REFERENCE
<PAGE>
INSTITUTIONAL CLASS PROSPECTUS
[LOGO]
MAS FUNDS
JANUARY 31, 1998
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-seven
portfolios, twenty-five of which are described in this Prospectus. The Fund's
Small Cap Value Portfolio is not currently being offered to new investors. This
Prospectus offers the Institutional Class Shares of these twenty-five
portfolios.
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.
PORTFOLIO PAGE REFERENCE
<TABLE>
<CAPTION>
<S> <C>
HOW TO USE THIS PROSPECTUS: 3
PORTFOLIO SUMMARIES:
EQUITY:
Emerging Markets Value 16
Equity 16
Growth 17
International Equity 17
Mid Cap Growth 18
Mid Cap Value 18
Small Cap Value 19
Value 20
FIXED INCOME:
Cash Reserves 21
Domestic Fixed Income 22
Fixed Income 23
Fixed Income II 24
Global Fixed Income 25
High Yield 26
Intermediate Duration 27
International Fixed Income 28
Limited Duration 29
Mortgage-Backed Securities 30
Multi-Market Fixed Income 31
Municipal 32
PA Municipal 33
Special Purpose Fixed Income 34
BALANCED:
Balanced 35
Balanced Plus 36
Multi-Asset-Class 37
PROSPECTUS GLOSSARY:
Strategies 38
Investments 42
GENERAL SHAREHOLDER
INFORMATION: 52
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, 1998 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 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.
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE * WEST CONSHOHOCKEN, PA 19428 * 800-354-8185
<PAGE>
EXPENSE SUMMARY - INSTITUTIONAL CLASS SHARES
The following tables illustrate the various expenses and fees that a shareholder
in a portfolio will incur either directly or indirectly. The Adviser may from
time to time waive fees or reimburse expenses thereby reducing total operating
expenses.
<TABLE>
<CAPTION>
<S> <C>
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
Shareholder Servicing Fee None
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT TOTAL
ADVISORY OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Value (formerly, Emerging Markets) 0.503%* 0.677% 1.180%
Equity 0.500 0.100 0.600
Growth 0.500 0.100** 0.600
International Equity 0.500 0.150 0.650
Mid Cap Growth 0.500 0.130 0.630
Mid Cap Value 0.750 0.130 0.880
Small Cap Value 0.750 0.100 0.850
Value 0.500 0.100 0.600
Cash Reserves 0.204* 0.116 0.320
Domestic Fixed Income 0.375 0.125 0.500
Fixed Income 0.375 0.105 0.480
Fixed Income II 0.375 0.125 0.500
Global Fixed Income 0.375 0.195 0.570
High Yield 0.375 0.125 0.500
Intermediate Duration 0.375 0.125 0.500
International Fixed Income 0.375 0.155 0.530
Limited Duration 0.300 0.120 0.420
Mortgage-Backed Securities 0.318* 0.182 0.500
Multi-Market Fixed Income 0.350* 0.230** 0.580
Municipal 0.352* 0.148 0.500
PA Municipal 0.281* 0.219 0.500
Special Purpose Fixed Income 0.375 0.105 0.480
Balanced 0.450 0.130 0.580
Balanced Plus 0.550 0.150** 0.700
Multi-Asset-Class 0.594* 0.186 0.780
</TABLE>
The Total Operating Expense ratios reflected in the table above may be
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 expenses that otherwise would be deducted from
portfolio assets. Amounts in the above table have been restated to reflect
current fees and expenses.
* Until further notice, the Adviser has voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary to
keep Total Operating Expenses actually deducted from portfolio assets for
the Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities,
Municipal, PA Municipal, Multi-Market Fixed Income and Multi-Asset-Class
Portfolios from exceeding 1.18%, 0.32%, 0.50%, 0.50%, 0.50%, 0.58% and
0.78%, respectively. Absent such waivers and/or reimbursements by the
Adviser, Total Operating Expenses would be 1.42 7%, 0.366%, 0.557%, 0.523%,
0.594%, 0.680% and 0.836%, for the Emerging Markets Value, Cash Reserves,
Mortgage-Backed Securities, Municipal, PA Municipal, Multi-Market Fixed
Income and Multi-Asset-Class Portfolios, respectively.
** Other expenses are based on estimated amounts for the current year.
MAS Fund -2
<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, which are
based on estimated expenses.
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Markets Value
(formerly, Emerging Markets) $12 $37 $65 $143
Equity 6 19 33 75
Growth 6 19 -- --
International Equity 7 21 36 81
Mid Cap Growth 6 20 35 79
Mid Cap Value 9 28 49 108
Small Cap Value 9 27 47 105
Value 6 19 33 75
Cash Reserves 3 10 18 41
Domestic Fixed Income 5 16 28 63
Fixed Income 5 15 27 60
Fixed Income II 5 16 28 63
Global Fixed Income 6 18 32 71
High Yield 5 16 28 63
Intermediate Duration 5 16 28 63
International Fixed Income 5 17 30 66
Limited Duration 4 13 24 53
Mortgage-Backed Securities 5 16 28 63
Multi-Market Fixed Income 6 19 -- --
Municipal 5 16 28 63
PA Municipal 5 16 28 63
Special Purpose Fixed Income 5 15 27 60
Balanced 6 19 32 73
Balanced Plus 7 22 -- --
Multi-Asset-Class 8 25 43 97
</TABLE>
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 6;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all portfolios
begins on page 14;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin on
page 16;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments, Policies
and Strategies printed in bold type throughout this Prospectus begins on
page 38; and
GENERAL SHAREHOLDER INFORMATION begins on page 52.
MAS Fund - 3
<PAGE>
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.
The Global Fixed Income, International Fixed Income and Emerging Markets Value
Portfolios are Non-Diversified for purposes of the Investment Company Act of
1940 (the "1940 Act"), meaning that they may invest a greater percentage of
assets in the securities of one issuer than the other portfolios. Each other
portfolio is diversified.
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 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.
Certain FIXED INCOME SECURITIES may be highly sensitive to interest rate
changes, and highly sensitive to the rate of principal payments (including
prepayments on underlying mortgage assets). 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;
* 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;
* Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies.
Portfolios investing in foreign securities may also engage in foreign
currency exchange transactions. See FORWARDS, FUTURES & OPTIONS, and SWAPS;
* 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;
MAS Fund - 4
<PAGE>
* 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; and
* 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.
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")
is a Pennsylvania limited liability partnership founded in 1969, wholly owned by
indirect subsidiaries of Morgan Stanley, Dean Witter, Discover and 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 December 31, 1997 had
in excess of $59.4 billion in assets under management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor") provides
distribution services to the Fund.
MAS Fund - 5
<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, 1997 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, 1997, the Growth, Balanced Plus, and
Multi-Market Fixed Income Portfolios had not commenced operations. (Data is
adjusted to reflect a 2.5 for 1 share split as of August 13, 1993 for all
portfolios in operation as of that date, except for the Global Fixed Income
Portfolio.)
<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 TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS VALUE PORTFOLIO (FORMERLY, THE EMERGING MARKETS PORTFOLIO) (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/95)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $11.52 $0.16 $1.73 $1.89 ($0.20) ($0.80) -- ($1.00)
1996 11.63 0.19 0.45 0.64 (0.17) (0.58) -- (0.75)
1995 10.00 0.10 1.53 1.63 -- -- -- --
EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1997 $25.67 $0.36 $8.22 $8.58 ($0.40) ($4.40) -- ($4.80)
1996 24.43 0.50 3.26 3.76 (0.50) (2.02) -- (2.52)
1995 21.05 0.52 4.55 5.07 (0.52) (1.17) -- (1.69)
1994 22.82 0.44 0.41 0.85 (0.41) (2.21) -- (2.62)
1993 22.04 0.41 1.95 2.36 (0.43) (1.15) -- (1.58)
1992 20.78 0.43 1.86 2.29 (0.42) (0.61) -- (1.03)
1991 15.86 0.44 5.64 6.08 (0.44) (0.72) -- (1.16)
1990 18.65 0.48 (2.57) (2.09) (0.54) (0.16) -- (0.70)
1989 14.48 0.51 4.15 4.66 (0.46) (0.03) -- (0.49)
1988 17.14 0.40 (1.93) (1.53) (0.32) (0.81) -- (1.13)
INTERNATIONAL EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/25/88)
1997+++ $13.24 $0.25 $2.71 $2.96 ($0.26) ($0.27) -- ($0.53)
1996 12.51 0.31 0.77 1.08 (0.29) (0.06) -- (0.35)
1995 14.52 0.19 (0.75) (0.56) -- (1.35) ($0.10)# (1.45)
1994 13.18 0.12 1.63 1.75 (0.16) (0.25) -- (0.41)
1993 11.03 0.21 2.14 2.35 (0.20) -- -- (0.20)
1992 11.56 0.36 (0.33) 0.03 (0.56) -- -- (0.56)
1991 9.83 0.22 1.83 2.05 (0.23) (0.09) -- (0.32)
1990 11.86 0.26 (1.90) (1.64) (0.31) (0.08) -- (0.39)
1989 10.00 0.26 1.75 2.01 (0.15) -- -- (0.15)
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO AVERAGE
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE RATE***
- - ------------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS VALUE PORTFOLIO (FORMERLY, THE EMERGING MARKETS PORTFOLIO) (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/95)
1997 $12.41 18.08% $22,808 1.18%++ 1.30% 64% $0.0019
1996 (11.52) 6.21% 32,984 1.18++ 1.62 108 0.0014
1995 11.63 16.30 42,459 1.18*++ 2.04* 63 --
EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1997 $29.45 38.46% $1,312,547 0.60% 1.30% 85% $0.0294
1996 25.67 16.48 1,442,261 0.60 1.95 67 0.0557
1995 24.43 26.15 1,597,632 0.61 2.39 67 --
1994 21.05 4.11 1,193,017 0.60 2.10 41 --
1993 22.82 11.05 1,098,003 0.59 1.86 51 --
1992 22.04 11.55 918,989 0.59 2.03 21 --
1991 20.78 40.18 675,487 0.60 2.36 33 --
1990 15.86 (11.67) 473,261 0.59 2.66 44 --
1989 18.65 32.95 602,261 0.59 3.29 29 --
1988 14.48 (8.41) 385,864 0.62 2.99 51 --
INTERNATIONAL EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/25/88)
1997+++ $15.67 23.16% $649,755 0.66% 1.81% 62% $0.0035
1996 13.24 8.87 635,706 0.69 1.88 78 0.0093
1995 12.51 (3.36) 1,160,986 0.70 1.90 112 --
1994 14.52 13.33 1,132,867 0.64 0.89 69 --
1993 13.18 21.64 891,675 0.66 1.23 43 --
1992 11.03 0.37 512,127 0.70 1.41 42 --
1991 11.56 21.22 274,295 0.67 2.08 51 --
1990 9.83 (14.38) 126,035 0.65 2.40 45 --
1989 11.86 20.36 87,083 0.63* 3.05* 4 --
</TABLE>
MASS Fund - 6
<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 TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/30/90)
1997 $20.53 ($0.01) $4.75 $4.74 -- ($3.43) -- ($3.43)
1996 18.60 0.01 4.70 4.71 (0.03) (2.75) -- (2.78)
1995 16.29 0.03 4.21 4.24 (0.03) (1.90) -- (1.93)
1994 18.56 0.02 (0.58) (0.56) (0.01) (1.70) -- (1.71)
1993 14.51 0.01 4.80 4.81 -- (0.76) -- (0.76)
1992 14.92 0.01 0.44 0.45 (0.03) (0.83) -- (0.86)
1991 9.00 0.04 5.91 5.95 (0.03) -- -- (0.03)
1990 10.00 0.02 (1.01) (0.99) (0.01) -- -- (0.01)
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/30/94)
1997+++ $14.49 $0.05 $8.37 $8.42 ($0.10) ($1.01) -- ($1.11)
1996 13.45 0.11 2.52 2.63 (0.55) (1.04) -- (1.59)
1995 10.00 0.55### 2.90 3.45 -- -- -- --
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1997 $19.64 $0.15 $8.39 $8.54 ($0.11) ($3.10) -- ($3.21)
1996 18.28 0.18 3.62 3.80 (0.20) (2.24) -- (2.44)
1995 17.67 0.19 2.49 2.68 (0.14) (1.93) -- (2.07)
1994 17.55 0.16 1.14 1.30 (0.24) (0.94) -- (1.18)
1993 12.84 0.18 4.64 4.82 (0.11) -- -- (0.11)
1992 11.45 0.10 1.48 1.58 (0.19) -- -- (0.19)
1991 7.20 0.23 4.21 4.44 (0.19) -- -- (0.19)
1990 10.42 0.28 (3.05) (2.77) (0.45) -- -- (0.45)
1989 8.54 0.34 1.74 2.08 (0.20) -- -- (0.20)
1988 10.24 0.18 (1.42) (1.24) (0.14) (0.32) -- (0.46)
VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/05/84)
1997+++ $15.61 $0.34 $5.75 $6.09 ($0.30) ($1.03) -- ($1.33)
1996 14.89 0.30 2.20 2.50 (0.32) (1.46) -- (1.78)
1995 12.63 0.31 3.34 3.65 (0.31) (1.08) -- (1.39)
1994 12.76 0.30 0.59 0.89 (0.29) (0.73) -- (1.02)
1993 12.67 0.30 1.92 2.22 (0.31) (1.82) -- (2.13)
1992 12.92 0.35 1.05 1.40 (0.38) (1.27) -- (1.65)
1991 10.29 0.44 3.79 4.23 (0.44) (1.16) -- (1.60)
1990 14.56 0.52 (3.14) (2.62) (0.62) (1.03) -- (1.65)
1989 12.42 0.54 2.73 3.27 (0.47) (0.66) -- (1.13)
1988 15.81 0.48 (1.68) (1.20) (0.46) (1.73) -- (2.19)
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO AVERAGE
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE RATE***
- - -----------------------------------------------------------------------------------------------------------------------------
MID CAP GROWTH PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/30/90)
1997 $21.84 28.05% $446,963 0.63% (0.07%) 134% $0.0514
1996 20.53 28.81 403,281 0.60 0.04 141 0.0491
1995 18.60 30.56 373,547 0.61 0.21 129 --
1994 16.29 (3.28) 302,995 0.60 0.12 55 --
1993 18.56 33.92 309,459 0.59 0.07 69 --
1992 14.51 2.87 192,817 0.60 0.05 39 --
1991 14.92 66.26 171,163 0.60 0.29 46 --
1990 9.00 (9.98) 76,398 0.64* 0.34* 23 --
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/30/94)
1997+++ $21.80 61.40% $220,260 0.90%++ 0.28% 184% $0.0467
1996 14.49 22.30 50,449 0.88++ 1.61 377 $0.0462
1995 13.45 34.50 4,507 0.93*++ 10.13*### 639### --
SMALL CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/01/86)
1997 $24.97 49.81% $897,396 0.86% 0.70% 107% $0.0480
1996 19.64 24.00 585,457 0.86 0.99 145 0.0498
1995 18.28 18.39 430,368 0.87 1.20 119 --
1994 17.67 8.04 308,156 0.88 0.91 162 --
1993 17.55 37.72 175,029 0.88 1.33 93 --
1992 12.84 14.12 105,886 0.86 1.06 50 --
1991 11.45 63.07 52,182 0.88 1.70 53 --
1990 7.20 (27.63) 100,848 0.85 1.77 59 --
1989 10.42 24.85 189,223 0.85 3.48 36 --
1988 8.54 (11.50) 202,500 0.86 2.32 41 --
VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/05/84)
1997+++ $20.37 41.25% $3,542,772 0.62% 1.93% 46% $0.0577
1996 15.61 18.41 1,844,740 0.61 2.07 53 0.0572
1995 14.89 32.58 1,271,586 0.60 2.43 56 --
1994 12.63 7.45 981,337 0.61 2.40 54 --
1993 12.76 19.67 762,175 0.59 2.48 43 --
1992 12.67 12.83 448,329 0.60 2.87 55 --
1991 12.92 45.54 458,117 0.60 3.67 64 --
1990 10.29 (19.88) 369,044 0.59 3.87 51 --
1989 14.56 28.49 726,776 0.59 4.05 35 --
1988 12.42 (5.40) 619,287 0.59 3.96 47 --
</TABLE>
MAS Fund - 7
<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 TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH RESERVES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/29/90)
1997 $1.000 $0.052 -- $0.052 ($0.052) -- -- ($0.052)
1996 1.000 .052 -- .052 (.052) -- -- (.052)
1995 1.000 .055 -- .055 (.055) -- -- (.055)
1994 1.000 .034 -- .034 (.034) -- -- (.034)
1993 1.000 .028 -- .028 (.028) -- -- (.028)
1992 1.000 .038 -- .038 (.038) -- -- (.038)
1991 1.000 .064 -- .064 (.064) -- -- (.064)
1990 1.000 .007 -- .007 (.007) -- -- (.007)
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1997 $10.89 $0.74 $0.33 $1.07 ($0.67) ($0.02) -- ($0.69)
1996 11.03 0.56 (0.09) 0.47 (0.57) -- (0.04)# (0.61)
1995 9.87 0.52 0.87 1.39 (0.23) -- -- (0.23)
1994 11.99 0.94 (1.23) (0.29) (0.95) ($0.73) (0.15)# (1.83)
1993 11.80 0.84 0.66 1.50 (0.78) (0.53) -- (1.31)
1992 11.34 0.87 0.76 1.63 (1.00) (0.17) -- (1.17)
1991 10.26 0.92 1.10 2.02 (0.94) -- -- (0.94)
1990 10.90 0.87 (0.45) 0.42 (0.96) (0.10) -- (1.06)
1989 10.78 0.86 0.08 0.94 (0.78) (0.04) -- (0.82)
1988 9.99 0.73 0.52 1.25 (0.45) (0.01) -- (0.46)
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1997+++ $11.83 $0.80 $0.50 $1.30 ($0.78) ($0.13) -- ($0.91)
1996 11.82 0.78 0.08 0.86 (0.79) (0.06) -- (0.85)
1995 10.93 0.80 0.69 1.49 (0.60) -- -- (0.60)
1994 12.86 0.77 (1.28) (0.51) (0.82) (0.47) ($0.13)# (1.42)
1993 12.67 0.88 0.75 1.63 (0.83) (0.61) -- (1.44)
1992 12.20 0.90 0.74 1.64 (1.02) (0.15) -- (1.17)
1991 10.94 0.94 1.25 2.19 (0.93) -- -- (0.93)
1990 11.64 0.92 (0.49) 0.43 (1.03) (0.10) -- (1.13)
1989 11.40 0.90 0.11 1.01 (0.76) (0.01) -- (0.77)
1988 10.86 0.97 0.43 1.40 (0.86) -- -- (0.86)
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO AVERAGE
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE RATE***
- - ------------------------------------------------------------------------------------------------------------------------------
CASH RESERVES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/29/90)
1997 $1.000 5.32% $98,464 0.33%++ 5.20% N/A --
1996 1.000 5.35 78,497 0.33++ 5.19 N/A --
1995 1.000 5.57 44,624 0.33++ 5.45 N/A --
1994 1.000 3.40 37,933 0.32++ 3.70 N/A --
1993 1.000 2.81 10,717 0.32++ 2.78 N/A --
1992 1.000 3.89 12,935 0.32++ 3.95 N/A --
1991 1.000 6.63 24,163 0.32++ 6.57 N/A --
1990 1.000 0.74 23,285 0.48*++ 8.31* N/A --
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1997 $11.27 10.20% $96,954 0.51%++ 6.48% 217% --
1996 10.89 4.41 95,362 0.52++ 5.73 168 --
1995 11.03 14.33 36,147 0.51++ 6.80 313 --
1994 9.87 (2.87) 36,521 0.50++ 7.65 78 --
1993 11.99 14.08 90,350 0.50 7.15 96 --
1992 11.80 15.41 98,130 0.47 7.67 136 --
1991 11.34 20.99 83,200 0.48 8.18 131 --
1990 10.26 3.90 77,622 0.48 8.35 181 --
1989 10.90 9.14 68,855 0.49 8.24 219 --
1988 10.78 12.63 53,236 0.50 8.62 224 --
FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1997+++ $12.22 11.47% $3,21 9,987 0.49% 6.73% 179%
1996 11.83 7.63 1,790,146 0.48 6.77 162 --
1995 11.82 14.19 1,487,409 0.49 7.28 140 --
1994 10.93 (4.43) 1,194,957 0.49 6.79 100 --
1993 12.86 14.26 909,738 0.47 7.06 144 --
1992 12.67 14.35 859,712 0.47 7.50 137 --
1991 12.20 21.12 831,547 0.47 8.25 143 --
1990 10.94 3.79 666,736 0.46 8.43 209 --
1989 11.64 9.25 559,995 0.47 8.36 100 --
1988 11.40 13.43 405,385 0.49 8.91 168 --
</TABLE>
MAS Fund - 8
<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 TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO II (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/31/90)
1997 $11.23 $0.74 $0.39 $1.13 ($0.79) ($0.11) -- ($0.90)
1996 11.33 0.70 (0.03) 0.67 (0.66) (0.08) (0.03)# (0.77)
1995 10.42 0.71 0.71 1.42 (0.51) -- -- (0.51)
1994 11.97 0.63 (1.16) (0.53) (0.67) (0.21) (0.14)# (1.02)
1993 11.67 0.69 0.77 1.46 (0.61) (0.55) -- (1.16)
1992 11.34 0.77 0.61 1.38 (0.81) (0.24) -- (1.05)
1991 10.09 0.81 1.10 1.91 (0.66) -- -- (0.66)
1990 10.00 0.04 0.05 0.09 -- -- -- --
GLOBAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/30/93)
1997+++ $11.01 $0.60 ($0.22) $0.38 (0.59) ($0.16) -- ($0.75)
1996 11.05 0.63 0.09 0.72 (0.71) (0.05) -- (0.76)
1995 10.20 0.71 0.81 1.52 (0.67) -- -- (0.67)
1994 10.67 0.58 (0.61) (0.03) (0.41) (0.03) -- (0.44)
1993 10.00 0.13 0.61 0.74 (0.07) -- -- (0.07)
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/89)
1997+++ $9.32 $0.86 $0.87 $1.73 ($0.87) ($0.03) -- ($0.90)
1996 9.08 0.88 0.28 1.16 (0.92) -- -- (0.92)
1995 8.97 0.90 0.19 1.09 (0.85) ($0.08) ($0.05)# (0.98)
1994 9.49 0.75 (0.42) 0.33 (0.69) (0.16) -- (0.85)
1993 8.58 0.73 0.90 1.63 (0.72) -- -- (0.72)
1992 7.80 0.74 0.89 1.63 (0.85) -- -- (0.85)
1991 7.07 1.42 0.82 2.24 (1.51) -- -- (1.51)
1990 9.98 1.36 (2.82) (1.46) (1.42) (0.03) -- (1.45)
1989 10.00 0.55 (0.44) 0.11 (0.13) -- -- (0.13)
INTERMEDIATE DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/3/94)
1997+++ $10.28 $0.61 $0.27 $0.88 ($0.53) ($0.15) -- ($0.68)
1996 10.68 0.60 0.03 0.63 (0.65) (0.38) -- (1.03)
1995 10.00 0.69 0.42 1.11 (0.43) -- -- (0.43)
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO AVERAGE
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE RATE***
- - ------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO II (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 8/31/90)
1997 $11.46 10.58% $226,662 0.50% 6.54% 182% --
1996 11.23 6.12 191,740 0.50 6.06 165 --
1995 11.33 14.13 176,945 0.51 6.75 153 --
1994 10.42 (4.76) 129,902 0.51 6.07 137 --
1993 11.97 13.53 94,836 0.51 6.17 101 --
1992 11.67 13.02 78,302 0.49 7.05 182 --
1991 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 INSTITUTIONAL CLASS OPERATIONS 4/30/93)
1997+++ $10.64 3.53% $77,493 0.57% 5.65% 137% --
1996 11.01 6.83 67,282 0.60 5.25 133 --
1995 11.05 15.54 55,147 0.58 6.34 118 --
1994 10.20 (0.29) 43,066 0.57 5.48 117 --
1993 10.67 7.43 53,164 0.58*++ 5.08* 30 --
HIGH YIELD PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 2/28/89)
1997+++ $10.15 19.90% $523,899 0.51% 9.05% 96% --
1996 9.32 13.83 289,810 0.49 10.04 115 --
1995 9.08 13.58 220,785 0.50 10.68 96 --
1994 8.97 3.57 182,969 0.50 9.01 112 --
1993 9.49 20.12 50,396 0.53++ 8.94 99 --
1992 8.58 22.49 20,491 0.53+ 9.74 148 --
1991 7.80 36.70 6,453 0.76 19.45 106 --
1990 7.07 (16.26) 4,820 0.82 16.93 65 --
1989 9.98 0.91 3,479 0.73* 11.66* 17 --
INTERMEDIATE DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/3/94)
1997+++ $10.48 8.93% $72,119 0.55%++ 5.93% 204% --
1996 10.28 6.27 12,017 0.56++ 6.17 251 --
1995 10.68 11.39 19,237 0.52*++ 6.56* 168 --
</TABLE>
MAS Fund - 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 TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/29/94)
1997 $10.77 $0.50 ($0.44) $0.06) ($0.38) ($0.26) -- ($0.64)
1996 11.01 0.52 0.12 0.64 (0.80) (0.08) -- (0.88)
1995 10.05 0.67 0.92 1.59 (0.63) -- -- (0.63)
1994 10.00 0.21 (0.11) 0.10 (0.05) -- -- (0.05)
LIMITED DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1997 $10.38 $0.62 $0.08 $0.70 ($0.59) -- -- ($0.59)
1996 10.41 0.58 (0.03) 0.55 (0.58) -- -- (0.58)
1995 10.19 0.56 0.22 0.78 (0.55) -- ($0.01)# (0.56)
1994 10.72 0.56 (0.52) 0.04 (0.51) ($0.04) (0.02)# (0.57)
1993 10.58 0.32 0.22 0.54 (0.32) (0.08) -- (0.40)
1992 10.00 0.19 0.49 0.68 (0.10) -- -- (0.10)
MORTGAGE-BACKED SECURITIES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 1/31/92)
1997 $10.42 $0.91 $0.16 $1.07 ($0.73) -- -- ($0.73)
1996 10.49 0.68 (0.07) 0.61 (0.68) -- -- (0.68)
1995 9.95 0.72 0.47 1.19 (0.65) -- -- (0.65)
1994 10.95 0.52 (0.83) (0.31) (0.45) ($0.21) ($0.03)# (0.69)
1993 10.44 0.63 0.48 1.11 (0.60) -- -- (0.60)
1992 10.00 0.29 0.28 0.57 (0.13) -- -- (0.13)
MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1997 $11.23 $0.53 $0.40 $0.93 ($0.52) -- -- ($0.52)
1996 10.75 0.51 0.49 1.00 (0.52) -- -- (0.52)
1995 10.04 0.59 0.71 1.30 (0.59) -- -- (0.59)
1994 11.15 0.51 (1.01) (0.50) (0.54) -- ($0.07)# (0.61)
1993 10.00 0.37 1.04 1.41 (0.26) -- -- (0.26)
PA MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1997 $11.37 $0.55 $0.34 $0.89 ($0.55) -- -- ($0.55)
1996 10.91 0.51 0.46 0.97 (0.51) -- -- (0.51)
1995 10.13 0.58 0.77 1.35 (0.57) -- -- (0.57)
1994 11.26 0.56 (1.00) (0.44) (0.64) ($0.05)# -- (0.69)
1993 10.00 0.39 1.17 1.56 (0.30) -- -- (0.30)
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO AVERAGE
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE RATE***
- - ------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 4/29/94)
1997 $10.19 0.44% $152,752 0.53% 5.27% 107% --
1996 10.77 6.13 143,137 0.53 5.39 124 --
1995 11.01 16.36 127,882 0.54 6.35 140 --
1994 10.05 1.01 66,879 0.60*++ 5.83* 31 --
LIMITED DURATION PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1997 $10.49 6.98% $155,570 0.43%++ 6.15% 130% --
1996 10.38 5.47 123,227 0.43 5.65 174 --
1995 10.41 7.95 100,186 0.43++ 5.96 119 --
1994 10.19 0.40 62,775 0.41 4.16 192 --
1993 10.72 5.33 128,991 0.42++ 3.92 217 --
1992 10.58 6.90 13,065 0.49* 4.99* 159 --
MORTGAGE-BACKED SECURITIES PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 1/31/92)
1997 $10.76 10.70% $38,085 0.50%++ 7.79% 164% --
1996 10.42 6.10 50,925 0.50++ 6.46 116 --
1995 10.49 12.52 49,766 0.50++ 6.35 107 --
1994 9.95 (2.95) 119,518 0.50++ 5.30 220 --
1993 10.95 11.03 50,249 0.50++ 6.92 93 --
1992 10.44 5.75 13,601 0.50*++ 8.11* 133 --
MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1997 $11.64 8.47% $75,120 0.51%++ 4.70% 54% --
1996 11.23 9.46 54,536 0.51++ 4.66 78 --
1995 10.75 13.37 36,040 0.50++ 5.64 58 --
1994 10.04 (4.64) 38,549 0.50++ 4.98 34 --
1993 11.15 14.20 26,914 0.50*++ 4.65* 66 --
PA MUNICIPAL PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 10/1/92)
1997 $11.71 8.01% $27,461 0.51%++ 4.74% 64% --
1996 11.37 9.03 28,488 0.51++ 4.58 51 --
1995 10.91 13.74 15,734 0.50++ 5.56 57 --
1994 10.13 (4.08) 23,515 0.50++ 5.39 69 --
1993 11.26 15.81 15,633 0.50*++ 4.74* 94 --
</TABLE>
MAS Fund - 10
<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 TOTAL
OF PERIOD INCOME UNREALIZED) ACTIVITIES INCOME) CAPITAL GAINS) DISTRIBUTIONS DISTRIBUTIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1997+++ $12.26 $0.85 $0.52 $1.37 ($0.87) ($0.18) -- ($1.05)
1996 12.53 0.83 0.08 0.91 (0.88) (0.30) -- (1.18)
1995 11.52 0.91 0.75 1.66 (0.65) -- -- (0.65)
1994 13.40 0.80 (1.28) (0.48) (0.78) (0.53) ($0.09)# (1.40)
1993 12.72 0.88 0.92 1.80 (0.82) (0.30) -- (1.12)
1992 11.80 0.39 0.72 1.11 (0.19) -- -- (0.19)
BALANCED PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/31/92)
1997 $13.81 $0.51 $2.91 $3.42 ($0.54) ($1.39) -- ($1.93)
1996 13.06 0.53 1.15 1.68 (0.50) (0.43) -- (0.93)
1995 11.28 0.54 1.78 2.32 (0.47) (0.07) -- (0.54)
1994 11.84 0.47 (0.45) 0.02 (0.43) (0.15) -- (0.58)
1993 11.06 0.25 0.66 0.91 (0.13) -- -- (0.13)
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1997+++ $12.28 $0.38 $2.57 $2.95 ($0.51) ($1.08) -- ($1.59)
1996 11.34 0.46 1.05 1.51 (0.42) (0.15) -- (0.57)
1995 9.97 0.44 1.33 1.77 (0.40) -- -- (0.40)
1994 10.00 0.07 (0.10) (0.03) -- -- -- --
NET ASSET NET ASSETS- RATIO OF RATIO OF
VALUE- END OF EXPENSES NET INCOME PORTFOLIO AVERAGE
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
PERIOD RETURN** (THOUSANDS) NET ASSETS+ NET ASSETS RATE RATE***
- - ------------------------------------------------------------------------------------------------------------------------------
SPECIAL PURPOSE FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 3/31/92)
1997+++ $12.58 11.78% $492,784 0.49% 6.88% 198% --
1996 12.26 7.74 447,646 0.49 6.75 151 --
1995 12.53 14.97 390,258 0.49 7.33 143 --
1994 11.52 (4.00) 384,731 0.50 6.66 100 --
1993 13.40 15.19 300,185 0.48 6.84 124 --
1992 12.72 9.47 274,195 0.53* 6.94* 138 --
BALANCED PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/31/92)
1997 $15.30 27.44% $343,284 0.58% 3.56% 145% $0.0578
1996 13.81 13.47 300,868 0.57 3.85 110 0.0521
1995 13.06 21.37 334,630 0.58 4.55 95
1994 11.28 0.19 309,596 0.58 4.06 75
1993 11.84 8.31 291,762 0.58* 3.99* 62
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1997+++ $13.64 26.50% $173,155 0.74%++ 3.07% 141% $0.0114
1996 12.28 13.75 129,558 0.58++ 3.82 122 0.0225
1995 11.34 18.28 96,839 0.58++ 4.56 112
1994 9.97 (0.30) 51,877 0.58*++ 4.39* 20
</TABLE>
MAS Fund - 11
<PAGE>
NOTES TO THE FINANCIAL HIGHLIGHTS
* Annualized
** Total return figures for partial years are not annualized.
*** For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share paid for
security transactions on which commissions were charged.
# Represents distributions in excess of net realized gains.
## Represents distributions in excess of net investment income.
### 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 the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods. Where
listed as N/A, if the expense offsets were included, the Ratio of Expenses
to Average Net Assets would not significantly differ.
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Emerging Markets Value 1.18%* 1.18% 1.18%
Equity 0.60 0.60 0.59
International Equity 0.66 0.65 0.63
Mid Cap Growth 0.60 0.60 0.61
Mid Cap Value 0.88* 0.88 0.88
Small Cap Value 0.87 0.86 0.86
Value 0.60 0.60 0.61
Cash Reserves 0.32 0.32 0.32
Domestic Fixed Income 0.50 0.50 0.50
Fixed Income 0.48 0.48 0.48
Fixed Income II 0.49 0.49 0.49
Global Fixed Income 0.56 0.58 0.57
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997
--------- ---- ---- ----
<S> <C> <C> <C>
High Yield 0.49% 0.48% 0.50%
Intermediate Duration 0.52 0.52 0.52
International Fixed Income 0.54 0.53 0.53
Limited Duration 0.42 0.42 0.42
Mortgage-Backed Securities 0.50 0.50 0.50
Municipal 0.50 0.50 0.50
PA Municipal N/A 0.50 0.50
Special Purpose Fixed Income 0.48 0.49 0.48
Balanced 0.57 0.57 0.56
Multi-Asset-Class 0.58 0.58 0.74
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep Total Operating Expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and/or reimbursed expenses totaled the below listed amounts.
VOLUNTARILY WAIVED AND/OR REIMBURSED EXPENSES FOR:
<TABLE>
<CAPTION>
PORTFOLIO 1992 1993 1994 1995 1996 1997
--------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Value -- -- -- 0.29%* 0.11% 0.10%
Mid Cap Value -- -- -- 2.13* 0.18 0.02
Cash Reserves -- 0.24% 0.14% 0.11 0.09 0.07
Domestic Fixed Income -- -- 0.03 0.09 0.01 0.01
Global Fixed Income -- 0.18* -- -- -- --
High Yield 0.22 0.09 -- -- -- --
Intermediate Duration -- -- -- 0.08* 0.13 0.05
International Fixed Income -- -- 0.11* -- -- --
Limited Duration -- 0.03 -- 0.02 -- 0.00+
Mortgage-Backed Securities 0.30* 0.06 0.01 0.01 0.04 0.04
Municipal -- 0.20* 0.06 0.09 0.09 0.05
PA Municipal -- 0.25* 0.09 0.19 0.15 0.09
Multi-Asset-Class -- -- 0.26* 0.14 0.08 0.08
</TABLE>
+++ Per share amounts for the year ended September 30, 1997, are based on
average shares outstanding.
+ Amount is less than 0.01%
MAS Fund - 12
<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).
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 a 30-day period 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 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 differs 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.
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.
MAS Fund - 13
<PAGE>
GENERAL INFORMATION
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 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 annual turnover. 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 with respect to forward
delivery mortgage-backed securities. For the Balanced, Multi-Asset-Class and
Balanced Plus Portfolios, annual turnover rate is not expected to exceed 100%
with respect to EQUITY SECURITIES.
The following portfolios have annual turnover rates of 100% or more: Mid Cap
Growth, Mid Cap Value, Small Cap Value, Domestic Fixed Income, Fixed Income,
Fixed Income II, Global Fixed Income, Intermediate Duration, International Fixed
Income, Limited Duration, Mortgage-Backed Securities, Special Purpose Fixed
Income, Balanced and Multi-Asset-Class. These high rates of annual 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 annual 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. The
annual turnover rate for each portfolio is shown in the Financial Highlights
under "Portfolio Turnover Rate."
MAS Fund - 14
<PAGE>
CASH EQUIVALENTS/TEMPORARY DEFENSIVE INVESTING: Although each portfolio intends
to remain substantially fully invested, a small percentage of a portfolio's
assets is 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, Emerging Markets Value and International Fixed Income Portfolios.
However, these portfolios will comply with the diversification requirements
imposed by Sub-Chapter M of the Internal Revenue Code and;
(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, Emerging Markets Value and
International Fixed Income Portfolios. However, these portfolios will comply
with the diversification requirements imposed by Sub-Chapter M of the
Internal Revenue Code.
Limitations (a) and (b) 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 the
portfolios. 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 in
this prospectus or the Statement of Additional Information 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 portfolios' assets will not be
considered a violation of the restriction, and the sale of securities will
not be required.
MAS Fund - 15
<PAGE>
EMERGING MARKETS VALUE PORTFOLIO - (FORMERLY, THE EMERGING MARKETS PORTFOLIO)
(A NON-DIVERSIFIED PORTFOLIO)
Objective: To achieve long-term capital growth by investing
primarily in common stocks of emerging markets
issuers.
Approach: The Adviser evaluates both short-term and long-term
international economic trends and relative
attractiveness of emerging markets and individual
emerging market securities. The Adviser selects
common stocks which are deemed to be undervalued at
the time of purchase, based on proprietary measures
of value.
Policies: Generally at least 65% invested in EQUITY SECURITIES
of EMERGING MARKETS ISSUERS, which are deemed to be
undervalued.
DERIVATIVES may be used to pursue portfolio strategy.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable ADRs EASTERN EUROPEAN ISSUERS HIGH YIELD STRUCTURED INVESTMENTS
Investments AGENCIES EMERGING MARKETS ISSUERS INVESTMENT COMPANIES STRUCTURED NOTES
BRADY BONDS FOREIGN BONDS INVESTMENT FUNDS SWAPS
CASH EQUIVALENTS FOREIGN CURRENCY LOAN PARTICIPATIONS U.S. GOVERNMENTS
COMMON STOCKS FOREIGN EQUITIES PREFERRED STOCK WARRANTS
CONVERTIBLES FORWARDS REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CORPORATES FUTURES & OPTIONS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: MSCI Emerging Markets Free Index
Strategies: EMERGING MARKETS INVESTING
FOREIGN INVESTING
NON-DIVERSIFIED STATUS
VALUE STOCK INVESTING
Portfolio
Manager: Horacio A. Valerias
- - --------------------------------------------------------------------------------
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's investment process is designed to
capture value by identifying stocks that offer low
but rising expectations. To determine the level of
expectations for various companies and the direction
of changes in those expectations, the Adviser
analyzes the companies' equity valuations and changes
in the companies' estimates of future earnings. In
addition, the Adviser diversifies across sectors to
preserve return while reducing risk, seeking the best
values within each sector of the market. A group of
senior investment professionals invests the portfolio
using a disciplined approach to stock selection
supported by fundamental research analysts. Each
investment professional makes his or her own buy,
sell and sector-allocation decisions. Overall sector
allocation is driven by bottom-up stock selection and
is reviewed regularly to preserve the benefits of
diversification.
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>
<CAPTION>
<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 STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P 500 Index
Strategies: CORE EQUITY INVESTING
Portfolio
Management Team: Arden C. Armstrong, James J. Jolinger, Nicholas J.
Kovich, Brian Kramp, Robert J. Marcin and
Gary G. Schlarbaum
MAS Fund - 16
<PAGE>
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 meeting 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs CORPORATES FUTURES & OPTIONS SWAPS
AGENCIES FOREIGN BONDS INVESTMENT COMPANIES U.S. GOVERNMENTS
CASHEQUIVALENTS FOREIGN CURRENCY PREFERRED STOCK WARRANTS
COMMON STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P 500 Index
Strategy: GROWTH STOCK INVESTING
Portfolio
Management Team: Arden C. Armstrong and Gary G. Schlarbaum
- - ------------------------------------------------------------------------------
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 U.S.
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs EASTERN EUROPEAN ISSUERS INVESTMENT COMPANIES STRUCTURED NOTES
AGENCIES EMERGING MARKETS ISSUERS
INVESTMENT FUNDS SWAPS
BRADY BONDS FOREIGN BONDS LOAN PARTICIPATIONS U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN CURRENCY PREFERRED STOCK WARRANTS
COMMON STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTSWHEN ISSUED SECURITIES
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
Portfolio
Management Team: Hassan Elmasry and Horacio A. Valerias
MAS Fund - 17
<PAGE>
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 selling 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 matching the S&P MidCap 400 Index
(currently $500 million to $6 billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs FOREIGN CURRENCY INVESTMENT COMPANIES RIGHTS
CASH EQUIVALENTS FOREIGN EQUITIES PREFERRED STOCK WARRANTS
COMMON STOCKS FUTURES & OPTIONS REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: GROWTH STOCK INVESTING
Portfolio
Management Team: Arden C. Armstrong and Abhi Y. Kanitkar
- - --------------------------------------------------------------------------------
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, which are 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs CORPORATES FUTURES & OPTIONS SWAPS
AGENCIES FOREIGN BONDS INVESTMENT COMPANIES U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN EQUITIES PREFERRED STOCK WARRANTS
COMMON STOCKS FOREIGN CURRENCY REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: VALUE STOCK INVESTING
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy
and Gary G. Schlarbaum,
MAS Fund - 18
<PAGE>
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, which are 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>
<CAPTION>
<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 STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: Russell 2000 Index
Strategies: VALUE STOCK INVESTING
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy
and Gary G. Schlarbaum
MAS Fund - 19
<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,
which are 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>
<CAPTION>
<S> <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 STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P 500 Index
Strategy: VALUE STOCK INVESTING
Portfolio
Management Team: Richard M. Behler, Nicholas J. Kovich and Robert J.
Marcin
MAS Fund - 20
<PAGE>
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>
<CAPTION>
<S> <C> <C> <C>
Allowable Investments: AGENCIES CORPORATES U.S. GOVERNMENTS
ASSET-BACKEDS FLOATERS YANKEES
CASH EQUIVALENTS INVESTMENT COMPANIES ZERO COUPONS
COMMERCIAL PAPER REPURCHASE AGREEMENTS
</TABLE>
Comparative Index: Lipper Money Market Index
Strategy: MONEY MARKET INVESTING
Portfolio
Management Team: Abigail Jones Feder and Ellen D. Harvey
MAS Fund - 21
<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 FIXED-INCOME SECURITIES rated A or higher (or
its equivalent)
May invest up to 20% in FIXED-INCOME SECURITIES rated
BBB (or its equivalent)
Maturity and Duration: Average weighted maturity generally greater than 5
years
<TABLE>
<CAPTION>
<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 SECURITIES
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
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
MAS Fund - 22
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES FLOATERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS LOAN PARTICIPATIONS SWAPS
BRADY BONDS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FORWARDS MUNICIPALS WHEN ISSUED SECURITIES
CMOS FUTURES & OPTIONS PREFERRED STOCK YANKEES
CONVERTIBLES HIGH YIELD REPURCHASE AGREEMENTS ZERO COUPONS
CORPORATES INVERSE FLOATERS SMBS
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
HIGH YIELD INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
MAS Fund - 23
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES FLOATERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS MORTGAGE SECURITIES SWAPS
BRADY BONDS FOREIGN CURRENCY MUNICIPALS U.S. GOVERNMENTS
CASH EQUIVALENTS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CMOS FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CONVERTIBLES INVERSE FLOATERS SMBS ZERO COUPONS
CORPORATES
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
MAS Fund - 24
<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 U.S. 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.
The Adviser 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES EASTERN EUROPEAN ISSUERS INVERSE FLOATERS STRUCTURED NOTES
ASSET-BACKEDS EMERGING MARKETS ISSUERS INVESTMENT COMPANIES SWAPS
BRADY BONDS FLOATERS MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN BONDS MUNICIPALS WHEN ISSUED SECURITIES
CMOS FOREIGN CURRENCY PREFERRED STOCK YANKEES
CONVERTIBLES FORWARDS REPURCHASE AGREEMENTS ZERO COUPONS
CORPORATES FUTURES & OPTIONS SMBS
</TABLE>
Comparative Index: Salomon World Government Bond Index
Strategies: FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
NON-DIVERSIFIED STATUS
EMERGING MARKETS INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley
MAS FUND - 25
<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 (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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES EMERGING MARKETS ISSUERS INVERSE FLOATERS STRUCTURED NOTES
ASSET-BACKEDS FLOATERS INVESTMENT COMPANIES SWAPS
BRADY BONDS FOREIGN BONDS LOAN PARTICIPATIONS U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN CURRENCY MORTGAGE SECURITIES WHEN ISSUED SECURITIES
CMOS FOREIGN EQUITIES MUNICIPALS YANKEES
CONVERTIBLES FORWARDS PREFERRED STOCK ZERO COUPONS
CORPORATES FUTURES & OPTIONS REPURCHASE AGREEMENTS
EASTERN EUROPEAN ISSUERS HIGH YIELD SMBS
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: HIGH YIELD INVESTING
MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
EMERGING MARKETS INVESTING
Portfolio
Management Team: Robert E. Angevine, Thomas L. Bennett and Stephen F.
Esser
MAS FUND - 26
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES FLOATERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS MORTGAGE SECURITIES SWAPS
BRADY BONDS FOREIGN CURRENCY MUNICIPALS U.S. GOVERNMENTS
CASH EQUIVALENTS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CMOS FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CONVERTIBLES INVERSE FLOATERS SMBS ZERO COUPONS
CORPORATES
</TABLE>
Comparative Index: Lehman Brothers Intermediate Government/Corporate
Index
Strategies: MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
Portfolio
Management Team: Ellen D. Harvey, Scott F. Richard and Christian G.
Roth
MAS FUND - 27
<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.
The Adviser 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES EASTERN EUROPEAN ISSUERS INVERSE FLOATERS STRUCTURED NOTES
ASSET-BACKEDS EMERGING MARKETS ISSUERS INVESTMENT COMPANIES SWAPS
BRADY BONDS FLOATERS MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN BONDS MUNICIPALS WHEN ISSUED SECURITIES
CMOS FOREIGN CURRENCY PREFERRED STOCK YANKEES
CONVERTIBLES FORWARDS REPURCHASE AGREEMENTS ZERO COUPONS
CORPORATES FUTURES & OPTIONS SMBS
</TABLE>
Comparative Index: Salomon World Government Bond Index Except U.S.
Strategies: FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
NON-DIVERSIFIED STATUS
EMERGING MARKETS INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: J. David Germany, Michael Kushma, Paul F. O'Brien and
Richard B. Worley
MAS FUND - 28
<PAGE>
LIMITED DURATI0N 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. The Adviser 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. The
Adviser then strives to purchase the most
attractively priced portfolio that meets our duration
and investment objectives. When purchasing securities
other than U.S. GOVERNMENTS, the Adviser evaluates
credit, liquidity, and option risk. When the Adviser
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES CONVERTIBLES MORTGAGE SECURITIES WHEN ISSUED SECURITIES
ASSET-BACKEDS CORPORATES REPURCHASE AGREEMENTS YANKEES
BRADY BONDS FLOATERS STRUCTURED NOTES ZERO COUPONS
CASH EQUIVALENTS FUTURES & OPTIONS SWAPS
CMOS INVESTMENT COMPANIES U.S. GOVERNMENTS
</TABLE>
Comparative Index: Salomon 1-3 Year Treasury/Government Sponsored
Index
Strategies: MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: Ellen D. Harvey, Scott F. Richard and Christian G.
Roth
MAS FUND - 29
<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
SECURITIES.
Policies: Generally at least 65% invested 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 7
years
Duration generally between 2 and 7 years
<TABLE>
<CAPTION>
<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 SECURITIES
CMOS MORTGAGE SECURITIES STRUCTURED NOTES ZERO COUPONS
FLOATERS
</TABLE>
Comparative Index: Lehman Mortgage Index
Strategies: MORTGAGE INVESTING
MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
Portfolio Management Team: Kenneth B. Dunn, Scott F. Richard and Roberto Sella
MAS FUND - 30
<PAGE>
MULTI-MARKET FIXED INCOME PORTFOLIO
Objective: To realize above-average total return over a market
cycle of three to five years, consistent with
reasonable risk, by investing primarily in a
diversified portofolio of fixed-income securities of
U.S. and foreign issuers.
Approach: The Adviser determines the mix of investments in
domestic and foreign FIXED-INCOME AND HIGH YIELD
SECURITIES expected to maximize available total
return. Strategic judgements 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
bond markets.
Policies: Generally at least 65% in FIXED-INCOME SECURITIES
DERIVATIVES may be used to pursue portfolio strategy
Quality Specifications: None
Maturity and Duration: Average weighted maturity generally greater than 5
years
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES EMERGING MARKETS ISSUERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FLOATERS LOAN ASSIGNMENTS STRUCTURED SECURITIES
BRADY BONDS FOREIGN BONDS LOAN PARTICIPATIONS SWAPS
CASH EQUIVALENTS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CMOS FORWARDS MUNICIPALS WARRANTS
CONVERTIBLES FUTURES & OPTIONS PREFERRED STOCK WHEN ISSUED SECURITIES
CORPORATES HIGH YIELD REPURCHASE AGREEMENTS YANKEES
EASTERN EUROPEAN ISSUERS INVERSE FLOATERS SMBS ZERO COUPONS
</TABLE>
Comparative Index: A weighted blend of quarterly returns compiled by
the Adviser using
60% Salomon Broad Investment Grade Index
20% Salomon World Government Bond Index Ex U.S.
12% Salomon High Yield Market Index
8% J.P. Morgan Emerging Markets Bond Index
Strategies: FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
EMERGING MARKETS INVESTING
HIGH YIELD INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn, Stephen F. Esser,
J. David Germany, Paul Ghaffari and Richard B. Worley
MAS FUND - 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 the Adviser 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES EMERGING MARKETS ISSUERS INVERSE FLOATERS STRUCTURED NOTES
ASSET-BACKEDS FLOATERS INVESTMENT COMPANIES SWAPS
BRADY BONDS FOREIGN BONDS MORTGAGE SECURITIES TAXABLE INVESTMENTS
CASH EQUIVALENTS FOREIGN CURRENCY MUNICIPALS U.S. GOVERNMENTS
CMOS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CONVERTIBLES FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CORPORATES HIGH YIELD SMBS 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
Portfolio
Management Team: Kenneth B. Dunn, Steven K. Kreider and Scott F.
Richard
MAS FUND - 32
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES EMERGING MARKETS ISSUERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FLOATERS MORTGAGE SECURITIES SWAPS
BRADY BONDS FOREIGN BONDS MUNICIPALS TAXABLE INVESTMENTS
CASH EQUIVALENTS FOREIGN CURRENCY PA MUNICIPALS U.S. GOVERNMENTS
CMOS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CONVERTIBLES FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CORPORATES HIGH YIELD SMBS ZERO COUPONS
EASTERN EUROPEAN ISSUERS INVERSE FLOATERS
</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
Portfolio
Management Team: Kenneth B. Dunn, Steven K. Kreider and Scott F.
Richard
MAS FUND - 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES FLOATERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS LOAN PARTICIPATIONS SWAPS
BRADY BONDS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FORWARDS MUNICIPALS WHEN ISSUED SECURITIES
CMOS FUTURES & OPTIONS PREFERRED STOCK YANKEES
CONVERTIBLES HIGH YIELD REPURCHASE AGREEMENTS ZERO COUPONS
CORPORATES INVERSE FLOATERS SMBS
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: MATURITY AND DURATION MANAGEMENT
FIXED INCOME MANAGEMENT AND ASSET ALLOCATION
VALUE INVESTING
MORTGAGE INVESTING
HIGH YIELD INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
MAS FUND - 34
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRS EASTERN EUROPEAN ISSUERS INVESTMENT COMPANIES SMBS
AGENCIES FLOATERS INVESTMENT FUNDS STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS LOAN PARTICIPATIONS SWAPS
BRADY BONDS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN EQUITIES MUNICIPALS WARRANTS
CMOS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
COMMON STOCKS FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CONVERTIBLES HIGH YIELD RIGHTS ZERO COUPONS
CORPORATES INVERSE FLOATERS
</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 INVESTING
FOREIGN FIXED INCOME INVESTING
Portfolio
Management Team: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A.
Valeiras and Richard B. Worley
MAS FUND - 35
<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>
<CAPTION>
<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 EQUIVALENTS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CMOS FOREIGN EQUITIES MUNICIPALS WARRANTS
COMMON STOCKS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CONVERTIBLES FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CORPORATES HIGH YIELD RIGHTS ZERO COUPONS
</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 INVESTING
FOREIGN FIXED INCOME INVESTING
CORE EQUITY INVESTING
INTERNATIONAL EQUITY INVESTING
EMERGING MARKETS INVESTING
HIGH YIELD INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G.
Schlarbaum, Horacio A, Valeiras and Richard B.
Worley
MAS FUND - 36
<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 U.S. 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>
<CAPTION>
<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 EQUIVALENTS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CMOS FOREIGN EQUITIES MUNICIPALS WARRANTS
COMMON STOCKS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CONVERTIBLES FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CORPORATES HIGH YIELD RIGHTS ZERO COUPONS
</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 INVESTING
FOREIGN FIXED INCOME INVESTING
CORE EQUITY INVESTING
INTERNATIONAL EQUITY INVESTING
EMERGING MARKETS INVESTING
HIGH YIELD INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G.
Schlarbaum, Horacio A. Valeiras and
Richard B. Worley
MAS FUND - 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
the Adviser'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 Special Purpose
Fixed Income, Balanced, Multi-Asset-Class and Balanced Plus 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 SECURITIES. 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 dura-
MAS Fund - 38
<PAGE>
tion 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.
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.
MAS Fund - 39
<PAGE>
This lower liquidity might have an effect on a portfolio's ability to value or
dispose of such securities. Also, there 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 COUPONS 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, 1997 (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.
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO MULTI-ASSET-CLASS PORTFOLIO
<S> <C> <C> <C>
QUALITY QUALITY
TSY, AGY, AAA 9.06% TSY, AGY, AAA 26.22%
AA 0.05 AA 2.32
A 0.19 A 1.09
BBB 6.09 BBB 2.09
BB 42.51 BB 4.64
B 35.48 B 6.02
CCC 0.96 CCC 0.35
Not rated: Not rated:
BB 0.83* BB 0.06*
B 2.30* B 0.22*
NR 2.54 NR 0.17
---- ----
Total not rated 5.66 Total not rated 0.45
TOTAL 100.00% TOTAL 43.18%
</TABLE>
* The Adviser believes that these non-rated securities are equivalent in
quality to the rating indicated.
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.
The Adviser 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
MAS Fund - 40
<PAGE>
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.
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 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 in MORTGAGE SECURITIES issued by the various
government-related organizations. However, a portfolio may invest, without
limit, in MORTGAGE 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 qualtity.
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-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.
MAS Fund - 41
<PAGE>
MUNICIPALS MANAGEMENT: The Adviser 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.
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 1940 Act. 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 the Adviser 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 the Adviser'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.
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
MAS Fund - 42
<PAGE>
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 fairly 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).
Each portfolio may invest in obligations of U.S. banks, and, except for the
Domestic Fixed Income Portfolio, in 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.
The 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 principal 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 the Cash Reserves Portfolio) 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;
MAS Fund - 43
<PAGE>
(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 Reserves 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 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.
COMMERCIAL PAPER: is a term used to desribe short-term obligations with
maturities ranging from 2 to 270 days. These obligations are primarily issued
by corporations needing to finance large amounts of receivables, but may be
issued by banks and other borrowers. COMMERCIAL PAPER is issued either
directly or through broker-dealers, and may be discounted or
interest-bearing. COMMERCIAL PAPER is unsecured, but is almost always backed
by bank lines of credit. Virtually all COMMERCIAL PAPER is ranked by Moody's
or Standard & Poor's.
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.
MAS Fund - 44
<PAGE>
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. The
portfolios may enter into over-the-counter Derivatives transactions with
counterparties 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. 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 a 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. As a result, 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.
EQUITY SECURITIES: Commonly include but are not limited to COMMON STOCK,
PREFERRED STOCK, ADRS, RIGHTS, WARRANTS, CONVERTIBLES, AND FOREIGN EQUITIES.
See each individual portfolio's listing of Allowable Investments to determine
which of these 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.
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's listing of Allowable
Investments to determine which of these 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.
MAS Fund - 45
<PAGE>
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
mortgages 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.
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.
MAS Fund - 46
<PAGE>
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 Securities and
Exchange Commission's ("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 CORPORATES,
PREFERRED STOCKS, and CONVERTIBLES 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 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." The rating C
is reserved for income bonds on which "no interest is being paid." 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
MAS Fund - 47
<PAGE>
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 1940 Act 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 or limit 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.
INVESTMENT GRADE SECURITIES: are those (a) 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));
(b) guaranteed by the U.S. Government or a private organization; or (c)
considered by the Adviser to be investment grade quality. 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 SECURITIES,
including mortgage pass-throughs and 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 fall 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
MAS Fund - 48
<PAGE>
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
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 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 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 U.S. Treasuries), 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.
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. Municipals 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 transpo
rtation 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.
MAS Fund - 49
<PAGE>
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 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 SEC, 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.
MAS - 50
<PAGE>
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 1940 Act. 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 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 the Adviser 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 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 prin-
MAS Fund - 51
<PAGE>
cipal 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.
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.
YANKEES: are U.S. dollar-denominated FIXED-INCOME SECURITIES issued by a
foreign government or corporation and sold in the U.S.
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 Coupons 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 General Shareholder Information-Valuation of Shares
each day that the portfolios are open for business. See Other Information-Closed
Holidays and General Shareholder Information--Valuation of Shares.
MAS Fund - 52
<PAGE>
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 value per share determined two business
days after receipt of the check by the Fund. Please note that payments to
investors who redeem shares purchased by check will not be made 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 additional 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.
MAS Fund - 53
<PAGE>
OTHER PURCHASE INFORMATION: The Fund reserves the right, in its sole
discretion, to suspend the offering 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
additional investment amounts.
Purchases of a portfolio's 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 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
Shares of each portfolio may be redeemed by mail, or, if authorized, by
telephone. No charge is made for redemptions. The value of 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 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.
MAS Fund - 54
<PAGE>
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.
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 New York Stock Exchange ("NYSE"), the Custodian, or the Fund is
closed (see Other Information-Closed Holidays) or under any emergency
circumstances as determined by the SEC.
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 SEC.
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 qualified 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
EMERGING MARKETS VALUE, 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
MAS Fund - 55
<PAGE>
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 values of other assets and securities
for which no quotations are readily available (including restricted
securities), and, to the extent permitted by the SEC, securities for which
the value has been materially affected by events occurring after the close of
the market on which they principally trade, are determined in good faith at
fair value using methods approved by the Trustees.
DOMESTIC FIXED INCOME, FIXED INCOME, FIXED INCOME PORTFOLIO II, GLOBAL FIXED
INCOME, HIGH YIELD, INTERMEDIATE DURATION, INTERNATIONAL FIXED INCOME,
LIMITED DURATION, MORTGAGE-BACKED SECURITIES, MULTI-MARKET FIXED INCOME,
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), and, to the extent
permitted by the SEC, securities for which the value has been materially
affected by events occurring after the close of the market on which they
principally trade, will be valued in good faith at fair value using methods
approved by the Board of Trustees.
BALANCED, BALANCED PLUS AND MULTI-ASSET-CLASS 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
MAS Fund - 56
<PAGE>
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 1940 Act. 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.
The Board of Trustees has 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 Board of 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 Board of 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.
ALL PORTFOLIOS: Net asset value per share for Investment Class Shares,
Institutional Class Shares and Adviser Class Shares may differ due to
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES: Dividends and Distributions: The Fund
maintains different dividend and capital gain distribution policies for each
portfolio. These are:
- - - The Equity, Value, Growth, Fixed Income, Fixed Income II, Special Purpose
Fixed Income, High Yield, Limited Duration, Intermediate Duration,
Mortgage-Backed Securities, Balanced, Multi-Asset-Class, Global Fixed Income,
International Fixed Income, Multi-Market Fixed Income, Domestic Fixed Income
and Balanced Plus Portfolios normally distribute substantially all of their
net investment income to shareholders on a quarterly basis.
- - - The International Equity, Emerging Markets Value, Small Cap Value, Mid Cap
Value and Mid Cap Growth Portfolios normally distribute substantially all of
their net investment income on an annual basis.
- - - The Municipal and the PA Municipal Portfolios normally distribute
substantially all of their net investment income on a monthly basis.
- - - The Cash Reserves Portfolio declares distributions daily and normally
distributes substantially all of its investment income on a monthly basis.
If any portfolio does not have income available to distribute, as determined
in compliance with the appropriate tax laws, no distribution will be made.
MAS Fund - 57
<PAGE>
If any net gains are realized from the sale of underlying securities, the
portfolios normally distribute such gains with the last distribution 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.
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.
TAXES: The following is a summary of some important tax issues that affect
the portfolios of the Fund and their shareholders. The summary 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 tax treatment of each portfolio or its
shareholders. More information about taxes is in the Statement of Additional
Information. Shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
FEDERAL TAXES: Each portfolio of the Fund is treated as a separate entity for
federal income tax purposes and intends to qualify for the special tax
treatment afforded regulated investment companies. As such, each portfolio
will not be subject to federal income tax to the extent it distributes net
investment company taxable income and net capital gains to shareholders. The
Fund will notify shareholders annually as to the tax classification of all
distributions.
Income dividends received by shareholders (except for shareholders of the
Municipal and PA Municipal Portfolios (see Special Tax Considerations for the
Municipal and PA Municipal Portfolios) will be taxable as ordinary income,
whether received in cash or in additional shares. 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, corporate shareholders may be
entitled to a dividends-received deduction for the portion of dividends they
receive which are attributable to dividends received by such portfolios from
U.S. corporations. Capital gains distributions are taxable to shareholders at
capital gains rates. Each portfolio will designate capital gains distributions
to individual shareholders as either subject to the federal capital gains
rate imposed on property held for more than 18 months or on property held for
more than 1 year but not more than 18 months.
Distributions paid in January but declared by a portfolio in October,
November or December of the previous year are taxable to shareholders in the
previous year.
Each portfolio intends to declare and pay dividends and distributions so as
to avoid imposition of the federal excise tax applicable to regulated
investment companies. Further discussion is included in the Statement of
Additional Information.
MAS Fund - 58
<PAGE>
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, shareholders
must certify on their Account Registration Forms that their Social Security
Number or Taxpayer Identification Number is correct, and that they are not
subject to backup withholding. Exchanges and redemptions of shares in a
portfolio are taxable events.
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. Each of the International Equity, Emerging Markets
Value, Global Fixed Income, International Fixed Income, Multi-Market Fixed
Income, Multi-Asset-Class and Balanced Plus Portfolios may be able to file an
election with the Internal Revenue Service to pass through to its
shareholders for foreign tax credit purposes the amount of foreign income
taxes paid by such portfolio. Further discussion is included in the Statement
of Additional Information. The other portfolios of the Fund will not be able
to make this election.
STATE AND LOCAL INCOME TAXES: The Fund is formed as a Pennsylvania Business
Trust and is not liable for any corporate income or franchise tax in the
Commonwealth of Pennsylvania. Shareholders should consult their tax advisors
for the state and local income tax consequences of distributions from the
portfolios.
SPECIAL TAX CONSIDERATIONS FOR THE MUNICIPAL AND PA MUNICIPAL PORTFOLIOS:
Each of the Municipal and PA Municipal Portfolios intends to pay
"exempt-interest" dividends to shareholders which are excluded from a
shareholder's gross income for federal income tax purposes. Exempt-interest
dividends received by shareholders from such portfolios may be subject to
state and local taxes, although some states allow a shareholder to exclude
that portion of a portfolio's tax-exempt income which is accountable to
municipal securities issued within the shareholder's state of residence.
Since each of the portfolios may invest in private activity municipal
securities, investment in either of the portfolios may not be an appropriate
investment for persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds
or private activity bonds.
To the extent, if any, that distributions paid to shareholders of either
portfolio are derived from taxable interest or capital gains, such
distributions will be subject to federal income tax. Additionally, such
distributions are not eligible for the dividends received deduction for
corporations.
Furthermore, the PA Municipal Portfolio invests at least 65% of its assets in
PA Municipals. As a result, the income of the PA Municipal 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.
Further discussion of tax considerations affecting shareholders of these
portfolios is found in the Statement of Additional Information.
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 December 31, 1997 had in excess of $59.4 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
MAS Fund - 59
<PAGE>
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.
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. The following table shows the
Adviser's contractual rate (annualized) along with the Adviser's actual rate
of compensation for the Fund's 1997 fiscal year.
<TABLE>
<CAPTION>
FY 1997
Contractual Actual
Rate Compensation Rate
---- -----------------
<S> <C> <C>
Emerging Markets Value Portfolio .750% .652%
Equity Portfolio .500 .500
Growth Portfolio .500 N/A
International Equity Portfolio .500 .500
Mid Cap Growth Portfolio .500 .500
Mid Cap Value Portfolio .750 .727
Small Cap Value Portfolio .750 .750
Value Portfolio .500 .500
Cash Reserves Portfolio .250 .180
Domestic Fixed Income Portfolio .375 .364
Fixed Income Portfolio .375 .375
Fixed Income Portfolio II .375 .375
Global Fixed Income Portfolio .375 .375
High Yield Portfolio .375 .375
Intermediate Duration Portfolio .375 .325
International Fixed Income Portfolio .375 .375
Limited Duration Portfolio .300 .297
Mortgage-Backed Securities Portfolio .375 .334
Multi-Market Fixed Income Portfolio .450 N/A
Municipal Portfolio .375 .329
PA Municipal Portfolio .375 .283
Special Purpose Fixed Income Portfolio .375 .375
Balanced Portfolio .450 .450
Balanced Plus Portfolio .550 N/A
Multi-Asset-Class Portfolio .650 .528
</TABLE>
Until further notice, the Adviser has voluntarily agreed to waive its advisory
fees and/or reimburse certain expenses to the extent necessary to keep Total
Operating Expenses actually deducted from portfolio assets for the Institutional
Class of the Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities,
Municipal, PA Municipal, Multi-Market Fixed Income and Multi-Asset-Class
Portfolios from exceeding 1.18%, 0.32%, 0.50%, 0.50%, 0.50%, 0.58% and 0.78%,
respectively.
PORTFOLIO MANAGEMENT
A description of the business experience during the past five years for each
of the investment professionals who are primarily responsible for the
day-to-day management of the Fund's portfolios is as follows:
Robert E. Angevine, Principal, Morgan Stanley, joined Morgan Stanley Asset
Management in 1988. He assumed responsibility for the High Yield Portfolio in
1996.
MAS Fund - 60
<PAGE>
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.
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
Portfolio in 1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus
Portfolio in 1996 and the Multi-Market Fixed Income Portfolio in 1997.
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, the Municipal and PA Municipal Portfolios in 1994 and the Multi-Market
Fixed Income Portfolio in 1997.
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 and the
Multi-Market Fixed Income Portfolio in 1997.
Abigail Jones Feder, Principal, Morgan Stanley, joined Morgan Stanley in
1985. She assumed responsibility for the Cash Reserves 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
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994, the
Balanced Plus Portfolio in 1996 and the Multi-Market Fixed Income Portfolio
in 1997.
Paul Ghaffari, Principal, Morgan Stanley, joined Morgan Stanley in 1993. He
served as Vice President in the Fixed Income Division of Emerging Markets
Sales and Trading Department at Morgan Stanley. He assumed responsibility for
the Multi-Market Fixed Income Portfolio in 1997.
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.
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. 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.
MAS - 61
<PAGE>
Brian Kramp, Vice President, Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management and its successor,
Corestates Investment Advisors from 1985-1997. He assumed responsibility for
the Equity Portfolio in 1998.
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.
Chris Leavy joined MAS in 1997. He served as a Portfolio Manager for
Capitoline Investment Services from 1995-1997; a Portfolio Manager for
Premier Trust Company from 1994 to 1995; and as a Research Analyst for Leavy
Investment Management from 1993-1994. He assumed responsibility for the Mid
Cap Value and Small Cap Value Portfolio in 1998.
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. 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
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 Growth Portfolio in 1993,
the Balanced Portfolio in 1992 and the Multi-Asset-Class and Mid Cap Value
Portfolios in 1994.
Roberto Sella, Principal, Morgan Stanley, joined MAS in 1992. He assumed
responsibility for the Mortgage-Backed Securities Portfolio in 1998.
Horacio A. Valeiras, Principal, Morgan Stanley, joined MAS in 1992. He
assumed responsibility for the International Equity Portfolio in 1992, the
Emerging Markets Value Portfolioin 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, the
Multi-Asset-Class Portfolio in 1994, the Balanced Plus Portfolio in 1996 and
the Multi-Market Fixed Income Portfolio in 1997.
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 Fund - 62
<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 or markups on principal transactions 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 or dealer 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. The Adviser
may place a combined order for two or more accounts or portfolios for the
purchase or sale of the same security if, in its judgement, joint execution
is in the best interest of each participant and will result in best price and
execution. 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. The Adviser 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-seven 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 1940 Act
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 5, 1998, Northern Trust Company (Chicago, IL) owned a
controlling interest (as that term is defined by the 1940 Act) of the Cash
Reserves Portfolio; The Northwestern University Investment Department
(Evanston, IL) and Cives Corporation Savings and Profit-Sharing Retirement
Trust (Roswell, GA) owned a controlling interest of the Mortgage-Backed
Securities Portfolio; Ministers and Missionaries Benefit Board of the
American Baptist Convention (New York, NY) and Chemical Bank (New York, NY)
owned a controlling interest of the Emerging Markets Value Portfolio;
Northern Trust Company (Chicago, IL) owned a controlling interest of the
Balanced Portfolio; The Charles A. Dana Foundation Inc. (New York, NY) owned
a controlling interest of the Global Fixed Income Portfolio; Southwest
National Bank of Pennsylvania (Greensburg, PA) owned a controlling interest
of the Intermediate Duration Portfolio; and the Connelly Foundation (West
Conshohocken, PA) owned a controlling interest of the Multi-Market Fixed
Income Portfolio.
MAS Fund - 63
<PAGE>
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.
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, Martin Luther King, Jr. 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
Columbus Day and Veteran's Day.
MAS Fund - 64
<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.;
formerly 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, Fannie Mae; Director, Reliance Group Holdings; Director, CVS
Corporation; Director, Union Carbide 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, 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.
JOHN H. GRADY, JR., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius
LLP; formerly Attorney, Ropes & Gray.
MAS Fund - 65
<PAGE>
(This page intentionally left blank)
MAS Fund - 66
<PAGE>
<TABLE>
<CAPTION>
<S><C>
- - ---------------------------------------------------------------------------------------------------------------------------
MAS
- - ---------
MAS FUNDS
ACCOUNT REGISTRATION FORM
Mas Fund Distribution, Inc.
General Distribution Agent
- - ---------------------------------------------------------------------------------------------------------------------------
/1/
REGISTRATION/PRIMARY |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
MAILING ADDRESS
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Confirmations and Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
month-end statements
will be mailed to Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
this address.
City |_|_|_|_|_|_|_|_|_|_|_|_| State |_|_| Zip |_|_|_|_|_| - |_|_|_|_|
Telephone No. |_|_|_| - |_|_|_| - |_|_|_|_|
Form of Business Entity: |_| Corporation |_| Partnership |_| Trust
|_| Other _______________________________________
Type of Account: |_| Defined Benefit Plan |_| Defined Contribution Plan
|_| Profit Sharing/Thrift Plan
|_| Other Employee Benefit Plan________________________
|_| Endowment |_| Foundation |_| Taxable
|_| Other (Specify)____________________________________
|_| United State Citizen |_| Resident Alien______________________________
|_| Non-Resident Alien, Indicate Country of Residence______________________
- - ---------------------------------------------------------------------------------------------------------------------------
/2/
INTERESTED PARTY Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
OPTION
Company (If Applicable) |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
In addition to the
account statement Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
sent to the above
registered address, City |_|_|_|_|_|_|_|_|_|_|_|_| State |_|_| Zip |_|_|_|_|_| - |_|_|_|_|
the Fund is
authorized to mail Telephone No. |_|_|_| - |_|_|_| - |_|_|_|_|
duplicate statements
to the name and
address provided at
right.
For additional
interested party
mailings, please
attach a separate
sheet.
- - ---------------------------------------------------------------------------------------------------------------------------
/3/ INVESTMENT
For Purchase of:
|_| Equity Portfolio |_| Fixed Income Portfolio |_| International Equity Portfolio
|_| Value Portfolio |_| Fixed Income Portfolio II |_| Emerging Markets Value 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 |_| Multi-Market Fixed Income Portfolio
|_| Balanced Portfolio |_| Intermediate Duration Portfolio |_| Municipal Portfolio
|_| Multi-Asset-Class Portfolio |_| Mortgage-Backed Securities Portfolio |_| PA Municipal Portfolio
|_| Balanced Plus Portfolio |_| Cash Reserves Portfolio
|_| Domestic Fixed Income Portfolio
- - ---------------------------------------------------------------------------------------------------------------------------
/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 340(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 subjects 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 PART2 at left.
- - ---------------------------------------------------------------------------------------------------------------------------
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 if no box is checked
below. 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
THIS APPLICATION IS SEPARATE FROM THE PROSPECTUS.
- - -----------------------------------------------------------------
FOR INTERNAL USE ONLY
(X)
_______________________________________________________________
Signature Date
_______________________________________________________________
O|__| F |__|
- - -----------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------
SIDE TWO OF TWO
</TABLE>
<PAGE>
(This page intentionally left blank)
MAS Fund - 69
<PAGE>
(This page intentionally left blank)
MAS Fund - 70
<PAGE>
(This page intentionally left blank)
MAS Fund - 71
<PAGE>
JANUARY 31, 1998
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
Fund Expenses 2
Prospectus Summary 4
Financial Highlights 6
Yield and Total Return 13
Investment Suitability 14
Investment Limitations 15
Portfolio Summaries 16
Equity Investments 16
Fixed-Income Investments 21
Prospectus Glossary:
Strategies 38
Investments 42
General Shareholder Information
Purchase of Shares 52
Redemption of Shares 54
Shareholder Services 55
Valuation of Shares 55
Dividends, Distributions and Taxes 57
Investment Adviser 59
Portfolio Management 60
Administrative Services 62
General Distribution Agent 63
Portfolio Transactions 63
Other Information 63
Trustees and Officers 65
<PAGE>
MAS ADVISER CLASS PROSPECTUS
- - --------
MAS FUND
JANUARY 31, 1998
AS REVISED MARCH 6, 1998
- - --------------------------------------------------------------------------------
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-seven
portfolios, ten of which are described in this Prospectus. This Prospectus
offers the Adviser Class Shares of these ten portfolios.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO PAGE REFERENCE
------------------------
HOW TO USE THIS PROSPECTUS: 3 FIXED INCOME: BALANCED:
- - -------------------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Domestic Fixed Income 17 Balanced 20
PORTFOLIO SUMMARIES: Fixed Income 18 Multi-Asset-Class 21
- - ------------------- High Yield 19
EQUITY: PROSPECTUS GLOSSARY:
- - ------ -------------------
International Equity 13 Strategies 22
Mid Cap Growth 14 Investments 27
Equity 12
Mid Cap Value 15
Value 16
GENERAL SHAREHOLDER
-------------------
INFORMATION: 40
-----------
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, 1998 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 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.
MILLER
ANDERSON
& SHERRERD, LLP ONE TOWER BRIDGE * WEST CONSHOHOCKEN, PA 19428 * 800-354-8185
<PAGE>
EXPENSE SUMMARY - ADVISER CLASS SHARES
The following tables illustrate the various expenses and fees that a shareholder
in a portfolio will incur either directly or indirectly. The Adviser may from
time to time waive fees or reimburse expenses thereby reducing total operating
expenses.
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 0.25%
Shareholder Servicing Fee None
<TABLE>
<CAPTION>
INVESTMENT TOTAL
ADVISORY OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity 0.500% 0.100% 0.850%
International Equity 0.500 0.150 0.900
Mid Cap Growth 0.500 0.130 0.880
Mid Cap Value 0.750 0.130 1.130
Value 0.500 0.100 0.850
Domestic Fixed Income 0.375 0.125 0.750
Fixed Income 0.375 0.105 0.730
High Yield 0.375 0.125 0.750
Balanced 0.450 0.130 0.830
Multi-Asset-Class 0.594* 0.186 1.030
</TABLE>
The Total Operating Expense ratios reflected in the table above may be 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 expenses that otherwise would be deducted from portfolio assets. The
amounts in the above table have been restated to reflect current fees and
expenses.
* The Adviser is, on a voluntary basis, waiving a portion of its fee and/or
reimbursing certain expenses for the Multi-Asset-Class Portfolio. Absent
such waivers and/or reimbursements by the Adviser, Total Operating Expenses
would be 1.086%. These fee waivers and expense reimbursements are voluntary
and may be discontinued at any time at the Adviser's discretion.
MAS Fund - 2
<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.
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- - -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity $9 $27 $47 $105
International Equity 9 29 50 111
Mid Cap Growth 9 28 49 108
Mid Cap Value 12 36 62 137
Value 9 27 47 105
Domestic Fixed Income 8 24 42 93
Fixed Income 7 23 41 91
High Yield 8 24 42 93
Balanced 8 26 46 103
Multi-Asset Class 11 33 57 126
- - ------------------------------------------------------------------------
</TABLE>
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 6;
GENERAL INFORMATION including INVESTMENT LIMITATIONS pertinent to all
portfolios begins on page 9;
SUMMARY PAGES for each portfolio's Objective, Policies and Strategies begin
on page 12;
The PROSPECTUS GLOSSARY which defines specific Allowable Investments,
Policies and Strategies printed in bold type throughout this Prospectus
begins on page 22; and
GENERAL SHAREHOLDER INFORMATION begins on page 40.
MAS Fund - 3
<PAGE>
SUMMARY 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.
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 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.
Certain FIXED INCOME SECURITIES may be highly sensitive to interest rate
changes, and highly sensitive to the rate of principal payments (including
prepayments on underlying mortgage assets). 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;
* 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;
* Investments in foreign securities involve certain special considerations
which are not typically associated with investing in U.S. companies.
Portfolios investing in foreign securities may also engage in foreign
currency exchange transactions. See FORWARDS, FUTURES & OPTIONS, and SWAPS;
MAS Fund - 4
<PAGE>
* Securities purchased on a when-issued basis may decline or appreciate in
market value prior to their actual delivery to the portfolio;
* Each 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; and
* Each 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.
HOW TO INVEST: Adviser Class Shares of each portfolio are available to
Shareholders with combined investments of $500,000 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 Institutional and Investment Class Shares
which differ from the Adviser 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. See Redemption of Shares and Shareholder Services.
THE FUND'S INVESTMENT ADVISER: 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 and 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 December 31, 1997 had in excess of $59.4 billion in assets under
management.
THE FUND'S DISTRIBUTOR: MAS Fund Distribution, Inc. (the "Distributor")
provides distribution services to the Fund.
MAS Fund - 5
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - FISCAL YEARS ENDED SEPTEMBER 30
Selected per share data and ratios for a share outstanding throughout each
period
The following should be read in conjunction with the Fund's financial statements
which are included in the Annual Report to Shareholders incorporated by
reference to the Statement of Additional Information. The Fund's financial
statements for the year ended September 30, 1997 have been examined by Price
Waterhouse LLP whose opinion thereon (which was unqualified) is also
incorporated by reference in the Statement of Additional Information.
The Adviser Class shares of the Equity, International Equity, Mid Cap Value,
Domestic Fixed Income and Multi-Asset-Class Portfolios had not commenced
operations as of September 30, 1997, therefore Institutional Class share
financial information is provided to investors for informational purposes only
and should be referred to as a historical guide to a portfolio's operations and
expenses. Past performance does not indicate future results.
(Data is adjusted to reflect a 2.5 for 1 share split as of August 13, 1993 for
all portfolios in operation as of that date.)
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 INSTITUTIONAL CLASS OPERATIONS 11/14/84)
1997 $25.67 $0.36 $8.22 $8.58 ($0.40) ($4.40) --
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) --
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>
1997 $(4.80) $29.45 38.46% $1,312,547 0.60% 1.30% 85% $0.0294
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 --
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>
INTERNATIONAL EQUITY PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 11/25/88)
1997 $13.24 $0.25 $2.71 $2.96 ($0.26) ($0.27) --
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) -- --
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>
1997 ($0.53) $15.67 23.16% $649,755 0.66% 1.81% 62% $0.0035
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 --
MAS Fund - 6
<PAGE>
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 ADVISER CLASS OPERATIONS 01/31/97)
1997 $17.04 ($0.02) $4.79 $4.77 -- -- --
MID CAP VALUE PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 12/30/94)
1997 $14.49 $0.05 $8.37 $8.42 ($0.10) ($1.01) --
1996 13.45 0.11 2.52 2.63 (0.55) (1.04) --
1995 10.00 0.55### 2.90 3.45 -- -- --
VALUE PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 07/17/96)
1997 $15.61 $0.30 $5.74 $6.04 ($0.27) ($1.03) --
1996 14.11 0.01 1.49 1.50 -- -- --
DOMESTIC FIXED INCOME PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 9/30/87)
1997 $10.89 $0.74 $0.33 $1.07 ($0.67) ($0.02) --
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 9.990.73 0.52 1.25 (0.45) (0.01) -- (0.46)
FIXED INCOME PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 11/07/96)
1997 $12.04 $0.70 $0.20 $0.90 ($0.59) ($0.13) --
HIGH YIELD PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 01/31/97)
1997 $9.39 $0.56 $0.59 $1.15 ($0.39) -- --
BALANCED PORTFOLIO (COMMENCEMENT OF ADVISER CLASS OPERATIONS 11/01/96)
1997 $14.05 $0.42 $2.60 $3.02 ($0.38) ($1.39) --
MULTI-ASSET-CLASS PORTFOLIO (COMMENCEMENT OF INSTITUTIONAL CLASS OPERATIONS 7/29/94)
1997 $12.28 $0.38 $2.57 $2.95 ($0.51) ($1.08) --
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) -- -- --
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>
1997 -- $21.81 27.99% $1,200 0.88%* (0.41%)* 134% $0.0514
1997 ($1.11) $21.80 61.40% $220,260 0.90% 0.28% 184% $0.0467
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*### 639### --
1997 ($1.30) $20.35 40.87 $201,253 0.90% 1.63% 46% $0.0577
1996 -- 15.61 10.63 15.493 0.86* 1.66* 53 0.0572
1997 ($0.69) $11.27 10.20% $96,954 0.51% 6.48% 217% --
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 10.78 12.63 53,236 0.50 8.62 224 --
1997 ($0.72) $12.22 7.79% $76,683 0.77%* 6.50%* 179% --
1997 ($0.39) $10.15 12.63% $4,327 0.78%* 8.68%* 96% --
1997 ($1.77) $15.30 23.82% $27,366 0.85%* 3.24%* 145% $0.0578
1997 ($1.59) $13.64 26.50% $173,155 0.74% 3.07% 141% $0.0114
1996 (0.57) 12.28 13.75 129,558 0.58 3.82 122 0.0225
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>
MAS Fund - 7
<PAGE>
NOTES TO THE FINANCIAL HIGHLIGHTS
* Annualized
** Total return figures for partial years are not annualized.
*** For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share paid for
security transactions on which commissions were charged.
# Represents distribution in excess of net realized gains.
## Represents distributions in excess of net investment income.
### 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 the respective periods ended September 30, the Ratio of Expenses to
Average Net Assets for the following portfolios excludes the effect of
expense offsets. If expense offsets were included, the Ratio of Expenses to
Average Net Assets would be as follows for the respective periods.
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997
<S> <C> <C> <C>
Equity 0.60% 0.60% 0.59%
International Equity 0.66 0.65 0.63
Mid Cap Value 0.88* 0.88 0.88
Mid Cap Growth -- -- 0.86*
Value -- 0.85* 0.89
Domestic Fixed Income 0.50 0.50 0.50
Fixed Income -- -- 0.76*
High Yield -- -- 0.76*
Balanced -- -- 0.84*
Multi-Asset-Class 0.58 0.58 0.74
</TABLE>
++ For the periods indicated, the Adviser voluntarily agreed to waive its
advisory fees and/or reimburse certain expenses to the extent necessary in
order to keep total operating expenses actually deducted from portfolio
assets for the respective portfolios from exceeding voluntary expense
limitations. For the respective periods ended September 30, the voluntarily
waived and reimbursed expenses totaled the below listed amounts.
VOLUNTARILY WAIVED AND/OR REIMBURSED EXPENSES FOR:
<TABLE>
<CAPTION>
PORTFOLIO 1994 1995 1996 1997
<S> <C> <C> <C> <C>
Mid Cap Value -- 2.13%* 0.18% 0.02%
Domestic Fixed Income 0.03% 0.09 0.01 0.01
Fixed Income -- -- -- 0.01*
Balanced -- -- -- 0.03*
Multi-Asset-Class 0.26* 0.14 0.08 0.08
</TABLE>
+++ Per share amounts for the year ended September 30, 1997, are based on
average shares outstanding.
MAS Fund - 8
<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. Figur
es 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).
The yield of a portfolio is computed by dividing the net investment income
per share (using the average number of shares entitled to receive dividends)
earned during a 30-day period 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 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.
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
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
will not be influenced by the different tax treatment of capital gains and
dividend income under the Internal Revenue Code.
MAS Fund - 9
<PAGE>
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 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 annual turnover. 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 and Multi-Asset-Class Portfolios the annual turnover rate will
ordinarily exceed 100% due to changes in portfolio duration, yield curve
strategy or commitments with respect to forward delivery mortgage-backed
securities. For the Balanced and Multi-Asset-Class Portfolios, annual
turnover rate is not expected to exceed 100% with respect to EQUITY
SECURITIES.
The following portfolios have annual turnover rates of 100% or more: Mid Cap
Growth, Mid Cap Value, Domestic Fixed Income, Fixed Income, Balanced and
Multi-Asset-Class. These high rates of annual 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 annual
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. The
annual turnover for each portfolio is shown in the financial highlights under
"Portfolio Turnover Rate".
CASH EQUIVALENTS/TEMPORARY DEFENSIVE INVESTING: Although each portfolio
intends to remain substantially fully invested, a small percentage of a
portfolio's assets is 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.
MAS Fund - 10
<PAGE>
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; and
(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.
Limitations (a) and (b), 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 the
portfolios. 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 in
this prospectus or Statement of Additional Information 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 portfolios' assets will not be
considered a violation of the restriction, and the sale of securities will
not be required.
MAS Fund - 11
<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's investment process is designed to capture
value by identifying stocks that offer low but rising
expectations. To determine the level of expectations
for various companies and the direction of changes in
those expectations, the Adviser analyzes the companies'
equity valuations and changes in the companies'
estimates of future earnings. In addition, the Adviser
diversifies across sectors to preserve return while
reducing risk, seeking the best values within each
sector of the market. A group of senior investment
professionals invests the portfolio using a disciplined
approach to stock selection supported by fundamental
research analysts. Each investment professional makes
his or her own buy, sell and sector-allocation
decisions. Overall sector allocation is driven by
bottom-up stock selection and is reviewed regularly to
preserve the benefits of diversification.
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>
<CAPTION>
<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 STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P 500 Index
Strategies: CORE EQUITY INVESTING
Portfolio
Management Team: Arden C. Armstrong, James J. Jolinger, Nicholas J.
Kovich, Brian Kramp, Robert J. Marcin and Gary G.
Schlarbaum
MAS Fund - 12
<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 U.S.
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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs EASTERN EUROPEAN ISSUERS INVESTMENT COMPANIES STRUCTURED NOTES
AGENCIES EMERGING MARKETS ISSUERS INVESTMENT FUNDS SWAPS
BRADY BONDS FOREIGN BONDS LOAN PARTICIPATIONS U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN CURRENCY PREFERRED STOCK WARRANTS
COMMON STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
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
Portfolio
Management Team: Hassan Elmasry and Horacio A. Valeiras
MAS Fund - 13
<PAGE>
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 selling 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 matching the S&P MidCap 400 Index (currently
$500 million to $6 billion)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs FOREIGN CURRENCY INVESTMENT COMPANIES RIGHTS
CASH EQUIVALENTS FOREIGN EQUITIES PREFERRED STOCK WARRANTS
COMMON STOCKS FUTURES & OPTIONS REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: GROWTH STOCK INVESTING
Portfolio
Management Team: Arden C. Armstrong, David P. Chu and Abhi Y. Kanitkar
MAS Fund - 14
<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, which are 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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs CORPORATES FUTURES & OPTIONS SWAPS
AGENCIES FOREIGN BONDS INVESTMENT COMPANIES U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN EQUITIES PREFERRED STOCK WARRANTS
COMMON STOCKS FOREIGN CURRENCY REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P MidCap 400 Index
Strategies: VALUE STOCK INVESTING
Portfolio
Management Team: Bradley S. Daniels, William B. Gerlach, Chris Leavy and
Gary G. Schlarbaum
MAS Fund - 15
<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,
which are 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>
<CAPTION>
<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 STOCKS FOREIGN EQUITIES REPURCHASE AGREEMENTS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS RIGHTS ZERO COUPONS
</TABLE>
Comparative Index: S&P 500 Index
Strategy: VALUE STOCK INVESTING
Portfolio
Management Team: Richard M. Behler, Nicholas J. Kovich and Robert J.
Marcin
MAS Fund - 16
<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 FIXED-INCOME SECURITIES rated A or higher (or
its equivalent) May invest up to 20% in FIXED-INCOME
SECURITIES rated BBB (or its equivalent)
Maturity and Duration: Average weighted maturity generally greater than 5
years
<TABLE>
<CAPTION>
<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 SECURITIES
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
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
MAS Fund - 17
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: AGENCIES FLOATERS INVESTMENT COMPANIES STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS LOAN PARTICIPATIONS SWAPS
BRADY BONDS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FORWARDS MUNICIPALS WHEN ISSUED SECURITIES
CMOs FUTURES & OPTIONS PREFERRED STOCK YANKEES
CONVERTIBLES HIGH YIELD REPURCHASE AGREEMENTS ZERO COUPONS
CORPORATES INVERSE FLOATERS SMBS
</TABLE>
Comparative Index: Salomon Broad Investment Grade
Lehman Brothers Aggregate
Strategies: MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
HIGH YIELD INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
Portfolio
Management Team: Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley
MAS Fund - 18
<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 (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>
<CAPTION>
<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 LOAN PARTICIPATIONS SWAPS
CASH EQUIVALENTS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CMOs FOREIGN EQUITIES MUNICIPALS WHEN ISSUED SECURITIES
CONVERTIBLES FORWARDS PREFERRED STOCK YANKEES
CORPORATES FUTURES & OPTIONS REPURCHASE AGREEMENTS ZERO COUPONS
EASTERN EUROPEAN ISSUERS HIGH YIELD
</TABLE>
Comparative Index: Salomon High Yield Market Index
Strategies: HIGH YIELD INVESTING
MATURITY AND DURATION MANAGEMENT
VALUE INVESTING
MORTGAGE INVESTING
FOREIGN INVESTING
FOREIGN FIXED INCOME INVESTING
EMERGING MARKETS INVESTING
Portfolio
Management Team: Robert E. Angevine, Thomas L. Bennett and Stephen F.
Esser
MAS Fund - 19
<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>
<CAPTION>
<S> <C> <C> <C> <C>
Allowable Investments: ADRs EASTERN EUROPEAN ISSUERS INVESTMENT COMPANIES SMBS
AGENCIES FLOATERS INVESTMENT FUNDS STRUCTURED NOTES
ASSET-BACKEDS FOREIGN BONDS LOAN PARTICIPATIONS SWAPS
BRADY BONDS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CASH EQUIVALENTS FOREIGN EQUITIES MUNICIPALS WARRANTS
CMOs FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
COMMON STOCKS FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CONVERTIBLES HIGH YIELD RIGHTS ZERO COUPONS
CORPORATES INVERSE FLOATERS
</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
<TABLE>
<CAPTION>
<S> <C> <C>
Strategies: ASSET ALLOCATION MANAGEMENT MORTGAGE INVESTING
CORE EQUITY INVESTING HIGH YIELD INVESTING
FIXED INCOME MANAGEMENT AND ASSET ALLOCATION FOREIGN INVESTING
MATURITY AND DURATION MANAGEMENT FOREIGN FIXED INCOME INVESTING
VALUE INVESTING
</TABLE>
Portfolio
Management Team: Thomas L. Bennett, Gary G. Schlarbaum, Horacio A.
Valeiras and Richard B. Worley
MAS Fund - 20
<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 U.S. 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>
<CAPTION>
<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 EQUIVALENTS FOREIGN CURRENCY MORTGAGE SECURITIES U.S. GOVERNMENTS
CMOs FOREIGN EQUITIES MUNICIPALS WARRANTS
COMMON STOCKS FORWARDS PREFERRED STOCK WHEN ISSUED SECURITIES
CONVERTIBLES FUTURES & OPTIONS REPURCHASE AGREEMENTS YANKEES
CORPORATES HIGH YIELD RIGHTS ZERO COUPONS
</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 INVESTING
FOREIGN FIXED INCOME INVESTING
CORE EQUITY INVESTING
INTERNATIONAL EQUITY INVESTING
EMERGING MARKETS INVESTING
HIGH YIELD INVESTING
MORTGAGE INVESTING
Portfolio
Management Team: Thomas L. Bennett, J. David Germany, Gary G.
Schlarbaum, Horacio A. Valeiras and Richard B. Worley
MAS Fund - 21
<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
the Adviser'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).
MAS Fund - 22
<PAGE>
FIXED INCOME MANAGEMENT AND ASSET ALLOCATION: Within the Balanced and
Multi-Asset-Class 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
SECURITIES. 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.
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
MAS Fund - 23
<PAGE>
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 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 COUPONS 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.
MAS Fund - 24
<PAGE>
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, 1997 (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.
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO MULTI-ASSET-CLASS PORTFOLIO
<S> <C> <C> <C>
QUALITY QUALITY
TSY, AGY, AAA 9.06% TSY, AGY, AAA 26.22%
AA 0.05 AA 2.32
A 0.19 A 1.09
BBB 6.09 BBB 2.09
BB 42.51 BB 4.64
B 35.48 B 6.02
CCC 0.96 CCC 0.35
Not Rated: Not Rated:
BB 0.83* BB 0.06*
B 2.30* B 0.22*
NR 2.54 NR 0.17
---- ----
Total Not Rated 5.66 Total Not Rated 0.45
TOTAL 100.00% TOTAL 43.18%
</TABLE>
* The Adviser believes that these non-rated securities are equivalent in
quality to the rating indicated.
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.
The Adviser 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
MAS Fund - 25
<PAGE>
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.
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 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 in MORTGAGE SECURITIES issued by the various
government-related organizations. However, a portfolio may invest, without
limit, in MORTGAGE SECURITIES issued by private issuers when the Adviser
deems that the quality of the investments, 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.
MAS Fund - 26
<PAGE>
VALUE INVESTING: One of two primary components of the Adviser's fixed-income
strategy is value investing, whereby the Adviser 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 the Adviser'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.
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.
MAS Fund - 27
<PAGE>
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 fairly 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).
Each portfolio may invest in obligations of U.S. banks and, except for the
Domestic Fixed Income Portfolio, in 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.
The 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 principal 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 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);
(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);
MAS Fund - 28
<PAGE>
(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; and
(6) REPURCHASE AGREEMENTS collateralized by securities listed above.
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 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
a verage 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.
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.
MAS Fund - 29
<PAGE>
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. The
portfolios may enter into over-the-counter Derivatives transactions with
counterparties 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. 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 a 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. As a result, 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 enti
MAS Fund - 30
<PAGE>
ties 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.
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 these 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.
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's listing of Allowable
Investments to determine which of these 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 mortgages 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).
MAS Fund - 31
<PAGE>
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.
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.
MAS Fund - 32
<PAGE>
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 Securities
and Exchange Commission's ("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 CORPORATES,
PREFERRED STOCKS, and CONVERTIBLES rated Ba through by Moody's or BB through
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 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." The rating C
is reserved for income bonds on which "no interest is being paid." Debt
rated D is in "default", and "payment of interest and/or repayment of
principal is in arrears."
MAS Fund - 33
<PAGE>
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 (the "1940 Act") 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 or limit 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.
MAS Fund - 34
<PAGE>
INVESTMENT GRADE SECURITIES: are those (a) rated by one or more nationally
recognized statistical rating roganization (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 Inv estors Service, Inc.,
(Fitch) or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. (Moody's));
(b) guaranteed by the U.S. Government or a private organization; or (c)
considered by the Adviser to be investment grade quality. 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 SECURITIES,
including mortgage pass-throughs and 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 fall 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 equival ent 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 MARKETS 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 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.
MAS Fund - 35
<PAGE>
There are two methods of trading Mortgage 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 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 U.S. Treasuries), 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.
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. Municipals 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
transpo rtation 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
MAS Fund - 36
<PAGE>
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.
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 SEC, 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
MAS Fund - 37
<PAGE>
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 1940 Act. 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 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 the Adviser 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,
MAS Fund - 38
<PAGE>
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 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.
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.
YANKEES: are U.S. dollar-denominated FIXED-INCOME SECURITIES issued by a
foreign government or corporation and sold in the U.S.
MAS Fund - 39
<PAGE>
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 Coupons 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
Adviser Class Shares are available to clients of the Adviser with combined
investments of $500,000 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.
Adviser Class Shares of each portfolio may be purchased at the net asset
value per share next determined after receipt of the purchase order. The
portfolios determine net asset value as described under General Shareholder
Information--Valuation of Shares each day that the portfolios are open. See
Other Information--Closed Holidays and General Shareholder
Information--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, PA 19428-0868 together
with a check ($500,000 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. Please note that payments to
investors who redeem shares purchased by check will not be made 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, Adviser 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, notification must
be given to MAS Funds' Client Services Group at 1-800-354-8185 prior to the
determination of net asset value. Adviser 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
MAS Fund - 40
<PAGE>
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)
ADDITIONAL INVESTMENTS: Additional investments of Adviser Class Shares at net
asset value may be made at any time (minimum additional 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, notification must be given to MAS Funds' Client Services
Group at 1-800-354-8185 prior to the determination of net asset value.
OTHER PURCHASE INFORMATION: The Fund reserves the right, in its sole
discretion, to suspend the offering 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 additional
investment amounts.
Purchases of a portfolio's 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.
Adviser 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 regarding purchases and
redemptions. Customers of Shareholder Organizations should read this
Prospectus in light of the terms governing accounts with their organization.
The Fund may pay compensation to or receive compensation from Shareholder
Organizations for the sale of Adviser Class Shares.
REDEMPTION OF SHARES
Shares of each portfolio may be redeemed by mail, or, if authorized, by
telephone. No charge is made for redemptions. The value of shares redeemed
may be more or less than the purchase price, depending on the net asset value
MAS Fund - 41
<PAGE>
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 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.
MAS Fund - 42
<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 New York Stock Exchange ("NYSE"), the custodian, or the fund is
closed (see Other Information-Closed Holidays) or under any emergency
circumstances as determined by the SEC.
If the Board of Trustees determines that it would be detrimental to the best
interest 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 SEC.
Investors may incur brokerage charges on the sale of portfolio securities
received in such payments of redemptions.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE: Each portfolio's Adviser Class Shares may be exchanged
for shares of the Fund's other portfolios offering Adviser 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
qualified 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.
MAS Fund - 43
<PAGE>
VALUATION OF SHARES
EQUITY, INTERNATIONAL EQUITY, MID CAP GROWTH, MID 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 values of other assets and securities
for which no quotations are readily available (including restricted
securities), and, to the extent permitted by the SEC, securities for which
the value has been materially affected by events occurring after the close of
the market on which they principally trade, are determined in good faith at
fair value using methods approved by the Trustees.
DOMESTIC FIXED INCOME, FIXED INCOME AND HIGH YIELD 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
w hich 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
MAS Fund - 44
<PAGE>
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), and, to the extent permitted by the SEC,
securities for which the value has been materially affected by events
occurring after the close of the market on which they principally trade, will
be valued in good faith at fair value using methods approved by the Board of
Trustees.
BALANCED AND MULTI-ASSET-CLASS 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 and
Multi-Asset-Class 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
portfolio is open for business. Equity, fixed-income and other securities
held by the portfolio will be valued using the policies described above.
ALL PORTFOLIOS: Net asset value per share for Investment Class Shares,
Institutional Class Shares and Adviser Class Shares may differ due to
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES: Dividends and Distributions: The Fund
maintains different dividend and distribution policies for each portfolio.
These are:
* The Equity, Value, Domestic Fixed Income, Fixed Income, High Yield,
Balanced and Multi-Asset-Class Portfolios normally distribute substantially
all of their net investment income to shareholders on a quarterly basis.
* The International Equity, Mid Cap Growth and Mid Cap Value Portfolios
normally distribute substantially all of their net investment income on an
annual basis.
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 gains are realized from the sale of underlying securities, the
portfolios normally distribute such gains with the last distribution 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, 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.
MAS Fund - 45
<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.
TAXES: The following is a summary of some important tax issues that affect
the portfolios of the Fund and their shareholders. The summary 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 tax treatment of each portfolio or its
shareholders. More information about taxes is in the Statement of Additional
Information. Shareholders are urged to consult their tax advisors regarding
sp ecific questions as to federal, state and local income taxes.
FEDERAL TAXES: Each portfolio of the Fund is treated as a separate entity for
federal income tax purposes and intends to qualify for the special tax
treatment afforded regulated investment companies. As such, each portfolio
will not be subject to federal income tax to the extent it distributes net
investment company taxable income and net capital gains to shareholders. The
Fund will notify shareholders annually as to the tax classification of all
distributions.
Income dividends received by shareholders will be taxable as ordinary income,
whether received in cash or in additional shares. In the case of the Equity,
Value, Mid Cap Value, Mid Cap Growth, Balanced and Multi-Asset-Class
Portfolios, corporate shareholders may be entitled to a dividends-received
deduction for the portion of dividends they receive which are attributable to
dividends received by such portfolios from U.S. corporations. Capital gains
distributions are taxable to shareholders at capital gains rates. Each
portfolio will designate capital gains distributions to individual
shareholders as either subject to the federal capital gains rate imposed on
property held for more than 18 months or on property held for more than 1
year but not more than 18 months.
Distributions paid in January but declared by a portfolio in October,
November or December of the previous year are taxable to shareholders in the
previous year.
Each portfolio intends to declare and pay dividends and distributions so as
to avoid imposition of the federal excise tax applicable to regulated
investment companies. Further discussion is included in the Statement of
Additional Information.
The Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders. In order to avoid this withholding requirement, shareholders
must certify on their Account Registration Forms that their Social Security
Number or Taxpayer Identification Number is correct, and that they are not
subject to backup withholding.
Exchanges and redemptions of shares in a portfolio are taxable events.
MAS Fund - 46
<PAGE>
FOREIGN INCOME TAXES: Investment income received by the portfolios from
sources within foreign countries may be subject to foreign income taxes
withheld at source. The International Equity and Multi-Asset-Class Portfolios
may be able to file an election with the Internal Revenue Service to pass
through to their shareholders for foreign tax credit purposes, the amount of
foreign income taxes paid by each such portfolio. Further discussion is
included in the Statement of Additional Information. The other portfolios
will not be able to make this election.
STATE AND LOCAL INCOME TAXES: The Fund is formed as a Pennsylvania Business
Trust and is not liable for any corporate income or franchise tax in the
Commonwealth of Pennsylvania. Shareholders should consult their tax advisors
for the state and local income tax consequences of distributions from the
portfolios.
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 December 31, 1997 had in excess of $59.4 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.
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. The following table shows the
Adviser's contractual rate (annualized) along with the Adviser's actual rate
of compensation for the Fund's 1997 fiscal year.
MAS Fund - 47
<PAGE>
<TABLE>
<CAPTION>
FY 1997
-------
CONTRACTUAL ACTUAL
----------- ------
RATE COMPENSATION RATE
---- -----------------
<S> <C> <C>
Equity Portfolio .500% .500%
International Equity Portfolio .500 .500
Mid Cap Growth Portfolio .500 .500
Mid Cap Value Portfolio .750 .727
Value Portfolio .500 .500
Domestic Fixed Income Portfolio .375 .364
Fixed Income Portfolio .375 .375
High Yield Portfolio .375 .375
Balanced Portfolio .450 .450
Multi-Asset-Class Portfolio .650 .528
</TABLE>
The Adviser is, on a voluntary basis, waiving a portion of its fee and/or
reimbursing certain expenses for the Multi-Asset-Class Portfolio. Absent such
waivers and/or reimbursements by the Adviser, Total Operating Expenses would
be 1.086%. These fee waivers and expense reimbursements are voluntary and may
be discontinued at any time at the Adviser's discretion.
PORTFOLIO MANAGEMENT
A description of the business experience during the past five years for each
of the investment professionals who are primarily responsible for the
day-to-day management of the Fund's portfolios is as follows:
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.
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
Portfolio in 1992, the Multi-Asset-Class Portfolio in 1994, the Balanced Plus
Portfolio in 1996 and the Multi-Market Fixed Income Portfolio in 1997.
David P. Chu, Vice President, Morgan Stanley, joined MAS in 1998. He served as
Senior Equity Analyst from 1992 to 1997 and as Co-Portfolio Manager in 1997
for NationsBank and its subsidiary, TradeStreet Investment Associates, Inc.
He assumed responsibility for the Mid Cap Growth Portfolio in 1998.
MAS Fund - 48
<PAGE>
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 PA, Municipal Portfolios in 1994 and the Multi-Market
Fixed Income Portfolio in 1997.
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 and the
Multi-Market Fixed Income Portfolio in 1997.
William B. Gerlach, Principal, 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
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994, the
Balanced Plus Portfolio in 1996 and the Multi-Market Fixed Income Portfolio
in 1997.
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, Principal, 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.
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. 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.
Brian Kramp, Vice President, Morgan Stanley, joined MAS in 1997. He served as
Analyst/Portfolio Manager for Meridian Asset Management, and its successor,
Corestates Investment Advisors from 1985-1997. He assumed responsibility for
the Equity Portfolio in 1998.
MAS Fund - 49
<PAGE>
Steven K. Kreider, Principal, Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the Municipal and the PA Municipal Portfolios in 1992.
Chris Leavy joined MAS in 1997. He served as a Portfolio Manager for
Capitoline Investment Services from 1995-1997; a Portfolio Manager for
Premier Trust Company from 1994 to 1995; and as a Research Analyst for Leavy
Investment Management from 1993-1994. He assumed responsibility for the Mid
Cap Value and Small Cap Value Portfolios in 1998.
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.
Scott F. Richard, Managing Director, Morgan Stanley, joined MAS 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 Growth Portfolio in 1993,
the Balanced Portfolio in 1992 and the Multi-Asset-Class and Mid Cap Value
Portfolios in 1994.
Horacio A. Valeiras, Managing Director, Morgan Stanley, joined MAS in 1992.
He assumed responsibility for the International Equity Portfolio in 1992, the
Emerging Markets Value Portfolioin 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 Balanced
Plus Portfolio in 1996, the Global Fixed Income and International Fixed
Income Portfolios in 1993, the Multi-Asset-Class Portfolio in 1994 and the
Multi-Market Fixed Income Portfolio in 1997.
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 Fund - 50
<PAGE>
GENERAL DISTRIBUTION AGENT: Shares of the Fund are distributed exclusively
through MAS Fund Distribution, Inc., a wholly-owned subsidiary of the Adviser.
DISTRIBUTION PLAN: Adviser Class Shares are sold without a sales charge, but
are subject to a Rule 12b-1 fee. The Fund, on behalf of the applicable
portfolio, will make monthly payments to the Fund's distributor under the
Distribution Plan approved by the Board of Trustees at an annual rate of up
to .25% of each portfolio's average daily net assets attributable to Adviser
Class Shares. The Fund's distributor will use the Rule 12b-1 fee it receives
for (i) compensation for its services in connection with distribution
assistan ce or provision of shareholder or account maintenance services, or
(ii) payments to financial intermediaries, plan fiduciaries, and investment
professionals, including the Adviser, for providing distribution support
services, and/or account maintenance services to shareholders (including,
where applicable, any underlying beneficial owners) of Adviser Class Shares.
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 or markups on principal transactions 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 or dealer 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. The Adviser
may place a combined order for two or more accounts or portfolios for the
purchase or sale of one same security if, in its judgement, joint execution
is in the best interest of each participant and will result in best price and
execution. 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. The Adviser 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-seven portfolios.
MAS Fund - 51
<PAGE>
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 1940 Act
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 5, 1998 Northern Trust Company (Chicago, Il) owned a
controlling interest (as that term is defined under the 1940 Act) of the
Balanced 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.
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, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
MAS Fund - 52
<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.;
formerly 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, Fannie Mae; Director, Reliance Group Holdings; Director, CVS
Corporation; Director, Union Carbide Corporation.
JOSEPH P. HEALEY, Trustee; Headmaster, Haverford School; formerly Dean,
Hobart College; Associate Dean, William & Mary College.
JOSEPH J. KEARNS, Trustee; investment consultant; Chief Investment Officer,
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, 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.
JOHN H. GRADY, JR., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius
LLP; formerly Attorney, Ropes & Gray.
MAS Fund - 53
<PAGE>
(This page intentionally left blank)
MAS Fund - 54
<PAGE>
<TABLE>
<CAPTION>
<S><C>
- - ---------------------------------------------------------------------------------------------------------------------------
MAS
- - ---------
MAS FUNDS
ACCOUNT REGISTRATION FORM
Mas Fund Distribution, Inc.
General Distribution Agent
- - ---------------------------------------------------------------------------------------------------------------------------
/1/
REGISTRATION/PRIMARY |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
MAILING ADDRESS
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Confirmations and Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
month-end statements
will be mailed to Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
this address.
City |_|_|_|_|_|_|_|_|_|_|_|_| State |_|_| Zip |_|_|_|_|_| - |_|_|_|_|
Telephone No. |_|_|_| - |_|_|_| - |_|_|_|_|
Form of Business Entity: |_| Corporation |_| Partnership |_| Trust
|_| Other _______________________________________
Type of Account: |_| Defined Benefit Plan |_| Defined Contribution Plan
|_| Profit Sharing/Thrift Plan
|_| Other Employee Benefit Plan________________________
|_| Endowment |_| Foundation |_| Taxable
|_| Other (Specify)____________________________________
|_| United State Citizen |_| Resident Alien______________________________
|_| Non-Resident Alien, Indicate Country of Residence______________________
- - ---------------------------------------------------------------------------------------------------------------------------
/2/
INTERESTED PARTY Attention |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
OPTION
Company (if applicable) |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
In addition to the
account statement Street or P.O. Box |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
sent to the above
registered address, City |_|_|_|_|_|_|_|_|_|_|_|_| State |_|_| Zip |_|_|_|_|_| - |_|_|_|_|
the Fund is
authorized to mail Telephone No. |_|_|_| - |_|_|_| - |_|_|_|_|
duplicate statements
to the name and
address provided at
right.
For additional
interested party
mailings, please
attach a separate
sheet.
- - ---------------------------------------------------------------------------------------------------------------------------
/3/
INVESTMENT
For Purchase of:
|_| Equity Portfolio $______________________________
|_| International Equity Portfolio $______________________________
|_| Mid Cap Growth Portfolio $______________________________
|_| Mid Cap Value Portfolio $______________________________
|_| Value Portfolio $______________________________
|_| Domestic Fixed Income Portfolio $______________________________
|_| Fixed Income Portfolio $______________________________
|_| High Yield Portfolio $______________________________
|_| Balanced Portfolio $______________________________
|_| Multi-Asset-Class Portfolio $______________________________
- - ---------------------------------------------------------------------------------------------------------------------------
/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 340(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 subjects 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 PART2 at left.
- - ---------------------------------------------------------------------------------------------------------------------------
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 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 if no box is checked
below. 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
THIS APPLICATION IS SEPARATE FROM THE PROSPECTUS.
FOR INTERNAL USE ONLY
(X)
_______________________________________________________________
Signature Date
O|__| F |__|
- - ---------------------------------------------------------------------------------------------------------------------------
SIDE TWO OF TWO
</TABLE>
<PAGE>
(This page intentionally left blank)
MAS Fund - 57
<PAGE>
(This page intentionally left blank)
MAS Fund - 58
<PAGE>
ADVISER CLASS PROSPECTUS
JANUARY 31, 1998
AS REVISED MARCH 6, 1998
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
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Yield and Total Return . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Suitability . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Portfolio Summaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Fixed-Income Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Prospectus Glossary:
Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
General Shareholder Information
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Valuation of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . 45
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Portfolio Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Administrative Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 50
General Distribution Agent . . . . . . . . . . . . . . . . . . . . . . . . . 51
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
MAS Fund - 59
<PAGE>
- - --------------------------------------MAS---------------------------------------
---------
MAS FUNDS
------------------------
ADVISER CLASS PROSPECTUS
------------------------
Miller
Anderson
& Sherrerd, LLP
ONE TOWER BRIDGE * WEST CONSHOHOCKEN, PA 19428 * 800-354-8185
<PAGE>
Exhibit 17(c)
MAS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 31, 1998
MAS Funds (the "Fund") is a no load mutual fund consisting of twenty-seven
portfolios offering a variety of investment alternatives. This Statement of
Additional Information sets forth information about the Fund applicable to all
twenty-seven portfolios.
This Statement is not a prospectus but should be read in conjunction with the
Fund's prospectuses dated January 31, 1998, each as revised from time to time.
To obtain any 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 8
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 22
Redemption of Shares 22
Transactions with Broker/Dealers 22
Shareholder Services 23
Investment Limitations 23
<PAGE>
Management of the Fund 26
Distribution Plans 30
Shareholder Service Agreement 31
Investment Adviser 31
Administration 33
Distributor for Fund 34
Custodians 34
Portfolio Transactions 34
Annual Turnover 36
General Information 36
Performance Information 38
Comparative Indices 44
Financial Statements 50
Appendix-Description of Securities and Ratings 50
</TABLE>
2
<PAGE>
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 supplements 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 ( the "1940 Act") or the
rules and regulations or interpretations of the Securities and Exchange
Commission (the "SEC") 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 U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
3
<PAGE>
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 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 SEC 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 their 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 is 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 Value, International Fixed Income,
Advisory Foreign Fixed Income, Global Fixed Income, Multi-Asset-Class, High
Yield, Municipal, PA Municipal, Balanced Plus, Balanced, and Multi-Market Fixed
Income Portfolios may invest in the securities of issuers in Eastern
4
<PAGE>
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 50 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. As a
result, there can be no assurance that a 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 U.S.. The above portfolios may invest in
sponsored and unsponsored GDRs and EDRs. For purposes of the Funds' investment
policies, a portfolio's 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. Minimum 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 of Trustees.
5
<PAGE>
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.
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
6
<PAGE>
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 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 each 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.
7
<PAGE>
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 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 portfolio 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
portfolio 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 or
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account 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.
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
8
<PAGE>
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.
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, are
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
9
<PAGE>
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 U.S. of
data on which to make trading decisions, (iii) delays in a portfolio's ability
to act upon economic events occurring in foreign markets during non business
hours in the U.S., (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the U.S., and (v) lesser
trading volume.
SWAP CONTRACTS
All portfolios, except the Cash Reserves and Mid Cap Growth Portfolios, 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 or
liquid securities 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 1940 Act 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
10
<PAGE>
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.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS--Foreign currency warrants are warrants which entitle
the holder to receive from the issuer an amount of cash (generally, for warrants
issued in the U.S., 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"
11
<PAGE>
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.
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 U.S.
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
12
<PAGE>
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 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 investment objectives and policies and consider recommending to
shareholders changes in such objectives 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 a portfolio to achieve its investment objective. In that event,
the Fund's Trustees and officers would reevaluate investment objectives and
policies and consider recommending to shareholders changes in such objectives
and policies.
DURATION
The Limited Duration and Intermediate Duration Portfolios seek to achieve their
objectives 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
13
<PAGE>
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, in the
case of mortgage-backed securities, the current prepayment rates are more
critical than their stated final maturities in determining their 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. 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
14
<PAGE>
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.
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 prepayment experience may cause the realized return to
differ from the assumed yield. Reinvestment of prepayments 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.
Fannie Mae is a Government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. Fannie Mae 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 Fannie Mae are
guaranteed as to timely payment of principal and interest by Fannie Mae.
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.
15
<PAGE>
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.
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's 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.
SMBS are generally purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers. Certain of these
securities may be deemed "illiquid" and subject to each portfolio's limitation
on investing 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 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 U.S.
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 U.S. In the case of securities not backed by the full
faith and credit of the U.S., 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 U.S. 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 U.S. 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
16
<PAGE>
Government National Mortgage Association, are, in effect, backed by the full
faith and credit of the U.S. 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 Fannie Mae, are not guaranteed by the U.S., 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 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 Fannie Mae.
ZERO COUPON BONDS
Zero Coupon Bonds is 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 issuer.
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 other 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
Each portfolio, except the Domestic Fixed Income Portfolio, can invest in
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
17
<PAGE>
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.
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 fairly 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.
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
18
<PAGE>
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 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. 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 addition, (i) a portfolio must distribute annually to its
shareholders at least the sum of 90% of its net interest income excludable from
gross income plus 90% of its investment company taxable income; (ii) at the
close of each quarter of a portfolio's taxable year, at least 50% of its total
assets must be represented by cash and cash items, vs. government securities,
securities of other regulated investment companies and such other securities
with limitations; and (iii) at the close of each quarter of a portfolio's
taxable year, not more than 25% of the value of its assets may be invested in
securities of any one issuer, or of two or more issuers engaged in same or
similar businesses if the portfolio owns at least 20% of the voting power of
such issuers.
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 Taxpayer Relief Act of 1997 provides various capital gains rates which
pertain to shareholders who are individuals. Each portfolio will, therefore,
designate distributions derived from capital gains of the portfolio (whether
such distributions are paid in cash or additional shares) as a "20% rate gain
distribution" or a "28% rate gain distribution" in accordance with guidance
issued by the Internal Revenue Service. The Fund will notify shareholders
annually as to the federal tax classification of dividends and distributions
paid by a portfolio including, but not limited to notifying individuals as to
the amount of capital gain distributions subject to the 20% and 28% federal
capital gain tax rates. Distributions of dividends or capital gains may also be
subject to state and local taxes.
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
19
<PAGE>
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 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.
The Taxpayer Relief Act of 1997 provides constructive sales treatment for
appreciated financial positions such as stock which has increased in value in
the hands of a portfolio. Under this constructive sales treatment, the
portfolio may be treated as having sold such stock and be required to recognize
gain if it enters into a short sale, an offsetting notional principal contract,
a futures or forward contract, or a similar transaction with respect to such
stock or substantially identical property.
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 for the
one-year period ending October 31st, and (iii) 100% of any undistributed
ordinary and capital gain net income from the prior year.
Although income received on direct U.S. Government obligations is taxable at the
Federal level, such income is exempt from tax at the state level when received
directly, and may be exempt, depending on the state, when received by a
shareholder. Each portfolio will inform shareholders annually of the percentage
of income and distributions derived from direct U.S. Government obligations.
Shareholders should consult their tax advisers to determine whether any portion
of dividends received from the portfolio is considered tax exempt in their
particular states.
Any gain or loss recognized on a sale or redemption of shares of a portfolio by
a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than
eighteen months, mid-term if the shares have been held for over one year but not
for over eighteen months, and short-term if for a year or less. Long-term
capital gains are currently taxed at a maximum rate of 20%; mid-term capital
gains are currently taxed at a maximum rate of 28%; and short-term gains are
currently taxed at ordinary income tax rates. If shares held for six months or
less are sold or redeemed for a loss, two special rules apply: First, if shares
on which a net capital gain distribution has been received are subsequently sold
or redeemed, and such shares have been held for six months or less, any loss
recognized will be treated as long-term capital loss to the extent of the
long-term capital gain distributions. Second, any loss recognized by a
shareholder upon the sale or redemption of shares of a municipal portfolio fund
held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the Shareholder with respect to such
shares.
20
<PAGE>
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 would entitle the 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.
If more than 50% of a portfolio's assets are represented by foreign securities,
then such portfolio may file an election with the Internal Revenue Service to
pass through to shareholders the amount of foreign income taxes paid by such
portfolio. A portfolio will make such an election only if it is deemed to be in
the best interests of such shareholders.
If a portfolio makes the above-described election, the portfolio will not be
allowed a deduction or a credit for foreign taxes it paid and the amount of such
taxes will be treated as a dividend paid by the portfolio. The shareholders of
the portfolios 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;
(iii) treat as gross income from sources within the respective foreign
countries, for purposes of the foreign tax credit, their pro rata share of such
foreign taxes and their pro rate share of any dividend paid by the portfolio
which represents income from sources within foreign countries; and (iv) 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 (the
"Code") as a foreign tax credit against U.S. income taxes (but not both). In no
event shall a shareholder be allowed a foreign tax credit if the shareholder
holds shares in a portfolio for 15 days or less during the 30-day period
beginning on the date which is 15 days before the date on which such shares
become ex-dividend with respect to such dividends.
Each shareholder of a 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. The notice from the
portfolio to shareholders will also include the amount of foreign taxes paid by
the portfolio which are not allowable as a foreign tax credit because the
portfolio did not hold the foreign securities for more than 15 days during the
30-day period beginning on the date which is 15 days before the date on which
the security becomes ex-dividend with respect to the foreign source dividend or
because and to the extent that the recipient of the dividend is under an
obligation to make related payments with respect to positions in substantially
similar or related property. Shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass-through" of foreign tax credits.
SPECIAL TAX CONSIDERATIONS FOR THE MUNICIPAL AND PA MUNICIPAL PORTFOLIOS: Each
of the Municipal and PA Municipal Portfolios intends that at the close of each
quarter of its taxable year, at least 50% of the value of the portfolio's total
assets will consist of obligations the interest on which is excludable from
gross income (i.e., municipal bonds and notes), so that it may pay "exempt-
interest" dividends to shareholders. Exempt-interest dividends, which are
defined in the Code, are excluded from a shareholder's gross income for federal
income tax purposes, but may nevertheless be subject to the alternative minimum
tax (imposed at a rate of 26%-28% in the case of non-corporate taxpayers and at
the rate of 20% in the case of corporate taxpayers). A shareholder may,
however, lose the federal tax-exempt status of the accrued income of the
portfolio if the shareholder redeems its shares before a dividend has been
declared. Exempt-interest dividends received by shareholders from the above-
referenced portfolios may be subject to state and local taxes, although some
states allow a shareholder to exclude that portion of a portfolio's tax-exempt
income which is accountable to municipal securities issued within the
shareholder's state of residence.
21
<PAGE>
These 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. These portfolios may not be an appropriate investment for persons who are
"substantial users" (or persons related to "substantial users") of facilities
financed by industrial development bonds or private activity bonds. A
"substantial user" is defined generally to include certain persons who regularly
use in a trade or business or facility financed from the proceeds of industrial
development bonds or private activity bonds. Such persons should consult their
tax advisers before purchasing shares.
Any distributions received by individual shareholders which are derived from
capital gains of the portfolio will be designated by either portfolio as a "20%
rate gain distribution" or a "28% rate gain distribution" in accordance with
guidance issued by the Internal Revenue Service.
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of these portfolios is not deductible for federal
income tax purposes to the extent that it relates to exempt-interest dividends
distributed to the shareholder during the taxable year.
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, and (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 ("NYSE") is closed, or
trading on the NYSE is restricted as determined by the SEC, (ii) during any
period when an emergency exists as defined by the rules of the SEC 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 SEC may permit.
The Fund has made an election with the SEC 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 the portfolio at the beginning of such period. Such commitment
is irrevocable without the prior approval of the SEC. 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 prospectuses 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.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's
22
<PAGE>
authorized designee, accepts the order. In other words, orders will be priced
at the net asset value net computed after such orders are accepted by an
authorized broker or the broker's authorized designee.
SHAREHOLDER SERVICES
Exchange Privilege
The exchange privilege is only available with respect to portfolios that are
qualified 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 the time at which each
portfolio determines its net asset value, as described in the prospectus 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 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. 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;
23
<PAGE>
(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,
subject 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 1940 Act, or the rules and regulations, or interpretations or orders of the
SEC 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 Value 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 or instrumentalities (this restriction
does not apply to the Global Fixed Income, International Fixed Income, Advisory
Foreign Fixed Income or the Emerging Markets Value 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); and
(8) 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 (i) there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(ii) the Cash Reserves Portfolio may invest without limitation in certificates
of deposit or bankers' acceptances of domestic banks; (iii) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iv)
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; (v) asset-backed securities
will be classified according to the underlying assets securing such securities;
and (vi) the Mortgage-Backed Securities and Advisory Mortgage Portfolios will
concentrate in mortgage-backed securities.
24
<PAGE>
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;
(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
Trustees;
(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.
25
<PAGE>
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.; formerly
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, Fannie
Mae; Director, Reliance Group Holdings; Director, CVS Corporation; Director,
Union Carbide 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, 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 1940 Act.
- - --------------------------------------------------------------------------------
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.
JOHN H. GRADY, JR., Secretary, MAS Funds; Partner, Morgan, Lewis & Bockius LLP;
formerly Attorney, Ropes & Gray.
26
<PAGE>
Remuneration of Trustees and Officers
The Fund pays each Trustee, who is not also an officer or interested 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
interested persons receive no remuneration for their service as Trustees. The
Fund's officers and employees are paid by the Adviser or Sub-Administrator.
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 1940 Act) 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 three (3) or more 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, 1997.
As of the fiscal year ended September 30, 1997, the Trustees and officers of the
Fund owned, in the aggregate, less than 1% of the outstanding shares of the
Fund. The aggregate compensation paid by the Fund to each of the Trustees
during its fiscal year ended September 30, 1997 is set forth below.
<TABLE>
<CAPTION>
Aggregate Pension or Benefits
Compensation from Accrued as Part of Total Compensation
Name of Trustee the Fund# Fund Expenses from the Fund
- - --------------- --------- ------------- -------------
<S> <C> <C> <C>
Thomas L. Bennett* (-0-) (-0-) (-0-)
Thomas P. Gerrity $57,000## $64,942 $57,000
Joseph P. Healey $57,000## $30,173 $57,000
Joseph J. Kearns $57,000## $60,102 $57,000
C. Oscar Morong, Jr. $57,000## $89,534 $57,000
Vincent R. McLean $57,000## $96,238 $57,000
</TABLE>
27
<PAGE>
* Trustee Bennett is deemed to be an "interested person" of the Fund as that
term is defined in the 1940 Act.
# 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 5, 1998 the following persons owned of record or beneficially 5%
or more of the shares of a portfolio:
EQUITY PORTFOLIO: Los Angeles County Deferred Compensation & Thrift Plan,
Englewood, CO, 7.4%.
VALUE PORTFOLIO: Charles Schwab & Co., Inc., Special Custody Account for the
Exclusive Benefit of Customers, San Francisco, CA, 13.7%; Donaldson Lufkin &
Jenrette, Jersey City, NJ, 6.0%.
SMALL CAP VALUE PORTFOLIO: The J. Paul Getty Trust, c/o The Northern Trust
Company, Chicago, IL, 10.6%; The Northern Trust Company, FBO Silicon Graphics,
Chicago, IL, 9.5%; Fishnet & Company, FBO The Hearst Foundation, Boston, MA,
5.1%.
MID CAP GROWTH PORTFOLIO: The J. Paul Getty Trust, c/o The Northern Trust
Company, Chicago, IL, 23.5%; Morgan Stanley, c/o MAS Team, Boston, MA, 6.2%; MAC
& Co., Pittsburgh, PA, 5.4%.
DOMESTIC FIXED INCOME PORTFOLIO: Fleet National Bank, Rochester, NY, 11.7%; The
Philadelphia Orchestra Unrestricted Endowment Fund, Philadelphia, PA, 11.0%;
Saxon & Company, FBO Weirton Medical Center Retirement Income Plan,
Philadelphia, PA, 9.2%; Strafe & Co., Marion General Hospital Retirement Plan,
Westerville, OH, 9.0%; Paintmakers Money Accumulation Pension Plan-B, Portland,
OR, 8.6%; Patterson & Co., c/o CoreStates Bank, N.A., Philadelphia, PA, 6.8%;
Key Trust Danis Industries, Cleveland, OH, 6.2%; Delta Dental Plan of NH, Inc.,
Concord, NH, 5.9%.
CASH RESERVES PORTFOLIO: The Northern Trust Company, Chicago, IL, 32.3%; The
Taft School, Watertown, CT, 13.1%; Skadden ARPS Slate Meagher & Flom LLP, New
York, NY, 11.2%; Association for Information and Image Management, Silver
Spring, MD, 5.2%.
INTERNATIONAL EQUITY PORTFOLIO: Western Metal Industry, c/o Miller Andersen &
Sherrerd, West Conshohocken, PA, 11.8%; Ministers & Missionaries Benefit Board
of American Baptist Churches, New York, NY, 11.0%; Carnegie Corporation of New
York, New York, NY, 6.8%; Puerto Rico Telephone Company Pension Plan, San Juan,
PR, 6.3%.
FIXED INCOME PORTFOLIO II: Diocese of Camden, Camden, NJ, 10.4%; Bankers Trust
Co., Jersey City, NJ, 9.9%; Board of Trustees of Sheet Metal Workers Local #100
Pension Plan, Suitland, MD, 9.5%; The Northern Trust Company, Chicago, IL, 6.5%;
Saul & Co., c/o First Union National Bank, Charlotte, NC, 6.2%.
HIGH YIELD SECURITIES PORTFOLIO: Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, San Francisco, CA, 8.5%; Western
Metal Industry, c/o Miller Andersen & Sherrerd, West Conshohocken, PA, 7.0%;
Donaldson Lufkin & Jenrette, Jersey City, NJ, 6.2%; Armco Master Pension Trust,
Pittsburgh, PA, 5.3%.
28
<PAGE>
SPECIAL PURPOSE FIXED INCOME PORTFOLIO: Robertson Research Fund, Cold Spring
Harbor, NY, 5.2%.
LIMITED DURATION PORTFOLIO: Bankers Trust Company, Los Angeles, CA, 14.4%; Boys
& Girls Club of America Pension Trust, Atlanta, GA, 11.9%; Citibank, NA,
Fieldcrest Cannon Hourly Retirement Plan, Tampa, FL, 8.6%; Northern California
Bakery Drivers Security Fund, Alameda, CA 7.0%; Batrus & Co., c/o Bankers Trust
Company, New York, NY, 6.4%; Sheet Metal Workers Local # 100, Washington, DC,
5.8%.
MORTGAGE-BACKED SECURITIES PORTFOLIO: Northwestern University Investment
Department, Evanston, IL, 30.6%; John S. Donovan, Trustee for Cives Corporation
Savings and Profit-Sharing Retirement Trust, Roswell, GA, 25.3%; The Paper Magic
Group, Inc., Scranton, PA, 16.3%; Melhorn & Co., c/o PNC Bank 641 Teamster
Pension, Philadelphia, PA 16.3%.
INTERNATIONAL FIXED INCOME PORTFOLIO: Armco Master Pension Trust, Pittsburgh,
PA, 16.4%; CoreStates Bank, Childrens Hospital, Philadelphia, PA, 15.5%;
Northern Trust Co. as Custodian FBO: The J. Paul Getty Trust, Chicago, IL,
12.7%; The Skillman Foundation, Detroit, MI, 11.4%; Western Metal Industry
Pension Fund, c/o Miller Anderson & Sherrerd, West Conshohocken, PA, 9.6%;
Syntex (U.S.A.) Inc., Pension Trust, Palo Alto, CA, 6.7%; Chemical Bank as
Custodian for Smithsonian Institution, New York, NY, 6.1%; Wellesley College,
Wellesley, MA, 5.4%.
EMERGING MARKETS VALUE PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, New York, NY, 34.9%; Chemical Bank as Custodian for
Smithsonian Institution, New York, NY, 33.0%; Richard B. Worley, c/o Miller
Anderson & Sherrerd, West Conshohocken, PA, 7.7%; Philadelphia Orchestra
Association, Employee Pension & Retirement Plan, Philadelphia, PA 6.0%.
PA MUNICIPAL PORTFOLIO: Kenneth B. Dunn & Pamela R. Dunn, Bala Cynwyd, PA 20.7%;
R. & S. Roberts, Philadelphia, PA, 17.9%; Southwest National Bank of PA,
Greensburg, PA 11.7%; John J. F. Sherrerd, Bryn Mawr, PA, 9.3%; A. Morris
Williams, Jr. & Ruth W. Williams, Gladwyne, PA, 6.9%; Sanford C. Bernstein & Co.
Inc., FBO Cook Family Fund, New York, NY, 5.2%.
MUNICIPAL PORTFOLIO: Bost & Co., FBO Union Electric Employees Benefit Trust for
Union Retirees, Pittsburgh, PA, 21.2%; Bost & Co., FBO Union Electric Employee
Benefit Trust for Management Retirees, Pittsburgh, PA, 12.2%; Batrus & Co., c/o
Bankers Trust Company, New York, NY, 8.6%; Robert A. Fox, Jenkintown, PA, 8.4%;
Jesse J. Thompson, Charlotte, NC, 8.4%.
BALANCED PORTFOLIO: Northern Trust Co., Chicago, IL, 30.2%; Wendel & Co.,
Trustee for A&P Savings Plan, New York, NY, 8.7%; Wendel & Co., c/o The Bank of
New York, New York, NY, 7.3%; Wendel & Co.,c/o The Bank of New York, New York,
NY, 6.7%; Wendel & Co., FAO Aramark Corporation, New York, NY, 5.9%; Fidelity
Investments Institutional Operations Co., Covington, KY, 6.5%.
GLOBAL FIXED INCOME PORTFOLIO: The Charles A. Dana Foundation, Inc., New York,
NY, 31.1%; "All for Her" Fund, c/o Rosary Inc., Albany, NY, 13.9%; Hudson-Webber
Foundation, Detroit, MI, 13.0%; Abilene Christian University, Abilene, TX,
10.2%; State Street Bank & Trust, Forest Oil Corporation Pension Trust, Boston,
MA, 8.4%; Rockefeller Family Fund Inc., New York, NY, 5.8%.
INTERMEDIATE DURATION PORTFOLIO: Southwest National Bank of PA, Greensburg, PA,
30.8%; Bankers Trust Company, the Los Angeles Hotel-Restaurant Employer Union
Welfare Fund, Los Angeles, CA, 19.2%; Jaffe Foundation, Suffern, NY, 11.5%;
Northumberland County Employees Retirement Fund, Altoona, PA, 8.1%; Nyack
Hospital, Nyack, NY, 6.5%.
29
<PAGE>
MULTI-ASSET-CLASS-PORTFOLIO: Albany Medical College, Albany, NY, 17.8%; Chase
Manhattan Bank, Milbank Tweed Hadley & McCloy Master trust, Brooklyn, NY, 11.5%;
The Library Company of Philadelphia, Philadelphia, PA, 8.7%; Wachovia Bank, NA,
The W-S Foundation, Winston-Salem, NC, 5.3%; The National Center for State
Courts, Williamsburg, VA, 5.2%.
ADVISORY FOREIGN FIXED INCOME PORTFOLIO: Minnesota State Board of Investments,
St. Paul, MN, 8.4%; Ford Motor Company Master Trust, Dearborn, MI, 7.0%; Kaiser
Foundation, Oakland, CA, 6.0%.
MID CAP VALUE PORTFOLIO: Charles Schwab & Co., Inc., Special Custody Account for
the Exclusive Benefit of Customers, San Francisco, CA, 10.7%; Georgetown
Memorial Hospital Funded Depreciation Account, Georgetown, SC, 9.3%; Fishnet &
Co., Boston, MA, 7.8%; The Chase Manhattan Bank, FAO Hearst Corporation, New
York, NY, 7.8%; Berklee College of Music, Boston, MA, 7.0%; The Northern Trust
Company, FBO Morgan Stanley Plan, Chicago, IL, 5.3%.
ADVISORY MORTGAGE PORTFOLIO: Ford Motor Company Master Trust, Dearborn, MI,
9.8%; Public School Teachers of Chicago, Chicago, IL, 5.1%.
MULTI-MARKET FIXED INCOME PORTFOLIO: Connelly Foundation, West Conshohocken, PA,
73.4%; The Greenwall Foundation, New York, NY, 18.0%; Paperworkers Union Local
#286, Philadelphia, PA, 5.1%.
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 1940 Act)
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 1940 Act. 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, 1997, the Mid Cap Growth,
Value, Fixed Income, High Yield and Balanced Portfolios paid $665, $201,647,
$67,500, $3,009 and $37,084, respectively, in distribution fees pursuant to the
Distribution Plan. Other than $4,492 of fees retained by the Distributor, fees
paid to the Distributor during the fiscal year were used to reimburse
third-parties for distribution-related services performed on behalf of the Fund.
30
<PAGE>
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, 1997, the Fund paid $61,244 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.
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:
<TABLE>
<CAPTION>
Rate
----
<S> <C>
Emerging Markets Value Portfolio 0.750%
Equity Portfolio 0.500
Growth Portfolio 0.500
International Equity Portfolio 0.500
Mid Cap Growth Portfolio 0.500
Mid Cap Value Portfolio 0.750
Small Cap Value Portfolio 0.750
Value Portfolio 0.500
Cash Reserves Portfolio 0.250
Domestic Fixed Income Portfolio 0.375
Fixed Income Portfolio 0.375
Fixed Income II Portfolio 0.375
Global Fixed Income Portfolio 0.375
Multi-Market Fixed Income Portfolio 0.450
High Yield Portfolio 0.375
Intermediate Duration Portfolio 0.375
International Fixed Income Portfolio 0.375
Limited Duration Portfolio 0.300
Mortgage-Backed Securities Portfolio 0.375
Municipal Portfolio 0.375
PA Municipal Portfolio 0.375
Special Purpose Fixed Income Portfolio 0.375
Balanced Portfolio 0.450
31
<PAGE>
Multi-Asset-Class Portfolio 0.650
Balanced Plus Portfolio 0.550
Advisory Foreign Fixed Income Portfolio 0.375
Advisory Mortgage Portfolio 0.375
</TABLE>
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 and/or reimburse certain expenses
to the extent necessary, if any, to keep total annual operating expenses
actually deducted from portfolio assets for the Institutional Class of the
Emerging Markets Value, Cash Reserves, Mortgage-Backed Securities, Municipal, PA
Municipal, Multi-Market Fixed Income, Advisory Foreign Fixed Income and Advisory
Mortgage Portfolios from exceeding 1.180%, .320%, .500%, .500%, .500%, .580%,
.150% and .080% of its average daily net assets, respectively. With respect to
the Investment Class and the Adviser Class of the Multi-Asset-Class Portfolio,
the Adviser is, on a voluntary basis, waiving its fees and/or reimbursing
certain expenses. The fee waivers and expense reimbursements for the Investment
Class and Adviser Class of the Multi-Asset-Class Portfolio are voluntary and may
be discontinues at any time at the Adviser's discretion. With respect to the
Institutional Class of the Multi-Asset-Class Portfolio, the Adviser has
voluntarily agreed to waive its advisory fees and/or reimburse certain expenses
to keep total operating expenses from exceeding 0.780%.
For the fiscal years ended September 30, 1995, 1996 and 1997, the Fund paid the
following advisory fees:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
1995 1996 1997 1995 1996 1997
Portfolio (000) (000) (000) (000) (000) (000)
- - --------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio $ 85 $ 286 $ 195 $ 52 $ 42 $ 30
Equity Portfolio 6,840 7,785 6,928 0 0 0
Growth Portfolio * * * * * *
International Equity Portfolio 5,437 3,458 3,236 0 0 0
Mid Cap Growth Portfolio 1,504 1,986 1,961 0 0 0
Mid Cap Value Portfolio 0 188 896 14 46 28
Small Cap Value Portfolio 2,683 3,464 5,161 0 0 0
Value Portfolio 5,078 7,716 14,010 0 0 0
Cash Reserves Portfolio 51 138 166 39 52 65
Domestic Fixed Income Portfolio 75 257 372 23 8 11
Fixed Income Portfolio 4,893 5,917 9,431 0 0 0
Fixed Income II Portfolio 567 773 776 0 0 0
Global Fixed Income Portfolio 190 205 289 0 0 0
Multi-Market Fixed Income Portfolio * * * * * *
High Yield Portfolio 764 1,073 1,558 0 0 0
Intermediate Duration Portfolio 57 52 144 17 18 23
International Fixed Income Portfolio 395 555 549 0 0 0
Limited Duration Portfolio 206 351 404 11 0 4
32
<PAGE>
Mortgage-Backed Securities Portfolio 348 177 173 5 21 22
Municipal Portfolio 110 167 211 37 38 30
PA Municipal Portfolio 32 77 79 31 30 26
Special Purpose Fixed Income Portfolio 1,574 1,517 1,816 0 0 0
Balanced Portfolio 1,385 1,521 1,527 0 0 0
Multi-Asset-Class Portfolio 220 635 797 100 112 126
Balanced Plus Portfolio * * * * * *
Advisory Foreign Fixed Income Portfolio 0 1,933 0 1,631 1,933 713
Advisory Mortgage Portfolio 0 6,056 0 1,711 6,056 9,155
</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) 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 or (2) on 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 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 Company
(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, 1995, 1996 and 1997, the Fund paid the
following administrative fees:
<TABLE>
<CAPTION>
Administrative Fees Paid
1995 1996 1997
(000) (000) (000)
-----------------------------------
<S> <C> <C> <C>
Emerging Markets Value Portfolio $ 14 $ 38 $ 24
Equity Portfolio 1,094 1,246 1,136
Growth Portfolio * * *
International Equity Portfolio 870 553 544
33
<PAGE>
Mid Cap Growth Portfolio 241 318 314
Mid Cap Value Portfolio 1 20 123
Small Cap Value Portfolio 286 369 550
Value Portfolio 812 1,235 2,285
Cash Reserves Portfolio 29 44 74
Domestic Fixed Income Portfolio 21 55 82
Fixed Income Portfolio 1,044 1,262 2,030
Fixed Income II Portfolio 121 165 165
Global Fixed Income Portfolio 41 44 62
Multi-Market Fixed Income Portfolio * * *
High Yield Portfolio 163 229 356
Intermediate Duration Portfolio 16 11 36
International Fixed Income Portfolio 84 118 117
Limited Duration Portfolio 58 93 109
Mortgage-Backed Securities Portfolio 75 38 42
Municipal Portfolio 31 36 51
PA Municipal Portfolio 13 16 22
Special Purpose Fixed Income Portfolio 336 323 414
Balanced Portfolio 246 271 280
Multi-Asset-Class Portfolio 57 113 143
Balanced Plus Portfolio * * *
Advisory Foreign Fixed Income Portfolio 357 412 152
Advisory Mortgage Portfolio 374 1,292 1,954
</TABLE>
* Not in operation during the period.
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 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
34
<PAGE>
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 or markups 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 or dealer
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 or markups 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, 1995, 1996 and 1997, the Fund paid brokerage commissions of
$13,457,075, $18,252,335 and $19,134,219, respectively.
Some securities considered for investment by each of the Fund's portfolios may
also be appropriate for other clients serviced by the Adviser. The Adviser may
place a combined order for two or more accounts or portfolios for the purchase
or sale of the same security if, in its judgment, joint execution is in the best
interest of each participant and will result in best price execution.
Transactions involving commingled orders are allocated in a manner deemed to be
equitable to each account or portfolio. Although it is recognized that, in some
cases, joint execution of orders could adversely affect the price or volume of
the security that a particular account or fund may obtain, it is the opinion of
the Adviser and the Fund's Board of Trustees that combining such orders
generally will be more advantageous to the Fund than effecting such transactions
separately.
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 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 AAffiliated
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 $132,104
in brokerage commissions to affiliates for $75,128,827 of brokered transactions
for the fiscal year ended September 30, 1997.
35
<PAGE>
ANNUAL TURNOVER
The annual turnover rate for each portfolio for the past two fiscal years ended
September 30 was as follows:
<TABLE>
<CAPTION>
Portfolio 1996 1997
- - --------- ---- ----
<S> <C> <C>
Emerging Markets Value 108% 64%
Equity 67% 85%
Growth N/A N/A
International Equity 78% 62%
Mid Cap Growth 141% 134%
Mid Cap Value 377% 184%
Small Cap Value 145% 107%
Value 53% 46%
Domestic Fixed Income 168% 217%
Fixed Income 162% 179%
Fixed Income II 165% 182%
Global Fixed Income 133% 137%
Multi-Market Fixed Income N/A N/A
High Yield 115% 96%
Intermediate Duration 251% 204%
International Fixed Income 124% 107%
Limited Duration 174% 130%
Mortgage-Backed Securities 116% 164%
Municipal 78% 54%
PA Municipal 51% 64%
Special Purpose Fixed Income 151% 198%
Balanced 110% 145%
Multi-Asset-Class 122% 141%
Balanced Plus N/A N/A
Advisory Mortgage 139% 144%
Advisory Foreign Fixed Income 170% 208%
</TABLE>
N/A -- Portfolio had not commenced operations as of September 30, 1997.
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-seven 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) in
the shareholder's name on the books of the Fund. Shareholders of a class have
36
<PAGE>
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.
Dividends and 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, 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.
As set forth in the prospectus, unless the shareholder elects otherwise in
writing, all dividends and 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 a dividend or 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.
37
<PAGE>
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 Fund's
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 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 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.
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.
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
period might have been greater or less than the average for the entire period.
Average annual total return is calculated according to the following formula:
38
<PAGE>
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 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
9/30/97 9/30/97 9/30/97 9/30/97 Date
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Emerging Markets Value Portfolio 18.08 -- -- 15.71 02/28/95
Equity Portfolio 38.46 18.66 14.74 17.56 11/14/84
Growth Portfolio* N/A N/A N/A N/A N/A
International Equity Portfolio 23.16 12.30 -- 9.54 11/25/88
Mid Cap Growth Portfolio 28.05 22.77 -- 21.44 03/30/90
Mid Cap Value Portfolio 61.40 -- -- 42.61 12/30/94
Small Cap Value Portfolio 49.81 26.75 17.15 15.44 07/01/86
Value Portfolio 41.25 23.31 16.39 18.59 11/05/84
Cash Reserves Portfolio 5.32 4.48 -- 4.75 08/29/90
Domestic Fixed Income Portfolio 10.20 7.83 10.02 10.01 09/30/87
Fixed Income Portfolio 11.47 8.39 10.30 10.96 11/14/84
Fixed Income Portfolio II 10.58 7.69 -- 10.08 08/31/90
Global Fixed Income Portfolio 3.53 -- -- 7.36 04/30/93
Multi-Market Fixed Income Portfolio* N/A N/A N/A N/A N/A
High Yield Portfolio 19.90 14.03 -- 12.40 02/28/89
Intermediate Duration Portfolio 8.93 -- -- 8.87 10/03/94
International Fixed Income Portfolio 0.44 -- -- 6.81 04/29/94
Limited Duration Portfolio 6.98 5.19 -- 5.99 03/31/92
Mortgage-Backed Securities Portfolio 10.70 7.32 -- 7.50 01/31/92
Municipal Portfolio 8.47 -- -- 7.95 10/01/92
PA Municipal Portfolio 8.01 -- -- 8.28 10/01/92
Special Purpose Fixed Income Portfolio 11.78 8.90 -- 9.84 03/31/92
Balanced Portfolio 27.44 -- -- 14.53 12/31/92
Multi-Asset-Class Portfolio 26.50 -- -- 18.14 07/29/94
Balanced Plus Portfolio* N/A N/A N/A N/A N/A
Advisory Foreign Fixed Income Portfolio 14.08 -- -- 14.31 10/07/94
Advisory Mortgage Portfolio 11.03 -- -- 9.63 04/12/95
</TABLE>
* The Growth, Balanced Plus and Multi-Market Fixed Income Portfolios had not
commenced operations as of September 30, 1997.
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
9/30/97 9/30/97 9/30/97 9/30/97 Class
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 38.12 -- -- 29.53 04/10/96
International Equity Portfolio 22.85 -- -- 16.24 04/10/96
Mid Cap Value Portfolio 61.05 -- -- 46.01 05/10/96
Value Portfolio 41.01 -- -- 32.09 05/06/96
Fixed Income Portfolio -- -- -- 10.07 10/15/96
High Yield Portfolio 19.77 -- -- 18.61 05/21/96
Special Purpose Fixed Income Portfolio 11.62 -- -- 10.83 04/10/96
Balanced Portfolio -- -- -- 18.40 04/04/97
39
<PAGE>
Multi-Asset-Class Portfolio 26.32 -- -- 21.18 06/10/96
Balanced Plus Portfolio* -- -- -- -- N/A
</TABLE>
* The Balanced Plus Portfolio had not commenced operations as of September 30,
1997.
The average annual total return of each Adviser 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 Adviser
9/30/97 9/30/97 9/30/97 9/30/97 Class
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Mid Cap Growth Portfolio -- -- -- 27.99 01/31/97
Value Portfolio 40.87 -- -- 44.49 07/17/96
Fixed Income Portfolio -- -- -- 7.79 11/07/96
High Yield Portfolio -- -- -- 12.63 01/31/97
Balanced Portfolio -- -- -- 23.82 11/01/96
</TABLE>
The portfolios may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring 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 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.
<TABLE>
<CAPTION>
5 Years
ended Inception to
9/30/97 9/30/97
------- -------
<S> <C> <C>
Emerging Markets Value Portfolio N/A 45.86%
Equity Portfolio 135.21% 702.87
Growth Portfolio** -- --
International Equity Portfolio 78.62 123.96
Mid Cap Growth Portfolio 178.94 329.47
Mid Cap Value Portfolio N/A 165.50
Small Cap Value Portfolio 227.21 403.11
Value Portfolio 185.13 802.03
Cash Reserves Portfolio 24.52 38.96
Domestic Fixed Income Portfolio 45.76 159.92
Fixed Income Portfolio 49.60 281.77
Fixed Income Portfolio II 44.81 97.47
Global Fixed Income Portfolio N/A 36.90
Multi-Market Fixed Income Portfolio** -- --
High Yield Portfolio 92.83 172.84
Intermediate Duration Portfolio N/A 28.94
International Fixed Income Portfolio N/A 25.29
Limited Duration Portfolio 28.81 37.70
Mortgage-Backed Securities Portfolio 42.40 50.58
Municipal Portfolio N/A 46.59
PA Municipal Portfolio N/A 48.80
Special Purpose Fixed Income Portfolio 53.13 67.63
Balanced Portfolio N/A 90.44
Multi-Asset-Class Portfolio N/A 69.69
Balanced Plus Portfolio** -- --
Advisory Foreign Fixed Income Portfolio N/A 48.97
Advisory Mortgage Portfolio N/A 25.44
</TABLE>
40
<PAGE>
* 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, Balanced Plus and Multi-Market Fixed Income Portfolios had not
commenced operations as of September 30, 1997.
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:
<TABLE>
<CAPTION>
Annualized Since
Inception
Period Ended:
9/30/97
MAS EQUITY FUNDS (Gross of Fees)*
Inception Date
- - --------------
<S> <C> <C>
11/14/84 Equity Portfolio 18.29%
N/A Growth Portfolio --
11/05/84 Value Portfolio 19.33
07/01/86 Small Cap Value Portfolio 16.44
03/30/90 Mid Cap Growth Portfolio 22.17
11/25/88 International Equity Portfolio 10.22
12/30/94 Mid Cap Value Portfolio 43.71
02/28/95 Emerging Markets Value Portfolio 17.10
MAS FIXED INCOME FUNDS
11/14/84 Fixed Income Portfolio 11.50%
09/30/87 Domestic Fixed Income Portfolio 10.54
03/31/92 Special Purpose Income Portfolio 10.36
03/31/92 Limited Duration Portfolio 6.41
01/31/92 Mortgage-Backed Portfolio 8.12
02/28/89 High Yield Portfolio 13.07
10/01/92 Municipal Portfolio 8.56
10/01/92 PA Municipal Portfolio 8.82
04/30/93 Global Fixed Income Portfolio 8.02
N/A Multi-Market Fixed Income Portfolio --
04/29/94 International Fixed Income Portfolio 7.40
10/07/94 Advisory Foreign Fixed Income Portfolio 16.64
10/03/94 Intermediate Duration Portfolio 9.46
04/12/95 Advisory Mortgage Portfolio 9.72
MAS BALANCED FUNDS
12/31/92 Balanced Portfolio 15.16%
N/A Balanced Plus Portfolio --
07/29/94 Multi-Asset-Class Portfolio 18.90
</TABLE>
*Annualized
41
<PAGE>
As of September 30, 1997, the Growth, Multi-Market Fixed Income and Balanced
Plus Portfolios had not commenced operations.
The Municipal and 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 and PA Municipal
Portfolios for the period 10/1/92 (inception of the Funds) through 9/30/97:
<TABLE>
<CAPTION>
Pre-tax return Post-tax return
<S> <C> <C>
Municipal Portfolio 7.95*/46.59** 7.86*/45.98**
PA Municipal Portfolio 8.28*/48.80** 7.98*/46.79**
</TABLE>
*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
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 PORTFOLIOS'S REPORTS TO
SHAREHOLDERS. A portfolio may also advertise or quote a yield which is gross of
expenses.
The yield figures provided will be calculated according to a formula prescribed
by the SEC and can be expressed as follows:
Yield = 2 [ ( (a-b/cd) + 1) 6 - 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
42
<PAGE>
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:
<TABLE>
<CAPTION>
Period ending
9/30/97
-------
<S> <C>
Emerging Markets Value Portfolio 1.02
Equity Portfolio 1.15
International Equity Portfolio 1.60
Mid Cap Growth Portfolio 0.00
Mid Cap Value Portfolio 0.08
Small Cap Value Portfolio 0.45
Value Portfolio 1.93
Domestic Fixed Income Portfolio 6.32
Fixed Income Portfolio 6.37
Fixed Income Portfolio II 6.66
Global Fixed Income Portfolio 5.30
High Yield Portfolio 8.60
Intermediate Duration Portfolio 6.34
International Fixed Income Portfolio 4.65
Limited Duration Portfolio 5.74
Mortgage-Backed Securities Portfolio 9.96
Municipal Portfolio 4.42
PA Municipal Portfolio 4.78
Special Purpose Fixed Income Portfolio 7.08
Balanced Portfolio 3.27
Multi-Asset-Class Portfolio 2.57
Advisory Foreign Fixed Income Portfolio 5.44
Advisory Mortgage Portfolio 7.39
</TABLE>
As of September 30, 1997, the Growth, Balanced Plus and Multi-Market Fixed
Income 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, 1997.
<TABLE>
<CAPTION>
Period ending
9/30/97
-------
<S> <C>
Value at beginning of period $1.00
Value at end of period $1.00
43
<PAGE>
Current yield 5.61%
Effective yield 5.46%
</TABLE>
The net asset value per share 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 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
Business 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.
44
<PAGE>
J.P. Morgan Emerging Markets Bond Index
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.
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.
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.
45
<PAGE>
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.
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 U.S. 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
46
<PAGE>
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.
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.
47
<PAGE>
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.
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
48
<PAGE>
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.
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.
49
<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended September 30, 1997,
including notes thereto and the report of Price Waterhouse LLP thereon are
incorporated herein by reference. A copy of the 1997 Annual Report will
accompany the delivery of this Statement of Additional Information. In the 1997
Annual Report, the Emerging Markets Value Portfolio is referred to as the
Emerging Markets Portfolio. The portfolio changed its name following the
printing of the Annual Report. In addition, the 1997 Annual Report includes
financial information for the Investment Class of the Special Purpose Fixed
Income Portfolio. Following the printing of the Annual Report, the Fund closed
the Investment Class of this portfolio. Accordingly, this portfolio has been
removed from the Investment Class prospectus.
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.
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
50
<PAGE>
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.
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.
51
<PAGE>
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
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
52
<PAGE>
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.
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,
53
<PAGE>
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.
54
<PAGE>
SUPPLEMENT DATED FEBRUARY 6, 1998
TO PROSPECTUS DATED MAY 1, 1997
PREVIOUSLY SUPPLEMENTED ON SEPTEMBER 26, 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 further amended and supplemented to: (i) reflect
a change in Portfolio Managers for the Value Equity and Balanced Portfolios;
(ii) reflect changes in certain non-fundamental investment limitations of the
High Yield Portfolio; and (iii) close the Small Cap Value Equity and Balanced
Portfolios to new investors.
------------
Alford E. Zick, Jr. will no longer serve as Portfolio Manager for the
Value Equity and Balanced Portfolios. Stephen C. Sexauer and Philip W.
Friedman now share primary responsibility for managing the assets of the
Value Equity and Balanced Portfolios. Accordingly, the second paragraph on
page 26 is hereby deleted and replaced with the following:
VALUE EQUITY AND BALANCED PORTFOLIOS -- STEPHEN C. SEXAUER AND PHILIP
W. FRIEDMAN. Stephen C. Sexauer is a Principal of Morgan Stanley and the
Adviser and is a member of the investment management team of the Adviser.
In addition to portfolio management, his equity research responsibilities
include financials, energy, utilities and technology. 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
Econometric's. 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. Philip W. Friedman is a Managing Director of Morgan Stanley
and the Adviser and is a member of the investment management team of the
Adviser. In addition to portfolio management, his equity research
responsibilities include business equipment and services, capital goods,
consumer durables, multi-industry and transportation. Prior to joining
the Adviser in 1997, he was the North American Director of Equity Research
at Morgan Stanley. From 1990 to 1995, he was a member of Morgan Stanley's
Equity Research team. Mr. Friedman graduated from Rutgers University with a
B.A. (PHI BETA KAPPA AND SUMMA CUM LAUDE) in Economics. He also holds an
M.B.A. from J.L. Kellogg School of Management at Northwestern University.
Mr. Sexauer and Mr. Friedman have had primary responsibility for managing
the Value Equity Portfolio since January 1992 and July 1997, respectively.
<PAGE>
Mr. Sexauer and Mr. Friedman have had primary responsibility for managing the
Balanced Portfolio since February 1990 and July 1997, respectively.
------------
The last paragraph on page 17 is deleted and replaced with the following:
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's fixed income
securities may have equity features such as conversion rights or warrants,
and the Portfolio may invest in equity securities other than preferred stock
(e.g., common stocks, warrants and rights and limited partnership interests).
The Portfolio may not invest more than 5% of its total assets at time of
acquisition in limited partnership interests. The Portfolio may invest in
fixed income securities that are investment grade (ie., 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.
------------
The following sentence is added to the end of the first paragraph on the
cover page of the Prospectus:
The Small Cap Value Equity and Balanced Portfolios are currently closed
to new investors with the exception of certain tax-qualified retirement
plans, other investment companies advised by Morgan Stanley Asset Management
Inc. and its affiliates and certain employees of the Adviser and its
affiliates.
The first sentence under "SHAREHOLDER SERVICES--EXCHANGE FEATURES" is deleted
and replaced with the following:
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, Emerging Markets, Small Cap Value Equity and Balanced Portfolios,
which are closed to new investors except as described above).
------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
!!!!!
<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.
17
<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
18
<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
19
<PAGE>
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.
20
<PAGE>
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
21
<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.
22
<PAGE>
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.
24
<PAGE>
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.
25
<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
26
<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
28
<PAGE>
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.
29
<PAGE>
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.)
30
<PAGE>
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
31
<PAGE>
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
32
<PAGE>
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
33
<PAGE>
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").
34
<PAGE>
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.
35
<PAGE>
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.
36
<PAGE>
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.
37
<PAGE>
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
38
<PAGE>
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
39
<PAGE>
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.
40
<PAGE>
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.
41
<PAGE>
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.
42
<PAGE>
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.
43
<PAGE>
<TABLE>
<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>
<PAGE>
- - -------------------------------------------
- - -------------------------------------------
- - -------------------------------------------
- - -------------------------------------------
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.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
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
- - ---------------------------------------
- - ---------------------------------------
- - ---------------------------------------
- - ---------------------------------------
<PAGE>
SUPPLEMENT DATED JANUARY 30, 1998
TO STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997
AS SUPPLEMENTED THROUGH SEPTEMBER 26, 1997
MORGAN STANLEY INSTITUTIONAL FUND, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MASSACHUSETTS
02208-2798
-------------
The Statement of Additional Information is being further supplemented to
reflect (i) certain changes in the non-fundamental investment limitations of the
High Yield Portfolio; (ii) changes in the biographical information of Andrew
McNally IV, a Director of the Fund; and (iii) the election of Stefanie V. Chang
as a Vice President of the Fund. The Statement of Additional Information is
further supplemented as follows:
--------------
On page 23 of the Statement of Additional Information, non-fundamental
limitation numbers (2), (3), (7), (8) and (9) are hereby deleted and replaced
with the following:
(2) except for the High Yield Portfolio, 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, except
that the High Yield Portfolio may pledge, mortgage or hypothecate a
maximum of 50% of its assets, not counting assets segregated to
comply with coverage requirements under Section 18(f) of the 1940
Act, and the SEC's rules, regulations, orders, and interpretations
thereunder;
(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, except that the High Yield Portfolio also may
purchase such securities that are not publicly distributed; (ii) by
lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not consistent with
the 1940 Act or the Rules and Regulations or interpretations of the
Commission thereunder; and (iii) the High Yield Portfolio may lend
securities to institutional investors in addition to entities
described in (ii);
(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, or purchase securities while borrowings
exceed 5% of its total assets, except that (i) the Latin American,
Emerging Markets Debt and Technology Portfolios may borrow in
accordance with Fundamental Restriction No. (5) above; and (ii) the
High Yield Portfolio may borrow up to 33 1/3% of its total assets in
the aggregate, including reverse repurchase agreements; and
(9) except for the High Yield Portfolio, 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.
--------------
<PAGE>
The first paragraph on page 24 is hereby deleted and replaced with the
following:
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 (i) with respect to the Money Market,
Municipal Money Market and High Yield Portfolios, (a) 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 (b) asset-backed
securities will be classified according to the underlying assets
securing such securities; and (ii) with respect to the High Yield
Portfolio, utility companies will be classified according to their
services, for example, electric, gas, gas transmission, and telephone
will be treated as separate industries.
--------------
The biographical information of Andrew McNally IV on page 25 is hereby
deleted and replaced with the following:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST FIVE
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND YEARS
- - ---------------------------------------- -------------------- ----------------------------------------
<S> <C> <C>
Andrew McNally IV Director Director of Allendale Insurance Co.,
8255 North Central Park Avenue Mercury Finance (consumer finance);
Skokie, IL 60076 Zenith Electronics, Hubbell, Inc.
11/11/39 (industrial electronics); Director of
Morgan Stanley Universal Funds, Inc. and
Morgan Stanley Strategic Adviser Fund,
Inc.; Formerly, Chairman and Chief
Executive Officer of Rand McNally &
Company (publishing).
</TABLE>
--------------
The following biographical information for Stefanie V. Chang is inserted
between the biographical information for Joseph P. Stadler and Valerie Y. Lewis
on page 25:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST FIVE
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND YEARS
- - ---------------------------------------- -------------------- ----------------------------------------
<S> <C> <C>
Stefanie V. Chang* Vice President Vice President of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated and Morgan Stanley Asset
New York, NY 10020 Management Inc.; Vice President of
11/30/66 various investment companies managed by
Morgan Stanley Asset Management Inc.
Previously practiced law with the New
York law firm of Rogers & Wells.
</TABLE>
--------------
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<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 -
<PAGE>
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
- 3 -
<PAGE>
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
- 4 -
<PAGE>
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
- 5 -
<PAGE>
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.
- 6 -
<PAGE>
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.
- 7 -
<PAGE>
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.
- 8 -
<PAGE>
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
- 9 -
<PAGE>
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.
- 10 -
<PAGE>
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.
- 11 -
<PAGE>
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.
- 12 -
<PAGE>
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
- 13 -
<PAGE>
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
- 14 -
<PAGE>
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.
- 15 -
<PAGE>
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").
- 16 -
<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.
- 17 -
<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.
- 18 -
<PAGE>
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.
- 19 -
<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
- 20 -
<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
- 26 -
<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, 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.............................. 14
Asian Real Estate......................... 19
Emerging Markets.......................... 23
European Equity .......................... 33
European Real Estate...................... 39
Global Equity ............................ 43
Gold...................................... 49
International Equity ..................... 51
International Magnum ..................... 56
International Small Cap................... 63
Japanese Equity........................... 69
Latin American............................ 73
U.S. Equity Portfolios:
Aggressive Equity......................... 77
Emerging Growth........................... 81
Equity Growth............................. 87
Small Cap Value Equity.................... 93
Technology................................ 98
U.S. Equity Plus.......................... 104
U.S. Real Estate.......................... 110
Value Equity.............................. 116
Balanced Portfolio.......................... 121
Fixed Income Portfolios:
Emerging Markets Debt..................... 127
Fixed Income.............................. 132
Global Fixed Income....................... 137
High Yield................................ 141
Municipal Bond............................ 146
Money Market Portfolios:
Money Market.............................. 150
Municipal Money Market.................... 154
Statements of Operations.................... 162
Statements of Changes in Net Assets......... 166
Statement of Cash Flows..................... 180
Financial Highlights ....................... 181
Notes to Financial Statements............... 209
Report of Independant Accountants........... 219
Federal Tax Information..................... 220
Officers and Directors ..................... 221
</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, 1997. Our Fund now offers 29 portfolios including 13 global
and international portfolios, 8 U.S. equity portfolios, 5 fixed income
portfolios, a balanced portfolio and two 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.
Despite the dismal events unfolding in Asia, world equities managed to
produce strong returns and global bonds produced modest gains for 1997. The
fourth quarter brought increased volatility in equity markets as a sharp
correction was touched off by concern over the spread of the Asian crisis. Bonds
moved higher as investors anticipated lower inflation and slower growth as a
result of the Asian currency devaluations. Dollar strength over the quarter
diminished most of the impact from international bond returns in local
currencies.
Among the equity markets, the U.S. ended 1997 on a positive note, shrugging
off the October correction with support from a strong bond market and lower
yields. Standard and Poor's 500 Index returned 33% for the year, after gains of
23% and 38% in 1996 and 1995, respectively. Internationally, European equities
delivered another impressive year of investment returns, while 1997 was a
difficult year in Japan. Asia ex-Japan, of course, saw significant wealth
destruction in 1997, with its regional stock markets collectively putting in
their worst performance in the past 20 years. Macroeconomics and current account
concerns put pressure on the Asian currencies and debt service problems
accelerated the trend. Fourth quarter stock market declines in Latin America
were precipitated by an over-flow of Asian troubles to other emerging markets,
leading to attacks on currency pegs and higher interest rates required to
maintain those pegs.
Among our global and international equity portfolios, the Latin American
Portfolio returned 41.28%, our Global Equity Portfolio gained 23.75% and our
International Equity Portfolio returned 13.91% (each for Class A shares), all
substantially outperforming their benchmarks. Among fixed income asset classes,
declining long-term interest rates and a strong U.S. stock market provided a
favorable backdrop to the high yield market which experienced another very good
year. Our High Yield Portfolio once again performed very well in both absolute
and relative terms, as did our Emerging Markets Debt Portfolio, which returned
18.29% (Class A shares) despite experiencing the spill-over effects of the
weakness across Asia in the fourth quarter.
As we enter 1998, our focus remains to provide you with world class
investment performance and service across a full range of investment products.
We hope you find the enclosed report informative. As always, we very much
appreciate your support of the Fund.
Sincerely,
[SIGNATURE]
Michael F. Klein
PRESIDENT
February 11, 1998
- - --------------------------------------------------------------------------------
1
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
PERFORMANCE SUMMARY (UNAUDITED)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<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 $ 138,667 $ 14 $ 10.39 $ 10.48
Asian Equity 7/01/91 1/02/96 85,503 1,468 9.43 9.40
Asian Real Estate 10/01/97 10/01/97 2,385 --** 7.94 8.03
Emerging Markets 9/25/92 1/02/96 1,501,386 9,666 12.97 12.98
European Equity 4/02/93 1/02/96 242,868 4,654 17.96 17.94
European Real Estate 10/01/97 10/01/97 15,177 789 9.52 9.52
Global Equity 7/15/92 1/02/96 108,074 5,910 18.52 18.46
Gold 2/01/94 1/02/96 436 690 4.10 4.14
International Equity 8/04/89 1/02/96 2,822,900 3,074 17.16 17.13
International Magnum 3/15/96 3/15/96 159,096 28,217 10.87 10.84
International Small Cap 12/15/92 -- 230,095 -- 15.61 --
Japanese Equity 4/25/94 1/02/96 77,086 1,703 5.89 5.87
Latin American 1/18/95 1/02/96 73,196 6,709 10.91 10.80
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 155,087 18,277 15.78 15.72
Emerging Growth 11/01/89 1/02/96 57,777 1,313 7.72 7.63
Equity Growth 4/02/91 1/02/96 591,789 27,879 16.93 16.91
Small Cap Value Equity 12/17/92 1/02/96 35,612 7,523 11.24 11.21
Technology 9/16/96 9/16/96 31,788 2,394 11.73 11.72
U.S. Equity Plus 7/31/97 7/31/97 20,914 102 10.31 10.31
U.S. Real Estate 2/24/95 1/02/96 361,549 21,231 15.38 15.34
Value Equity 1/31/90 1/02/96 86,054 2,246 13.62 13.59
BALANCED PORTFOLIO 2/20/90 1/02/96 4,606 621 7.55 7.53
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 142,382 2,281 5.77 5.77
Fixed Income 5/15/91 1/02/96 183,192 4,834 10.88 10.89
Global Fixed Income 5/01/91 1/02/96 84,635 366 11.15 11.13
High Yield 9/28/92 1/02/96 113,006 7,213 11.58 11.56
Municipal Bond 1/18/95 1/02/96 60,541 -- 10.51 --
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,506,210 -- 1.00 --
Municipal Money Market 2/10/89 -- 804,607 -- 1.00 --
</TABLE>
- - --------------------------------------------------------------------------------
**Amount is less than $500.
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 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 10.24% 9.95% Money Market 5.25% 5.39% 5.24% 5.44%(19)
Fixed Income 5.95 5.80 Municipal Money Market 3.40 3.46 3.22 3.44(20)
Global Fixed Income 4.87 4.72
High Yield 8.34 8.10
Municipal Bond 4.20 --
</TABLE>
- - --------------------------------------------------------------------------------
+The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at December 31, 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 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 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>
8.61% 8.35% 1.78%(1) 11.37% 11.39%(1) 8.69% 7.96%(1) 7.65% 3.87%(1)
- - -48.29 -48.48 -45.48(2) -0.19 0.47(2) 4.16 3.90(2) -27.21 -23.01(2)
- - -19.92* -19.70* -33.91*(21) -- -- -- -- -- --
-1.03 -1.31 -14.42(3) 10.23 6.16(3) 10.13 6.93(3) 4.69 -4.08(3)
17.88 17.73 23.80(4) -- -- 19.25 18.55(4) 19.26 22.11(4)
-4.72* -4.76* 0.13*(22) -- -- -- -- -- --
23.75 23.37 15.76(5) 22.71 15.34(5) 20.03 13.69(5) 22.74 14.41(5)
- - -55.64 -55.17 -35.82(6) -- -- -14.67 -12.84(6) -28.79 -22.78(6)
13.91 13.57 1.78(1) 20.19 11.39(1) 12.19 3.84(1) 16.07 3.87(1)
6.58 6.33 1.78(1) -- -- 8.28 4.52(1) 7.94 4.52(1)
-0.55 -- 1.78(1) 12.76 11.39(1) 12.84 11.24(1) -- --(1)
-9.23 -9.64 -23.67(7) -- -- -4.38 -10.59(7) -5.75 -19.42(7)
41.28 40.37 31.66(8) -- -- 24.70 14.12(8) 41.47 25.29(8)
33.31 32.90 33.36(10) -- -- 41.36 30.90(10) 36.32 27.63(10)
11.36 11.13 21.64(9) 8.88 18.33(9) 11.88 16.36(9) 7.30 21.86(9)
31.32 31.05 33.36(10) 21.86 20.27(10) 19.07 17.79(10) 30.53 27.63(10)
36.80 36.51 24.35(11) 18.30 17.59(11) 18.46 18.16(11) 29.27 21.55(11)
37.27 36.90 33.36(10) -- -- 34.80 33.61(10) 34.52 33.61(10)
3.94* 3.93* 2.44*(10) -- -- -- -- -- --
27.62 27.21 20.29(12) -- -- 30.92 24.58(12) 32.66 27.63(12)
29.20 28.70 33.36(10) 18.64 20.27(10) 14.89 17.85(10) 23.56 27.63(10)
17.30 16.94 18.22(13) 11.98 13.06(13) 11.25 12.44(13) 13.56 16.34(13)
18.29 18.05 13.02(14) -- -- 18.77 13.18(14) 32.46 24.83(14)
9.54 9.48 9.65(15) 7.54 7.48(15) 8.53 8.52(15) 6.89 6.62(15)
1.50 1.29 1.40(16) 6.91 7.51(16) 7.42 8.54(16) 3.68 2.90(16)
15.87 15.48 12.65(17) 13.98 11.84(17) 13.46 11.56(17) 14.94 12.49(17)
7.25 -- 7.67(18) -- -- 6.66 8.12(18) -- --(18)
5.20 -- -- -- -- -- -- -- --
3.17 -- -- -- -- -- -- -- --
</TABLE>
- - --------------------------------------------------------------------------------
* Cumulative (unannualized) total return since inception of the Portfolio.
<TABLE>
<C> <S>
INDICES:
(1) MSCI EAFE (Europe, Australasia, 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
(21) GPR Life Far East Asia Real Estate T.R.
(22) GPR Life European Real Estate T.R.
</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 DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 2.2 %
Austria 0.5 %
Finland 0.8 %
France 8.1 %
Germany 9.4 %
Italy 7.2 %
Japan 18.9 %
Netherlands 3.3 %
Norway 0.5 %
Portugal 1.4 %
Singapore 0.8 %
Spain 3.8 %
Sweden 3.4 %
Switzerland 7.6 %
United Kingdom 17.3 %
Other 14.8 %
</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
MSCI EAFE ALLOCATION
INDEX (1) PORTFOLIO--CLASS A
<S> <C> <C>
01/17/92* 500,000 500,000
10/31/92 452,945 468,500
12/31/92 459,595 479,500
12/31/93 609,250 626,820
12/31/94 656,600 623,550
12/31/95 730,205 689,459
12/31/96 774,382 756,405
12/31/97 788,166 821,531
* 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
ONE YEAR FIVE YEARS SINCE INCEPTION
------------- ----------------- ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 8.61% 11.37% 8.69%
PORTFOLIO -- CLASS
B..................... 8.35 N/A 7.65
INDEX -- CLASS A...... 1.78 11.39 7.96
INDEX -- CLASS B...... 1.78 N/A 3.87
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 that 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 potential and minimize the risk associated with global
investing.
For the year ended December 31, 1997, the Portfolio had a total return of 8.61%
for the Class A shares and 8.35% for the Class B shares, as compared to a total
return of 1.78% for the Morgan Stanley Capital International (MSCI) EAFE Index
(the "Index"). For the five-year period ended December 31, 1997, the average
annual total return for Class A was 11.37% compared to 11.39% for the Index.
From inception on January 17, 1992 to December 31, 1997, the average annual
total return of Class A was 8.69% compared to 7.96% for the Index. From
inception on January 2, 1996 to December 31, 1997, the average annual total
return of Class B was 7.65% as compared to 3.87% for the Index.
The Portfolio outperformed in the fourth quarter due to our cash position and
our underweights in Asia and Japan. During the quarter, market returns were very
volatile. We had underweights in Malaysia (-38%), Hong Kong (-29%), Finland
(-17%), and New Zealand (-16%). Overweight positions in Europe included: Italy
(3.3%), Spain and the U.K.
In 1997, the Japanese economy moved from a potentially robust recovery to the
brink of recession. Europe's vision of a single currency went from a dream to a
near-certainty, and what began as pressure on the Thai baht, turned into an ever
widening Asian currency/asset price debacle.
Of the developed international regions, Europe has the most investment promise
for 1998. Though valuations are high by historic measures, earnings expectations
remain strong (though falling) and there is substantial potential for corporate
restructuring and government deregulation. Though much downsizing and balance
sheet recovery has already taken place in the manufacturing/industrial sectors,
restructuring has just begun in the financial and service industries. With
regard to deregulation, European telecommunication markets officially opened to
cross border competition January 1, and more is to follow. In countries where
the politics are too rigid or splintered to push through necessary pension and
labor market reforms (e.g.
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
Germany, France, and Italy), many corporations are showing dynamism and
entrepreneurship on their own.
One of the major themes for the European markets this year will be the run-up to
the introduction of the euro in January 1999. By the close of 1998, short-term
interest rates in the countries participating in the single currency will have
to be identical, as there will be one short rate for the whole new currency
area. Our economists and currency strategists expect short rates to converge at
around 4.25% by late 1998. This implies an easing of monetary conditions in the
peripheral countries of Italy, Spain, Portugal, and Ireland (rates are currently
5%-6%) and a tightening of short rates in Germany, France, Benelux, Austria and
Finland (rates are currently 3.7%) This divergence of monetary policy, in
combination with high German and French export exposure to Asia, should lead to
a slight easing of growth in the core and an acceleration of growth in the
periphery. We have recently increased our Portfolio overweights to Italy and
Spain and have moved back to neutral in France and Germany.
With regard to Japan, 1997 was a difficult year, and the outlook for 1998 is not
very different. Restrictive Japanese fiscal policy in April, brought the long-
faltering recovery to a standstill and renewed pressure on Japanese banks. The
banks, profligate lenders for years, have become extremely risk averse in the
face of bankruptcies and tougher government regulations. Though tighter lending
standards are necessary for the financial system in the long run, small and
medium sized companies are facing a severe credit squeeze and consumer and
business confidence has plummeted. Export growth potential is dampened by the
fallout from Asia and U.S. trade pressures, while the government's anti-deficit
stance implies no major fiscal stimulus or personal/corporate tax relief.
The silver lining is that as the economic and market strain increases, the odds
for a more aggressive policy response increase. Effective policy will need to
both stimulate the economy and reform the financial sector. Unfortunately, up to
this point, economic stimulus has emphasized deregulation and structural reform
rather than direct pump priming. Bank reform has focused on guaranteeing
depositors and recapitalizing the banks -- all banks. Government officials we
met in mid-December assured us that the old bank convoy system of "good banks"
bailing out "bad banks" was over, but they had no RTC-type proposals to clear
bank balance sheets and no plans to close down insolvent institutions.
We are underweight Japan, with a significant hedge out of the Yen. Within our
Japanese basket we are underweight in banks.
As we write this letter, the Asian crisis is worsening as markets continue to
savagely mark down Asian currencies and share prices. In U.S. dollar terms
through January 12, Hong Kong is down -26%, Malaysia -33%, Singapore -32%, not
to mention Indonesia -49% and Thailand -27%. While these precipitous drops have
all the earmarkings of a panic, even contrarian investors hesitate to re-invest
until the currencies stabilize and local governments show sufficient resolve to
let the asset bubbles dissolve. Malaysia is an interesting example. While we
concur with the Central Bank that an IMF type program of high rates and severe
fiscal tightening would not necessarily stabilize the currency and may serve to
kill off the economy, we don't think the Central Bank should be suppressing
interest rates and printing money to keep banks and companies afloat.
Unfortunately, as the crisis deepens, even countries like Malaysia and
Singapore, that initially hoped to grow their way out of the price deflation,
are now looking at negative to flat economic growth.
We remain underweight Asia-Ex Japan but have begun to initiate small positions
in some oversold markets.
Going into 1998, the US economy continues to be the prime global growth engine,
but we believe Europe is slowly picking up some slack. While all markets would
probably fall in sympathy with a US pullback, we think Europe, Japan and Asia
would outperform in a down market and have more upside if the US keeps chugging
along. In sum, we remain cautious, but are fully invested for the moment. We
have no regional bets, except for a slight underweight in Asia.
Ann D. Thivierge
PORTFOLIO MANAGER
Barton M. Biggs
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMON STOCKS (84.1%)
AUSTRALIA (2.0%)
13,800 Amcor Ltd......................................... $ 61
7,400 Australian Gas Light Co., Ltd..................... 52
18,700 Australian National Industries Ltd................ 17
25,629 Boral Ltd......................................... 65
4,700 Brambles Industries Ltd........................... 93
40,383 Broken Hill Proprietary Co., Ltd.................. 375
10,297 Burns, Philip & Co., Ltd.......................... 2
16,433 Coca Cola Amatil Ltd.............................. 123
22,941 Coles Myer Ltd.................................... 110
11,783 Crown Ltd......................................... 5
23,400 CSR Ltd........................................... 79
39,700 Fosters Brewing Group Ltd......................... 76
13,881 Gio Australia Holdings Ltd........................ 35
26,110 Goodman Fielder Ltd............................... 42
6,100 ICI Australia Ltd................................. 43
5,200 Leighton Holdings Ltd............................. 18
5,072 Lend Lease Corp., Ltd............................. 99
30,123 MIM Holdings Ltd.................................. 18
28,672 National Australia Bank Ltd....................... 400
(a)5,437 Newcrest Mining Ltd............................... 6
38,027 News Corp., Ltd................................... 210
33,153 Normandy Mining Ltd............................... 32
14,520 North Ltd......................................... 38
18,900 Pacific Dunlop Ltd................................ 40
19,300 Pioneer International Ltd......................... 53
4,700 Plutonic Resources Ltd............................ 13
4,202 RGC Ltd........................................... 6
6,800 Rio Tinto Ltd..................................... 79
12,725 Santos Ltd........................................ 52
4,300 Smith (Howard) Ltd................................ 36
2,600 Sons of Gwalia Ltd................................ 6
13,408 Southcorp Holdings Ltd............................ 44
6,900 TABCORP Holdings Ltd.............................. 32
(a)47,200 Telstra Corp., Ltd. (Installment Receipts-Final
Installment: AUD 1.35/shr due 11/17/98)......... 100
36,000 Westpac Banking Corp.............................. 230
20,858 WMC Ltd........................................... 73
----------
2,763
----------
AUSTRIA (0.5%)
100 Austria Mikro Systeme Int'l AG.................... 5
(a)400 Austrian Airlines/Oesterreiche Luftverkehrs AG.... 9
200 Brau-Beteiligungs AG.............................. 10
100 BWT AG............................................ 15
1,400 Bank Austria AG................................... 71
(a)1,200 Bank Austria AG (New)............................. 59
200 Bau Holding AG.................................... 12
400 Boehler-Uddeholm AG............................... 23
200 EA-Generali AG.................................... 53
800 Flughafen Wien AG................................. 32
(a)100 Lenzing AG........................................ 6
400 Mayr-Melnhof Karton AG............................ 22
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
800 OMV AG............................................ $ 111
1,000 Oest Elektrizatswirts AG, Class A................. 106
500 Radex-Heraklith Industriebet AG................... 17
300 Steyr-Daimler-Puch AG............................. 8
400 VA Technologie AG................................. 61
300 Wienerberger Baustoffindustrie AG................. 58
----------
678
----------
FINLAND (0.5%)
(a)600 Amer-Yhtymae Oyj, Class A......................... 11
400 Cultor Oyj........................................ 22
300 Instrumentarium Group, Class B Free............... 10
3,600 Kemira Oyj........................................ 34
2,600 Kesko Oyj......................................... 41
200 Kone Oyj, Class B................................. 24
21,200 Merita Ltd., Class A.............................. 116
1,100 Metra Oyj, Class B................................ 26
2,100 Nokia Oyj, Class K................................ 150
3,300 Outokumpu Oyj..................................... 40
600 Pohjola Insurance Co., Class A.................... 23
500 Pohjola Insurance Co., Class B.................... 19
1,600 Sampo Insurance Co., Ltd., Class A................ 52
400 Stockmann AB, Class B Free........................ 25
7,000 UPM-Kymmene Oyj................................... 140
----------
733
----------
FRANCE (8.0%)
958 Accor............................................. 178
3,639 Alcatel Alsthom................................... 463
7,617 Axa-UAP........................................... 589
5,131 Banque Nationale de Paris......................... 273
690 Bouygues.......................................... 78
808 Canal Plus........................................ 150
925 Carrefour......................................... 483
2,150 Casino Guichard-Perrachon......................... 120
701 Cie Bancaire...................................... 113
2,182 Cie de Saint Gobain............................... 310
2,661 Cie Financiere de Paribas, Class A................ 231
3,088 Cie Generale des Eaux............................. 431
3,041 Cie Generale des Establissements Michelin, Class
B............................................... 153
6,300 Elf Aquitaine..................................... 733
725 Eridania Beghin-Say............................... 113
275 Essilor International............................. 82
(a)18,900 France Telecom.................................... 686
1,883 Groupe Danone..................................... 336
1,819 Havas............................................. 131
400 Imetal............................................ 50
3,240 L'Air Liquide..................................... 507
2,342 Lafarge........................................... 154
2,719 Lagardere S.C.A................................... 90
755 Legrand........................................... 150
1,635 L'OREAL........................................... 640
2,100 LVMH Moet Hennessy Louis Vuitton.................. 349
200 Pathe............................................. 39
1,650 Pernod Ricard..................................... 97
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
505 Pinault-Printemps-Redoute......................... $ 269
470 Promodes.......................................... 195
1,250 PSA Peugeot Citroen............................... 158
8,342 Rhone-Poulenc, Class A............................ 374
130 Sagem............................................. 58
2,626 Sanofi............................................ 292
3,241 Schneider......................................... 176
658 Simco (RFD)....................................... 44
1,650 Societe BIC....................................... 120
100 Societe Eurafrance................................ 41
2,381 Societe Generale, Class A......................... 324
175 Sodexho Alliance.................................. 94
(a)19 Sodexho Alliance.................................. 10
2,994 Suez Lyonnaise des Eaux........................... 331
2,996 Thomson CSF....................................... 94
5,754 Total, Class B.................................... 626
6,100 Usinor Sacilor.................................... 88
1,600 Valeo............................................. 109
----------
11,132
----------
GERMANY (9.0%)
1,100 Adidas AG......................................... 145
(a)750 AGIV AG........................................... 14
5,050 Allianz AG........................................ 1,303
1,000 AMB AG............................................ 110
13,200 BASF AG........................................... 471
16,150 Bayer AG.......................................... 599
6,100 Bayerische Hypotheken Bank AG..................... 296
5,800 Bayerische Vereinsbank AG......................... 374
1,300 Bilfinger & Berger Bau AG......................... 41
(a)150 Brau Und Brunnen AG............................... 15
600 CKAG AG........................................... 57
1,800 Continential AG................................... 40
11,900 Daimler-Benz AG................................... 840
2,150 Degussa AG........................................ 106
11,250 Deutsche Bank AG.................................. 787
49,256 Deutsche Telekom AG............................... 912
10,100 Dresdner Bank AG.................................. 459
1,185 Heidelberger Zement AG............................ 83
2,300 Hochtief AG....................................... 95
250 Karstadt AG....................................... 86
(a)1,150 Kloeckner-Humboldt-Deutz AG....................... 8
250 Linde AG.......................................... 152
8,050 Lufthansa AG...................................... 151
300 MAN AG............................................ 87
850 Mannesmann AG..................................... 427
4,150 Merck KGaA........................................ 140
5,976 Metro AG.......................................... 212
2,090 Muechener Rueck AG (Registered)................... 795
400 Preussag AG....................................... 123
7,850 RWE AG............................................ 421
1,400 SAP AG............................................ 424
1,800 Schering AG....................................... 174
12,750 Siemens AG........................................ 769
(a)100 STRABAG AG........................................ 7
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
800 Thyssen AG........................................ $ 171
11,550 VEBA AG........................................... 787
856 Viag AG........................................... 469
650 Volkswagen AG..................................... 363
----------
12,513
----------
ITALY (7.1%)
39,762 Assicurazioni Generali S.p.A...................... 977
62,700 Banca Commerciale Italiana........................ 218
24,300 Banco Ambrosiano Veneto S.p.A..................... 93
8,344 Benetton Group S.p.A.............................. 136
7,500 Cartiere Burgo.................................... 45
108,500 Credito Italiano.................................. 334
29,000 Edison S.p.A...................................... 175
343,000 ENI S.p.A......................................... 1,945
4,800 Falck Acciaierie & Ferriere Lombarde.............. 22
158,950 Fiat S.p.A........................................ 462
34,980 Fiat S.p.A. Di Risp (NCS)......................... 58
11,500 Impregilo S.p.A................................... 9
38,000 Istituto Bancario San Paolo....................... 363
27,450 Istituto Mobiliare Italiano S.p.A................. 326
181,900 Istituto Nazionale delle Assicurazioni............ 369
10,350 Italcementi S.p.A................................. 72
7,300 Italcementi S.p.A. (RNC).......................... 22
28,800 Italgas........................................... 119
11,400 La Rinascente S.p.A............................... 85
21,400 Magneti Marelli S.p.A............................. 37
52,000 Mediaset S.p.A.................................... 255
22,000 Mediobanca S.p.A.................................. 173
125,574 Montedison S.p.A.................................. 113
41,900 Montedison S.p.A. Di Risp (NCS)................... 27
(a)99,680 Olivetti S.p.A.................................... 60
66,920 Parmalat Finanziaria S.p.A........................ 96
73,000 Pirelli S.p.A..................................... 195
16,260 R.A.S. S.p.A...................................... 159
1,705 R.A.S. S.p.A. (RNC)............................... 12
5,900 SAI............................................... 66
13,500 Sirti S.p.A....................................... 82
28,000 Snia BPD S.p.A.................................... 29
154,444 Telecom Italia S.p.A.............................. 987
(a)39,534 Telecom Italia S.p.A. Di Risp (NCS)............... 174
283,900 Telecom Italia Mobile S.p.A....................... 1,310
67,500 Telecom Italia Mobile S.p.A. (RNC)................ 192
----------
9,797
----------
JAPAN (18.9%)
2,100 Advantest Corp.................................... 119
28,400 Ajinomoto Co...................................... 277
(a)16,600 Aoki Corp......................................... 5
2,300 Aoyama Trading Co................................. 41
900 Asahi Bank Ltd.................................... 4
16,600 Asahi Breweries Ltd............................... 242
50,000 Asahi Chemical Industry Co., Ltd.................. 169
47,800 Asahi Glass Co., Ltd.............................. 227
60,000 Bank of Tokyo-Mitsubushi Ltd...................... 828
800 Bank of Yokohama Ltd.............................. 2
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
16,600 Bridgestone Co.................................... $ 360
20,600 Canon, Inc........................................ 480
9,800 Casio Computer Co................................. 70
5,400 Chiba Bank Ltd.................................... 17
16,600 Chugai Pharmaceuticals Co......................... 85
19,600 Dai Nippon Printing Co., Ltd...................... 368
17,600 Daiei, Inc........................................ 73
16,600 Daikin Industries Ltd............................. 63
16,600 Daiwa House Industry Co., Ltd..................... 88
20,600 Denso Corp........................................ 371
98 East Japan Railway Co............................. 442
10,800 Ebara Corp........................................ 114
7,200 Fanuc Ltd......................................... 273
9,000 Fuji Photo Film Ltd............................... 345
43,200 Fujitsu Ltd....................................... 464
12,800 Furukawa Electric Co.............................. 55
22,600 Hankyu Corp....................................... 106
16,600 Hazama Corp....................................... 8
83,200 Hitachi Ltd....................................... 593
21,000 Honda Motor Co.................................... 771
800 Industrial Bank of Japan Ltd...................... 6
10,800 Ito-Yokado Co., Ltd............................... 550
52,000 Japan Airlines Co................................. 141
42,000 Japan Energy Corp................................. 40
600 Joyo Bank......................................... 2
7,800 Jusco Co., Ltd.................................... 110
33,400 Kajima Corp....................................... 84
22,300 Kansai Electric Power Co.......................... 378
29,000 Kao Corp.......................................... 418
26,400 Kawasaki Steel Corp............................... 36
40,200 Kinki Nippon Railway Co., Ltd..................... 215
33,400 Kirin Brewery Co., Ltd............................ 243
33,400 Komatsu Ltd....................................... 168
50,000 Kubota Corp....................................... 132
33,400 Kumagai Gumi Co................................... 18
5,000 Kyocera Corp...................................... 227
16,600 Kyowa Hakko Kogyo Co., Ltd........................ 72
41,000 Long-Term Credit Bank of Japan Ltd................ 66
48,000 Marubeni Corp..................................... 84
3,800 Marui Co., Ltd.................................... 59
50,000 Matsushita Electric Industrial Co., Ltd........... 732
50,000 Mitsubishi Chemical Corp.......................... 72
44,000 Mitsubishi Corp................................... 347
58,800 Mitsubishi Electric Corp.......................... 151
91,000 Mitsubishi Heavy Industries Ltd................... 379
33,400 Mitsubishi Materials Corp......................... 54
17,000 Mitsubishi Trust & Banking Co..................... 171
48,800 Mitsui & Co....................................... 289
(a)33,400 Mitsui Engineering & Shipbuilding Co., Ltd........ 21
400 Mitsui Fudosan Co., Ltd........................... 4
200 Mitsui Trust & Banking Co., Ltd................... --
17,800 Mitsukoshi Ltd.................................... 47
5,000 Murata Manufacturing Co., Ltd..................... 126
10,800 Mycal Corp........................................ 90
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
28,400 NEC Corp.......................................... $ 303
16,600 NGK Insulators Ltd................................ 148
12,800 Nippon Express Co., Ltd........................... 64
16,600 Nippon Fire & Marine Insurance Co................. 62
15,800 Nippon Light Metal Co............................. 23
16,600 Nippon Meat Packers, Inc.......................... 226
47,800 Nippon Oil Co..................................... 123
185,000 Nippon Steel Co................................... 274
250 Nippon Telegraph & Telephone Corp................. 2,146
50,000 Nippon Yusen Kabushiki Kaisha..................... 137
63,600 Nissan Motor Co................................... 263
97,800 NKK Corp.......................................... 78
19,600 Odakyu Electric Railway Corp...................... 85
33,400 Oji Paper Co., Ltd. (New)......................... 133
73,600 Osaka Gas Co...................................... 168
16,600 Penta-Ocean Construction Co., Ltd................. 23
4,000 Pioneer Electric Corp............................. 62
1,000 Rohm Co........................................... 102
44,000 Sakura Bank Ltd................................... 126
12,800 Sankyo Co., Ltd................................... 289
55,000 Sanwa Bank Ltd.................................... 556
50,000 Sanyo Electric Co., Ltd........................... 130
3,800 Secom Co., Ltd.................................... 243
3,300 Sega Enterprises Ltd.............................. 60
16,600 Sekisui House Ltd................................. 107
33,200 Sharp Corp........................................ 229
4,800 Shimano, Inc...................................... 88
23,600 Shimizu Corp...................................... 55
7,000 Shin-Etsu Chemical Co............................. 134
7,000 Shiseido Co., Ltd................................. 95
600 Shizuoka Bank Ltd................................. 6
33,400 Showa Denko....................................... 29
7,800 Sony Corp......................................... 693
66,600 Sumitomo Chemical Co.............................. 153
31,400 Sumitomo Corp..................................... 176
22,400 Sumitomo Electric Industries...................... 306
6,800 Sumitomo Forestry Co., Ltd........................ 33
15,800 Sumitomo Metal & Mining Co........................ 52
59,800 Sumitomo Metal Industries......................... 77
16,600 Sumitomo Osaka Cement Co., Ltd.................... 21
33,400 Taisei Corp., Ltd................................. 55
9,800 Taisho Pharmaceutical Co.......................... 250
20,600 Takeda Chemical Industries........................ 587
33,400 Teijin Ltd........................................ 70
23,400 Tobu Railway Co................................... 73
12,000 Tohoku Electric Power Co., Inc.................... 182
800 Tokai Bank Ltd.................................... 4
50,000 Tokio Marine & Fire Insurance Co.................. 567
31,000 Tokyo Electric Power Co........................... 565
2,000 Tokyo Electron Ltd................................ 64
66,600 Tokyo Gas Co...................................... 151
28,400 Tokyu Corp........................................ 110
22,600 Toppan Printing Co., Ltd.......................... 294
50,100 Toray Industries, Inc............................. 225
16,600 Toto Ltd.......................................... 106
33,400 Toyoba Co......................................... 40
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
73,400 Toyota Motor Corp................................. $ 2,104
33,400 Ube Industries Ltd................................ 42
600 Yamaichi Securities Co............................ --
----------
26,159
----------
NETHERLANDS (3.3%)
19,017 ABN Amro Holding N.V.............................. 370
1,150 Akzo Nobel N.V.................................... 198
9,900 Elsevier N.V...................................... 160
1,200 Getronics N.V..................................... 38
650 Heineken N.V...................................... 113
10,913 ING Groep N.V..................................... 460
1,270 KLM Royal Dutch Airlines N.V...................... 47
7,133 Koninklijke Ahold N.V............................. 186
1,500 Koninklijke KNP BT N.V............................ 35
6,348 Koninklijke PTT Nederland N.V..................... 265
350 Nedlloyd Groep N.V................................ 8
301 Oce N.V........................................... 33
4,800 Philips Electronics N.V........................... 288
29,100 Royal Dutch Petroleum Co.......................... 1,597
539 Stork N.V......................................... 19
9,800 Unilever N.V...................................... 604
985 Wolters Kluwer N.V................................ 127
----------
4,548
----------
NORWAY (0.5%)
1,400 Aker RGI ASA, Class A............................. 25
1,200 Bergesen d.y. ASA, Class A........................ 28
500 Bergesen d.y. ASA, Class B........................ 12
11,900 Christiania Bank Og Kreditkasse................... 48
700 Dyno Industrier ASA - Oslo........................ 14
1,100 Elkem ASA......................................... 15
2,200 Hafslund ASA, Class A............................. 13
500 Helikopter Services Group ASA..................... 6
900 Kvaerner ASA...................................... 46
700 Leif Hoegh & Co. ASA.............................. 14
(a)3,000 NCL Holdings ASA.................................. 11
5,100 Norsk Hydro ASA................................... 248
600 Norske Skogindustrier ASA, Class A................ 17
1,000 Orkla ASA, Class A................................ 86
(a)700 Petroleum Geo-Services ASA........................ 44
(a)6,200 Storebrand ASA.................................... 44
400 Unitor ASA........................................ 5
----------
676
----------
PORTUGAL (1.4%)
8,900 Banco Commercial Portugues (Registered)........... 182
4,700 Banco Espirito Santo (Registered)................. 140
4,500 BPI SGPS (Registered)............................. 109
3,400 Banco Totta & Acores, Class B (Registered)........ 67
400 Cia de Seguros Tranquilidade (Registered)......... 10
4,700 Cimpor SGPS....................................... 123
200 CIN............................................... 13
(a)700 Sociedade de Construcoes Soares da Costa.......... 5
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
1,100 Corticeira Amorim................................. $ 13
20,800 EDP-Electricidade de Portugal..................... 394
400 Engil-SGPS........................................ 4
700 INAPA-Investimentos Participacoes e Gestao........ 8
5,950 Jeronimo Martins SGPS............................. 189
5,100 Portucel Industrial Empressa Produtora de
Celulose........................................ 31
10,700 Portugal Telecom, (Registered).................... 496
2,400 Sonae Investimentos............................... 97
700 UNICER-Uniao Cervejeira........................... 10
----------
1,891
----------
SINGAPORE (0.8%)
(a)32,000 Asia Food & Properties Ltd........................ 5
18,000 City Developments Ltd............................. 84
(a)2,000 Creative Technology Ltd........................... 41
5,000 Cycle & Carriage Ltd.............................. 21
22,000 DBS Land Ltd...................................... 34
11,000 Development Bank of Singapore Ltd. (Foreign)...... 94
7,000 First Capital Corp., Ltd.......................... 6
6,800 Fraser & Neave Ltd................................ 30
13,000 Hai Sun Hup Group Ltd............................. 5
11,000 Hotel Properties Ltd.............................. 7
5,000 Inchcape Bhd...................................... 8
16,750 Keppel Corp., Ltd................................. 48
2,000 Metro Holdings Ltd................................ 2
8,000 NatSteel Ltd...................................... 11
20,000 Neptune Orient Lines Ltd. (Foreign)............... 8
19,560 Oversea-Chinese Banking Corp. (Foreign)........... 114
4,000 Overseas Union Enterprise Ltd..................... 10
8,000 Parkway Holdings Ltd.............................. 18
1,200 Robinson & Co., Ltd............................... 4
3,600 Shangri-La Hotel Ltd.............................. 7
20,000 Singapore Airlines Ltd. (Foreign)................. 131
4,800 Singapore Press Holdings Ltd. (Foreign)........... 60
17,000 Singapore Technologies Industrial Corp............ 16
141,000 Singapore Telecommunications Ltd.................. 263
8,000 Straits Trading Co., Ltd.......................... 10
34,000 United Industrial Corp., Ltd...................... 13
20,000 United Overseas Bank Ltd. (Foreign)............... 111
13,000 United Overseas Land Ltd.......................... 11
----------
1,172
----------
SPAIN (3.8%)
435 Acerinox.......................................... 64
1,489 Aguas de Barcelona................................ 61
18 Aguas de Barcelona (New).......................... --
4,200 Argentaria........................................ 256
7,107 Autopistas Concesionaria Espanola................. 95
22,500 Banco Bilbao Vizcaya (Registered)................. 728
11,000 Banco Central Hispano Americano................... 268
16,000 Banco Santander................................... 535
500 Corporacion Financiera Alba....................... 53
1,890 Corporacion Mapfre................................ 50
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
1,900 Dragados y Construccion........................... $ 40
1,650 Ebro Agricolas.................................... 29
750 ENCE.............................................. 10
34,400 Endesa............................................ 611
(a)5,700 Ercros............................................ 6
2,200 Fomento Construction y Cantractas................. 84
5,000 Gas Natural SDG................................... 259
31,200 Iberdrola......................................... 411
735 Inmobiliaria Metropolitana Vasco Central.......... 33
200 Portland Valderrivas.............................. 18
10,100 Repsol............................................ 431
1,200 Tabacalera, Class A............................... 97
31,500 Telefonica de Espana.............................. 899
9,800 Union Electrica Fenosa............................ 94
1,750 Uralita........................................... 20
1,467 Vallehermoso...................................... 45
750 Viscofan Envolturas Celulosicas................... 19
284 Zardoya Otis...................................... 33
----------
5,249
----------
SWEDEN (3.4%)
24,400 ABB AB, Class A................................... 289
4,500 AGA AB, Class A................................... 62
3,700 AGA AB, Class B................................... 49
49,633 Astra AB, Class A................................. 860
4,650 Atlas Copco AB, Class A........................... 139
2,600 Electrolux AB, Series B........................... 180
30,300 Ericsson LM, Class B.............................. 1,139
1,300 Esselte AB, Class A............................... 25
6,500 Hennes & Mauritz AB, Class B...................... 287
3,000 Securitas AB, Class B............................. 91
3,900 Skandia Forsakrings AB............................ 184
17,600 Skandinaviska Enskilda Banken, Class A............ 223
4,400 Skanska AB, Class B............................... 180
2,700 S.K.F. AB, Class B................................ 57
11,050 Stora Kopparbergs Bergslags AB, Class A........... 139
6,800 Svenska Cellulosa AB, Class B..................... 153
7,100 Svenska Handelsbanken, Class A.................... 245
16,900 Swedish Match AB.................................. 56
4,600 Trelleborg AB, Class B............................ 58
13,650 Volvo AB, Class B................................. 366
----------
4,782
----------
SWITZERLAND (7.6%)
225 ABB AG............................................ 283
425 Adecco............................................ 123
135 Alusuisse-Lonza Holdings Ltd. (Registered)........ 130
6,150 CS Holding AG (Registered)........................ 952
25 Georg Fischer AG (Bearer)......................... 34
160 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 130
915 Nestle (Registered)............................... 1,371
1,485 Novartis AG (Registered).......................... 2,410
38 Roche Holding AG (Bearer)......................... 585
161 Roche Holding AG (Registered)..................... 1,599
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
40 SGS Surveillance.................................. $ 77
120 SMH AG (Bearer)................................... 66
90 Sulzer AG (Registered)............................ 57
1,760 Swiss Bank Corp. (Registered)..................... 547
340 Swiss Reinsurance (Registered).................... 636
(a)80 SwissAir (Registered)............................. 110
450 Union Bank of Switzerland (Bearer)................ 651
540 Union Bank of Switzerland (Registered)............ 156
155 Valora Holding AG................................. 33
1,100 Zuerich Versicherung (Registered)................. 524
----------
10,474
----------
THAILAND (0.0%)
(d)8,000 CMIC Finance & Securities PCL (Foreign)........... 1
(d)18,600 General Finance & Securities PCL (Foreign)........ 3
10,657 Land & House Co., Ltd. (Foreign).................. 2
(d)34,700 Siam City Bank PCL (Foreign)...................... 2
(d)14,600 TPI Polene PCL (Foreign).......................... 1
----------
9
----------
UNITED KINGDOM (17.3%)
28,800 Abbey National plc................................ 516
14,400 Arjo Wiggins Appleton plc......................... 38
10,300 Associated British Foods plc...................... 90
35,017 Barclays plc...................................... 931
22,700 Bass plc.......................................... 352
63,835 B.A.T. Industries plc............................. 581
79,941 BG plc............................................ 360
14,454 BICC plc.......................................... 41
26,810 Blue Circle Industries plc........................ 151
14,470 BOC Group plc..................................... 238
22,700 Boots Co. plc..................................... 327
14,400 BPB Industries plc................................ 81
86,505 BTR plc........................................... 262
10,275 British Aerospace plc............................. 293
24,725 British Airways plc............................... 228
118,323 British Petroleum Co. plc......................... 1,556
33,000 British Sky Broadcasting plc...................... 247
41,200 British Steel plc................................. 88
119,500 British Telecommunications plc.................... 940
6,226 Burmah Castrol plc................................ 109
51,472 Cable & Wireless plc.............................. 453
22,680 Cadbury Schweppes plc............................. 229
16,540 Caradon plc....................................... 48
(a)90,600 Centrica plc...................................... 133
18,543 Coats Viyella plc................................. 28
14,396 Commercial Union plc.............................. 201
10,300 Courtaulds plc.................................... 50
2,116 De La Rue Co. plc................................. 14
87,594 Diageo plc........................................ 806
10,289 EMI Group plc..................................... 86
1 Energy Group plc.................................. --
59,700 General Electric plc.............................. 387
12,415 GKN plc........................................... 254
65,900 Glaxo Wellcome plc................................ 1,559
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
14,472 Granada Group plc................................. $ 221
24,700 Great Universal Stores plc........................ 311
16,463 Guardian Royal Exchange plc....................... 89
12,340 Hanson plc........................................ 55
26,800 Harrisons & Crosfield plc......................... 62
45,288 HSBC Holdings plc................................. 1,118
18,600 Imperial Chemical Industries plc.................. 291
24,719 Ladbroke Group plc................................ 107
16,500 Land Securities plc............................... 263
16,500 Lasmo plc......................................... 75
24,700 Legal & General Group plc......................... 216
113,300 Lloyds TSB Group plc.............................. 1,465
16,496 Lonrho plc........................................ 25
72,100 Marks and Spencer plc............................. 710
12,400 MEPC plc.......................................... 104
28,800 National Power plc................................ 284
16,870 Peninsular & Oriental Steam Navigation Co......... 192
30,920 Pilkington plc.................................... 65
41,162 Prudential Corp. plc.............................. 496
18,500 Rank Group plc.................................... 103
12,416 Redland plc....................................... 70
28,800 Reed International plc............................ 289
35,000 Reuters Holdings plc.............................. 382
12,400 Rexam plc......................................... 61
24,748 Rio Tinto plc..................................... 305
6,200 RMC Group plc..................................... 87
28,828 Royal & Sun Alliance Insurance Group plc.......... 290
10,270 Royal Bank of Scotland Group plc.................. 130
18,527 Safeway plc....................................... 104
32,923 Sainsbury (J) plc................................. 275
4,100 Schroders plc..................................... 129
20,630 Scottish Power plc................................ 182
41,200 Sears plc......................................... 36
12,346 Sedgwick Group plc................................ 29
10,300 Slough Estates plc................................ 58
102,996 Smithkline Beecham plc............................ 1,055
10,338 Southern Electric plc............................. 86
28,807 Tarmac plc........................................ 54
16,516 Taylor Woodrow plc................................ 48
39,120 Tesco plc......................................... 318
14,452 Thames Water plc.................................. 215
10,328 Thorn plc......................................... 27
10,317 TI Group plc...................................... 79
57,600 Unilever plc...................................... 493
14,386 United Utilities plc.............................. 184
67,956 Vodafone Group plc................................ 490
18,500 Zeneca Group plc.................................. 650
----------
24,055
----------
TOTAL COMMON STOCKS (Cost $108,000)........................... 116,631
----------
PREFERRED STOCKS (0.9%)
AUSTRALIA (0.1%)
28,063 News Corp., Ltd................................... 139
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
AUSTRIA (0.0%)
664 Bank Austria AG (New)............................. $ 30
500 Bank Austria AG-Vorzug............................ 24
100 Bau Holding AG.................................... 4
----------
58
----------
FINLAND (0.3%)
5,400 Nokia Oyj, Series A............................... 383
----------
GERMANY (0.4%)
5,250 RWE AG............................................ 225
1,000 SAP AG............................................ 325
----------
550
----------
ITALY (0.1%)
53,900 Fiat S.p.A........................................ 82
----------
TOTAL PREFERRED STOCKS (Cost $1,052).......................... 1,212
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- - ----------
RIGHTS (0.0%)
AUSTRALIA (0.0%)
(a)4,284 Crown Ltd., expiring 2/04/98...................... --
----------
NORWAY (0.0%)
(a)3,000 NCL Holdings ASA.................................. --
----------
PORTUGAL (0.0%)
(a)1,100 Jeronimo Martins SGPS, expiring 1/02/98........... --
----------
TOTAL RIGHTS (Cost $0)........................................ --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- - ----------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)620 Casino Guichard-Perrachon, expiring 12/31/99...... 13
(a)4,333 Cie Generale des Eaux, expiring 5/02/01........... 3
----------
16
----------
HONG KONG (0.0%)
(a)845 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... --
----------
ITALY (0.0%)
(a)1,400 La Rinascente S.p.A., CW99, expiring 12/31/99..... 1
(a)2,450 La Rinascente S.p.A., CW99, expiring 12/31/99..... 3
----------
4
----------
SINGAPORE (0.0%)
(a)2,400 Asia Food & Properties Ltd., expiring 7/12/02..... --
(a)11,750 Keppel Land Ltd., expiring 12/20/00............... 3
----------
3
----------
SWITZERLAND (0.0%)
(a)112 Roche Holding AG, expiring 5/05/98................ 12
----------
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
WARRANTS (CONT.)
THAILAND (0.0%)
(a)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ $ --
----------
TOTAL WARRANTS (Cost $10)..................................... 35
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- - ----------
UNITS (0.1%)
AUSTRALIA (0.1%)
25,921 General Property Trust............................ 46
26,954 Westfield Trust................................... 51
----------
TOTAL UNITS (Cost $98)........................................ 97
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ----------
CONVERTIBLE DEBENTURES (0.1%)
FRANCE (0.1%)
FRF 60 Sanofi 4.00%, 1/01/00............................. 74
18 Simco 3.25%, 1/01/06.............................. 16
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $53)....................... 90
----------
FIXED INCOME SECURITIES (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01......................................... 35
----------
ITALY (0.0%)
ITL 11,200 Mediobanca S.p.A., Series XW 4.50%, 1/01/00....... 6
----------
TOTAL FIXED INCOME SECURITIES (Cost $33)...................... 41
----------
TOTAL FOREIGN SECURITIES (85.2%) (Cost $109,246).............. 118,106
----------
</TABLE>
<TABLE>
<C> <S> <C>
SHORT-TERM INVESTMENT (12.3%)
REPURCHASE AGREEMENT (12.3%)
$ 17,041 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $17,047,
collateralized by U.S. Treasury Notes, 6.00%,
due 6/30/99, valued at $17,409 (Cost $17,041)... 17,041
----------
FOREIGN CURRENCY (0.4%)
ATS 10 Austrian Schilling................................ 1
BEF 15 Belgian Franc..................................... --
GBP 9 British Pound..................................... 15
FRF 8 French Franc...................................... 1
DEM 46 German Mark....................................... 25
IDR 115,705 Indonesian Rupiah................................. 21
ITL 212,542 Italian Lira...................................... 120
JPY 1,025 Japanese Yen...................................... 8
NLG 14 Netherlands Guilder............................... 7
PTE 960 Portuguese Escudo................................. 5
KRW 21,851 South Korean Won.................................. 13
ESP 3,184 Spanish Peseta.................................... 21
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
SEK 30 Swedish Krona..................................... $ 4
CHF 502 Swiss Franc....................................... 344
----------
TOTAL FOREIGN CURRENCY (Cost $631)............................ 585
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.9%) (Cost $126,918)..................... 135,732
----------
OTHER ASSETS (17.4%)
Securities at Value, Held as Collateral for
Securities Lending............................ $ 20,612
Net Unrealized Gain on Foreign Currency Exchange
Contracts..................................... 1,544
Margin Deposit on Futures Contracts............. 1,326
Receivable for Daily Variation on Futures
Contracts..................................... 419
Dividends Receivable............................ 205
Foreign Withholding Tax Reclaim Receivable...... 63
Security Lending Income Receivable.............. 14
Interest Receivable............................. 3
Other........................................... 12 24,198
----------
LIABILITIES (-15.3%)
Collateral on Securities Loaned................. (20,612)
Payable for Investments Purchased............... (344)
Investment Advisory Fees Payable................ (141)
Custodian Fees Payable.......................... (41)
Administrative Fees Payable..................... (23)
Security Lending Fees Payable................... (18)
Payable for Portfolio Shares Redeemed........... (12)
Directors' Fees & Expenses Payable.............. (9)
Bank Overdraft.................................. (1)
Other Liabilities............................... (48) (21,249)
---------- ----------
NET ASSETS (100%)............................................. $ 138,681
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 132,252
Distributions in Excess of Net Investment Income.............. (220)
Accumulated Net Realized Loss................................. (4,098)
Unrealized Appreciation on Investments, Foreign Currency
Translations and Futures Contracts.......................... 10,747
----------
NET ASSETS.................................................... $ 138,681
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $138,667
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,346,092 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.39
----------
----------
CLASS B:
- - --------------------------------------------------------------
NET ASSETS.................................................... $14
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,326 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.48
----------
----------
</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, 1997
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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>
- - --------------- -------- ----------- --------------- -------- ------------
ESP 3,141 $ 21 1/02/98 U.S.$ 21 $ 21 $ --
IDR 115,705 21 1/02/98 U.S.$ 21 21 --
U.S.$ 1,250 1,250 1/16/98 DEM 2,145 1,193 (57)
U.S.$ 55 55 1/16/98 DEM 95 53 (2)
U.S.$ 3,409 3,409 1/16/98 DEM 5,797 3,226 (183)
DEM 8,037 4,472 1/16/98 U.S.$ 4,589 4,589 117
U.S.$ 1,100 1,100 1/21/98 FRF 6,313 1,050 (50)
U.S.$ 206 206 1/21/98 FRF 1,178 196 (10)
U.S.$ 2,425 2,425 1/21/98 ITL 4,145,237 2,343 (82)
FRF 7,491 1,246 1/21/98 U.S.$ 1,285 1,285 39
ITL 4,523,160 2,556 1/21/98 U.S.$ 2,644 2,644 88
ITL 3,772,946 2,132 1/21/98 U.S.$ 2,203 2,203 71
JPY 1,284,947 9,891 1/29/98 U.S.$ 10,687 10,687 796
JPY 1,588,688 12,239 2/05/98 U.S.$ 13,387 13,387 1,148
U.S.$ 5,090 5,090 2/05/98 JPY 605,048 4,662 (428)
NLG 1,028 508 2/12/98 U.S.$ 530 530 22
ESP 40,905 269 2/12/98 U.S.$ 280 280 11
U.S.$ 535 535 2/12/98 NLG 1,028 509 (26)
U.S.$ 282 282 2/12/98 ESP 40,905 269 (13)
AUD 1,703 1,111 2/19/98 U.S.$ 1,210 1,210 99
ITL 1,426,260 806 2/19/98 U.S.$ 838 838 32
NLG 709 351 2/19/98 U.S.$ 367 367 16
SEK 9,767 1,232 2/19/98 U.S.$ 1,295 1,295 63
GBP 909 1,490 2/19/98 U.S.$ 1,512 1,512 22
U.S.$ 2,042 2,042 2/19/98 ITL 3,453,780 1,952 (90)
U.S.$ 368 368 2/19/98 NLG 709 351 (17)
U.S.$ 9,418 9,418 2/19/98 GBP 5,582 9,152 (266)
JPY 144,843 1,119 2/26/98 U.S.$ 1,185 1,185 66
JPY 275,339 2,128 2/26/98 U.S.$ 2,230 2,230 102
DEM 2,905 1,620 2/26/98 U.S.$ 1,715 1,715 95
U.S.$ 1,700 1,700 2/26/98 DEM 2,905 1,620 (80)
U.S.$ 3,096 3,096 2/26/98 JPY 398,473 3,079 (17)
SGD 1,763 1,042 3/05/98 U.S.$ 1,091 1,091 49
U.S.$ 1,108 1,108 3/05/98 SGD 1,763 1,042 (66)
FRF 6,380 1,065 3/16/98 U.S.$ 1,089 1,089 24
DEM 2,220 1,240 3/16/98 U.S.$ 1,268 1,268 28
U.S.$ 1,859 1,859 3/16/98 FRF 11,038 1,842 (17)
U.S.$ 33 33 3/16/98 JPY 4,185 32 (1)
SGD 432 255 3/23/98 U.S.$ 262 262 7
U.S.$ 250 250 3/23/98 SGD 432 255 5
JPY 250,430 1,951 4/20/98 U.S.$ 2,000 2,000 49
-------- -------- ------
$ 82,991 $ 84,535 $ 1,544
--------
-------- -------- ------
-------- ------
</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
PCL -- Public Company Limited
RFD -- Ranked for Dividend
RNC -- Non Convertible Savings Shares
SGD -- Singapore Dollar
- - ------------------------------------------------------------
FUTURES CONTRACTS:
At December 31, 1997 the following futures contracts were open:
<TABLE>
<CAPTION>
NET
UNREALIZED
NUMBER AGGREGATE APPRECIATION
OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
<S> <C> <C> <C> <C>
- - -
---------- ------------- ----------- ---------------
PURCHASES:
CAC 40 Index 21 FRF 12,637 Jan-98 $ 112
FT-SE 100 Index 37 GBP 4,794 Mar-98 159
SALES:
OMX Index 42 SEK 10,118 Jan-98 (31)
Aust All Ord. 28 AUD 1,845 Mar-98 (22)
Milan MIB30 Index 9 ITL 2,276,550 Mar-98 (69)
TOPIX Index 60 JPY 714,600 Mar-98 277
-----
$426
-----
-----
</TABLE>
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ----------------------------------------------------------------
Capital Equipment...................... $ 15,234 11.0%
Consumer Goods......................... 25,425 18.3
Energy................................. 12,170 8.8
Finance................................ 26,137 18.9
Gold Mines............................. 50 --
Materials.............................. 17,599 12.7
Multi-Industry......................... 2,457 1.8
Services............................... 19,034 13.7
--------- ---
$ 118,106 85.2%
--------- ---
--------- ---
</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
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
China 4.5 %
Hong Kong 30.5 %
India 8.7 %
Indonesia 2.5 %
Korea 2.8 %
Malaysia 2.6 %
Philippines 6.1 %
Singapore 15.3 %
Taiwan 15.2 %
Thailand 3.4 %
Other 8.4 %
</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 MSCI COMBINED FAR
PORTFOLIO--CLASS
A EAST FREE EX-JAPAN INDEX(1)
<S> <C> <C>
7/01/91* $500,000 $500,000
10/31/91 483,500 493,080
10/31/92 684,130 676,180
12/31/92 658,030 630,045
12/31/93 1,353,595 1,252,425
12/31/94 1,139,550 1,014,350
12/31/95 1,217,837 1,083,427
12/31/96 1,260,340 1,182,886
12/31/97 651,722 644,909
* 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.
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..................... -48.29% -0.19% 4.16%
PORTFOLIO -- CLASS
B..................... -48.48 N/A -27.21
INDEX -- CLASS A...... -45.48 0.47 3.90
INDEX -- CLASS B...... -45.48 N/A -23.01
</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 (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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of
- - -48.29% for the Class A shares and -48.48% for the Class B shares, as compared
to a total return of -45.48% for the Morgan Stanley Capital International (MSCI)
Combined Far East Free ex-Japan Index (the "Index"). For the five-year period
ending December 31, 1997, the average annual total return for Class A was -0.19%
compared to 0.47% for the Index. From inception on July 1, 1991 to December 31,
1997, the average annual total return of Class A was 4.16% compared to 3.90% for
the Index. From inception on January 2, 1996 to December 31, 1997 the average
annual total return of Class B was -27.21% compared to -23.01% for the Index
MARKET REVIEW
Asian markets witnessed a disastrous year in 1997, as the Index suffered its
largest yearly decline since its inception. Of the core East Asian markets, not
a single individual country managed a positive return for the year, as the
region's best performers were Taiwan (-6.3%) and Hong Kong (-23.3%). Five of the
nine countries encompassed within the Index suffered declines of more than 60%,
led by Indonesia (-74.1%) followed by Thailand (-73.4%), Malaysia (-68.0%),
Korea (-66.7%) and the Philippines (-62.6%).
Though the meltdown in the region can be traced to factors which existed in many
countries, the collapse was precipitated by the de-pegging of the Thai baht on
July 2, 1997, which subsequently forced the currency and equity markets into a
vicious downward spiral. A large current account deficit coupled with unhedged
U.S. dollar loans going into a property bubble first attracted the speculators
who eventually triggered the depreciation of the currency. Despite a change of
government and an IMF led bailout package, the equity market remains badly
beaten,
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
down close to 90% from its peak two years ago. Though the IMF has been
successful in closing shaky financial institutions, a complete lack of
confidence in the currency and illiquidity in the markets has led most
international equity investors to desert Thailand.
The currency depreciation quickly spread to other Southeast Asian countries,
most severely to Indonesia. Despite reasonably solid macroeconomic fundamentals,
domestic and international holders of the currency quickly fled to U.S. dollars,
forcing the rupiah down 56% by the year end. Indonesian corporates and banks
with large exposure to U.S. dollar-denominated debt led the market down, as
interest costs skyrocketed throughout the economy. The ensuing economic
slowdown, as well as concerns over the health of Indonesia's ailing patriarch
Suharto, allowed little upside to the equity market through year end.
The contagion effect which lashed Southeast Asia quickly spread to Northeast
Asia with the Korean won depreciating by 47%. In the fourth quarter, the stock
market declined sharply amidst concern over the credit quality of the financial
sector and the ability of Korea to repay its foreign short-term obligations.
Korea's downturn was a result of the excessive expansion and over-leverage by
Korean chaebols, the business conglomerates of Korea, which comprise over 70% of
GDP. Several large chaebols entered into court receivership including Sammi,
Hanbo, Kia and Jinro with net debt to equity ratios well above 500%,
respectively. In the latter part of the year, the IMF stepped in and Korea was
forced to undertake quick liberalization and reform measures, including the
opening of its capital markets.
Lastly, even Hong Kong did not remain unscathed from the regional turmoil.
Though its currency board system allowed it to maintain the Hong Kong dollar peg
to the U.S. dollar, the cost was levied through a rapid increase in interest
rates. The equity market, dominated by interest sensitive stocks such as
property and banks, reversed the 20% return it had made through September and
plummeted to a final -25% performance for the year. Hong Kong property prices,
among the most expensive in the world dropped 30% in 4 months, as asset
deflation took the place of currency depreciation.
OUTLOOK
As the crash takes its initial victims in ASEAN to below 70% from their peaks,
focus has now shifted to North-East Asia. The imminent demise of the Korean
economy (the 11(th) largest in the world) as we know it today has finally
awakened the world to the risk of a worldwide contagion and begun to elicit some
concerted response from the U.S. and the international community.
At the same time, however, as the other currencies and markets fall, the
remaining markets like Hong Kong, Singapore and Taiwan are looking more and more
expensive and vulnerable. The risk in Hong Kong is that China is obviously
slowing rapidly and its currency peg to the U.S. dollar is exacting a heavy toll
on its economy. Should the U.S. equity markets crash, Hong Kong's position could
become untenable.
Similarly, should China falter, Taiwan would be seriously impacted, and its
problems compounded by the current weakness in the technology and electronics
area. Any fallout in the electronics area will also be problematic for Singapore
which is already contending with the devastation of its ASEAN partners and
hinterland.
We would therefore look to reduce our Hong Kong and China exposure and seek to
hedge our currency exposure to the Hong Kong dollar, the New Taiwan dollar and
the Singapore dollar. Concurrently, we would be seeking to put money to work in
selected stocks in the more devastated markets which are beginning to offer
compelling values for the patient investor.
It is anticipated that 1998 will be a very difficult year for the region. The
effect of the fallout in the regional markets is just beginning to filter
through into the real economy and 1998 will be marked by corporate collapses and
massive layoffs which are likely to cause many of the economies to descend into
economic recessions and possible political and social unrest.
Although the currency turmoil and confidence crisis continues and there are no
signs of the stock markets stabilizing, the speed at which some of the regional
currencies and markets are sliding would seem to indicate a climatic condition.
- - --------------------------------------------------------------------------------
Asian Equity Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
It is therefore our view that now is not the time for serious investors to exit
these markets. Indeed, we believe investors with the luxury of a longer term
horizon stand to reap considerable long term gains through capitalizing on this
monumental meltdown in the Asian markets.
Our strategy would be to concentrate on identifying for acquisition, the
companies and stocks that represent irreplaceable franchises which are currently
available at bargain prices.
In closing, we are pleased to inform you that Vinod Sethi has joined Ean Wah
Chin and assumed portfolio management responsibility for the Portfolio. As
Managing Director in charge of our Bombay office, Vinod has expanded his duties
to include oversight of all stock selection in Asia.
Ean Wah Chin
PORTFOLIO MANAGER
Vinod Sethi
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
COMMON STOCKS (91.6%)
CHINA (4.5%)
3,299,000 Qingling Motors Co., Class H..................... $ 1,618
61,340 Shenzhen Fangda Co., Ltd., Class B............... 70
(a)4,901,000 Zhejiang Expressway Co., Ltd., Class H........... 993
(a)2,029,000 Zhejiang Southeast Electric Power Co., Ltd.,
Class B........................................ 653
1,359,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 566
--------
3,900
--------
HONG KONG (30.5%)
1,228,000 Cheung Kong Holdings Ltd......................... 8,042
785,000 China Light & Power Co., Ltd..................... 4,356
615,000 Dao Heng Bank Group Ltd.......................... 1,536
206,000 HSBC Holdings plc................................ 5,077
602,000 Hutchison Whampoa Ltd............................ 3,776
966,000 Ng Fung Hong Ltd................................. 1,016
379,400 Sun Hung Kai Properties Ltd...................... 2,644
23,000 Television Broadcasts Ltd........................ 66
--------
26,513
--------
INDIA (8.7%)
117,500 Bharat Heavy Electricals, Ltd.................... 1,061
31,500 Castrol (India) Ltd.............................. 599
20,000 Container Corp of India, Ltd..................... 214
32,000 Housing Development Finance Corp.,
Ltd............................................ 2,512
37,600 Reckitt & Coleman of India Ltd................... 373
61,450 Smithkline Beecham Pharmaceuticals (India)
Ltd............................................ 838
158,050 State Bank of India.............................. 980
130,000 Tata Engineering & Locomotive Co., Ltd........... 982
--------
7,559
--------
INDONESIA (2.5%)
53,000 Bat Indonesia.................................... 250
203,500 Gudang Garam..................................... 310
(a)45,400 Gulf Indonesia Resources Ltd..................... 999
921,000 Telekomunikasi Indonesia......................... 490
(d)17,900 Unilever Indonesia............................... 98
--------
2,147
--------
KOREA (2.8%)
(e)16,167 Housing & Commercial Bank, Korea GDR............. 85
(a)48,600 Korea Fund, Inc., (The).......................... 322
15,645 LG Information & Communication Ltd............... 439
22,020 Pohang Iron & Steel Co., Ltd..................... 614
290 SK Telecom Co. Ltd............................... 88
(a)1,000 Samsung Electronics Co. GDR...................... 14
39,878 Samsung Electronics Co........................... 903
--------
2,465
--------
MALAYSIA (2.6%)
220,000 Dialog Group Bhd................................. 379
44,000 Kuala Lumpur Kepong Bhd.......................... 94
25,000 Telekom Malaysia Bhd............................. 74
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
744,000 Tenaga Nasional Bhd.............................. $ 1,588
117,000 United Engineers Bhd............................. 97
--------
2,232
--------
PHILIPPINES (6.1%)
2,926,971 Ayala Land, Inc., Class B........................ 1,156
206,034 Manila Electric Co., Class B..................... 682
(a)4,697,000 Music Corp....................................... 1,682
6,997,000 SM Prime Holdings................................ 1,037
637,000 San Miguel Corp., Class B........................ 778
--------
5,335
--------
SINGAPORE (15.3%)
(a)73,600 Creative Technology Ltd.......................... 1,619
179,500 Development Bank of Singapore Ltd. (Foreign)..... 1,537
197,000 Electronic Resources Ltd......................... 201
(a)384,000 Natsteel Electronics Ltd......................... 493
559,378 Oversea-Chinese Banking Corp. (Foreign).......... 3,260
396,000 Parkway Holdings Ltd............................. 895
142,400 Singapore Press Holdings Ltd. (Foreign).......... 1,787
573,200 United Overseas Bank Ltd. (Foreign).............. 3,187
131,000 Venture Manufacturing (Singapore) Ltd............ 366
--------
13,345
--------
TAIWAN (15.2%)
(a)245,000 Asustek Computer, Inc............................ 3,882
(a)14,300 Asustek Computer, Inc. GDR....................... 228
247,000 Cathay Construction Corp......................... 282
(a)168,000 China Development Corp........................... 479
(a)730,398 Compal Electronics............................... 2,127
75,000 Delta Electronics, Inc........................... 299
2,085,056 Far East Textile Ltd............................. 2,262
(a)304,000 Hon Hai Precision Industry....................... 1,538
(a)239,740 Kuoyang Construction............................. 452
(a)58,000 Pou Chen Corp.................................... 238
604,200 Siliconware Precision Industries Co.............. 1,426
--------
13,213
--------
THAILAND (3.4%)
12,000 Advanced Info Service PCL (Foreign).............. 57
(d)24,000 BEC World PLC (Foreign).......................... 96
(a,d)95,000 Bangkok Expressway PCL (Foreign)................. 53
(d)174,000 CVD Entertainment PCL (Foreign).................. 91
784,200 Eastern Water Resources Development & Management
PCL (Foreign).................................. 814
(a,d)459,400 Nation Multimedia Group PCL
(Foreign)...................................... 119
(d)911,700 National Petrochemical PCL (Foreign)............. 483
(d)25,000 Siam Makro PCL (Foreign)......................... 30
554,270 Thai Farmers Bank PCL (Foreign).................. 1,007
(d)33,000 Thai Storage Battery PCL (Foreign)............... 28
(d)166,500 Thai Theparos Food Product PCL (Foreign)......... 161
--------
2,939
--------
TOTAL COMMON STOCKS (Cost $106,978)................................ 79,648
--------
</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, 1997
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
FOREIGN CURRENCY (1.7%)
INR 4,208 Indian Rupee..................................... $ 107
MYR 28 Malaysian Ringgit................................ 7
PHP 21,144 Philippine Peso.................................. 522
KRW 614,778 South Korean Won................................. 363
TWD 9,427 Taiwan Dollar.................................... 289
THB 12,058 Thai Baht........................................ 251
--------
TOTAL FOREIGN CURRENCY (Cost $1,583)............................... 1,539
--------
TOTAL INVESTMENTS (93.3%) (Cost $108,561).......................... 81,187
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (19.8%)
Receivable for Investments Sold.................... $ 9,319
Securities at Value, Held as Collateral for
Securities Lending............................... 7,197
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................ 392
Receivable for Portfolio Shares Sold............... 204
Dividends Receivable............................... 37
Security Lending Income Receivable................. 33
Foreign Withholding Tax Reclaim Receivable......... 19
Other.............................................. 21 17,222
----------
LIABILITIES (-13.1%)
Collateral on Securities Loaned.................... (7,197)
Bank Overdraft..................................... (2,645)
Payable for Portfolio Shares Redeemed.............. (1,108)
Investment Advisory Fees Payable................... (179)
Payable for Investments Purchased.................. (96)
Custodian Fees Payable............................. (70)
Security Lending Fees Payable...................... (36)
Deferred Foreign Taxes Payable..................... (28)
Administrative Fees Payable........................ (18)
Directors' Fees and Expenses Payable............... (18)
Distribution Fees Payable.......................... (2)
Other Liabilities.................................. (41) (11,438)
---------- ----------
NET ASSETS (100%)................................................ $ 86,971
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................. 183,074
Undistributed Net Investment Income.............................. 2,300
Accumulated Net Realized Loss.................................... (71,344)
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign taxes of $28 on
unrealized appreciation on investments)........................ (27,059)
----------
NET ASSETS....................................................... $ 86,971
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -----------------------------------------------------------------
NET ASSETS....................................................... $85,503
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,068,014 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $9.43
----------
----------
CLASS B:
- - -----------------------------------------------------------------
NET ASSETS....................................................... $1,468
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 156,228 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $9.40
----------
----------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - -------------- -------- ----------- ----------- -------- ------------
HKD 34,754 $ 4,485 1/2/98 U.S.$ 4,485 $ 4,485 $ --
KRW 638,345 377 1/2/98 U.S.$ 357 357 (20)
MYR 7,461 1,918 1/2/98 U.S.$ 1,917 1,917 (1)
PHP 21,101 521 1/2/98 U.S.$ 520 520 (1)
SGD 956 569 1/2/98 U.S.$ 570 570 1
KRW 1,533,000 900 2/25/98 U.S.$ 1,400 1,400 500
SGD 16,129 9,519 3/18/98 U.S.$ 9,432 9,432 (87)
-------- -------- -----
$ 18,289 $ 18,681 $ 392
--------
-------- -------- ------------
-------- ------------
</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.
GDR -- Global Depositary Receipt
HKD -- Hong Kong Dollar
PCL -- Public Company Limited
SGD -- Singapore Dollar
- - ------------------------------------------------------------
SUMMARY OF COMMON STOCKS BY INDUSTRY CLASSIFICATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ---------------------------------------------------------------
Capital Equipment...................... $ 13,927 16.0%
Consumer Goods......................... 14,155 16.3
Energy................................. 6,625 7.6
Finance................................ 33,887 39.0
Materials.............................. 3,565 4.1
Multi-Industry......................... 4,192 4.8
Services............................... 3,297 3.8
-------- ---
$ 79,648 91.6%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 14.2 %
Hong Kong 52.6 %
Japan 8.9 %
New Zealand 1.6 %
Philippines 2.1 %
Singapore 18.0 %
Other 2.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASIAN REAL ESTATE ASIAN REAL ESTATE
PORTFOLIO-- PORTFOLIO-- GPR LIFE FAR EAST
ASIA REAL ESTATE T.R.
CLASS A CLASS B INDEX(1)
<S> <C> <C> <C>
10/01/97* $500,000 $100,000 $500,000
12/31/97 400,400 80,300 330,450
* 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 performance of Class B shares will vary based
upon the different fees assessed to that class. The GPR Life Far East Asia Real
Estate T.R. value at December 31, 1997 assumes a minimum initial investment of
$500,000; if a minimum initial investment of $100,000 (the minimum investment
for Class B shares) is assumed, the value at December 31, 1997 would be $66,090.
PERFORMANCE COMPARED TO THE GPR LIFE
FAR EAST ASIA REAL ESTATE T.R. INDEX(1)
- - -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
SINCE INCEPTION
---------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... -19.92%
PORTFOLIO -- CLASS B(3)..................... -19.70
INDEX....................................... -33.91
</TABLE>
1. The GPR Life Far East Asia Real Estate T.R. Index is a Far East market
capitalization weighted index of listed property/real estate securities
measuring total return.
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 October 1, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 Asian Real Estate Portfolio is to provide
long-term capital appreciation by investing primarily in equity securities of
companies in the Asian real estate industry whose shares trade on recognized
stock exchange in Asia and in equity securities of companies organized under the
laws of an Asian country whose business is conducted principally in Asia.
For the period from October 1, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return for Class A and Class B
shares of -19.92% and -19.70%, respectively compared to -33.91% for the GPR Life
Far East Asia Real Estate T.R. Index.
The contagion effect of the Asian currency debacle continued unabated into the
final quarter of 1997. What was originally a Southeast Asian problem, quickly
spread onto South Korea, Hong Kong and Japan, leading to the collapse of the
Korean won, speculative attacks on the Hong Kong dollar and a sharp weakening of
the Japanese yen. Equity markets punished governments whose policies disregarded
economic reality. Investors confidence was shaken by a spate of corporate
bankruptcies in Korea and Japan, as weaker Asian currencies eroded the debt
servicing ability of corporations with huge foreign-currency denominated
borrowings. Domestic economic conditions of Asian countries have continued to
deteriorate as rising interest rates eliminate profits and purchasing power.
Equity market valuations have adjusted for a higher risk premium of investing in
Asia.
During the period, the Portfolio maintained overweight positions in Hong Kong,
Singapore, and Australia. Mass residential housing in Hong Kong met with good
sales after a swift 25.30% price cut by property developers. Hong Kong offers an
attractive potential return as soon as the currency situation stabilizes because
housing demand continued to be strong and buyers and sellers were quick to
arrive at a new asset price clearing level. Demand for residential and
commercial real estate in Singapore had slowed as a result of the currency
turmoil and growing tension in Indonesia. The government on its part had cut
back its land supply by 30% in 1997 and frozen land sales during the first half
of 1998. We believe the supply-demand imbalance will be gradually restored. The
risk-reward profile of property stocks appears favorable. Australia remains the
least affected by the currency crisis, as stock prices remain stable with
- - --------------------------------------------------------------------------------
Asian Real Estate Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
improving office market yields. We continue to avoid markets plagued by external
debt overhang, rising political risk and widespread corporate insolvency.
Although we expect the market to remain volatile in the near term, current share
prices have already discounted sharp declines in asset prices throughout Asia.
Attractive investment opportunities abound, especially in fundamentally sound
economies like Hong Kong, Singapore and Australia. Stock selection is key. Our
Portfolio is primarily focused on companies with a strong balance sheet, good
operating cash flow and quality land banks to take advantage of either a
technical or cyclical upswing when the currency crisis subsides.
Kiat Seng Seah
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -------------------------------------------------------------------------
COMMON STOCKS (96.6%)
AUSTRALIA (14.2%)
39,000 Australian Growth Properties Ltd................. $ 23
(a)23,000 Australand Holdings Ltd.......................... 22
58,000 BT Office Trust.................................. 58
(a)14,000 BT Sydney Development Trust...................... 21
42,000 Capital Property Trust........................... 63
37,000 Grand Hotel Group................................ 47
13,000 Westfield Trust.................................. 25
69,000 Westpac Property Trust........................... 80
-------
339
-------
HONG KONG (52.6%)
34,000 Cheung Kong Holdings Ltd......................... 223
319,000 China Overseas Land & Investment................. 98
200,000 China Resources Beijing Land..................... 95
156,600 HKR International Ltd............................ 115
27,000 Henderson Land Development Co., Ltd.............. 127
30,000 Hysan Development Co., Ltd....................... 60
180,000 Lai Sun Development Co., Ltd..................... 59
49,000 New World Development Co., Ltd................... 169
29,000 Sun Hung Kai Properties Ltd...................... 202
57,000 Wheelock & Co., Ltd.............................. 67
(a)480,000 Winsan (China) Investment Group Co., Ltd......... 38
-------
1,253
-------
JAPAN (8.9%)
10,000 Mitsubishi Estate Co., Ltd....................... 109
9,000 Mitsui Fudosan Co., Ltd.......................... 87
3,000 Sumitomo Realty & Development Co., Ltd........... 17
-------
213
-------
NEW ZEALAND (0.8%)
(a)34,000 AMP NZ Office Trust.............................. 20
-------
PHILIPPINES (2.1%)
(a)123,000 Ayala Land, Inc., Class B........................ 49
-------
SINGAPORE (18.0%)
26,000 City Developments Ltd............................ 121
27,000 DBS Land Ltd..................................... 41
49,000 Keppel Land Ltd.................................. 68
60,000 Marco Polo Developments Ltd...................... 91
93,000 Wing Tai Holdings Ltd............................ 109
-------
430
-------
TOTAL COMMON STOCKS (Cost $2,716)............................... 2,304
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - -----------
CONVERTIBLE DEBENTURE (0.8%)
NEW ZEALAND (0.8%)
NZD 34 AMP NZ Office Trust 7.50%, 6/30/03............... 20
-------
TOTAL CONVERTIBLE DEBENTURE (Cost $20).......................... 20
-------
TOTAL FOREIGN SECURITIES (97.4%) (Cost $2,736).................. 2,324
-------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -------------------------------------------------------------------------
FOREIGN CURRENCY (5.0%)
JPY 13,459 Japanese Yen..................................... $ 103
TWD 516 Taiwan Dollar.................................... 16
-------
TOTAL FOREIGN CURRENCY (Cost $121).............................. 119
-------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (102.4%) (Cost $2,857)....................... 2,443
--------
OTHER ASSETS (4.7%)
Due from Adviser................................... $ 71
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................ 22
Dividends Receivable............................... 18 111
----------
LIABILITIES (-7.1%)
Payable for Investments Purchased.................. (103)
Bank Overdraft..................................... (11)
Custodian Fees Payable............................. (8)
Administrative Fees Payable........................ (1)
Other Liabilities.................................. (46) (169)
---------- --------
NET ASSETS (100%).............................................. $ 2,385
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................ $ 3,005
Distributions in Excess of Net Investment Income............... (20)
Accumulated Net Realized Loss.................................. (211)
Unrealized Depreciation on Investments and Foreign Currency
Translations................................................. (389)
--------
NET ASSETS..................................................... $ 2,385
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - ---------------------------------------------------------------
NET ASSETS..................................................... $2,385
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 300,517 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,
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>
- - ------------ ------ ----------- ------------ ------ ------------
SGD 729 $ 429 6/04/98 U.S.$ 450 $ 450 $ 21
SGD 731 429 6/29/98 U.S.$ 430 430 1
------ ------ ---
$ 858 $ 880 $ 22
------
------ ------ ---
------ ---
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
NZD -- New Zealand Dollar
SGD -- Singapore Dollar
- - ------------------------------------------------------------
As of December 31, 1997, Class B had a Net Asset Value, Offering and Redemption
Price Per Share, of $8.03, applicable to 1 outstanding $0.001 par value share
(authorized 500,000,000 shares).
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Asian Real Estate Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- - --------------------------------------------------------------
Apartments............................. $ 113 4.7%
Diversified............................ 1,380 57.9
Land................................... 296 12.4
Lodging/Leisure........................ 137 5.7
Office and Industrial.................. 373 15.6
Shopping Center........................ 25 1.1
------- ---
$ 2,324 97.4%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Asian Real Estate Portfolio
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.6%
Brazil 15.6%
Canada 0.0%
Chile 0.7%
China 0.3%
Colombia 0.0%
Egypt 2.0%
Hong Kong 1.9%
Hungary 0.7%
India 8.4%
Indonesia 2.3%
Israel 3.0%
Korea 3.2%
Malaysia 2.9%
Mexico 11.3%
Morocco 0.5%
Pakistan 4.4%
Peru 0.5%
Philippines 1.8%
Poland 2.1%
Russia 7.9%
South Africa 6.2%
Taiwan 4.0%
Thailand 2.8%
Turkey 5.5%
United States 1.3%
Venezuela 0.5%
Zimbabwe 0.6%
Other 7.0%
</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 IFC GLOBAL TOTAL
PORTFOLIO--CLASS A RETURN COMPOSITE INDEX(1)
<S> <C> <C>
9/25/92* $500,000 $500,000
10/31/92 505,500 525,300
12/31/92 511,000 527,370
12/31/93 950,000 880,750
12/31/94 858,500 878,950
12/31/95 748,870 770,488
12/31/96 840,157 831,280
12/31/97 831,503 711,409
* 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 AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... -1.03% 10.23% 10.13%
PORTFOLIO -- CLASS
B..................... -1.31 N/A 4.69
INDEX -- CLASS A...... -14.42 6.16 6.93
INDEX -- CLASS B...... -14.42 N/A -4.08
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of -1.03%
for the Class A shares and -1.31% for the Class B shares, as compared to a total
return of -14.42% for the IFC Global Total Return Composite Index (the "Index").
For the five-year period ended December 31, 1997, the average annual total
return for Class A was 10.23% as compared to 6.16% for the Index. From inception
on September 25, 1992 to December 31, 1997, the average annual total return of
Class A was 10.13% as compared to 6.93% for the Index. From inception on January
2, 1996 to December 31, 1997, the average annual total return of Class B was
4.69% as compared to -4.08% for the Index.
The currency crisis in Asia and the contagion effect of Asian devaluations
triggered a collapse of practically every emerging market in the fourth quarter
of 1997. The selling panic which ensued across all emerging markets left Asia
down 33%, Latin America down 11% and Russia down 18%. Even India, insulated and
isolated, was off 12% during the quarter. The Portfolio underperformed its
benchmark during this period. Negatives included our overweight positions in
Russia, Indonesia, Korea and Thailand.
For the year we outperformed the Index, as the Portfolio's Class A shares
returned -1.03% vs. -14.42%. Country allocation drove performance, as
overweights in Russia, India, Pakistan and Turkey, combined with underweights in
Asia in general helped the relative results. We began easing into Asia in the
third and fourth quarters of 1997 as we felt that both the currency and stock
markets had dramatically overshot fair-value benchmarks. Asian markets are down
70% -- 85% from their highs and have discounted economic devastation and
corporate bankruptcies. While we do believe that the near-term economic and
earnings outlook for the Asian countries is grim, and that economic pain with
its commensurate political convulsions are ahead (particularly in countries like
Indonesia and Korea), we believe that the worst has been discounted in the
prices of stocks and the currencies. These markets have been tremendously
oversold, and in the face of such negative sentiment, any marginally positive
news could ignite a huge rally in the region.
- - --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
We have been discriminating in the selection of both markets and stocks as we
believe that the markets will bifurcate (as in Japan in the last few years). We
envision a distinction between winners and losers as the era of "Asian Value"
crony-capitalism comes to an end. We feel that Korea has the best chance of
transforming its economy and its corporate structure for the benefit of the
shareholder. World class companies such as Samsung Electronics, LG
Semiconductors and Pohang Iron and Steel are at bargain basement levels. We are
overweight Korea and concentrated in these stocks.
The closure of 56 out of 58 finance companies in Thailand last month signaled to
us the start of the corporate restructuring that is inevitable in Thailand.
After an agonizing six months it appears that the Thai government and the
corporate sector have seen the writing on the wall as slow, fitful, ambivalent
restructuring has begun. We are overweight Thailand since we feel that, although
positive economic and corporate news will be scarce over the next year, the
market in its discounting wisdom may have seen the worst.
Indonesia has fallen the furthest and the fastest of all Asian markets. Although
this market is currently capitalized at 10% of its value in U.S. dollars from a
year earlier, we hesitate to add to positions. While Indonesia is very cheap, it
is deservedly so. The country is poised on a razor's edge as the fate of a
country of 200 million people depends on the will of one man. The corrupt nexus
between politics and business remains intractable, and it appears that no real
progress on economic reform can be made with the current political regime.
President Suharto has made some concessions and conciliatory noises under duress
from the IMF and a phone call from President Clinton. However, a true embracing
of the IMF reform package implies a fundamental reformation of the political
system and abdication of economic largesse by the Suharto family. Resentment for
the First Family, particularly toward the Suharto children, runs deep and may
prove incendiary in the coming months. The scenario developing in Indonesia
includes sharply higher inflation, a recession, a dramatic rise in unemployment,
food shortages and an election. We maintain a neutral weight in Indonesia as the
market is dramatically oversold. Although we expect a significant upward move
from these levels, we would expect to sell into a rally, assuming no change in
underlying fundamentals.
Malaysia has earned the dubious distinction of the "least-worst" Asian market.
Its banking system is sound, politics stable and its corporate sector is in
reasonable shape. Our hesitancy towards Malaysia has been valuation-based. Given
the recent correction, we are in the process of increasing our long underweight
position.
We are slightly underweight Latin America and expect to decrease our exposure
even further. We remain upbeat on the government and corporate leadership
witnessed during the post-Mexico devaluation crisis and the more recent Asian
crisis. In Mexico, the consumer recovery continues and in Brazil the
privatization program is moving ahead. However, the Brazilian real is perhaps
one of the more overvalued currencies in the emerging market universe, and the
high real interest rates required to support it in the aftermath of the Asian
crisis will prove burdensome both for the corporate sector and for equity market
performance. Mexico has performed spectacularly in the past 12 months as it has
enjoyed the unique position of having taken its devaluation "medicine" early as
well as being geographically situated to capitalize on the phenomenal strength
of the U.S. economy. As a result, though, many of the Mexican stocks we own no
longer offer compelling value, and will likely be trimmed to gain exposure to
other investments in Asia.
We continue to view India and South Africa as a source of funds for our
increased exposure in Asia. India is well underpinned by both valuations and
corporate fundamentals; however, we believe that political uncertainty and
slightly higher interest rates will cap some of the upside in the market.
In Europe, Russia has had a big correction after a stellar run. We continue to
remain sanguine about its long term prospects but have trimmed our position a
bit. Likewise, Turkey experienced tremendous returns over the last year, and
remains one of the last markets that have yet to conquer inflation. Positive
news on this front could trigger another move up. As valuations remain at
attractive levels, we are overweight the Turkish market. Cash has built up and
is slowly being redeployed as the entire asset class has been joltingly repriced
significantly below fair value.
In closing, we are happy to inform you that we have added Tim Jensen to the
Emerging Market team as a portfolio manager covering the Asian markets. Tim will
be the point person in New York coordinating
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
investments in the Asian markets for the global emerging market funds. He will
work with our Singapore based team. Tim has eight years of investment experience
and was most recently a partner at Ardsley. Additionally, Vinod Sethi, Managing
Director in charge of our India investment team, has expanded his
responsibilities to include oversight of stock selection in Asia. He will act as
the CIO for the team in Asia and will maintain his responsibility for stock
selection in India. Ean Wah Chin, Managing Director, is now Chairman of the
overall investment management business for Asia ex-Japan.
Madhav Dhar
PORTFOLIO MANAGER
Robert L. Meyer
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
COMMON STOCKS (UNLESS OTHERWISE NOTED) (92.2%)
ARGENTINA (2.6%)
(a)6 Acindar, Class B................................. $ --
(a)119,870 Nortel ADR....................................... 3,057
163,876 Telecom Argentina ADR............................ 5,859
619,465 Telefonica de Argentina ADR...................... 23,075
211,357 YPF ADR.......................................... 7,226
-----------
39,217
-----------
BRAZIL (15.5%)
609,989,448 Banco Bradesco (Preferred)....................... 6,012
(a,d)295,998,880 Banco Nacional (Preferred)....................... 13
26,935,030 Brahma (Preferred)............................... 18,101
296,000 Brahma ADR (Preferred)........................... 4,200
307,152,993 CEMIG (Preferred)................................ 13,345
(e)84,361 CEMIG ADR........................................ 3,628
80,351 CEMIG ADR........................................ 3,491
12,714,900 Coteminas........................................ 4,557
(e)98,865 Coteminas........................................ 1,639
(a)38,011,600 CRT (Preferred).................................. 46,831
(a)276,100 CVRD (Preferred)................................. 5,554
185,219 CVRD ADR (Preferred)............................. 3,646
11,559,000 Encorpar......................................... 9
14,931,800 Itaubanco (Preferred)............................ 8,027
1,277,207 Light-Servicos de Eletricidade................... 532
4,012,000 Lightpar......................................... 1,204
119,019,000 Lojas Arapua (Preferred)......................... 427
(e)120,830 Lojas Arapua ADR (Preferred)..................... 404
(a)52,673,000 Lojas Renner (Preferred)......................... 1,652
198,559 Pao de Acucar ADR................................ 3,847
(a)39,236,000 Pao de Acucar ADR (Preferred).................... 717
(e)98,915 Petrobras ADR.................................... 2,362
56,777,333 Petrobras (Preferred)............................ 13,278
(a,e)137,875 Rossi GDR........................................ 672
52,673,000 Telebras......................................... 5,357
159,269,000 Telebras (Preferred)............................. 18,167
481,530 Telebras ADR..................................... 56,068
(a)1 TELESP........................................... --
478,299 TELESP (Preferred)............................... 127
(a)334,420 Unibanco GDR (Preferred)......................... 10,764
-----------
234,631
-----------
CANADA (0.0%)
2,085,038 International UNP Holdings Ltd................... 175
-----------
CHILE (0.7%)
147,900 CCU ADR.......................................... 4,345
71,100 Enersis ADR...................................... 2,062
203,972 Santa Isabel ADR................................. 3,570
-----------
9,977
-----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
CHINA (0.3%)
2,029,000 Qingling Motors Co., Class H..................... $ 995
8,647,000 Zhejiang Expressway Co., Ltd., Class H........... 1,752
3,331,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 1,386
-----------
4,133
-----------
COLOMBIA (0.0%)
989,763 Banco de Colombia................................ 343
-----------
EGYPT (2.0%)
54,000 Al-Ahram Beverages Co., GDR...................... 1,499
89,993 Ameriyah Cement Co............................... 2,103
185,840 Commercial International Bank.................... 3,750
(a)175,500 Commercial International Bank GDR (Registered)... 3,672
130,160 Eastern Tobacco.................................. 3,022
49,350 Egyptian Finance & Industrial.................... 2,973
(a)78,000 Helwan Cement.................................... 1,570
50,603 Industrial & Engineering......................... 848
80,460 Madinet Nasr Housing & Development............... 5,202
21,655 North Cairo Flour Mills Co....................... 617
2,500 Paints & Chemical Industry....................... 80
255,400 Paints & Chemical Industry GDR................... 2,554
125,765 Torah Portland Cement............................ 2,883
-----------
30,773
-----------
HONG KONG (1.9%)
677,000 Cheung Kong Holdings Ltd......................... 4,434
917,000 China Light & Power Co., Ltd..................... 5,089
1,228,000 China Resources Enterprise Ltd................... 2,742
202,600 HSBC Holdings plc................................ 4,994
3,573,000 Ng Fung Hong Ltd................................. 3,758
643,000 Shanghai Industrial Holdings Ltd................. 2,390
654,000 Sun Hung Kai Properties Ltd...................... 4,557
-----------
27,964
-----------
HUNGARY (0.7%)
(a)21,178 Borsod Chem Rt. GDR (Registered)................. 763
7,700 Gedeon Richter Rt................................ 876
28,300 Gedeon Richter Rt. GDR (Registered).............. 2,972
(a)158,984 MOL Magyar Olaj-es Gazipari Rt. GDR
(Registered)................................... 3,879
(a)49,300 OTP Bank Rt...................................... 1,871
-----------
10,361
-----------
INDIA (8.3%)
(a)7,570 Apollo Tyres Ltd................................. 15
658 Associated Cement Cos., Ltd...................... 23
4,663,400 Bharat Heavy Electricals Ltd..................... 42,107
(a)151,400 Bharat Pipes & Fittings Ltd., Class B............ 2
</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, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ----------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
INDIA (CONT.)
<TABLE>
<C> <S> <C>
300 Birla VXL Ltd.................................... $ --
20,875 Carrier Aircon Ltd............................... 115
8,031 Ceat Ltd......................................... 5
209,490 Century Textiles and Industries Ltd.............. 371
1,058,400 Container Corp of India Ltd...................... 11,340
27,700 Dabur India Ltd.................................. 147
(a)475,450 DCL Polyesters Ltd............................... 42
260,300 Esab India Ltd................................... 720
(a,d)2,000 Federal Bank Ltd. (New).......................... 4
(a)575,300 Garware Plastics & Polyester Ltd.,
Class A........................................ 305
347,700 Godrej Soaps Ltd................................. 303
500 Great Eastern Shipping Co........................ 1
100 Gujarat Narmada Valley Fertilizers Co., Ltd...... --
(a)635,421 Hero Honda Motors Ltd., Class B.................. 14,958
88,100 Hindustan Development Corp., Ltd................. 20
113,386 Housing Development Finance Corp................. 8,902
190,300 ICI India Ltd.................................... 857
4,500 Industrial Credit & Investment Corp.............. 4
(a,g)55,194 India Magnum Fund Ltd., (The) Class A............ 2,125
(a,f,g)78,000 India Magnum Fund Ltd., (The) Class A............ 3,003
(a)2,800 Indian Petrochemicals Corp., Ltd................. 5
(a)726,601 Indo Rama Synthetics Ltd......................... 185
140 Industrial Credit & Investment Corp. of India
Ltd............................................ --
207,500 Infosys Technology Ltd........................... 6,525
100 ITC Agrotech Ltd., Class B....................... --
544,063 ITC Bhadrachalam Paperboards Ltd................. 482
330,467 ITC Ltd.......................................... 5,214
(a)1,288,662 JK Synthetics Ltd................................ 53
361,300 KEC International Ltd............................ 249
175,000 Kirloskar Cummins Ltd............................ 2,121
145,450 Lakme Ltd., Class B.............................. 1,062
145,800 Lakshmi Precision Screws......................... 45
6,000 Mahanagar Telephone Nigam........................ 39
180 Mahavir Spinning Mills Ltd....................... --
(a,g)42,697,100 Morgan Stanley Growth Fund....................... 6,590
136,581 MRF Ltd., Class B................................ 6,736
25,000 OM Sindoori Hotels Ltd........................... 26
130 PCS Data Products Ltd., Class B.................. --
223,300 Patheja Forgings & Auto Parts, Class B........... 37
(a)218,440 Philips India Ltd................................ 362
(a)625 Raymond Ltd...................................... 1
190,900 Shanti Gears Ltd................................. 409
180,800 Shriram Honda Power Equipment, Class B........... 1,266
(a)45,000 Sri Venkatesa Mills Ltd.......................... 65
1,082,500 State Bank of India Ltd.......................... 6,710
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
67,000 Sudarshan Chemical Industries Ltd................ $ 93
258,150 Supreme Industries Ltd........................... 1,199
1,221 Tata Engineering & Locomotive Ltd., Class A...... 9
50 Tata Hydro-Electric Power Supply Co.............. --
50 Tata Iron and Steel Co., Ltd..................... --
196,017 Tube Investments of India........................ 173
941,000 Uttam Steels Ltd., Class A....................... 150
100 Videocon International Ltd., Class A............. --
10,450 Wartsila Diesel Ltd.............................. 41
-----------
125,216
-----------
INDONESIA (2.3%)
3,592,000 Astra International.............................. 931
(a,d)18,273,808 Astra International (Foreign).................... 4,735
(a,d)28,603,960 Bank International Indonesia (Foreign)........... 1,690
(d)16,409,400 Bank Negara Indonesia (Foreign).................. 1,566
711,600 Barito Pacific Timber (Foreign).................. 204
2,825,569 Bimantara Citra (Foreign)........................ 539
1,359,400 Citra Marga Nusaphala Persada.................... 148
412,504 Daya Guna Samudera............................... 313
379,500 Gudang Garam..................................... 578
(d)3,973,841 Gudang Garam (Foreign)........................... 6,051
34,900 Gulf Indonesia Resources Ltd..................... 768
(d)2,473,000 Hanjaya Mandala Sampoerna (Foreign).............. 1,866
(d)12,964,855 Indah Kiat Pulp & Paper Corp. (Foreign).......... 2,298
(a,d)5,622,000 Indofood Sukses Makmur (Foreign)................. 1,840
(d)303,900 London Sumatra Indonesia......................... 173
(a,d)1,483,000 Matahari Putra Prima (Foreign)................... 121
(d)10,849,000 Mayora Indah (Foreign)........................... 937
431,500 Tambang Timah.................................... 463
(d)9,383,000 Putra Surya Multidana (Foreign).................. 896
9,464,000 Telekomunikasi Indonesia......................... 5,033
53,300 Telekomunikasi Indonesia ADR..................... 590
(d)6,216,300 Telekomunikasi Indonesia (Foreign)............... 3,306
-----------
35,046
-----------
ISRAEL (3.0%)
(a)2,208,000 Bank Hapoalim Ltd. (Registered).................. 5,300
413,803 Elbit Systems Ltd................................ 5,463
5,250 First International Bank of Israel, Class 1...... 717
7,680 First International Bank of Israel, Class 5...... 5,637
113,485 Koor Industries Ltd.............................. 12,577
469,000 Osem Investment Ltd.............................. 2,271
4,198,150 Supersol Ltd..................................... 11,904
122,100 Supersol Ltd ADR................................. 1,717
-----------
45,586
-----------
</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, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ----------------------------------------------------------------------------------
<C> <S> <C>
KOREA (3.2%)
235,820 Hansol Paper Co., Ltd............................ $ 1,036
(a,e)260,361 Housing & Commercial Bank Korea.................. 1,751
448,221 Housing & Commercial Bank Korea GDR.............. 2,351
405,100 Korea Fund, Inc.................................. 2,684
358,458 LG Information & Communication Ltd............... 10,045
239,000 Pohang Iron & Steel Co., Ltd..................... 6,666
(d)258,150 Pohang Iron & Steel Co., Ltd. ADR................ 7,200
(a)437,820 Samsung Electronics Co........................... 9,918
258,354 Samsung Electronics Co. GDR (New)................ 3,669
(d)8,997 Telecom Co., Ltd................................. 2,716
-----------
48,036
-----------
MALAYSIA (2.9%)
568,800 AMMB Holdings Bhd................................ 373
144,000 Berjaya Sports Toto Bhd.......................... 368
202,000 Carlsberg Brewery Malaysia Bhd................... 649
1,338,000 Commerce Asset Holdings Bhd...................... 640
1,010,200 Genting Bhd...................................... 2,532
1,922,000 Golden Hope Plantations Bhd...................... 2,224
1,014,000 IOI Corp. Bhd.................................... 328
1,204,000 Kuala Lumpur Kepong Bhd.......................... 2,585
1,352,000 Magnum Corp. Bhd................................. 813
1,253,600 Malayan Banking Bhd.............................. 3,642
1,269,000 Malayan United Industries Bhd.................... 222
491,000 Malaysian International Shipping Corp. Bhd
(Foreign)...................................... 720
156,000 Malaysian Pacific Industries Bhd................. 375
385,000 Nestle Bhd....................................... 1,782
252,000 New Straits Times Press Bhd...................... 312
415,000 Perusahaan Otomobil Nasional Bhd................. 405
1,502,000 Petronas Gas Bhd................................. 3,418
503,000 Rashid Hussain Bhd............................... 391
479,000 Resorts World Bhd................................ 807
2,062,000 RHB Capital Bhd.................................. 997
492,000 R.J. Reynolds Bhd................................ 803
498,000 Rothmans of Pall Mall Bhd........................ 3,873
2,626,000 Sime Darby Bhd................................... 2,525
838,000 Technology Resources Industries Bhd.............. 496
2,039,000 Telekom Malaysia Bhd............................. 6,029
2,659,000 Tenaga Nasional Bhd.............................. 5,674
1,708,000 United Engineers Bhd............................. 1,423
-----------
44,406
-----------
MEXICO (11.3%)
397,452 Apasco........................................... 2,737
(a)1,244,479 Banacci, Class B................................. 3,729
(a)966,103 Banacci, Class L................................. 2,493
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
(a)846,000 Bancomer, Class B................................ $ 550
(a,e)326,595 Bancomer, Class B ADR............................ 4,225
(a)747,338 Cemex CPO........................................ 3,384
940,462 Cemex CPO ADR.................................... 8,464
146,858 Cifra, Class A................................... 361
142,485 Cifra, Class B................................... 350
256,080 Cifra, Class B ADR............................... 629
1,158,857 Cifra, Class C................................... 2,602
5,206,197 FEMSA, Class B................................... 41,856
4,531,961 Kimberly-Clark, Class A.......................... 21,535
(a)747,803 Televisa CPO GDR................................. 28,931
707,645 Telmex, Class L ADR.............................. 39,672
402,450 TV Azteca ADR.................................... 9,080
-----------
170,598
-----------
MOROCCO (0.5%)
82,900 SNI Maroc, Series `V' (Bearer)................... 7,101
-----------
PAKISTAN (4.4%)
(a)3,162 D.G. Khan Cement Ltd............................. 1
32,800 Engro Chemical Ltd............................... 85
6,639,600 Fauji Fertilizer Co., Ltd........................ 12,712
(a)10,043,700 Hub Power Co..................................... 13,078
(a)327,860 Karachi Electric Supply Corp..................... 177
(a)1,377,865 Pakistan State Oil Co., Ltd...................... 11,726
(a)38,350 Pakistan Telecommunications Corp. GDS............ 2,646
29,528,600 Pakistan Telecommunications Corp., Class A....... 22,311
(a)4,893,654 Sui Northern Gas................................. 2,991
-----------
65,727
-----------
PERU (0.5%)
47 Cementos Lima.................................... --
351,960 Tel Peru, Class B ADR............................ 8,205
-----------
8,205
-----------
PHILIPPINES (1.8%)
13,409,500 Ayala Corp....................................... 5,215
1,723,520 Ayala Land, Inc., Class B........................ 681
2,840,720 C&P Homes, Inc................................... 166
2,311,950 Filinvest Land, Inc.............................. 91
1,571,270 Manila Electric Co., Class B..................... 5,199
1,512,240 Metro Pacific Corp............................... 42
145,068 Metropolitan Bank & Trust Co..................... 976
2,075,750 Petron Corp...................................... 172
346,170 Philippine Long Distance Telephone Co............ 7,522
26,100 Phillipine Long Distance Telephone Co., ADR...... 587
71,500 Philippine National Bank......................... 157
3,176,360 San Miguel Corp., Class B........................ 3,882
18,875,000 SM Prime Holdings, Inc........................... 2,796
-----------
27,486
-----------
</TABLE>
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, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ----------------------------------------------------------------------------------
<C> <S> <C>
POLAND (2.1%)
(a)233,000 Agros Holding, Class C........................... $ 4,825
38,860 Bank Slaski...................................... 2,150
72,900 Bank of Handlowy W Warszawie..................... 931
(a)1,650,000 BIG Bank Gdanski................................. 1,615
194,000 BIG Bank Gdanski GDR............................. 3,007
68,000 BRE Bank......................................... 1,408
160,560 Debica........................................... 3,917
(a)33,400 Eastbridge NV.................................... 2,245
727,000 Elektrim......................................... 7,033
(a)188,468 Exbud............................................ 1,764
(a)373,740 Mostostal Exports................................ 944
491,000 Polifarb Wroclaw................................. 2,326
-----------
32,165
-----------
RUSSIA (7.8%)
(a,d)592,359 Alliance Cellulose Ltd........................... 2,358
54,736,000 Unified Energy Systems (2nd Issue)............... 16,421
(a,d)400,000 Global Tele-Systems Group, Inc. (Registered)..... 8,000
(a)13,765,000 Irkutskenergo.................................... 2,712
(a)214,733 Lukoil Holding................................... 4,960
(a,e)138,153 Lukoil Holding ADR............................... 12,745
6,523,333 Mosenergo ADR.................................... 8,278
(d)37,259,635 Mustcom.......................................... 31,671
(a)813,200 Rostelecom (New)................................. 2,887
(a,d)317,851 Russian Telecom Development Corp................. 1,510
406,000 Surgutneftgaz ADR................................ 4,150
(d)21,882,643 Svyaz Finance.................................... 19,038
(a)26,300 Tatneft ADR...................................... 3,737
-----------
118,467
-----------
SOUTH AFRICA (6.1%)
563,400 Barlow Rand Ltd.................................. 4,781
192,312 Bidvest Group Ltd................................ 1,591
33,000 Coronation Holdings Ltd.......................... 498
90,900 Coronation Holdings Ltd. (New)................... 1,324
1,078,300 Ellerine Holdings Ltd............................ 6,957
564,968 Foodcorp Ltd..................................... 2,902
842,400 Forbes Group Ltd................................. 1,558
(a)1,608,300 Illovo Sugar Ltd................................. 2,743
2,020,275 Malbak Ltd....................................... 1,972
(g)224,490 Morgan Stanley Africa Investment Fund, Inc....... 2,582
2,537,470 NBS Boland Group Ltd............................. 6,283
7,974,500 New Africa Investments Ltd., Class N............. 7,620
1,903,300 Orion Selections Holdings Ltd.................... 4,889
1,287,000 Orion Selections Ltd............................. 2,777
549,700 Persetel Holdings Ltd............................ 3,016
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
4,250,000 Protea Furnishers Ltd............................ $ 2,113
1,710,500 Rembrandt Group Ltd.............................. 12,478
2,358,400 Sasol Ltd........................................ 24,667
800,000 Spur Holdings Ltd................................ 995
-----------
91,746
-----------
TAIWAN (4.0%)
(a)1,604,000 Asustek Computer, Inc............................ 25,418
3,008,000 Cathay Construction Corp......................... 3,430
(a)1,916,759 Compal Electronics............................... 5,581
9,838,441 Far Eastern Textile Ltd.......................... 10,675
1,693,000 Hon Hai Precision Industry....................... 8,562
2,905,200 Siliconware Precision Industries Co.............. 6,857
-----------
60,523
-----------
THAILAND (2.8%)
66,500 Advance Agro PCL................................. 56
158,200 Advance Agro PCL (Foreign)....................... 132
1,157,650 Advanced Info Service PCL (Foreign).............. 5,530
116,800 Bangkok Bank PCL (Foreign)....................... 291
(d)6,396,800 Bangkok Expressway PCL (Foreign)................. 3,554
26,700 Bank of Ayudhya PCL (Foreign).................... 11
(d)305,500 BEC World PCL (Foreign).......................... 1,218
(d)818,000 Central Pattana PCL (Foreign).................... 255
(d)412,900 Delta Electronics PCL (Foreign).................. 3,396
226,700 Electricity Generating PCL (Foreign)............. 424
(d)715,000 Grammy Entertainment PCL (Foreign)............... 3,118
3,206,200 Industrial Finance Corp. of Thailand PCL
(Foreign)...................................... 493
(a,d)224,000 Lanna Lignite PCL (Foreign)...................... 456
2,469,000 National Finance & Securities PCL (Foreign)...... 456
(d)2,433,400 National Petrochemical PCL (Foreign)............. 1,289
830,700 PTT Exploration & Production PCL (Foreign)....... 9,558
1,048,400 Shinawatra Computer Co. PCL (Foreign)............ 3,484
34,600 Siam Cement PCL (Foreign)........................ 38
4,082,533 Siam Commercial Bank PCL (Foreign)............... 4,663
126,500 TelecomAsia Corp. PCL (Foreign).................. 24
(d)1,881,000 Thai Airways International PCL (Foreign)......... 2,031
(d)268,100 Thai Engine Manufacturing PCL (Foreign).......... 451
336,200 Thai Farmers Bank PCL (Foreign).................. 611
68,600 Thai Petrochemical Industry PCL.................. 7
1,569,900 United Communication Industry PCL (Foreign)...... 636
-----------
42,182
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ----------------------------------------------------------------------------------
<C> <S> <C>
TURKEY (5.5%)
62,099,500 Arcelik.......................................... $ 5,843
84,122,100 Ege Biracilik.................................... 7,611
43,205,000 Erciyas Biracilik................................ 6,046
116,214,000 Eregli Demir Celik............................... 17,944
927,000 Migros Turk T.A.S................................ 839
74,655,208 Turkiye Garanti Bankasi A.S...................... 3,692
212,010 Turkiye Garanti Bankasi A.S. ADR................. 1,049
60,437,000 Vestel Elektronik Sanayi Ve Ticaret A.S.......... 4,957
(a)925,996,710 Yapi Ve Kredi Bankasi A.S........................ 35,297
-----------
83,278
-----------
UNITED STATES (0.9%)
(a,d)990 Storyfirst Communications, Inc., Class C......... 1,416
(a,d)2,640 Storyfirst Communications, Inc., Class D......... 3,775
(a,d)3,250 Storyfirst Communications, Inc., Class E......... 4,648
(a,d)1,331 Storyfirst Communications, Inc., Class F......... 3,807
-----------
13,646
-----------
VENEZUELA (0.5%)
141,050 CANTV ADR........................................ 5,871
1,868,532 Electricidad de Caracas.......................... 2,242
-----------
8,113
-----------
ZIMBABWE (0.6%)
3,819,900 Delta Corp. Ltd.................................. 2,599
(a)290,800 Meikles Africa Ltd............................... 332
1,495,500 Meikles Africa Ltd. ADR.......................... 1,346
(e)9,900,000 Trans Zambesi Industries Ltd..................... 3,152
3,800,000 Trans Zambesi Industries Ltd. (Registered)....... 1,210
-----------
8,639
-----------
TOTAL COMMON STOCKS (Cost $1,516,762)................................ 1,393,740
-----------
PREFERRED STOCK (0.0%)
RUSSIA (0.0%)
85,000 Norilsk Nickel (Cost $357)....................... 493
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- - ----------------
RIGHTS (0.1%)
BRAZIL (0.1%)
(a,d)609,989,448 Banco Bradesco (Preferred)....................... 55
(a)1,111,637 CRT RFD.......................................... 1,370
(a)478,299 TELESP (Preferred)............................... --
-----------
1,425
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
INDIA (0.0%)
(a)30 Philips India Ltd................................ $ --
-----------
SOUTH AFRICA (0.0%)
(a)20,000 Coronation Holdings Ltd.......................... --
-----------
THAILAND (0.0%)
(a)2,469,000 National Finance & Securities PCL (Foreign)...... --
-----------
TOTAL RIGHTS (Cost $1,436)........................................... 1,425
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- - ----------------
WARRANTS (0.0%)
INDIA (0.0%)
(a,d)100 Apollo Tyres Ltd., expiring 2/28/98.............. --
-----------
INDONESIA (0.0%)
(a)1,003,404 Bank International Indonesia (Foreign), expiring
1/17/00........................................ 14
(a)1,093,112 Indah Kiat Pulp & Paper Corp. (Foreign), expiring
7/11/02........................................ 30
-----------
44
-----------
MALAYSIA (0.0%)
(a)244,500 Commerce Asset Holdings Bhd, expiring 7/11/02.... 35
(a)61,571 Rashid Hussain Bhd, expiring 12/31/02............ 11
-----------
46
-----------
THAILAND (0.0%)
(a)1,020,633 Siam Commercial Bank PCL......................... --
-----------
TOTAL WARRANTS (Cost $230)........................................... 90
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- - ----------------
UNITS (0.4%)
UNITED STATES (0.4%)
(a,d)722 Storyfirst Communications, Inc.,
First Section, Tranche I, 25.00%, 1/31/98...... 1,032
(a,d)840 Storyfirst Communications, Inc., Second Section,
Tranche I, 25.00%, 1/31/98..................... 1,201
(a,d)376 Storyfirst Communications, Inc., Tranche II,
26.00%, 1/31/98................................ 566
(a,d)643 Storyfirst Communications, Inc., Tranche IV,
28.00%, 1/31/98................................ 919
(a,d)654 Storyfirst Communications, Inc., Tranche V,
29.00%, 1/31/98................................ 936
(a,d)550 Storyfirst Communications, Inc., Tranche VI
30.00%, 1/31/98................................ 787
-----------
TOTAL UNITS (Cost $4,537)............................................ 5,441
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Portfolio
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
FIXED INCOME SECURITIES (0.1%)
RUSSIA (0.1%)
U.S.$ 1,954 Russian Interest Anticipation Notes, (Floating
Rate), 6.719%, 12/15/15 (Cost $1,549).......... $ 1,387
-----------
CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.0%)
INR (d)336 DCM Shriram Industries Ltd.,
7.50%, 2/21/02................................. 341
-----------
SOUTH AFRICA (0.1%)
ZAR 111 Sasol Ltd. 8.50%................................. 1,116
-----------
TOTAL CONVERTIBLE DEBENTURES (Cost $1,862)........................... 1,457
-----------
NON-CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR (d)341 DCM Shriram Industries Ltd., (Floating Rate),
9.90%, 2/21/02................................. 437
(d)700 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98....................................... 1,657
-----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $2,865)....................... 2,094
-----------
LOAN AGREEMENTS (0.0%)
POLAND (0.0%)
U.S.$ (e,n)54 Republic of Poland Interest Arrears PDI Bonds,
4.00%, 10/27/14 (Cost $0)...................... 47
-----------
TOTAL FOREIGN SECURITIES (93.0%) (Cost $1,529,598)................... 1,406,174
-----------
SHORT-TERM INVESTMENT (4.9%)
REPURCHASE AGREEMENT (4.9%)
74,001 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $74,025,
collateralized by U.S. Treasury Notes, 6.00%,
due 6/30/99, valued at $75,588 (Cost
$74,001)....................................... 74,001
-----------
FOREIGN CURRENCY (1.2%)
ARP 4 Argentine Peso................................... 4
BRL 430 Brazilian Real................................... 385
GBP 11 British Pound.................................... 18
COP 195,968 Colombian Peso................................... 151
EGP 1,889 Egyptian Pound................................... 555
HUF 359,010 Hungarian Forint................................. 1,760
INR 86,739 Indian Rupee..................................... 2,213
IDR 11,696 Indonesian Rupiah................................ 2
ILS 2,236 Israeli Shekel................................... 632
MYR 126 Malaysian Ringgit................................ 32
MXP 8,562 Mexican Peso..................................... 1,062
MAD 895 Morrocan Dhiram.................................. 92
PKR 8,251 Pakistani Rupee.................................. 187
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------------
PLN 3,056 Polish Zloty..................................... $ 867
ZAR 28,078 South African Rand............................... 5,770
KRW 2,883,662 South Korean Won................................. 1,701
LKR 2 Sri Lankan Rupee................................. --
TWD 2,669 Taiwan Dollar.................................... 82
THB 9,773 Thai Baht........................................ 203
TRL 433,775,821 Turkish Lira..................................... 2,093
VEB 10,010 Venezuelan Bolivar............................... 20
-----------
TOTAL FOREIGN CURRENCY (Cost $18,367)................................ 17,829
-----------
TOTAL INVESTMENTS (99.1%) (Cost $1,621,966).......................... 1,498,004
-----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.3%)
Cash.................................................... $ 1,103
Receivable for Investments Sold......................... 38,781
Receivable for Portfolio Shares Sold.................... 5,083
Dividends Receivable.................................... 3,643
Interest Receivable..................................... 276
Foreign Withholding Tax Reclaim Receivable.............. 25
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................. 6
Other................................................... 96 49,013
----------
LIABILITIES (-2.4%)
Payable for Investments Purchased....................... (21,318)
Investment Advisory Fees Payable........................ (5,256)
Net Unrealized Loss on Swap Agreements.................. (5,232)
Payable for Foreign Taxes............................... (2,255)
Custodian Fees Payable.................................. (703)
Dividends Payable....................................... (287)
Administrative Fees Payable............................. (198)
Payable for Stamp Duty Tax.............................. (88)
Directors' Fees and Expenses Payable.................... (67)
Sub-Administrative Fees Payable......................... (52)
Distribution Fees Payable............................... (7)
Other Liabilities....................................... (502) (35,965)
---------- ----------
NET ASSETS (100%)..................................................... $1,511,052
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital....................................................... $1,710,768
Distributions in Excess of Net Investment Income...................... (2,735)
Accumulated Net Realized Loss......................................... (66,762)
Unrealized Depreciation on Investments, Foreign Currency Translations
and Swaps (Net of accrual for foreign taxes of $2,255 on unrealized
appreciation on investments)........................................ (130,219)
----------
NET ASSETS............................................................ $1,511,052
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - ----------------------------------------------------------------------------------
CLASS A:
- - ----------------------------------------------------------
NET ASSETS................................................ $1,501,386
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 115,786,391 outstanding $0.001 par value
shares (authorized 500,000,000 shares).................. $12.97
----------
----------
CLASS B:
- - ----------------------------------------------------------
NET ASSETS................................................ $9,666
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 744,744 outstanding $0.001 par value
shares (authorized 500,000,000 shares).................. $12.98
----------
----------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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>
- - ---------- ------ ----------- ------------ ------ ------------
THB 9,773 $ 203 1/5/98 U.S.$ 209 $ 209 $ 6
------
------ ------
------
--
--
</TABLE>
SWAP AGREEMENTS:
The Potfolio had the following Total Return Swap Agreements open at December 31,
1997:
<TABLE>
<CAPTION>
NET
UNREALIZED
NOTIONAL APPRECIATION
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
- - -------------- ----------------------------------------- -----------
<C> <S> <C>
$ (d)7,400 Agreement with Goldman Sachs
International terminating November 3,
1998 to pay 12 month USD-LIBOR minus
4.00% and to receive the SET Index
converted into USD at the mid-market rate
on October 30, 1998 $ (2,149)
(d)3,000 Agreement with Goldman Sachs
International terminating November 5,
1998 to pay 12 month USD-LIBOR minus
4.50% and to receive the SET Index
converted into USD at the mid-market rate
on November 3, 1998 (877)
(d)2,000 Agreement with Goldman Sachs
International terminating November 9,
1998 to pay 12 month USD-LIBOR minus
3.50% and to receive the SET Index
converted into USD at the mid-market rate
on November 5, 1998 (735)
(d)4,000 Agreement with Goldman Sachs
International terminating May 8, 1998 to
pay 6 month USD-LIBOR minus 4.50% and to
receive the SET Index converted into USD
at the mid-market rate on May 6, 1998 (1,471)
-----------
$ (5,232)
-----------
-----------
</TABLE>
- - ------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $135,334 or 9.0% of net assets at December 31,
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 December 31, 1997 was $3,003 or 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, 1997. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
LIBOR -- London Interbank Offer Rate
PCL -- Public Company Limited
PDI -- Past Due Interest
RFD -- Ranked for Dividend
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 December 31, 1997.
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ------------------------------------------------------------------
Capital Equipment...................... $ 97,301 6.4%
Consumer Products...................... 270,076 17.9
Energy................................. 190,933 12.6
Finance................................ 231,044 15.3
Materials.............................. 202,612 13.4
Multi-Industry......................... 137,415 9.1
Services............................... 276,793 18.3
----------- ---
$ 1,406,174 93.0%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Austria 0.7 %
Belgium 1.0 %
Denmark 2.2 %
Finland 4.8 %
France 10.4 %
Germany 12.6 %
Italy 5.6 %
Netherlands 9.4 %
Norway 1.2 %
Spain 3.6 %
Sweden 5.4 %
Switzerland 10.0 %
United Kingdom 25.8 %
Other 7.3 %
</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 MSCI EUROPE
PORTFOLIO--CLASS
A INDEX(1)
<S> <C> <C>
4/02/93* $500,000 $500,000
12/31/93 645,500 606,800
12/31/94 715,750 620,650
12/31/95 800,566 754,835
12/31/96 979,012 914,030
12/31/97 1,154,059 1,131,569
* 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 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............. 17.88% 19.25%
PORTFOLIO -- CLASS B............. 17.73 19.26
INDEX -- CLASS A................. 23.80 18.55
INDEX -- CLASS B................. 23.80 22.11
</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 (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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of 17.88%
for the Class A shares and 17.73% for the Class B shares as compared to a total
return of 23.80% for the Morgan Stanley Capital International (MSCI) Europe
Index (the "Index"). From inception on April 2, 1993 to December 31, 1997, the
average annual total return of Class A was 19.25% compared to 18.55% for the
Index. From inception on January 2, 1996 to December 31, 1997, the average
annual total return of Class B was 19.26% compared to 22.11% for the Index.
Underperformance during 1997 was largely due to our underweighting in banks and
pharmaceutical stocks, notably in Switzerland and Germany and our overweighting
in basic industry and consumer cyclical stocks as they faced increasing
competition from cheaper Asian exports and weakening commodity prices. Another
feature was the "flight to safety" which has led investors away from smaller cap
names. Offsetting this to a degree was good stock performance in Italy and
Sweden, while our underweighting in the U.K. also contributed.
In Europe, weaker currencies, lower yields, accelerating restructuring and
consolidation played a significant part in driving exceptional local currency
returns, with the MSCI Europe Index up 38% in local currency terms, and 24% in
U.S. dollars. Exporters, particularly in Germany and Switzerland, made strong
- - --------------------------------------------------------------------------------
European Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
gains. While restructuring remained a central investment theme throughout 1997
it was hampered by double digit unemployment, difficult labor laws and the
election, across the region, of socialist governments. EMU driven interest rate
convergence was a key feature with increasing confidence that Italy would join
in the first wave. The U.K. lagged its continental counterparts (up 28% in local
currency) as the newly independent Bank of England hiked interest rates 1 1/4%
in an attempt to subdue the conservatives' legacy of an overheated domestic
economy. Sterling strength has begun to impact exporters, placing pressure on
New Labor following their landslide election in May.
Following the strong performance of the European banking sector on the back of
restructuring and mergers, we believe this sector is now looking fully valued.
That said, we are always looking for new value opportunities and are currently
investigating some names that have been hit due to their exposure to South East
Asia. Having added several new U.K. names to the Portfolio in recent months, we
continue to find attractive stocks across the industrial spectrum which benefit
from strong business franchises and an environment in which management are
dedicated to returning shareholder value. Hence, the Portfolio is moving from
under, closer to market weight in the U.K. Compelling investment ideas are also
continuing to come from Scandinavia, notably Finland, and we expect to remain
overweight the Index in this region in the coming months. Our weightings in
southern Europe have been reduced recently as our holdings in the region have
reached full value.
RECENT ADDITIONS TO THE PORTFOLIO
VALMET (Finland) is the world's leading paper machine manufacturer. It has
expanded from a strong European base and is well established globally. The group
has recently reduced its cyclicality by increasing the use of subcontractors and
expanding service and maintenance.
MAGNETTI MARELLI -- an Italian auto components manufacturer, it is seeking to
reduce exposure to Fiat to 30% of OEM sales over the next 3 years. Expansion is
driven by competitive new products including fuel injection, air conditioning
and engine cooling systems.
PLETTAC -- a leading German scaffolding manufacturer/ service provider, recently
diversified into security systems. Aiming to grow the business organically and
by acquisition helped by strong cashflow. The market sees this as a cyclical
construction stock, allowing us to buy at cheap levels.
BUNZL (United Kingdom) is a tightly managed company enjoying high returns on low
technology businesses due to its dominant market shares and focus on working
capital. The company has a long history of intelligent and return enhancing
growth by acquisition.
CHARTER PLC (United Kingdom) is an engineering conglomerate, consisting of Esab
(welding), Pandrol (railtrack equipment) and Howden (engineering). Charter has
strong management, while its businesses enjoy genuinely global franchises and
good levels of profitability.
Traditionally known as a major United Kingdom mail-order retailer GREAT
UNIVERSAL STORES also has a number of international retailing businesses.
Appointed in 1996 the new Chairman, David Wolfson, has a great track record
including the turnaround of Next PLC.
MEDEVA (United Kingdom) is a pharmaceutical company specializing in generic
drugs for the prescription market; being controlled these drugs are protected
from open competition. Two-thirds of output is to the USA, generating greater
than 80% of operating profit. Medeva is heavily undervalued relative to its
peers.
SCAPA (United Kingdom) manufactures consumables for global industries.
Traditionally supplies the paper manufacturing industry with Paper Machine
Clothing and Paper Machine roll covers which are consumed in the production and
are crucial to the efficient running of the machines.
WESTMINSTER HEALTH CARE is the United Kingdom's second largest nursing home
operator and the leading retirement home operator. Perceived as the quality
operator in the U.K., it aims to offer a complete range of services, with non
nursing homes accounting for 50% of PBT.
FRANCE TELECOM is the last major European telecommunications company to be
privatized. FT benefits from a stable, transparent regulatory environment. FT is
rebalancing its tariff structure, the best defense against looming competition.
BANK OF IRELAND is a leading financial organization in Ireland. It has offices
located throughout Ireland, the U.K. and Europe. It also operates a subsidiary
bank in
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
New Hampshire. The bank remains cheap, relative to its European and U.K. peers,
whilst offering an attractive yield.
TELECOM ITALIA has a monopoly on local and cellular telephone usage and a
virtual monopoly in the domestic long distance market. Traffic has grown at an
average 10% over the past four years and the number of telephone subscribers per
capita at 40% is among the lowest in Europe. The anticipated tariff reform will
allow TI to link tariff charges more directly to costs.
One of the cheapest telecoms in Europe TELEFONICA DE ESPANA provides all Spain's
domestic and international telephone services. It owns the public exchanges,
exchange equipment and nationwide network connecting subscribers and exchanges.
TdE has good growth potential in its Peruvian business and is set to benefit
from the liberalization of European telecommunications industry.
ASSOCIATED BRITISH FOODS (U.K.) dominates the U.K. flour milling and bread
baking industry, with further involvement in Australia and in food retailing in
Northern Ireland. The net cash position is being steadily built up again
following the 1991 acquisition of British Sugar.
BASS (U.K.): leading market position in U.K. brewing, pub retailing, and the
international franchise hotel business, Holiday Inn. Bass's management team is
highly disciplined in capital allocation in an industry where these skills are
insufficiently rigorous.
Stock sales during the latter part of the year included:
BONGRAIN (France) was sold after successfully reaching price target.
EDITORALE L'ESPRESSO (Italy) was sold after reaching price target.
BALOISE HOLDING (Switzerland) was eliminated on strength.
ZUERICH VERSICHERUNGS (Switzerland) was eliminated on strength.
SCOTTISH HYDRO-ELECTRIC (U.K.) was sold on strength and after reaching price
target.
MANNESMANN (Germany) was eliminated on strength.
OLIVETTI (Italy) was sold due to operating environment fears.
STOREBRAND (Norway) was sold on strength after our price target had been
reached.
OERLIKON BUEHRLE (Switzerland) was sold on strength after our price target had
been reached.
COURTAULDS TEXTILES (U.K.) was sold due to operating environment fears.
Robert Sargent
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
European Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------
COMMON STOCKS (89.8%)
AUSTRIA (0.7%)
27,890 Boehler-Uddeholm AG.............................. $ 1,635
---------
BELGIUM (1.0%)
52,900 G.I.B. Holdings Ltd.............................. 2,570
55 G.I.B. Holdings Ltd. VVPR (New).................. 2
---------
2,572
---------
DENMARK (2.2%)
40,400 BG Bank A/S...................................... 2,718
35,800 Unidanmark A/S, Class A (Registered)............. 2,628
---------
5,346
---------
FINLAND (4.8%)
(a)55,300 Amer-Yhtymae Oyj, Class A........................ 1,060
48,600 Huhtamaki Oyj, Series 1.......................... 2,006
14,945 Kone Oyj, Class B................................ 1,810
300,000 Merita Ltd., Class A............................. 1,640
(a)47,650 Metra Oyj, Class B............................... 1,119
301,000 Rautaruukki Oyj.................................. 2,430
130,350 Valmet Oyj....................................... 1,798
---------
11,863
---------
FRANCE (10.4%)
10,800 Alcatel Alsthom.................................. 1,373
22,517 Cie de Saint Gobain.............................. 3,199
30,800 Elf Aquitaine.................................... 3,582
(a)48,000 France Telecom................................... 1,741
17,400 Groupe Danone.................................... 3,108
48,511 Lafarge.......................................... 3,183
53,600 Legris Industries................................ 1,861
(a)29,400 SGS-Thompson Microelectronics N.V................ 1,820
5,300 Scor............................................. 253
31,100 Total, Class B................................... 3,385
163,500 Usinor Sacilor................................... 2,361
---------
25,866
---------
GERMANY (9.7%)
76,100 BASF AG.......................................... 2,716
62,550 Bayer AG......................................... 2,321
5,340 Buderus AG....................................... 2,395
93,150 Gerresheimer Glas AG............................. 1,305
128,400 Lufthansa AG..................................... 2,412
28,320 Metro AG......................................... 1,004
(a)4,020 Philipp Holzmann AG.............................. 1,037
10,943 Plettac AG....................................... 1,509
37,500 VEBA AG.......................................... 2,554
7,360 Viag AG.......................................... 4,030
5,000 Volkswagen AG.................................... 2,793
---------
24,076
---------
ITALY (5.6%)
673,000 Magneti Marelli S.p.A............................ 1,151
270,800 Marzotto (Gaetano) & Figli S.p.A................. 3,383
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------
324,350 Mediaset S.p.A................................... $ 1,593
1,009,000 Sogefi S.p.A..................................... 2,567
400,001 Telecom Italia S.p.A............................. 2,555
595,360 Telecom Italia S.p.A. Di Risp (NCS).............. 2,625
---------
13,874
---------
NETHERLANDS (9.4%)
102,400 ABN Amro Holding N.V............................. 1,995
22,200 Akzo Nobel N.V................................... 3,828
(a)15,600 Benckiser N.V., Class B.......................... 645
103,570 Hollandsche Beton Groep N.V...................... 1,926
86,300 ING Groep N.V.................................... 3,635
40,800 KLM Royal Dutch Airlines N.V..................... 1,509
35,000 Koninklijke Bijenkorf Beheer N.V................. 2,192
138,380 Koninklijke KNP BT N.V........................... 3,187
41,900 Koninklijke Van Ommeren N.V...................... 1,405
47,550 Philips Electronics N.V.......................... 2,852
---------
23,174
---------
NORWAY (1.2%)
130,120 Saga Petroleum A/S, Class B...................... 1,973
26,050 Sparebanken...................................... 928
---------
2,901
---------
SPAIN (3.6%)
11,518 Bodegas y Bebidas................................ 445
204,000 Iberdrola........................................ 2,685
92,700 Telefonica de Espana............................. 2,647
280,200 Uralita.......................................... 3,200
---------
8,977
---------
SWEDEN (5.4%)
88,350 Esselte AB, Class B.............................. 1,792
(a)667,000 Nordbanken AB.................................... 3,772
65,000 Pharmacia & Upjohn, Inc.......................... 2,390
43,100 S.K.F. AB, Class B............................... 917
50,600 Forenings Sparbanken AB.......................... 1,150
69,300 Spectra-Physics AB, Class A...................... 1,314
61,000 Svenska Handelsbanken, Class A................... 2,109
---------
13,444
---------
SWITZERLAND (10.0%)
(a)1,870 Ascom Holdings AG (Bearer)....................... 2,407
1,710 Bobst AG (Bearer)................................ 2,517
6,500 Forbo Holding AG (Registered).................... 2,657
3,800 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 3,101
3,300 Nestle (Registered).............................. 4,946
633 Novartis AG (Registered)......................... 1,027
600 Schindler Holding AG (Participating
Certificates).................................. 625
1,320 Schindler Holding AG (Registered)................ 1,418
1,760 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................... 2,404
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
European Equity Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
3,030 Sulzer AG (Registered)........................... $ 1,921
7,950 Valora Holding AG................................ 1,677
---------
24,700
---------
UNITED KINGDOM (25.8%)
(a)462,134 Aggreko plc...................................... 1,185
14,600 Associated British Foods plc..................... 127
171,394 B.A.T. Industries plc............................ 1,560
299,205 BG plc........................................... 1,347
190,000 Bank of Ireland.................................. 2,919
194,910 Bank of Scotland................................. 1,794
85,700 Bass plc......................................... 1,330
255,900 Booker plc....................................... 1,346
319,800 British Telecommunications plc................... 2,515
328,700 Bunzl plc........................................ 1,277
220,150 Burmah Castrol plc............................... 3,835
152,300 Charter plc...................................... 1,875
462,134 Christian Salvesen plc........................... 744
95,050 Commercial Union plc............................. 1,326
60,200 Danka Business Systems plc....................... 234
384,000 Diageo plc....................................... 3,531
40,300 Glynwed International plc........................ 172
252,800 Great Universal Stores plc....................... 3,186
542,000 Imperial Tobacco Group plc....................... 3,411
916,654 John Mowlem & Co. plc............................ 1,341
460,000 Kwik Save Group plc.............................. 2,215
603,900 Medeva plc....................................... 1,608
184,400 Peninsular & Oriental Steam Navigation Co........ 2,098
184,800 Premier Farnell plc.............................. 1,330
928,800 Premier Oil plc.................................. 809
302,900 Racal Electronic plc............................. 1,329
260,632 Reckitt & Colman plc............................. 4,090
372,172 Royal & Sun Alliance Insurance Group
plc............................................ 3,749
537,200 Scapa Group plc.................................. 2,057
254,218 Tate & Lyle plc.................................. 2,093
299,500 Unilever plc..................................... 2,564
728,600 WPP Group plc.................................... 3,245
286,900 Westminster Health Care Holdings plc............. 1,721
---------
63,963
---------
TOTAL COMMON STOCKS (Cost $188,632).............................. 222,391
---------
PREFERRED STOCKS (2.9%)
GERMANY (2.9%)
5,373 Dyckerhoff AG.................................... 1,377
36,000 Hornbach Holding AG.............................. 2,481
3,845 Suedzucker AG.................................... 1,892
3,200 Volkswagen AG.................................... 1,372
---------
TOTAL PREFERRED STOCKS (Cost $6,266)............................. 7,122
---------
TOTAL FOREIGN SECURITIES (92.7%) (Cost $194,898)................. 229,513
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.2%)
REPURCHASE AGREEMENT (2.2%)
$ 5,494 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $5,496,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $5,607
(Cost $5,494).................................. $ 5,494
---------
FOREIGN CURRENCY (1.1%)
GBP 11 British Pound.................................... 18
FIM 900 Finnish Markka................................... 165
DEM 450 German Mark...................................... 250
ITL 150,742 Italian Lira..................................... 85
NLG 1,261 Netherlands Guilder.............................. 622
ESP 25 Spanish Peseta................................... --
CHF 2,163 Swiss Franc...................................... 1,481
---------
TOTAL FOREIGN CURRENCY (Cost $2,631)............................. 2,621
---------
TOTAL INVESTMENTS (96.0%) (Cost $203,023)........................ 237,628
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.6%)
Receivable for Investments Sold..................... $ 10,152
Dividends Receivable................................ 808
Foreign Withholding Tax Reclaim Receivable.......... 271
Receivable for Portfolio Shares Sold................ 237
Net Unrealized Gain on Foreign Currency Exchange
Contracts......................................... 5
Interest Receivable................................. 1
Other............................................... 6 11,480
----------
LIABILITIES (-0.6%)
Payable for Investments Purchased................... (890)
Investment Advisory Fees Payable.................... (473)
Bank Overdraft...................................... (75)
Administrative Fees Payable......................... (33)
Payable for Portfolio Shares Redeemed............... (27)
Custodian Fees Payable.............................. (24)
Directors' Fees & Expenses Payable.................. (8)
Distribution Fees Payable........................... (3)
Other Liabilities................................... (53) (1,586)
---------- --------
NET ASSETS (100%)................................................. $247,522
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $202,996
Distributions in Excess of Net Investment Income.................. (74)
Accumulated Net Realized Gain..................................... 10,115
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 34,485
--------
NET ASSETS........................................................ $247,522
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
European Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - ------------------------------------------------------------------
NET ASSETS........................................................ $242,868
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,522,329 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $17.96
--------
--------
CLASS B:
- - ------------------------------------------------------------------
NET ASSETS........................................................ $4,654
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 259,447 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $17.94
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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>
- - ---------- ------- ----------- ------------ ------- ------------
ESP 60,156 $ 395 1/02/98 U.S.$ 396 $ 396 $ 1
U.S.$ 81 81 1/02/98 FRF 484 80 (1)
U.S.$ 353 353 1/02/98 DEM 632 352 (1)
CHF 2,163 1,481 1/05/98 U.S.$ 1,485 1,485 4
FIM 380 70 1/05/98 U.S.$ 70 70 --
NLG 1,729 853 1/05/98 U.S.$ 855 855 2
------- -------
--
$ 3,233 $ 3,238
$ 5
-------
------- -------
-------
--
--
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
FRF -- French Franc
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - -------------------------------------------------------------------
Capital Equipment...................... $ 42,333 17.1%
Consumer Goods......................... 44,709 18.1
Energy................................. 11,494 4.6
Finance................................ 30,616 12.4
Materials.............................. 47,861 19.3
Multi-Industry......................... 12,500 5.0
Services............................... 40,000 16.2
--------- ---
$ 229,513 92.7%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
European Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Belgium 4.9 %
Denmark 5.6 %
France 19.8 %
Netherlands 6.8 %
Norway 9.0 %
Spain 1.0 %
Sweden 11.9 %
United Kingdom 35.9 %
Other 5.1 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EUROPEAN REAL EUROPEAN REAL THE GRP LIFE EUROPEAN
Estate Portfolio--Class Estate Portfolio--Class
A B Real Estate T.R. Index
<S> <C> <C> <C>
10/01/97* $500,000 $100,000 $500,000
12/31/97 476,400 95,240 500,650
* 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 performance of Class B shares will vary based
upon the different fees assessed to that class. The GPR Life European Real
Estate T.R. value at December 31, 1997 assumes a minimum initial investment of
$500,000; if a minimum initial investment of $100,000 (the minimum investment
for Class B shares) is assumed, the value at December 31, 1997 would be
$100,130.
PERFORMANCE COMPARED TO THE GPR LIFE
EUROPEAN REAL ESTATE T.R. INDEX(1)
- - -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
SINCE INCEPTION
---------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... -4.72%
PORTFOLIO -- CLASS B(3)..................... -4.76
INDEX....................................... 0.13
</TABLE>
1. The GPR Life European Real Estate T.R. Index is a European market
capitalization weighted index of listed property/real estate securities
measuring total return.
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 October 1, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 investment objective of the European Real Estate Portfolio is to provide
current income and long-term capital appreciation by investing primarily in
equity securities of companies in the European real estate industry.
For the period from October 1, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of -4.72% for the Class A
shares and -4.76% for the Class B shares compared to 0.13% for the GPR Life
European Real Estate T.R. Index.
The fourth quarter activity in the European property markets was dominated by
speculation on early entry of the Great Britain Pound ("GBP") to the common
currency and the unrest in the Asian markets. The speculation on early entry of
the GBP drove U.K. bond yields down. This caused a re-rating of the property
share sector on the assumption of lower property yields. The U.K. property
market was up 7.9% in the month of October. A rise in German interest rates
pushed bond yields higher in Sweden, which, combined with the expected economic
slowdown from the Asian crisis, effected property shares negatively. The Swedish
property shares fell -3.7% and -5.5% in October and November, respectively. The
GPR Life European Real Estate Index posted a total return of 0.13% for the
quarter based on strong performance in the U.K.. The Portfolio was hurt by a
strong overweight in Sweden and underweight the U.K. registering a total return
of -4.7%.
With the increased volatility in the capital markets, we added exposure to the
more stable Dutch market through Uni-Invest. The company has a very high
dividend yield (8.0%) and trades at net asset value. Looking forward, we believe
London office, retail warehousing, and shopping centers will continue to see
increases in rents and strengthening yields. Thus, we remain overweight in these
areas even though underweight the U.K. market as a whole. We continue to see
strong rental growth in Sweden and the rest of the Nordic market and are
maintaining an overweight position albeit at a decreased level. We have also
started to build an exposure to the Spanish property market through Urbis. We
expect a reduction in Spanish yields and increases in rents and housing sales
due to strong economic growth. Finally, we remain slightly underweight in the
French market, but
- - --------------------------------------------------------------------------------
European Real Estate Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
strongly overweight the commercial sector in anticipation of a cyclical rebound
while underweighting the apartment sector.
The Portfolio performance was also negatively affected by two non-property
events: strong currency fluctuations and an extraordinarily large cash
redemption at the end of the period. The global turmoil sparked by the Asian
meltdown drove investors into traditional safe-havens, i.e., the U.S. and U.K.
markets. The result of this capital shift was a re-adjustment in the currency
markets. The Nordic region was the hardest hit, as Sweden, Norway and Denmark
fell 4.6%, 4.4%, and 2.2%, respectively, while the British pound appreciated by
1.8%. These currency moves resulted in an increased cost to our strong Nordic
exposure, while again penalizing an underweight U.K. position.
Jan Willem de Geus
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------
COMMON STOCKS (94.9%)
BELGIUM (4.9%)
3,850 Befimmo S.C.A.................................... $ 247
(a)8,450 Befimmo S.C.A. (New)............................. 541
--------
788
--------
DENMARK (5.6%)
19,900 EjendomsSelskabet Norden A/S..................... 900
--------
FRANCE (19.8%)
1,600 Bail Investissement.............................. 212
4,152 Klepierre........................................ 522
2,474 Locindus......................................... 305
6,000 Sefimeg.......................................... 299
8,300 Sophia........................................... 315
4,200 Silic............................................ 565
7,550 Unibail.......................................... 754
5,224 Union Pour le Financement d'Immeubles de
Societes....................................... 183
--------
3,155
--------
NETHERLANDS (6.8%)
35,000 Schroders International Property Fund N.V........ 599
33,700 UNI-INVEST N.V................................... 479
--------
1,078
--------
NORWAY (9.0%)
86,700 Avantor ASA...................................... 857
(a)42,417 Steen & Strom ASA................................ 574
--------
1,431
--------
SPAIN (1.0%)
17,100 Inmobiliaria Urbis............................... 162
--------
SWEDEN (11.9%)
(a)86,400 Castellum AB..................................... 859
260,300 Platzer Bygg AB, Class B......................... 387
32,800 PriFast AB....................................... 306
76,300 Storheden AB..................................... 341
--------
1,893
--------
UNITED KINGDOM (35.9%)
29,700 British Land Co. plc............................. 332
112,800 Brixton Estate plc............................... 393
337,000 Buford Holdings plc.............................. 554
55,500 Capital Shopping Centers plc..................... 374
227,400 Freeport Leisure plc............................. 848
168,500 Great Portland Estates plc....................... 668
25,000 Hammerson plc.................................... 193
241,000 Jarvis Hotels plc................................ 594
30,500 Land Securities plc.............................. 486
113,400 MEPC plc......................................... 947
299,200 St. Modwen Properties plc........................ 352
--------
5,741
--------
TOTAL FOREIGN SECURITIES (94.9%) (Cost $15,771)................... 15,148
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ----------------------------------------------------------------------------
FOREIGN CURRENCY (1.3%)
BEF 477 Belgian Franc.................................... $ 13
GBP 2 British Pound.................................... 3
FRF 1 French Franc..................................... --
NOK 1,417 Norwegian Krone.................................. 192
SEK 1 Swedish Krona.................................... --
--------
TOTAL FOREIGN CURRENCY (Cost $212)................................ 208
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.2%) (Cost $15,983).......................... 15,356
--------
OTHER ASSETS (7.7%)
Receivable for Investments Sold..................... $ 1,132
Due from Adviser.................................... 49
Dividends Receivable................................ 46
Net Unrealized Gain on Foreign Currency Exchange
Contracts......................................... 4
Foreign Withholding Tax Reclaim Receivable.......... 3 1,234
----------
LIABILITIES (-3.9%)
Payable for Investments Purchased................... (310)
Bank Overdraft...................................... (153)
Payable for Portfolio Shares Redeemed............... (107)
Custodian Fees Payable.............................. (9)
Administrative Fees Payable......................... (3)
Other Liabilities................................... (42) (624)
---------- --------
NET ASSETS (100%)................................................. $ 15,966
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital....................................... $ 16,964
Undistributed Net Investment Income................... 9
Accumulated Net Realized Loss......................... (375)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................... (632)
--------
NET ASSETS............................................ $ 15,966
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
NET ASSETS........................................................ $15,177
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,594,897 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $9.52
--------
--------
CLASS B:
NET ASSETS........................................................ $789
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 82,947 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $9.52
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
European Real Estate Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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>
- - ---------- ------ ----------- ------------ ------ ------------
SEK 1,788 $ 225 1/02/98 U.S.$ 226 $ 226 $ 1
GBP 218 358 1/05/98 U.S.$ 361 361 3
SEK 826 104 1/05/98 U.S.$ 104 104 --
------ ------ ---
$ 687 $ 691 $ 4
------
------ ------ ---
------ ---
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ------------------------------------------------------------------
Apartment.............................. $ 640 4.0%
Diversified............................ 4,280 26.8
Land................................... 1,692 10.6
Lodging/Leisure........................ 594 3.7
Office & Industrial.................... 3,856 24.2
Shopping Centers....................... 4,086 25.6
-------- ---
Net Assets............................. $ 15,148 94.9%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
European Real Estate Portfolio
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 1.3 %
Canada 1.6 %
France 2.4 %
Germany 6.2 %
Hong Kong 0.5 %
Ireland 5.7 %
Italy 3.7 %
Japan 7.6 %
Netherlands 4.4 %
New Zealand 0.7 %
Portugal 0.3 %
Spain 3.0 %
Sweden 1.6 %
Switzerland 4.3 %
United Kingdom 13.7 %
United States 38.5 %
Other 4.5 %
</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 MSCI WORLD
PORTFOLIO--CLASS
A INDEX(1)
<S> <C> <C>
7/15/92* $500,000 $500,000
10/31/92 467,500 482,000
12/31/92 455,813 475,879
12/31/93 703,145 604,750
12/31/94 752,000 635,450
12/31/95 892,323 767,115
12/31/96 1,096,041 870,522
12/31/97 1,356,351 1,007,716
* 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 MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- - --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 23.75% 22.71% 20.03%
PORTFOLIO -- CLASS
B..................... 23.37 N/A 22.74
INDEX -- CLASS A...... 15.76 15.34 13.69
INDEX -- CLASS B...... 15.76 N/A 14.41
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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
emerging markets.
For the year ended December 31, 1997, the Portfolio had a total return of 23.75%
for the Class A shares and 23.37% for the Class B shares, compared to a total
return of 15.76% for the Morgan Stanley Capital International (MSCI) World Index
(the "Index"). For the five-year period ended December 31, 1997, the average
annual total return for Class A was 22.71% compared to 15.34% for the Index,
from inception on July 15, 1992 to December 31, 1997, the average annual total
return of Class A was 20.03% compared to 13.69% for the Index. From inception on
January 2, 1996 to December 31, 1997, the average annual total return of Class B
was 22.74% compared to 14.41% for the Index.
The approach in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of global databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Stocks selected
from this screening process are put through detailed fundamental analysis.
Important areas covered during this in-depth study include the companies'
balance sheet and cash flow, franchise, products, management and the strategic
value of the businesses assets.
Outperformance during 1997 came largely from the combination of our heavily
underweight position in Japan and Southeast Asia and strong Japanese stock
selection, notably the large exporters which continued to benefit from yen
weakness. Stock selection in many European markets, particularly financials,
also contributed, as did our overweighting in continental Europe.
After beginning 1997 as perceivably one of the most "at risk" markets on a
valuation basis, the U.S. ended the year again among the strongest developed
markets, despite high volatility. As the economic expansion continued into its
seventh year, the "Goldilocks" investment scenario prevailed: a firming dollar,
robust growth, benign inflation (despite full employment), shrinking supply in
both debt and equities and booming demand (another U.S.$250 billion of net
equity mutual fund inflows). This was despite a 1/4% rise in the Federal Funds
rate in February (first in over two years) and warnings from
- - --------------------------------------------------------------------------------
Global Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
the Federal Reserve Chairman of "irrational exuberance". In Europe, weaker
currencies, lower yields, accelerating restructuring and consolidation drove
exceptional local currency returns. While restructuring remained a central
investment theme throughout 1997, it was hampered by double digit unemployment,
difficult labor laws and the election, across the region, of socialist
governments. EMU driven interest rate convergence was a feature with increasing
confidence that Italy would join in the first wave. The U.K. lagged its
continental counterparts as the newly independent Bank of England hiked interest
rates 1 1/4% in an attempt to subdue the overheated domestic economy.
In Japan, a weak domestic economy following April's VAT hike, the spectre of
deregulation and the deepening banking crisis, brought a further loss of
confidence. Some hope was extended by year end tax cuts, and increasing
government willingness to restructure its banking system. Changing sentiment was
also evident in the collapse of Yamaichi, Japan's 4th largest broker, perhaps
heralding a breakdown in the traditional keiretsu "convoy" system. Significant
risks remain, however, not least of which is the threat to corporate earnings
posed by Asian devaluations and the inevitable corporate collapses, to which
Japan Inc. is the major creditor. Southeast Asia's problems have been widely
documented, with much of the region's growth based on hard currency financing
which has become exorbitantly expensive. Despite the IMF "bail out" of Korea,
Indonesia and Thailand, the austerity programmes, recessions and necessary
reforms in these economies have barely begun and the political willingness to
achieve this not yet demonstrated.
Given a projected slowdown in global growth, the U.S. Treasury market is now
predicting the Federal Reserve Board will ease rates. If mid single digit
earnings growth can be maintained, and inflation remains quiescent, the U.S.
market is arguably fairly valued with long bond yields at current levels. While
equity mutual fund inflows should slow, merger activity is expected to continue.
We remain slightly underweight in the U.S., finding better relative value in
Europe, particularly Ireland and the U.K.. We have moved from market to over
weight in the U.K. recently having found several strong business franchises with
management dedicated to maximizing shareholder value. Despite continued
underperformance, we still struggle to find value in Japan, other than in
selected sectors such as pharmaceuticals. Hence we expect to remain underweight
in the foreseeable future. We also remain cautious about Asia as a whole despite
the exceptionally steep sell off.
Additions to the Portfolio in the past six months included:
LION NATHAN (New Zealand) is the dominant name, along with Fosters, in the
Australasian brewing market. The stock is currently undervalued due to concern
over recent market share losses and management turnover.
The Portuguese cement company, CIMPOR, is benefiting from growth in its core
domestic market. With its strong balance sheet it is well positioned to exploit
opportunities in emerging markets such as Brazil.
GENERAL SIGNAL (USA) is a leading manufacturer of process and electronic control
equipment. New management (ex General Electric) has focused the company on cash
flow generation. Underperforming businesses are being sold. A stock buy back may
be forthcoming in the near term.
B F GOODRICH (USA) has transformed from a commodity manufacturer into an
aerospace and specialty chemical company. Asset sales have left BFG in a strong
financial position. Jet production is strong; OE sales, spares and overhaul
provide some protection from production slowdown.
NOBLE DRILLING (USA) is a leading operator of jackup rigs for the oil and gas
industry, with growing deep water focus and strong earnings growth prospects
over the next 3-4 years. Conservative management and a favorable industry
outlook provide further comfort in a highly cyclical industry.
TENNECO (USA), after five years of restructuring is a leading global
consolidator in automotive equipment and packaging. The company plans to exit
the unprofitable commodities businesses and use the proceeds to make further
specialty acquisitions, pay down debt and buy back stock.
UNITED MERIDIAN (USA) is a mid-cap gas weighted U.S. E&P company which has grown
production and cash flow by 30% per annum over the past four years. Despite
strong management and locked in production gains over the next 2-3 years, UM
trades at an unjustified discount to its peers.
Following the sale of Camas (building materials) ENGLISH CHINA CLAYS (U.K.) has
refocused on core areas: producing kaolin and calcium carbonates for
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
the paper industry, and the supply of specialty chemicals for water treatment.
ECC will benefit from the worldwide recovery in the paper industry.
ROYAL & SUN ALLIANCE (U.K.) is a global insurer writing most classes of
insurance, created in 1996 from the merger of Royal Insurance Holdings and Sun
Alliance. The company's U.S. operations are improving under better management
and proactive resolution of major U.S. pollution liabilities.
BANK OF IRELAND provides a wide range of banking and financial services. It has
offices throughout Ireland, the U.K. and Europe and has a subsidiary bank in New
Hampshire. BoI remains cheap, relative to its European and U.K. peers, while
offering an attractive yield.
BENCKISER focuses on household cleaning products with leading niche positions in
dish washing products, laundry products and home cleaners. Strong management
have steadily grown Benckiser's market shares, together with strong growth in
its niche categories.
FRANCE TELECOM is the last major European telco to be privatized. FT benefits
from a stable, transparent regulatory environment. FT is rebalancing its tariff
structure, the best defense against looming competition.
FUJISAWA, a medium sized Japanese pharmaceutical company, has moderate growth
prospects and a difficult domestic environment. Its value attractions are its
free cash generation and strong financials. We believe its latent value will be
realized when inevitable industry rationalization takes place.
POTASH CORP. OF SASKATCHEWAN (Canada) is the world's lowest cost, highest
reserved producer of potash and is one of the most efficient producers of
phosphate and nitrogen, the other key fertilizer applications. Potash is
renowned for its supply management and generates substantial free cash flow.
Rescued by the Swedish government during the Scandinavian banking crisis,
NORDBANKEN has arguably the best asset quality of the Swedish banks. The 1997
merger with Finland's largest bank, Merita, gives it a unique retail network in
the Nordic region.
NCR CORP (USA) has leading global market shares in its core automated teller
machine and retail scanning products, and should benefit from its independence
after several years of AT&T ownership.
PENINSULAR & ORIENTAL STEAM NAVIGATION (U.K.) includes the Peninsular & Oriental
and Princess brands. Management have recently taken radical action to improve
return on capital through joint ventures and are investing cash flow in the
higher yielding Peninsular & Oriental Cruise business.
PREMIER FARNELL (U.K.), the world's largest catalogue distributor of
electronic/industrial components, provides engineers needing guaranteed
availability and delivery, giving PF pricing power. Price weakness followed the
acquisition of its large U.S. competitor. PF is well placed for global
expansion.
Stock sales during the second half of the year included:
MANNESMANN (Germany) was eliminated on strength.
VARTA (Germany) was sold as better value was found elsewhere.
OLIVETTI (Italy) was sold due to operating environment fears.
AMR (USA) was sold on strength after our price target had been reached.
TANDY (USA) was sold on strength after our price target had been reached.
SCOTTISH HYDRO-ELECTRIC (U.K.) was eliminated on strength.
BANQUE NATIONALE DE PARIS (France) successfully reached our target price.
GREENFIELD INDUSTRIES (USA) sold to takeover offer from Kennemetal. Greenpoint
Financial Corp (USA) successfully reached our price target.
GREENPOINT FINANCIAL CORP (USA) successfully reached our price target.
MCI COMMUNICATIONS CORP (USA) subject to successive takeover bids; we took
advantage of Worldcom's offer.
Frances Campion
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Global Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
COMMON STOCKS (94.4%)
AUSTRALIA (1.3%)
205,100 CSR Ltd.......................................... $ 695
90,298 Coles Myer Ltd................................... 434
(a)186,800 Telstra Corp., Ltd. (Installment Receipts-Final
Installment: AUD 1.35/shr due 11/17/98)........ 394
---------
1,523
---------
CANADA (1.6%)
13,480 Potash Corp. of Saskatchewan, Inc................ 1,123
32,120 TELUS Corp....................................... 712
---------
1,835
---------
FRANCE (2.4%)
2,010 Bongrain......................................... 848
9,266 Elf Aquitaine.................................... 1,078
(a)8,200 France Telecom................................... 297
11,000 Scor............................................. 526
---------
2,749
---------
GERMANY (5.1%)
25,900 BASF AG.......................................... 924
32,920 Bayer AG......................................... 1,222
3,470 Karstadt AG...................................... 1,200
(a)2,364 Sinn AG.......................................... 482
14,100 VEBA AG.......................................... 960
800 Viag AG.......................................... 438
1,000 Volkswagen AG.................................... 559
---------
5,785
---------
HONG KONG (0.5%)
196,481 Jardine Strategic Holdings, Inc.................. 519
---------
IRELAND (5.7%)
703,737 Anglo Irish Bank Corp. plc....................... 1,372
69,200 Clondalkin Group plc............................. 559
340,503 Green Property plc............................... 1,938
467,394 Irish Life plc................................... 2,680
---------
6,549
---------
ITALY (3.7%)
164,800 Mediaset S.p.A................................... 810
781,813 Telecom Italia S.p.A. Di Risp (NCS).............. 3,447
---------
4,257
---------
JAPAN (7.6%)
66,000 Fuji Photo Film Ltd.............................. 2,529
60,000 Fujisawa Pharmaceutical Co., Ltd................. 524
21,000 Hitachi Ltd...................................... 150
81,000 Kao Corp......................................... 1,167
47,000 Matsushita Electric Industrial Co., Ltd.......... 688
222,000 NKK Corp......................................... 177
140,000 Nichido Fire & Marine Insurance Co., Ltd......... 730
9,000 Sony Corp........................................ 800
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
86,000 Sumitomo Rubber Industries....................... $ 363
13,000 TDK Corp......................................... 981
37,000 Toyo Seikan Kaisha Ltd........................... 527
---------
8,636
---------
NETHERLANDS (4.4%)
83,012 ABN Amro Holding N.V............................. 1,617
(a)12,800 Benckiser N.V., Class B.......................... 530
18,880 Hollandsche Beton Groep N.V...................... 351
35,324 ING Groep N.V.................................... 1,488
17,200 Philips Electronics N.V.......................... 1,031
---------
5,017
---------
NEW ZEALAND (0.7%)
362,100 Lion Nathan Ltd.................................. 811
---------
PORTUGAL (0.3%)
13,450 Cimpor SGPS...................................... 352
---------
SPAIN (3.0%)
93,700 Iberdrola........................................ 1,233
74,800 Telefonica de Espana............................. 2,136
---------
3,369
---------
SWEDEN (1.6%)
(a)201,800 Nordbanken AB.................................... 1,141
14,300 Skandia Forsakrings AB........................... 675
---------
1,816
---------
SWITZERLAND (4.3%)
300 ABB AG (Bearer).................................. 377
(a)800 Ascom Holdings AG (Bearer)....................... 1,030
370 Bobst AG (Bearer)................................ 545
2,500 Forbo Holding AG (Registered).................... 1,022
835 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 681
780 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................... 1,065
189 Sulzer AG (Registered)........................... 120
---------
4,840
---------
UNITED KINGDOM (13.7%)
(a)228,888 Aggreko plc...................................... 587
79,900 Bank of Ireland.................................. 1,228
61,400 Bass plc......................................... 953
45,500 Burmah Castrol plc............................... 792
228,888 Christian Salvesen plc........................... 369
37,850 Danka Business Systems plc ADR................... 603
92,700 English China Clays plc.......................... 408
78,000 Imperial Tobacco Group plc....................... 491
105,028 John Mowlem & Co. plc............................ 154
241,400 Matthews (Bernard) plc........................... 389
94,600 Peninsular & Oriental Steam Navigation Co........ 1,077
(a,d)653,333 Pentos plc....................................... --
118,100 Premier Farnell plc.............................. 850
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Global Equity Portfolio
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
137,100 Racal Electronic plc............................. $ 601
138,491 Reckitt & Colman plc............................. 2,173
64,567 Rolls-Royce plc.................................. 249
139,300 Royal & Sun Alliance Insurance Group plc......... 1,403
81,453 Southern Electric plc............................ 677
91,077 Tate & Lyle plc.................................. 750
160,000 Unilever plc..................................... 1,370
113,800 WPP Group plc.................................... 507
---------
15,631
---------
UNITED STATES (38.5%)
16,200 AT&T Corp........................................ 992
29,600 Albertson's, Inc................................. 1,402
17,750 Aluminum Company of America...................... 1,249
(a)36,904 Ascent Entertainment Group, Inc.................. 383
25,000 B.F. Goodrich Co................................. 1,036
(a)47,400 BJ's Wholesale Club, Inc......................... 1,487
(a)26,300 Beazer Homes USA, Inc............................ 524
28,700 Borg-Warner Automotive, Inc...................... 1,493
12,307 Browning-Ferris Industries, Inc.................. 455
(a)129,300 Cadiz Land Co., Inc.............................. 1,108
98,100 Comsat Corp...................................... 2,379
(a)69,000 Data General Corp................................ 1,203
(a)109,000 Egghead, Inc..................................... 709
43,100 Enhance Financial Services Group, Inc............ 2,565
47,000 Finova Group, Inc................................ 2,335
(a)90,600 GenRad, Inc...................................... 2,735
11,700 General Signal Corp.............................. 494
13,800 Georgia Pacific Corp............................. 838
(a)13,800 Georgia Pacific Corp. (Timber Group)............. 313
(a)47,400 Homebase, Inc.................................... 373
68,000 Houghton Mifflin Co.............................. 2,610
22,500 IBP, Inc......................................... 471
(a)83,000 InteliData Technologies Corp..................... 153
20,900 Lukens, Inc...................................... 597
22,400 MBIA, Inc........................................ 1,497
24,600 Mellon Bank Corp................................. 1,491
(a)29,562 NCR Corp......................................... 822
(a)13,650 Noble Drilling Corp.............................. 418
53,200 Penncorp Financial Group, Inc.................... 1,899
3,250 Pennzoil Co...................................... 217
55,400 Pharmacia & Upjohn, Inc.......................... 2,029
67,500 Philip Morris Cos., Inc.......................... 3,059
700 Polaroid Corp.................................... 34
3,800 Prime Retail, Inc................................ 54
11,300 Tecumseh Products Co., Class A................... 551
17,780 Tenneco, Inc..................................... 702
38,100 Terra Nova (Bermuda) Holdings Ltd., Class A...... 1,000
(a)16,800 Toys "R" Us, Inc................................. 528
28,800 UST Corp......................................... 799
6,400 United Dominion Industries Ltd................... 162
(a)21,150 United Meridian Corp............................. 595
(a)135,400 WorldCorp, Inc................................... 152
---------
43,913
---------
TOTAL COMMON STOCKS (Cost $81,702)................................. 107,602
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
PREFERRED STOCK (1.1%)
GERMANY (1.1%)
3,000 Volkswagen AG (Cost $647)........................ $ 1,286
---------
TOTAL FOREIGN & U.S. SECURITIES (95.5%) (Cost $82,349)............. 108,888
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - --------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$3,642 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $3,643,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $3,717 (Cost $3,642).... 3,642
---------
FOREIGN CURRENCY (1.5%)
AUD 145 Australian Dollar................................ 94
GBP 13 British Pound.................................... 21
FRF 8,889 French Franc..................................... 1,477
DEM 1 German Mark...................................... --
JPY 9,534 Japanese Yen..................................... 73
NZD 20 New Zealand Dollar............................... 12
---------
TOTAL FOREIGN CURRENCY (Cost $1,682)............................... 1,677
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.2%) (Cost $87,673)................ 114,207
--------
OTHER ASSETS (0.3%)
Cash....................................... $ 1
Dividends Receivable....................... 241
Receivable for Portfolio Shares Sold....... 67
Foreign Withholding Tax Reclaim
Receivable............................... 53
Interest Receivable........................ 1
Other...................................... 6 369
----------
LIABILITIES (-0.5%)
Payable for Investments Purchased.......... (285)
Investment Advisory Fees Payable........... (190)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (44)
Administrative Fees Payable................ (14)
Custodian Fees Payable..................... (8)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (43) (592)
---------- --------
NET ASSETS (100%)........................................ $113,984
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Global Equity Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- - -------------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 85,533
Undistributed Net Investment Income............... 125
Accumulated Net Realized Gain..................... 1,842
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 26,484
--------
NET ASSETS........................................ $113,984
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------
NET ASSETS........................................ $108,074
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,835,884 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $18.52
--------
--------
CLASS B:
- - --------------------------------------------------
NET ASSETS........................................ $5,910
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 320,196 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $18.46
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - ------------ -------- ----------- ------------ -------- ------------
U.S.$ 24 $ 24 1/5/98 ITL 42,229 $ 24 $ --
GBP 2,150 3,525 2/16/98 U.S.$ 3,495 3,495 (30)
NLG 6,000 2,969 2/25/98 U.S.$ 2,918 2,918 (51)
FRF 18,500 3,086 3/12/98 U.S.$ 3,090 3,090 4
GBP 1,300 2,104 12/16/98 U.S.$ 2,137 2,137 33
-------- -------- ------
$ 11,708 $ 11,664 $ (44)
--------
-------- -------- ------
-------- ------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value - see note A-1 to financial statements.
ADR -- American Depositary Receipt
ITL -- Italian Lira
NCS -- Non Convertible Shares
NLG -- Netherland Guilder
- - ------------------------------------------------------------
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...................... $ 24,982 21.9%
Consumer Goods......................... 1,286 1.1
Consumer Products...................... 16,502 14.5
Energy................................. 3,271 2.9
Finance................................ 26,760 23.5
Materials.............................. 10,119 8.9
Multi-Industry......................... 5,651 4.9
Services............................... 19,714 17.3
Technology............................. 603 0.5
--------- ---
$ 108,888 95.5%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Global Equity Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
GOLD PORTFOLIO
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOLD
PORTFOLIO-- PHILADELPHIA GOLD
CLASS A AND SILVER INDEX(1)
<S> <C> <C>
2/01/94* $500,000 $500,000
12/31/94 228,775 198,075
12/31/95 258,996 220,141
12/31/96 605,740 430,243
12/31/97 268,706 276,130
* 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............. -55.64% -14.67%
PORTFOLIO -- CLASS B............. -55.17 -28.79
INDEX -- CLASS A................. -35.82 -12.84
INDEX -- CLASS B................. -35.82 -22.78
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of
- - -55.64% for the Class A shares and -55.17% for the Class B shares as compared to
- - -35.82% for the Philadelphia Gold and Silver Index (the "Index"). From inception
on February 1, 1994 through December 31, 1997, the average annual total return
of Class A was -14.67% compared to -12.84% for the Index. From inception on
January 2, 1996 through December 31, 1997, the average annual total return of
Class B was -28.79% compared to -22.78% for the Index.
The price of gold declined 13.6% in the fourth quarter primarily due to
continued fears of central bank selling, high levels of speculative short
positions held by funds, and hedging by producers who are trying to protect
marginal cash flows. The XAU, which is representative of a narrow large cap
group, was down 32.0%, the JSE index was down 21.8%, and the Aussie index was
down 21.6%. The damage has been universal and severe.
The basic premise we have been using is that gold is part of a portfolio to
provide risk diversification and some negative correlation in an asset class
which is out of favor, but still has solid long-term fundamentals. Gold is
acting as one would expect, negatively correlated to U.S. financial stocks. The
challenge to the industry right now is the belief that gold will be permanently
demonitized, an argument we are not willing to accept in the current state of
generally high global financial risks.
Nonetheless, by year end, the Portfolio moved into cash in the face of
widespread shareholder redemptions. At this writing, substantially all of the
shareholders have redeemed and we have begun the process of winding down the
Portfolio.
Peter F. Palmedo
PORTFOLIO MANAGER
Michael F. Klein
PRESIDENT
January 1998
- - --------------------------------------------------------------------------------
Gold Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
GOLD PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -------------------------------------------------------------
ASSETS
Receivable for Investments Sold........ $ 4,851
Receivable for Portfolio Shares Sold... 1
Foreign Withholding Tax Reclaim
Receivable........................... 1
Dividends Receivable................... 1
Other.................................. 1 $ 4,855
--------
LIABILITIES
Bank Overdraft Payable................. (2,623)
Payable for Portfolio Shares
Redeemed............................. (1,046)
Sub-Advisory Fees Payable.............. (11)
Custodian Fees Payable................. (4)
Administrative Fees Payable............ (2)
Distribution Fees Payable.............. (2)
Directors' Fees and Expenses Payable... (2)
Other Liabilities...................... (39) (3,729)
-------- ---------
NET ASSETS....................................... $ 1,126
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 27,618
Distributions in Excess of Net
Investment Income.................... (26)
Accumulated Net Realized Loss.......... (26,443)
Unrealized Depreciation on Foreign
Currency Translations................ (23)
---------
NET ASSETS............................. $ 1,126
---------
---------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $ 436
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 106,584 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $4.10
---------
---------
CLASS B:
- - --------------------------------------------------------------
NET ASSETS.................................................... $ 690
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 166,717 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $4.14
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Gold Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 2.7 %
Belgium 0.4 %
Canada 2.5 %
Denmark 2.1 %
Finland 0.5 %
France 11.5 %
Germany 7.3 %
Hong Kong 2.3 %
Italy 3.8 %
Japan 16.2 %
Netherlands 6.2 %
New Zealand 0.8 %
Portugal 0.5 %
Spain 2.1 %
Singapore 0.4 %
Sweden 3.9 %
Switzerland 4.7 %
United Kingdom 26.1 %
Other 6.0 %
</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 MSCI EAFE
PORTFOLIO--CLASS A INDEX(1)
<S> <C> <C>
8/04/89* $500,000 $500,000
10/31/90 505,380 417,750
10/31/91 541,635 446,800
10/31/92 516,940 387,750
12/31/92 524,830 393,450
12/31/93 769,000 521,500
12/31/94 864,150 562,100
12/31/95 965,860 625,111
12/31/96 1,155,555 662,930
12/31/97 1,316,293 674,730
* 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 MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- - --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 13.91% 20.19% 12.19%
PORTFOLIO -- CLASS
B..................... 13.57 N/A 16.07
INDEX -- CLASS A...... 1.78 11.39 3.84
INDEX -- CLASS B...... 1.78 N/A 3.87
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of 13.91%
for the Class A shares and 13.57% for the Class B shares as compared to a total
return of 1.78% for the Morgan Stanley Capital International (MSCI) EAFE Index
(the "Index"). For the five-year period ended December 31, 1997, the average
annual total return of Class A was 20.19% compared to 11.39% for the Index. From
inception on August 4, 1989 to December 31, 1997, the average annual total
return of Class A was 12.19% compared to 3.84% for the Index. From inception on
January 2, 1996 to December 31, 1997, the average annual total return of Class B
was 16.07% compared to 3.87% for the Index.
For the three month period ended December 31, 1997, the Portfolio had a total
return of -4.84% for the Class A shares and -4.91% for the Class B shares as
compared to -7.83% for the Index. The Portfolio's meaningful outperformance of
its benchmark in the final quarter of 1997 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.
Though some outperformance of the benchmark was achieved in the final quarter,
it didn't feel good with stock selection actually lagging local market returns
in aggregate, good relative returns only being seen in Japan and the United
Kingdom. Continental European stock returns were notably weak with the
underweight position in the financial sectors proving a particular handicap.
Returns for the year were substantially above that of the Index with both market
and stock returns making positive contributions and moderate currency hedging
more than offsetting the moderate negative return from the Portfolio's natural
currency position. However, as for the final quarter, the Portfolio over the
year suffered from its underweight positions in bank and insurance stocks which
accounted for sub-market returns for the year
- - --------------------------------------------------------------------------------
International Equity Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
in Switzerland, Spain and Germany. Disappointing relative returns in the United
Kingdom were also attributable to failed investments in busted growth stocks of
middle capitalization. One final regret for 1997 is our small exposure to
domestic Japanese issues which gradually got smaller and our poor timing in
switching some money out of Japanese exporters into mid cap pharmaceuticals in
December.
Turnover for the fourth quarter was moderate at 7.60% with profits being taken
in European bank stocks like BNP and the problematic holding in Redland being
solved by a surprise takeover bid. Coles Myer was sold on strength in Australia
while new positions were established in the Canadian special situations Potash
and Renaissance Energy. The quarter saw the establishment of new initial
positions in Asian stocks while in Japan blue chip exporters were sold in part
in favor of cash rich domestic pharmaceutical companies. Turnover for the year
at 33% was above the Portfolio's long term average reflecting the huge relative
return differentials observed in different markets over the year.
Looking forward to 1998 there are two clear concentrations of value in
international stock markets, South East Asia and certain domestic sectors in
Japan. Recent visits to South East Asia have left us convinced that the
Singapore banking sector is the only area where risk and reward favors the
investor and accordingly we are building a position in Development Bank of
Singapore despite having to pay a moderate foreign premium, which we find
acceptable in a bank with tier one capital of 18.5%. In Hong Kong we find high
corporate quality, good management and relatively strong balance sheets but the
overwhelming dominance of the stock market and the bank loan books by property
leaves us gingerly picking up well capitalized property investment companies at
price levels below those discounting Armageddon. The factor precluding a more
virile buying stance on Hong Kong is our suspicion that China's economy will
confront structural challenges in the quarters ahead and our belief that Hong
Kong's authorities will do anything necessary to avoid a breaking of the
currency peg to the U.S. dollar.
The Japanese stock market can be broadly split into three sectors: the heavily
owned and strongly performing export sector, the quality end of the domestic
economy which embraces everything from the non life insurance companies to the
better managed retailers, the pharmaceutical companies and the national
telephone, tobacco and railway companies. The third sector comprises the low
quality components of the domestic economy which includes the heavy cyclicals,
the banks, the construction sector and anything with too much debt. It is
important that most of the value resides in the third sector where,
unsurprisingly, lies most of the risk. So far we have identified nothing where
potential reward outweighs risk because contact with these companies reveals a
remarkable reluctance to cut capital expenditure back to prudent levels. We have
lost substantial amounts on our half holdings in Daicel Chemical and Nippon
Kokan but management at both companies remain unrepentant as do the management
of similar companies where we are not invested. Until our quarterly visits to
Japan reveal a change of attitude, we will focus our buying on higher quality
domestic sectors including cash rich pharmaceutical companies, financially sound
housing stocks and non life insurance stocks. We are not buyers of exporters as
their current cash flow multiples reflect their buoyant operating conditions and
their strong management. So far our switch out of exporters into drug stocks has
not been profitable but we will persevere.
In Europe we believe takeover activity has taken bank and insurance valuations
beyond fundamental value other than in Scandinavia and the U.K. where valuations
are at least full. Meanwhile, restructuring stocks are largely running ahead of
reality, particularly in Germany, and valuations for industrial companies with a
high degree of cyclicality are less than compelling outside the areas of highest
capital intensity like steel and paper. In this environment we favor defensive
sectors such as telecom companies, chemicals with a high pharmaceutical exposure
and reasonably valued household product companies with high cash flow
generation. Our significant overweight in this area is driven far more by a
preference for quality than outstanding valuations. This preference reflects our
lingering concerns as to the prospects for the world economy in 1998.
Dominic Caldecott
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
COMMON STOCKS (92.4)
AUSTRALIA (2.7%)
1,418,400 Brambles Industries Ltd.......................... $ 28,136
5,991,700 CSR Ltd.......................................... 20,297
14,299,100 Fosters Brewing Group Ltd........................ 27,200
486,000 WMC Ltd.......................................... 1,694
-----------
77,327
-----------
BELGIUM (0.4%)
243,350 G.I.B. Holdings Ltd.............................. 11,822
2,156 G.I.B. Holdings Ltd. VVPR (New).................. 102
-----------
11,924
-----------
CANADA (2.5%)
214,580 Potash Corp. of Saskatchewan, Inc................ 17,871
(a)659,700 Renaissance Energy Ltd........................... 13,614
1,750,650 TELUS Corp....................................... 38,823
-----------
70,308
-----------
DENMARK (2.1%)
161,600 Den Danske Bank A/S.............................. 21,533
98,000 Novo-Nordisk A/S, Class B........................ 14,017
309,308 Unidanmark A/S, Class A (Registered)............. 22,706
-----------
58,256
-----------
FINLAND (0.5%)
350,000 Huhtamaki Oyj, Series I.......................... 14,447
168,467 Merita Ltd., Class A............................. 921
-----------
15,368
-----------
FRANCE (11.5)
389,600 Alcatel Alsthom.................................. 49,521
16,110 Bongrain......................................... 6,799
164,682 Cie de Saint Gobain.............................. 23,395
419,300 Elf Aquitaine.................................... 48,768
(a)809,100 France Telecom................................... 29,347
270,300 Groupe Danone.................................... 48,280
347,600 Lafarge.......................................... 22,808
116,800 PSA Peugeot Citroen.............................. 14,730
68,000 Pernod Ricard.................................... 4,000
410,654 Schneider........................................ 22,298
264,750 Scor............................................. 12,660
255,000 Total, Class B................................... 27,752
904,198 Usinor Sacilor................................... 13,056
-----------
323,414
-----------
GERMANY (5.7%)
673,100 BASF AG.......................................... 24,021
1,024,500 Bayer AG......................................... 38,014
198,450 Commerzbank AG................................... 7,722
389,300 Hoechst AG....................................... 13,482
37,750 Karstadt AG...................................... 13,052
(a)24,900 Varta AG......................................... 3,467
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
364,000 VEBA AG.......................................... $ 24,787
67,110 Viag AG.......................................... 36,746
-----------
161,291
-----------
HONG KONG (2.3%)
237,000 Amoy Properties Ltd.............................. 208
7,763,855 Hong Kong Land Holdings Ltd...................... 14,907
3,849,000 Hysan Development Co., Ltd....................... 7,674
16,090,537 Jardine Strategic Holdings, Inc.................. 42,479
-----------
65,268
-----------
ITALY (3.8%)
5,971,300 Mediaset S.p.A................................... 29,333
17,948,487 Telecom Italia S.p.A. (RNC)...................... 79,140
-----------
108,473
-----------
JAPAN (16.2%)
1,120,000 Aisin Seiki Co., Ltd............................. 11,588
635,600 Aoyama Trading Co., Ltd.......................... 11,350
608,000 Canon, Inc....................................... 14,166
348,000 Chudenko Corp.................................... 7,601
1,640,000 Daibiru Corp..................................... 12,004
2,952,000 Daicel Chemical Industries Ltd................... 3,846
687,000 Eisai Co., Ltd................................... 10,478
2,484,000 Fuji Photo Film Ltd.............................. 95,191
487,000 Fujisawa Pharmaceutical Co., Ltd................. 4,255
1,511,000 Hitachi Ltd...................................... 10,770
4,640 Japan Tobacco, Inc............................... 32,931
3,142,000 Kao Corp......................................... 45,273
1,461,000 Matsushita Electric Industrial Co., Ltd.......... 21,387
909,000 NEC Corp......................................... 9,684
7,750,000 NKK Corp......................................... 6,177
3,626,000 Nichido Fire & Marine Insurance Co., Ltd......... 18,898
512,000 Ono Pharmaceutical Co., Ltd...................... 9,928
232,000 Ryosan Co........................................ 3,254
2,018,000 Shionogi & Co., Ltd.............................. 9,249
167,000 Sony Corp........................................ 14,847
4,224,000 Sumitomo Marine & Fire Insurance Co.............. 22,338
1,303,000 Sumitomo Rubber Industries....................... 5,503
165,000 TDK Corp......................................... 12,444
2,306,000 Toyo Seikan Kaisha Ltd........................... 32,873
1,470,000 Yamanouchi Pharmaceutical Co..................... 31,546
-----------
457,581
-----------
NETHERLANDS (6.2%)
726,800 ABN Amro Holding N.V............................. 14,159
209,000 Akzo Nobel N.V................................... 36,035
844,360 Hollandsche Beton Groep N.V...................... 15,699
823,783 ING Groep N.V.................................... 34,696
271,100 Koninklijke Bijenkorf Beheer N.V................. 16,980
642,340 Koninklijke KNP BT N.V........................... 14,794
724,400 Philips Electronics N.V.......................... 43,443
-----------
175,806
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Equity Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ---------------------------------------------------------------------------------
<C> <S> <C>
NEW ZEALAND (0.8%)
2,323,579 Fisher & Paykel Industries Ltd................... $ 7,421
6,322,500 Lion Nathan Ltd.................................. 14,171
(a)392,500 Smith City Group Ltd............................. --
-----------
21,592
-----------
PORTUGAL (0.5%)
501,650 Cimpor SGPS...................................... 13,148
-----------
SINGAPORE (0.4%)
1,220,000 Development Bank of Singapore Ltd. (Foreign)..... 10,448
-----------
SPAIN (2.1%)
2,569,600 Iberdrola........................................ 33,817
228,400 Repsol........................................... 9,745
559,300 Telefonica de Espana............................. 15,970
-----------
59,532
-----------
SWEDEN (3.9%)
26,170 Electrolux AB, Series B.......................... 1,816
(a)44,935 Granges AB....................................... 705
(a)3,259,900 Nordbanken Holding AB............................ 18,435
690,400 Pharmacia & Upjohn, Inc., ADR.................... 25,390
376,100 S.K.F. AB, Class B............................... 8,005
229,600 Skandia Forsakrings AB........................... 10,830
1,017,400 Sparbanken Sverige AB, Class A................... 23,129
970,100 Svenska Cellulosa AB, Class B.................... 21,809
-----------
110,119
-----------
SWITZERLAND (4.7%)
17,840 ABB AG........................................... 22,415
23,040 Forbo Holding AG (Registered).................... 9,418
20,981 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 17,124
38,400 Nestle (Registered).............................. 57,554
4,677 Novartis AG (Registered)......................... 7,590
13,814 Schindler Holding AG (Participating
Certificates).................................. 14,396
5,670 Sulzer AG (Registered)........................... 3,595
-----------
132,092
-----------
UNITED KINGDOM (26.1%)
(a)6,355,200 Aggreko plc...................................... 16,292
573,700 Associated British Foods plc..................... 4,997
3,491,798 B.A.T. Industries plc............................ 31,789
4,916,719 BG plc........................................... 22,138
2,729,867 Bank of Scotland................................. 25,122
2,434,300 British Telecommunications plc................... 19,141
5,200,800 Bunzl plc........................................ 20,212
2,490,450 Burmah Castrol plc............................... 43,381
6,355,200 Christian Salvesen plc........................... 10,235
2,212,500 Commercial Union plc............................. 30,868
1,240,900 Danka Business Systems plc....................... 4,833
4,950,000 Diageo plc....................................... 45,512
3,693,028 English China Clays plc.......................... 16,264
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
2,910,000 Great Universal Stores plc....................... $ 36,678
2,551,400 Imperial Tobacco Group plc....................... 16,058
5,082,251 John Mowlem & Co. plc............................ 7,433
2,783,500 Kwik Save Group plc.............................. 13,402
2,370,068 National Westminster Bank plc.................... 39,415
2,903,520 Peninsular & Oriental Steam Navigation Co........ 33,042
2,027,800 Premier Farnell plc.............................. 14,595
3,509,500 Racal Electronic plc............................. 15,398
4,238,002 Reckitt & Colman plc............................. 66,509
3,603,368 Rolls-Royce plc.................................. 13,915
3,579,757 Royal & Sun Alliance Insurance Group plc......... 36,061
1,005,100 Sedgwick Group plc............................... 2,345
2,041,150 Southern Electric plc............................ 16,972
2,057,102 Tate & Lyle plc.................................. 16,936
6,610,300 Unilever plc..................................... 56,595
13,151,000 WPP Group plc.................................... 58,566
577,333 Williams plc..................................... 3,207
-----------
737,911
-----------
TOTAL COMMON STOCKS (Cost $2,160,148)............................... 2,609,858
-----------
PREFERRED STOCK (1.6%)
GERMANY (1.6%)
106,950 Volkswagen AG (Cost $21,041)..................... 45,837
-----------
TOTAL FOREIGN SECURITIES (94.0%) (Cost $2,181,189).................. 2,655,695
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ---------------
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT (4.3%)
$ 122,073 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $122,113,
collateralized by U.S. Treasury Notes
6.00%-6.875%, due 8/15/99-5/15/06, valued at
$124,693 (Cost $122,073)....................... 122,073
-----------
FOREIGN CURRENCY (0.4%)
GBP 8 British Pound.................................... 13
FIM 61 Finnish Markka................................... 11
FRF 17 French Franc..................................... 3
DEM 20,243 German Mark...................................... 11,253
HKD 64 Hong Kong Dollar................................. 8
JPY 39,947 Japanese Yen..................................... 306
NLG 1 Netherlands Guilder.............................. --
NZD 454 New Zealand Dollar............................... 263
NOK 9 Norwegian Krone.................................. 1
ESP 230 Spanish Peseta................................... 2
SEK 1,064 Swedish Krona.................................... 134
-----------
TOTAL FOREIGN CURRENCY (Cost $12,051)............................... 11,994
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Equity Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- - ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.7%) (Cost $2,315,313).......................... $2,789,762
----------
OTHER ASSETS (12.7%)
Securities at Value, Held as Collateral for Securities
Loaned............................................... $ 313,615
Receivable for Portfolio Shares Sold................... 26,729
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................ 11,049
Dividends Receivable................................... 5,909
Foreign Withholding Tax Reclaim Receivable............. 1,713
Receivable for Investments Sold........................ 240
Interest Receivable.................................... 20
Other.................................................. 128 359,403
----------
LIABILITIES (-11.4%)
Collateral on Securities Loaned........................ (313,615)
Investment Advisory Fees Payable....................... (5,663)
Payable for Investments Purchased...................... (1,984)
Payable for Portfolio Shares Redeemed.................. (559)
Administrative Fees Payable............................ (361)
Bank Overdraft......................................... (271)
Securities Lending Fees Payable........................ (200)
Custodian Fees Payable................................. (128)
Directors' Fees and Expenses Payable................... (107)
Distribution Fees Payable.............................. (2)
Other Liabilities...................................... (301) (323,191)
---------- ----------
NET ASSETS (100%).................................................... $2,825,974
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $2,299,569
Distributions in Excess of Net Investment Income..................... (3,083)
Accumulated Net Realized Gain........................................ 44,116
Unrealized Appreciation on Investments and Foreign Currency
Translations....................................................... 485,372
----------
NET ASSETS........................................................... $2,825,974
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -----------------------------------------------------------------------
NET ASSETS............................................................. $2,822,900
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 164,531,600 outstanding $0.001 par value shares
(authorized 500,000,000 shares)...................................... $17.16
----------
----------
CLASS B:
- - -----------------------------------------------------------------------
NET ASSETS............................................................. $3,074
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 179,438 outstanding $0.001 par value shares (authorized
500,000,000 shares).................................................. $17.13
----------
----------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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 IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - ------------ --------- ----------- ------------ --------- ------------
DEM 29 $ 16 1/02/98 GBP 86 $ 141 $ 125
DEM 241 134 1/02/98 GBP 81 133 (1)
AUD 51,000 33,233 1/12/98 U.S.$39,913 39,913 6,680
FRF 970,000 162,703 6/19/98 U.S.$170,095 170,095 7,392
U.S.$113,300 113,300 6/19/98 FRF 645,000 108,189 (5,111)
GBP 68,500 111,023 11/09/98 U.S.$112,987 112,987 1,964
--------- --------- ------------
$ 420,409 $ 431,458 $ 11,049
---------
--------- --------- ------------
--------- ------------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
ADR -- American Depositary Receipt
AUD -- Australian Dollar
RNC -- Non Convertible Savings Shares
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ---------------------------------------------------------------------
Capital Equipment...................... $ 400,143 14.2%
Consumer Goods......................... 747,443 26.4
Energy................................. 231,230 8.2
Finance................................ 401,253 14.2
Materials.............................. 325,505 11.5
Multi-Industry......................... 143,968 5.1
Services............................... 406,153 14.4
----------- ---
$ 2,655,695 94.0%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Equity Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 2.0 %
Austria 0.5 %
Belgium 0.7 %
Denmark 1.3 %
Finland 3.2 %
France 7.9 %
Germany 8.4 %
Hong Kong 1.4 %
Italy 3.8 %
Japan 17.0 %
Malaysia 0.2 %
Netherlands 5.9 %
Norway 0.9 %
Singapore 1.0 %
Spain 3.2 %
Sweden 4.0 %
Switzerland 7.0 %
United Kingdom 17.6 %
Other 14.0 %
</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 INTERNATIONAL MAGNUM MSCI EAFE
PORTFOLIO--CLASS A PORTFOLIO--CLASS B INDEX(1)
<S> <C> <C> <C>
3/15/96* $500,000 $100,000 $500,000
12/31/96 541,250 107,900 526,300
12/31/97 576,864 114,730 535,668
* 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 performance of Class B shares will vary based
upon the different fees assessed to that class. The MSCI EAFE Index value at
December 31, 1997 assumes a minimum initial investment of $500,000; if a minimum
initial investment of $100,000 (the minimum investment for Class B shares) is
assumed the value at December 31, 1997 would be $107,134.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- - --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 6.58% 8.28%
PORTFOLIO -- CLASS B............. 6.33 7.94
INDEX............................ 1.78 4.52
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 year ended December 31, 1997, the Portfolio had a total return of 6.58%
for the Class A shares and 6.33% for the Class B shares compared to 1.78% for
the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). From
inception on March 15, 1996 to December 31, 1997 the average annual total return
of Class A was 8.28% and 7.94% for Class B compared to 4.52% for the Index.
The fourth quarter of 1997 saw most international markets registering losses in
U.S. dollar terms as the turmoil in Asia continued to rattle investors around
the globe. While the contagion continued to have its greatest impact on the
nations in the Pacific Rim, investors in the more distant markets such as the
U.S. and Europe began to consider the effects of cheap Asian exports, slower
global growth and lower Asian demand on corporate earnings.
The Asian currency crisis began mid-year with the devaluation of the Thai baht
on July 2, and quickly spread throughout the region. The countries that have
succumbed to the Asian crisis, including Thailand, Malaysia, the Philippines,
Indonesia and South Korea, share common traits: their companies have largely
financed themselves with readily available bank credit, and have used much of
this money in unproductive ways that have earned a less than economic return on
investment. Much of this debt was borrowed in U.S. dollars to take advantage of
lower U.S. interest rates, and, as these countries' currencies have devalued,
corporate debt obligations have ballooned, pushing many firms toward bankruptcy.
Because loans were often granted based on relationships and cronyism rather than
sound credit analysis, banks within these countries have also suffered, leading
to a banking crisis as well. Although the International Monetary Fund (IMF) has
stepped in to help shore up the financial system and stabilize the currencies in
the region, a lack of political will to implement the IMF's austere policies in
several countries has left the region vulnerable and sent investors fleeing, at
least until there are signs of real progress.
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
Virtually no country in the region has escaped the debacle. Although the Hong
Kong dollar's peg to the U.S. dollar has stubbornly held to-date, despite
speculators' attacks, it has come at a high cost to the Hong Kong economy. In
order to defend its currency, the Hong Kong Monetary Authority was forced in
October to raise interest rates to painfully high levels, thereby putting
pressure on the interest sensitive stocks (e.g., real estate and banks) that
comprise the bulk of the Hong Kong market. As a result, the Hong Kong market
fell nearly 29% for the quarter. Even markets with relatively healthy
fundamentals were not spared; for the quarter, the supposed "safe haven"
Singapore market fell 20.6% in U.S. dollar terms (-10.0% local currency) while
Australia declined 12.9% (-3.2% local).
The Japanese market also experienced a difficult quarter as the MSCI Japan index
fell 19.8% in U.S. dollar terms and 13.6% in local currency terms. December was
the Japanese market's sixth consecutive month in the red. Business, consumer and
investor confidence has plummeted, contributing to the market's downward spiral.
Sentiment worsened as a string of high-profile bankruptcies in the financial
sector including Sanyo Securities, Hokkaido-Takushoku Bank and Yamaichi
Securities, one of Japan's "big four" brokerage houses, caught the market and
the Japanese government by surprise. The bankruptcies were caused in part by a
credit crunch ahead of stricter capital requirements for Japanese banks
beginning in 1999 (delayed from 1998). Small and mid-size companies are being
especially hard hit by the bank's reticence to lend. The market was also clearly
disappointed by the Japanese government's inaction; the government thus far has
failed to announce a meaningful plan to shore up the financial sector or pass a
fiscal stimulus package able to jump start the economy. And if domestic problems
were not enough, the uncertainty in Asia and in particular in Korea, one of
Japan's major competitors, helped propel Japan's equity markets by year end to
lows set in 1995.
Relatively speaking, the brightest spot for the quarter was Europe, which
registered a mere 0.1% gain in U.S. dollars and 0.7% in local currencies for the
quarter. Performance throughout the region was mixed, with Switzerland the
strongest performer (+8.2% U.S. dollars, +8.7% local). The Swiss market
benefited from the $25 billion merger of UBS and Swiss Bank Corp., as well as
from its heavy weighting in defensive pharmaceutical stocks. Financial stocks
throughout Europe have performed well during the past several months as interest
rates have fallen and restructuring has just begun within the industry. In
addition, a "flight to quality" prompted by the Asian crisis saw investors
moving toward the more liquid markets and currencies of Germany, Switzerland and
France. Exporters and other companies with exposure to Asia also suffered during
the quarter with capital goods, electronics, autos, metals and paper all
noticeably weak. Among the weakest European markets was Finland, which suffered
as Nokia, the cellular telephone manufacturer which comprises a third of the
Finnish index, fell over 10% during December alone. On the positive side,
restructuring and merger activity continues at a robust pace in Europe, with six
mergers/acquisitions worth approximately $87 billion announced on a single day
in October. Industry consolidation should continue as EMU is forcing companies
to reevaluate their competitive positions and seek partners across borders.
Against this backdrop, the Portfolio performed in line with the benchmark MSCI
EAFE Index over the fourth quarter. Near the start of the quarter, we further
reduced our exposure to both Asia and Japan, preferring to increase cash levels
given our bearish outlook. Our regional allocation, in which we were underweight
in Japan and Asia and neutral in Europe, contributed to performance, while stock
selection particularly in Europe provided an offset. Specifically, our
underweight in European financials and our exposure to smaller capitalization
stocks in Germany and Switzerland were negatives for the Portfolio. Small caps
suffered during the fourth quarter as investors sought safety in the liquidity
of large cap names. Certain export-oriented companies, like SGS Thompson
Microelectronics (34%/ for the quarter) and Volkswagen (-19%/ for the quarter)
and Philips Electronics (-29%/ for the quarter) detracted from performance. Our
Hong Kong property stocks were hurt as interest rates there rose. On the
positive side, stock selection in the U.K. and in Australia were strong with
some of the British consumer products stocks including Tate & Lyle and Bass
contributing strongly to performance.
Looking ahead, we expect the beginning of 1998 to continue to be volatile,
particularly as the Asian crisis plays itself out. The financial sector in both
Asia and Japan are both in fragile shape, and the world will be
- - --------------------------------------------------------------------------------
International Magnum Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
watching carefully to see how these difficulties are resolved. The wildcard in
Asia will be whether or not China and in turn Hong Kong allow their currencies
to devalue in light of the competitive devaluations sweeping the region.
Although we do not believe such a devaluation is likely near term, the
possibility nonetheless makes us cautious about the outlook for the Hong Kong
market and the region overall, as another round of devaluations would likely
ensue. We currently are underweight in Asia relative to the benchmark EAFE
Index, with the majority of our Asian holdings in Australia. In Japan, we
believe that the government will come under increasing pressure to implement
policies to stimulate the domestic economy and reform the banking sector. Thus
far, however, the government's anti-deficit stance has precluded any government
spending package or meaningful tax cut, and no approach has been announced to
deal with the weakest banks or the huge amount of bad debt on bank balance
sheets. Therefore, despite valuations that have become increasingly attractive,
we will remain wary and underweight with regard to the Japanese market until we
begin to see signs of a change. Because of our bearishness regarding these two
markets, we have been holding a higher-than-average amount of cash -- something
we view as a temporary, defensive measure.
Of the developed international regions, Europe offers the most investment
potential for the coming year. As a result, Europe currently represents our
largest weighting, with nearly 70% of the Portfolio's net assets invested there.
Restructuring, consolidation and deregulation should continue as EMU approaches,
with companies jockeying for better strategic position in the new pan-European
world. Additionally, with the introduction of the new euro currency scheduled
for 1999, interest rates will continue to converge with rates falling in the
peripheral nations and rising in the core countries. Although we expect growth
to slow as exports of European luxury and capital goods moderate due to lower
Asian demand, overall the environment is benign for European equities. In
particular, we are finding new investment opportunities in the U.K. in companies
offering the attractive combination of strong business franchises with low
capital requirements and managements focused on shareholder value. Overall, we
will continue to monitor conditions around the world, seeking the best
investment opportunities available. We strive to remain agile regarding stock
selection, and will put cash to work as soon as we find suitable opportunities
to do so.
Francine J. Bovich
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
COMMON STOCKS (84.5%)
AUSTRALIA (2.0%)
83,200 Australia & New Zealand Banking Group Ltd........ $ 549
57,600 Commonwealth Bank Of Australia................... 660
32,630 Lend Lease Corp., Ltd............................ 638
46,030 National Australia Bank Ltd...................... 643
141,400 News Corp., Ltd.................................. 780
(a)227,200 Telstra Corp., Ltd. (Installment Receipts--Final
installment: AUD 1.35/Share due on 11/17/98)... 480
------------
3,750
------------
AUSTRIA (0.5%)
16,100 Boehler-Uddeholm AG.............................. 944
------------
BELGIUM (0.7%)
26,325 G.I.B. Holdings Ltd.............................. 1,279
------------
DENMARK (1.3%)
18,500 BG Bank A/S...................................... 1,245
16,800 Unidanmark A/S, Class A
(Registered)................................... 1,233
------------
2,478
------------
FINLAND (3.2%)
(a)26,900 Amer-Yhtymae Oyj, Class A........................ 516
20,200 Huhtamaki Oyj, Series 1.......................... 834
8,000 Kone Oyj, Class B................................ 969
176,300 Merita Ltd., Class A............................. 964
23,050 Metra Oyj, Class B............................... 541
159,100 Rautaruukki Oyj.................................. 1,284
64,900 Valmet Oyj....................................... 895
------------
6,003
------------
FRANCE (7.9%)
5,200 Alcatel Alsthom.................................. 661
1,600 Bongrain......................................... 675
12,821 Cie de Saint Gobain.............................. 1,821
17,700 Elf Aquitaine.................................... 2,059
(a)24,000 France Telecom................................... 871
8,930 Groupe Danone.................................... 1,595
22,600 Lafarge.......................................... 1,483
28,800 Legris Industries................................ 1,000
(a)14,400 SGS-Thomson Microelectronics N.V................. 891
7,900 Scor............................................. 378
18,800 Total, Class B................................... 2,046
88,300 Usinor Sacilor................................... 1,275
------------
14,755
------------
GERMANY (6.9%)
37,900 BASF AG.......................................... 1,352
31,650 Bayer AG......................................... 1,174
2,670 Buderus AG....................................... 1,198
58,100 Gerresheimer Glas AG............................. 814
61,200 Lufthansa AG..................................... 1,150
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
16,320 Metro AG......................................... $ 579
(a)2,170 Philipp Holzmann AG.............................. 560
5,632 Plettac AG....................................... 776
23,800 VEBA AG.......................................... 1,621
3,700 Viag AG.......................................... 2,026
3,000 Volkswagen AG.................................... 1,676
------------
12,926
------------
HONG KONG (1.4%)
110,000 Cheung Kong Holdings Ltd......................... 720
50,000 China Light & Power Co., Ltd..................... 277
55,000 Dao Heng Bank Group Ltd.......................... 137
98,000 Hong Kong Telecommunications
Ltd............................................ 202
16,900 HSBC Holdings plc................................ 417
61,000 Hutchison Whampoa Ltd............................ 382
84,000 Ng Fung Hong Ltd................................. 88
38,000 Shanghai Industrial Holdings Ltd................. 141
33,000 Sun Hung Kai Properties Ltd...................... 230
18,000 Swire Pacific Ltd., Class A...................... 99
------------
2,693
------------
ITALY (3.8%)
78,300 Editoriale L'Expresso S.p.A...................... 376
327,900 Magneti Marelli S.p.A............................ 561
89,000 Marzotto (Gaetano) & Figli S.p.A................. 1,112
162,300 Mediaset S.p.A................................... 797
415,200 Sogefi S.p.A..................................... 1,056
(a)730,611 Telecom Italia S.p.A. Di Risp (NCS).............. 3,221
------------
7,123
------------
JAPAN (17.0%)
126,000 Amada Co., Ltd................................... 468
78,000 Asahi Tec Corp................................... 124
45,000 Canon, Inc....................................... 1,048
33,000 Dai Nippon Printing Co., Ltd..................... 620
187,000 Daicel Chemical Industries Ltd................... 244
59,000 Daifuku Co., Ltd................................. 287
100,000 Daikin Industries Ltd............................ 377
10,020 Family Mart Co., Ltd............................. 359
40,000 Fuji Machine Manufacturing Co.................... 966
27,000 Fuji Photo Film Ltd.............................. 1,035
59,000 Fujitec Co., Ltd................................. 325
108,000 Fujitsu Ltd...................................... 1,159
153,000 Furukawa Electric Co............................. 656
22,000 Hitachi Credit Corp.............................. 363
149,000 Hitachi Ltd...................................... 1,062
60,000 Inabata & Co..................................... 188
130,000 Kaneka Corp...................................... 587
36,000 Kurita Water Industries.......................... 367
13,300 Kyocera Corp..................................... 603
59,000 Kyudenko Co., Ltd................................ 298
25,000 Lintec Corp...................................... 387
67,000 Matsushita Electric Industrial Co., Ltd.......... 981
190,000 Mitsubishi Chemical Corp......................... 272
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Magnum Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
57,000 Mitsubishi Estate Co., Ltd....................... $ 620
164,000 Mitsubishi Heavy Industries Ltd.................. 684
54,000 Mitsumi Electric Co., Ltd........................ 770
12,000 Murata Manufacturing Co., Ltd.................... 302
104,000 NEC Corp......................................... 1,108
47,000 Nifco, Inc....................................... 306
12,000 Nintendo Corp., Ltd.............................. 1,177
29,000 Nippon Pillar Packing............................ 156
127 Nippon Telegraph & Telephone
Corp........................................... 1,090
126,000 Nissan Motor Co.................................. 521
45,000 Nissha Printing Co., Ltd......................... 271
88,000 Ricoh Co., Ltd................................... 1,093
41,000 Rinnai Corp...................................... 619
18,000 Sangetsu Co., Ltd................................ 185
36,000 Sankyo Co., Ltd.................................. 814
74,000 Sanwa Shutter Corp............................... 372
54,000 Sekisui Chemical Co.............................. 274
43,000 Sekisui House Co., Ltd........................... 277
16,000 Shimamura Co., Ltd............................... 278
90,000 Shin-Etsu Polymer Co., Ltd....................... 297
15,700 Sony Corp........................................ 1,396
31,000 Sumitomo Marine & Fire Insurance
Co............................................. 164
61,000 Suzuki Motor Co., Ltd............................ 552
16,000 TDK Corp......................................... 1,207
19,000 Tokyo Electron Ltd............................... 609
256,000 Toshiba Corp..................................... 1,065
38,000 Toyota Motor Corp................................ 1,089
132,000 Tsubakimoto Chain Co............................. 475
34,000 Yamaha Corp...................................... 386
41,000 Yamanouchi Pharmaceutical Co..................... 880
------------
31,813
------------
MALAYSIA (0.2%)
6,000 Dialog Group Bhd................................. 10
151,000 Tenaga Nasional Bhd.............................. 322
------------
332
------------
NETHERLANDS (5.9%)
51,600 ABN Amro Holding N.V............................. 1,005
13,100 Akzo Nobel N.V................................... 2,259
(a)7,400 Benckiser N.V., Class B.......................... 306
30,000 Hollandsche Beton Groep N.V...................... 558
44,405 ING Groep N.V.................................... 1,870
19,000 KLM Royal Dutch Airlines N.V..................... 703
12,000 Koninklijke Bijenkorf Beheer N.V................. 752
66,800 Koninklijke KNP BT N.V........................... 1,539
21,000 Koninklijke Van Ommeren N.V...................... 704
23,500 Philips Electronics N.V.......................... 1,409
------------
11,105
------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
NEW ZEALAND (0.0%)
(a)127,000 AMP NZ Office Trust.............................. $ 76
7,280 Fletcher Challenge Forest........................ 6
------------
82
------------
NORWAY (0.9%)
75,900 Saga Petroleum ASA, Class B...................... 1,151
14,400 Sparebanken NOR.................................. 513
------------
1,664
------------
SINGAPORE (1.0%)
(a)1,750 Creative Technology Ltd. (U.S. Dollar)........... 39
(a)12,500 Creative Technology Ltd.......................... 254
15,000 Development Bank of Singapore Ltd. (Foreign)..... 128
10,000 Electronic Resources Ltd......................... 10
(a)53,000 Natsteel Electronics Ltd......................... 68
62,040 Oversea-Chinese Banking Corp.
(Foreign)...................................... 362
42,000 Parkway Holdings Ltd............................. 95
20,000 Singapore Press Holdings Ltd. (Foreign).......... 251
283,000 Summit Holdings Ltd.............................. 60
18,000 Super Coffeemix Manufacturing Ltd................ 3
61,000 United Overseas Bank Ltd. (Foreign).............. 339
47,000 Venture Manufacturing Ltd........................ 131
(a)43,000 WBL Corp., Ltd................................... 40
------------
1,780
------------
SPAIN (3.2%)
48,600 Banco Bilbao Vizcaya (Registered)................ 1,573
125,800 Iberdrola........................................ 1,656
43,650 Telefonica de Espana............................. 1,246
138,900 Uralita.......................................... 1,586
------------
6,061
------------
SWEDEN (4.0%)
48,530 Esselte AB, Class B.............................. 984
(a)382,900 Nordbanken Holding AB............................ 2,165
32,800 Pharmacia & Upjohn, Inc.......................... 1,206
30,800 S.K.F. AB, Class B............................... 656
25,300 Sparbanken Sverige AB, Class A................... 575
48,400 Spectra-Physics AB, Class A...................... 918
30,600 Svenska Handelsbanken, Class A................... 1,058
------------
7,562
------------
SWITZERLAND (7.0%)
(a)790 Ascom Holdings AG (Bearer)....................... 1,017
710 Bobst AG (Bearer)................................ 1,045
4,270 Forbo Holding AG (Registered).................... 1,745
2,090 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 1,706
1,960 Nestle (Registered).............................. 2,938
258 Novartis AG (Registered)......................... 419
150 Schindler Holding AG (Participating
Certificates).................................. 156
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Magnum Portfolio
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
815 Schindler Holding AG (Registered)................ $ 876
820 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................... 1,120
1,313 Sulzer AG (Registered)........................... 832
5,670 Valora Holding AG (Registered)................... 1,196
------------
13,050
------------
UNITED KINGDOM (17.6%)
(a)206,744 Aggreko plc...................................... 530
8,700 Associated British Foods plc..................... 76
159,517 BG plc........................................... 718
100,100 Bank of Ireland.................................. 1,538
104,683 Bank of Scotland................................. 963
43,300 Bass plc......................................... 672
60,455 B.A.T. Industries plc............................ 550
139,500 Booker plc....................................... 734
162,100 British Telecommunications plc................... 1,275
(a)157,500 Bunzl plc........................................ 612
120,400 Burmah Castrol plc............................... 2,097
82,300 Charter plc...................................... 1,013
206,744 Christian Salvesen plc........................... 333
55,725 Commercial Union plc............................. 778
32,300 Danka Business Systems plc....................... 126
198,700 Diageo plc....................................... 1,827
(a)33,600 Glynwed International
plc............................................ 143
135,600 Great Universal Stores plc....................... 1,709
332,700 Imperial Tobacco Group plc....................... 2,094
275,761 John Mowlem & Co. plc............................ 403
183,200 Kwik Save Group plc.............................. 882
288,200 Medeva plc....................................... 767
112,500 Peninsular & Oriental Steam Navigation Co........ 1,280
98,100 Premier Farnell plc.............................. 706
503,100 Premier Oil plc.................................. 438
168,200 Racal Electronic plc............................. 738
139,296 Reckitt & Colman plc............................. 2,186
178,789 Royal & Sun Alliance Insurance Group
plc............................................ 1,801
286,100 Scapa Group plc.................................. 1,095
114,300 Tate & Lyle plc.................................. 941
144,800 Unilever plc..................................... 1,240
135,700 Westminster Health Care Holdings
plc............................................ 814
405,100 WPP Group plc.................................... 1,804
------------
32,883
------------
TOTAL COMMON STOCKS (Cost $156,263)............................. 158,283
------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
PREFERRED STOCKS (1.5%)
GERMANY (1.5%)
3,000 Dyckerhoff AG.................................... $ 769
12,700 Hornbach Holding AG.............................. 875
2,130 Suedzucker AG.................................... 1,048
------------
TOTAL PREFERRED STOCKS (Cost $2,699)............................ 2,692
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ------------
CORPORATE BOND (0.0%)
NEW ZEALAND (0.0%)
NZD 127 AMP NZ Office Trust 7.50%, 6/30/03 (Cost $75).... 76
------------
TOTAL FOREIGN SECURITIES (86.0%) (Cost $159,037)................ 161,051
------------
SHORT-TERM INVESTMENT (13.2%)
REPURCHASE AGREEMENT (13.2%)
$ 24,699 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $24,707,
collateralized by U.S. Treasury Notes, 7.875%,
due 11/15/04, valued at $25,198 (Cost
$24,699)....................................... 24,699
------------
FOREIGN CURRENCY (0.3%)
GBP 274 British Pound.................................... 450
FRF 404 French Franc..................................... 67
JPY 16,613 Japanese Yen..................................... 127
------------
TOTAL FOREIGN CURRENCY (Cost $650).............................. 644
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.5%) (Cost $184,386)........................... 186,394
--------
OTHER ASSETS (1.8%)
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................... $ 1,607
Receivable for Investments Sold....................... 738
Dividends Receivable.................................. 528
Receivable for Portfolio Shares Sold.................. 400
Foreign Withholding Tax Reclaim Receivable............ 117
Interest Receivable................................... 4
Other Assets.......................................... 4 3,398
----------
LIABILITIES (-1.3%)
Payable for Investments Purchased..................... (2,029)
Investment Advisory Fees Payable...................... (308)
Custodian Fees Payable................................ (26)
Administrative Fees Payable........................... (24)
Distribution Fees Payable............................. (18)
Bank Overdraft Payable................................ (11)
Payable for Portfolio Shares Redeemed................. (7)
Directors' Fees and Expenses Payable.................. (4)
Other Liabilities..................................... (52) (2,479)
---------- --------
NET ASSETS (100%)................................................... $187,313
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Magnum Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
<S> <C>
Paid in Capital..................................................... $185,180
Undistributed Net Investment Income................................. 63
Accumulated Net Realized Loss....................................... (896)
Unrealized Appreciation on Investments and Foreign Currency
Translations...................................................... 2,966
--------
NET ASSETS.......................................................... $187,313
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------------
NET ASSETS.......................................................... $159,096
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,642,404 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $10.87
--------
--------
CLASS B:
- - --------------------------------------------------------------------
NET ASSETS.......................................................... $28,217
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,601,986 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $10.84
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - ------------- ------- ---------- ------------ ------- ------------
U.S.$ 50 $ 50 1/02/98 FRF 298 $ 50 $ --
U.S.$ 208 208 1/02/98 DEM 372 207 (1)
JPY 16,613 127 1/05/98 U.S.$ 128 128 1
JPY 1,328,133 10,223 1/29/98 U.S.$ 10,957 10,957 734
JPY 859,360 6,621 2/05/98 U.S.$ 7,305 7,305 684
JPY 446,832 3,443 2/05/98 U.S.$ 3,653 3,653 210
SGD 2,510 1,483 3/05/98 U.S.$ 1,552 1,552 69
U.S.$ 1,562 1,562 3/05/98 SGD 2,510 1,483 (79)
U.S.$ 220 220 3/18/98 SGD 371 219 (1)
SGD 1,850 1,092 3/18/98 U.S.$ 1,082 1,082 (10)
------- ------- ------
$25,029 $26,636 $ 1,607
-------
------- ------- ------
------- ------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
AUD -- Australian Dollar
DEM -- German Mark
NCS -- Non Convertible Shares
SGD -- Singapore Dollar
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ---------------------------------------------------------------
Capital Equipment...................... $43,230 23.0%
Consumer Goods......................... 32,143 17.2
Energy................................. 8,607 4.6
Finance................................ 25,876 13.9
Materials.............................. 19,766 10.5
Multi-Industry......................... 8,436 4.5
Services............................... 22,993 12.3
------- ---
$161,051 86.0%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Magnum Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 9.2 %
Denmark 1.7 %
Finland 5.7 %
France 6.3 %
Germany 8.8 %
Hong Kong 2.2 %
Ireland 3.6 %
Italy 2.0 %
Japan 8.1 %
Netherlands 8.7 %
New Zealand 1.2 %
Norway 1.3 %
Singapore 0.9 %
Spain 2.4 %
Sweden 2.5 %
Switzerland 8.5 %
United Kingdom 22.6 %
Other 4.3 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL MSCI EAFE MSCI EAFE
SMALL CAP PORTFOLIO INDEX(1) SMALL CAP INDEX(2)
<S> <C> <C> <C>
12/15/92* $500,000 $500,000 $ 500,000
12/31/92 504,500 498,985 500,000
12/31/93 718,245 661,450 665,450
12/31/94 756,343 712,900 742,952
12/31/95 776,008 792,816 727,944
12/31/96 906,533 840,781 726,925
12/31/97 901,547 855,747 547,811
* 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 MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- - --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(3)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO............. -0.55% 12.76% 12.84%
MSCI EAFE INDEX....... 1.78 11.39 11.24
MSCI EAFE SMALL CAP
INDEX -24.64 1.83 1.83
</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. The MSCI EAFE Small Cap Index is an arithmetic, unmanaged, market
value-weighted average of the performance of over 900 securities of companies
listed on the stock exchange of countries in Europe, Australasia and the Far
East with a fixed market capitalization cut off of U.S. $200-800 million
(this index is a price only index and does not include dividends).
3. 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 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 year ended December 31, 1997, the Portfolio had a total return of -0.55%
as compared to a total return of 1.78% for the Morgan Stanley Capital
International (MSCI) EAFE Index and -24.64% for the Morgan Stanley Capital
International (MSCI) EAFE Small Cap Index. For the five-year period ended
December 31, 1997, the average annual total return for Class A was 12.76%
compared to 11.39% for the MSCI EAFE Index and 1.83% for the MSCI EAFE Small Cap
Index. From inception on December 15, 1992 through December 31, 1997 the average
annual total return of Class A was 12.84% compared to 11.24% for the MSCI EAFE
Index and 1.83% for the MSCI EAFE Small Cap Index.
The Portfolio fell 5.97% in the fourth quarter compared to -17.25% the newly
launched MSCI EAFE Small Cap Index in U.S. Dollar terms. Beginning with this
report, the Portfolio's performance will be compared to the MSCI EAFE Small Cap
Index as it more closely represents the investment characteristics of the
Portfolio. The Portfolio's outperformance reflected its very low weighting in
the tumbling Japanese and South East Asian markets and currencies together with
strong stock selection in Hong Kong, the U.K., Australia and the four
Scandinavian markets. This was despite small caps substantially lagging in the
year-end rally and some marked underperformance from small caps in all the major
Continental European markets. Japanese stock selection was broadly neutral for
the fourth quarter but reflected strong outperformance in the October sell off,
followed by marked underperformance in the latter weeks of the quarter. The
Portfolio's Australian Dollar and French Franc hedges went some way towards
mitigating the strength of the dollar. Returns for the full year were
substantially above that of the
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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.
- - --------------------------------------------------------------------------------
International Small Cap Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
EAFE Small Cap Index with both market and stock returns making very positive
contributions. The Portfolio's currency hedging also contributed positively.
Turnover for the fourth quarter was moderate at 7% with profits taken on a
number of the Portfolio's European capital goods stocks reflecting our concerns
over the likely impact of the turmoil in Asia, and a couple of Japanese
positions were sold following relative strength but disappointing meetings with
management. A new initial position was established in Rock Field in Japan which
stood out during a recent visit to Japan for its interesting market niche in
pre-prepared food, management's strength and attractive valuations. New
positions were also established in Moebel Walther in Germany and Quadramatic and
Capital Radio in the U.K., all three of which had been substantially oversold
despite each having solid franchises, management and cash flow characteristics.
Rock Field is a successful food retailer offering quality convenience food and
has been a leader in this growing market. Its brand is already a household name
and cash flow should improve with growing economies of scale, higher added value
products and better inventory controls. Rock Field is trading at low valuation
multiples relative to the Japanese food sector and to comparable companies
particularly given the company's superior profitability and growth prospects.
Moebel Walther was purchased following extreme price weakness after
disappointing interim results. Moebel Walther is one of Germany's leading
furniture retailers which is growing rapidly via new site openings in Germany
and Eastern Europe combined with acquisitions. Earnings should rebound sharply
next year as one-off costs relating to the recent Mutschler acquisition and the
refurbishment program of its flagship store at Grundau should not reoccur. The
shares were purchased on a Price Earnings of 9.4, Price Cash Flows of 4.4 times
and Price-forecasted cash flows 6.8 times.
Quadramatic is a U.K. specialist engineering manufacturer active in coin
handling equipment, specialist mouldings and high precision monitoring
instruments. The company focuses on high margin, technically demanding, niche
products in which it is a market leader. The business is highly cash generative
and enjoys good growth prospects. The stock has been hammered by the strength of
the British Pound (although Quadramatic only has translational, not
transactional, risk) and by a couple of teething manufacturing problems with new
products. At 9.8-times 1997 Price earnings and 8.2-times 1997 Price-cash flows,
the company is trading at a substantial discount to the U.K. engineering sector.
The 1997 P/FCF is an undemanding 9.2-times. The icing on the cake is the
attractive yield, 5.2% for 1997.
Capital Radio is the leading commercial radio station in the United Kingdom and
is well positioned to benefit from the continued growth of radio advertising in
the United Kingdom. Purchased on a 1997 price earning multiple of 14.4-times and
price cash multiple of 13.5-times the shares do not fully reflect the earnings
potential and cash flow dynamics of this company.
Sangetsu, a Japanese trader of interior materials, was sold following a meeting
with management. The decision to sell the stock was taken in light of a marked
deterioration in operating performance due to a decline in turnover and higher
operating costs, combined with severe price pressure due to overcapacity in the
industry and a shift in customer buying patterns. The changing nature of the
Japanese distribution system will reduce Sangetsu's pricing power long term.
Looking forward to 1998 we are concerned over the impact of the Asian crisis on
the global economy and Japan in particular, but remain optimistic on the outlook
for small cap valuations which have singularly failed to participate in the
large cap bull market of the last few years.
Having avoided chasing the boom and resultant bust of the Asian markets, some
value now appears to be emerging and we will be looking to follow up with a
number of company visits across the region in the weeks ahead. We remain
extremely cautious however on the extent of the fallout from contracting Hong
Kong property valuations and the clear strains on the Chinese economy. The
market appears to be largely overlooking the proposed reform of the grossly
inefficient and loss making state sector in China and the viability of this
strategy without a competitive export sector and continuing inward foreign
investment to create new employment. Any increase in the Hong Kong weighting
will be made with extreme caution.
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
In Japan, small cap valuations are fairly compelling following their dramatic
underperformance with many companies available for little more than the cash on
their balance sheets. In many instances, however, these companies will continue
to face declining demand, price deflation through overcapacity and have little
by way of franchise to differentiate themselves from the competition. Moreover,
an absence of merger and acquisition activity or improving attitudes to
shareholder value such as share buybacks will continue to hold back the shares.
The Japanese market has been reasonably efficient at paying up for quality and
growth leaving value investors a minefield of rubbish and risk. The Portfolio's
Japanese weighting is likely to rise but again with extreme caution. The
escalating credit crunch, with its deleterious impact on consumer sentiment
combined with political inaction are major causes for concern.
Attractive valuations are available in small cap Europe and the Portfolio is
likely to remain broadly overweight. We do not, however, underestimate the
potential impact of the Asian crisis on many export driven capital goods
companies and the tendency to be overweight in this sector in small caps. Too
many European companies with weak domestic demand saw Asia as their panacea and
have been building up their cost bases in the region. We have reduced the
Portfolio's positions in a number of names reflecting these concerns. Our focus
remains service-sector companies, particularly health where the Portfolio has
already enjoyed some strong performance, together with media where some very
strong franchises are available at attractive valuations.
There are some signs of a revival in domestic demand in both France and Germany,
despite depressingly high levels of unemployment. Politics however are unlikely
to take a backstage in 1998 with the French Socialist Government facing an
unemployment backlash and the Germans facing constitutional issues over EMU in
an election year. Meanwhile management attitudes to shareholders, while
improving, remain patchy. The depth of the U.K. small cap universe together with
solidly shareholder friendly management and some oversold franchise stocks leads
us to anticipate the U.K. weighting continuing to rise at the expense of
Continental Europe.
The defensive nature of small caps during the market sell-off in August and
again in October contradicts normal small cap behavior but reflects the
concentration of liquidity and thus performance in the large cap sector. The
valuation gap between small caps and large caps is at an unprecedented level and
strongly supports our optimism for international small caps. While we would be
concerned over the impact of a prolonged market sell-off, if the market is not
prepared to rerate some compelling small cap valuations, corporate activity is
likely to continue to intervene.
Margaret Naylor
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
International Small Cap Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------------
COMMON STOCKS (90.4%)
AUSTRALIA (9.2%)
(a)783,000 Auspine Ltd...................................... $ 1,530
(a)1,057,866 Bains Harding Ltd................................ 155
466,160 BRL Hardy Ltd.................................... 1,434
2,560,636 Country Road Ltd................................. 3,470
1,476,631 Eltin Ltd........................................ 1,116
5,417,800 E.R.G. Ltd....................................... 4,553
347,000 Morgan & Banks Ltd............................... 2,272
7,298,696 Parbury Ltd...................................... 2,235
(a)537,000 Ramsay Health Care Ltd........................... 742
1,272,340 Skilled Engineering Ltd.......................... 1,641
(a)1,990,900 Solution 6 Holdings Ltd.......................... 1,128
699,748 W.D. & H.O. Wills Holdings Ltd................... 866
---------
21,142
---------
DENMARK (1.7%)
68,600 SYD-Sonderjylland Holdings....................... 3,905
---------
FINLAND (5.7%)
8,360 Aamulehti Yhtymae Oyj, Series II................. 279
64,000 KCI Konecranes International..................... 2,113
46,375 Kone Oyj, Class B................................ 5,615
151,300 Rauma Oyj........................................ 2,360
150,000 Rautaruukki Oyj.................................. 1,211
270,200 Tamro Oyj........................................ 1,482
---------
13,060
---------
FRANCE (6.3%)
38,569 Dauphin O.T.A.................................... 2,551
75,523 De Dietrich et Compagnie......................... 3,488
49,093 Europeene d'Extincteurs.......................... 3,304
102,500 Legris Industries................................ 3,559
(a)59,768 Sediver.......................................... 1,599
---------
14,501
---------
GERMANY (3.6%)
75,850 Gerresheimer Glas AG............................. 1,063
83,695 Marseille-Kliniken AG............................ 930
35,500 Moebel Walther AG................................ 975
(a)2,572 Philipp Holzmann AG.............................. 663
17,080 Plettac AG....................................... 2,355
(a)11,330 Sinn AG.......................................... 2,311
---------
8,297
---------
HONG KONG (2.2%)
1,685,000 Li & Fung Ltd.................................... 2,359
6,480,000 Vitasoy International Holdings Ltd............... 2,739
---------
5,098
---------
IRELAND (3.6%)
178,330 Clondalkin Group plc............................. 1,441
1,187,066 Green Property plc............................... 6,756
---------
8,197
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------------
ITALY (1.9%)
459,000 Sogefi S.p.A..................................... $ 1,168
628,000 Unicem Di Risp (NCS)............................. 2,237
19,000 Vincenzo Zucchi S.p.A............................ 118
207,050 Vincenzo Zucchi S.p.A. (NCS)..................... 744
---------
4,267
---------
JAPAN (8.1%)
231,000 Foster Electric Co., Ltd......................... 717
510,000 Hankyu Realty.................................... 2,384
783,000 Japan Oil Transportation Co., Ltd................ 1,134
102,000 Japan Vilene Co., Ltd............................ 227
176,000 Kansei Corp...................................... 957
321,000 Kirin Beverage Corp.............................. 5,314
165,000 Nifco, Inc....................................... 1,075
676,000 Nissan Fire & Insurance Co....................... 2,057
(a)33,000 Rock Field Co., Ltd.............................. 440
470,000 Toc Co........................................... 3,566
239,000 Toyoda Gosei Co.................................. 865
---------
18,736
---------
NETHERLANDS (8.7%)
76,000 Ahrend Groep N.V................................. 2,387
92,805 Apothekers Cooperatie OPG........................ 2,769
37,081 Atag Holding N.V................................. 2,308
(a)68,000 Benckiser N.V., Class B.......................... 2,814
93,000 GTI Holding N.V.................................. 2,330
250,000 Hollandsche Beton Groep N.V...................... 4,648
32,730 Koninklijke Van Ommeren N.V...................... 1,098
(a)61,600 Nutreco Holding N.V.............................. 1,404
4,122 Samas Groep N.V.................................. 192
---------
19,950
---------
NEW ZEALAND (1.2%)
876,736 Fisher & Paykel Industries Ltd................... 2,800
---------
NORWAY (1.3%)
73,850 Adelsten ASA, Class B............................ 950
119,700 Kverneland ASA................................... 1,945
(a,d)228,020 Oceanor.......................................... --
---------
2,895
---------
SINGAPORE (0.9%)
824,000 GP Batteries International Ltd................... 2,146
---------
SPAIN (2.4%)
69,248 Bodegas y Bebidas................................ 2,677
74,251 Miquel y Costas & Miquel......................... 2,885
---------
5,562
---------
SWEDEN (2.5%)
88,200 Marieberg Tidnings AB............................ 2,066
23,650 Nobel Biocare AB................................. 310
(a)137,412 Scandic Hotels AB................................ 3,357
---------
5,733
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Small Cap Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND (8.5%)
1,610 Bobst AG (Bearer)................................ $ 2,370
3,007 Bucher Holdings AG (Bearer)...................... 2,615
9,112 Edipresse (Bearer)............................... 2,645
2,750 LEM Holdings AG.................................. 557
10,500 PubliGroupe...................................... 2,293
2,618 SIG-Schweizerische Industrie-Gesellschaft
Holdings AG (Registered)....................... 3,576
14,630 Valora Holding AG................................ 3,085
5,950 Zehnder Holding AG, Class B...................... 2,436
---------
19,577
---------
UNITED KINGDOM (22.6%)
2,610,000 Anglo Irish Bank Corp. plc (British Pound
Shares)........................................ 5,061
1,330,900 Bluebird Toys plc................................ 1,957
140,970 Capital Radio plc................................ 1,147
598,900 Corporate Services Group plc..................... 2,096
666,200 Devro plc........................................ 4,149
(a,d)2,540,850 Donelon Tyson plc................................ --
2,032,800 GEI International plc............................ 3,307
(a)1,309,000 Industrial Control Services Group plc (Sub
Notes)......................................... --
654,500 Industrial Control Services Group plc............ 414
442,389 International Business Communications (Holdings)
plc............................................ 2,868
1,608,965 John Mowlem & Co. plc............................ 2,353
(a,d)33,795,100 Kendell plc...................................... --
213,535 Le Riches Stores plc............................. 1,737
543,600 Litho Supplies plc............................... 2,104
206,335 Mallett plc...................................... 358
2,575,600 Matthews (Bernard) plc........................... 4,148
120,000 Northern Leisure plc............................. 793
762,800 Oriflame International........................... 5,578
(a,d)2,659,393 Pentos plc....................................... --
368,400 Quadramatic plc.................................. 1,268
485,000 Ricardo Group plc................................ 1,196
(a)443,900 SGB Group plc.................................... 1,105
373,500 Scholl plc....................................... 1,584
(a)539,300 Tandem Group plc................................. 35
1,287,000 The 600 Group plc................................ 2,728
718,850 UniChem plc...................................... 3,780
487,800 Waterman Partnership Holdings plc................ 373
(a)310,000 Westminster Health Care Holdings plc............. 1,859
---------
51,998
---------
TOTAL COMMON STOCKS (Cost $211,968).................................. 207,864
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------------
PREFERRED STOCKS (5.2%)
GERMANY (5.2%)
9,785 Dyckerhoff AG.................................... $ 2,508
26,811 Hornbach Holding AG.............................. 1,848
9,862 STO AG-Vorzug.................................... 3,563
(a)15,065 Villeroy & Boch AG............................... 1,851
14,700 Wuerttembergische Metallwarenfabrik AG........... 2,288
---------
TOTAL PREFERRED STOCKS (Cost $13,627)................................ 12,058
---------
</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).... 331
---------
TOTAL FOREIGN SECURITIES (95.7%) (Cost $225,923)..................... 220,253
---------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 7,257 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at 7,259,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $7,406 (Cost $7,257).... 7,257
---------
FOREIGN CURRENCY (0.8%)
AUD 148 Australian Dollar................................ 97
GBP 651 British Pound.................................... 1,070
FRF 797 French Franc..................................... 132
DEM 728 German Mark...................................... 405
HKD 283 Hong Kong Dollar................................. 36
IEP 1 Irish Punt....................................... 2
JPY 16,370 Japanese Yen..................................... 125
NLG 57 Netherlands Guilder.............................. 28
---------
TOTAL FOREIGN CURRENCY (Cost $1,909)................................. 1,895
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Small Cap Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- - -------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%) (Cost $235,089)................ $229,405
--------
OTHER ASSETS (2.4%)
Cash....................................... $ 1,681
Receivable for Investments Sold............ 1,574
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 1,300
Dividends Receivable....................... 472
Receivable for Portfolio Shares Sold....... 343
Foreign Withholding Tax Reclaim
Receivable............................... 188
Interest Receivable........................ 17
Other...................................... 13 5,588
----------
LIABILITIES (-2.1%)
Payable for Portfolio Shares Redeemed...... (2,419)
Payable for Investments Purchased.......... (1,761)
Investment Advisory Fees Payable........... (591)
Administrative Fees Payable................ (32)
Custodian Fees Payable..................... (25)
Directors' Fees and Expenses Payable....... (12)
Other Liabilities.......................... (58) (4,898)
---------- --------
NET ASSETS (100%)........................................ $230,095
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $232,284
Distributions in Excess of Net Investment Income.............. (676)
Accumulated Net Realized Gain................................. 2,886
Unrealized Depreciation on Investments and Foreign Currency
Translations................................................ (4,399)
--------
NET ASSETS.................................................... $230,095
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,741,753 outstanding $0.001 par value shares
(authorized 1,000,000,000 shares)........................... $15.61
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - ----------- -------- ----------- ------------ -------- ------------
U.S.$ 251 $ 251 1/02/98 DEM 450 $ 250 $ (1)
SEK 865 109 1/05/98 U.S.$ 109 109 --
DEM 96 53 1/05/98 U.S.$ 54 54 1
AUD 9,100 5,930 1/12/98 U.S.$ 7,076 7,076 1,146
FRF 17,000 2,836 3/12/98 U.S.$ 2,843 2,843 7
GBP 3,250 5,267 11/09/98 U.S.$ 5,414 5,414 147
-------- -------- ------
$ 14,446 $ 15,746 $ 1,300
--------
-------- -------- ------
-------- ------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value - see note A-1 to financial statements.
ITL -- Italian Lira
NCS -- Non Convertible Shares
SEK -- Swedish Krona
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - -------------------------------------------------------------------
Capital Equipment...................... $ 59,421 25.8%
Consumer Goods......................... 59,970 26.2
Finance................................ 26,332 11.4
Materials.............................. 24,724 10.7
Multi-Industry......................... 7,341 3.2
Services............................... 42,465 18.4
--------- ---
$ 220,253 95.7%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
International Small Cap Portfolio
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Appliances & Household Durables 7.3 %
Automobiles 5.9 %
Banking 0.3 %
Business & Public Services 3.0 %
Chemicals 3.4 %
Construction & Housing 2.4 %
Data Processing & Reproduction 7.5 %
Electrical & Electronics 13.7 %
Electrical Components & Instruments 7.8 %
Financial Services 1.2 %
Health & Personal Care 5.3 %
Industrial Components 1.3 %
Machinery & Engineering 11.4 %
Merchandising 2.0 %
Metals--Non-Ferrous 1.1 %
Miscellaneous Materials & Components 2.3 %
Real Estate 1.3 %
Recreation, Other Consumer Goods 3.8 %
Telecommunications 2.6 %
Textiles & Apparel 1.1 %
Other 15.3 %
</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 MSCI JAPAN
PORTFOLIO--CLASS
A 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
12/31/97 423,877 332,513
* 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 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............. -9.23% -4.38%
PORTFOLIO -- CLASS B............. -9.64 -5.75
INDEX -- CLASS A................. -23.67 -10.59
INDEX -- CLASS B................. -23.67 -19.42
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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,
convertible securities and rights and warrants to puchase common stocks.
For the year ended December 31, 1997, the Portfolio had a total return of -9.23%
for the Class A shares and -9.64% for the Class B shares as compared to a total
return of -23.67% for the Morgan Stanley Capital International (MSCI) Japan
Index (the "Index"). From inception on April 25, 1994 to December 31, 1997, the
average annual total return of Class A was -4.38% compared to -10.59% for the
Index. From inception on January 2, 1996 to December 31, 1997, the average
annual total return of Class B was -5.75% compared to -19.42% for the Index.
During the fourth quarter of 1997, economic conditions deteriorated
substantially faster than market expectations. In fact, the Tankan survey of
Japanese corporations released in December showed almost all economic indicators
to be accelerating lower than most pessimists had been predicting.
A vicious downward spiral, starting with a weak economy leading to declining
stock prices and erosion of "hidden profits" held by Japanese institutions
resulted in a sharply higher Japan premium. This self-feeding economic downturn
further depressed investor confidence and consumer spending. Moreover, in order
to meet international BIS standards, Japanese banks were forced to liquidate
cross-holdings of equities to raise capital while their lending activity was
also curtailed to avoid unnecessary exposure, particularly to medium to smaller
companies. These events, coupled with a severe economic climate led to the
collapse of several major Japanese corporations in the fourth quarter,
unprecedented since WWII, including Sanyo & Yamaichi Securities and Hokkaido
Takushoku Bank. The mounting credit crunch from the rising Japan premium for
interbank loans also forced Toshoku, a medium sized trading company, into
bankruptcy. The Japanese Government in an act of desperation announced plans for
a new type of bond to provide capital for the DIC (Deposit Insurance
Corporations) and also proposed to purchase preferred stocks from Japanese
banks. Also, in order to boost public confidence, the government announced a one
time two trillion yen individual tax cut in mid December.
- - --------------------------------------------------------------------------------
Japanese Equity Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
However, investors' reactions to such proposals were largely cool as most
participants believe that only a massive fiscal stimulus program will help the
ailing economy. Foreign investors in particular were disappointed with the lack
of fiscal stimulus and became large net sellers, preferring to shore-up overseas
investments and flee to "quality" and back to the dollar. The combined unstable
Asian economies and Korea's economic uncertainty propelled Japan's equity
markets to lows set in 1995 and the year ended amid clouds of uncertainty over
the future of Japan.
For the full year of 1997, most Japanese government authorities and investors
grossly underestimated the severely negative implications on the Japanese
economy by changes made in fiscal policy at the beginning of the year.
In particular, the consumption tax hike in April followed by depressed consumer
sentiment during a stagnant economy resulted in a sharp reversal of gradually
improving economic indicators from the previous year. Moreover, most bureaucrats
firmly believed that austerity measures together with a deregulated economy
would lead to long term growth despite the weakening economic back drop. From
July 1997, such an environment created a severe credit crunch for non-performing
loans held by banks. In addition, the collapse of several Asian currencies
during the second half of 1997 further impacted an already faltering economy.
With a mounting domestic financial crisis looming, Japanese authorities seemed
to sense little urgency in responding with necessary stimulus measures.
Judging by both the Asian crisis and the critically slowing Japanese economy,
foreign investors became net sellers of Japanese equity in an increasingly
deteriorating demand environment for equities by domestic institutions and which
led to sharply higher volatility and selling pressures. However, a pronounced
and polarized market developed within Japanese equities whereby those companies
participating in a favorable global economy provided relatively good returns. In
particular, sectors in new technologies and consumer growth products withheld
sharp declines in indexes heavily weighted by financial companies and banks. The
overweight position in these sectors provided the basis for the Portfolio's
outperformance for 1997.
Our view on the outlook for the overall Japanese equity market is based on
whether Japanese authorities seriously recognize the need to massively change
fiscal policy. Specifically, we believe "supply side" measures must be
implemented together with deregulation. Although a two trillion yen one time
personal income tax cut was announced in December, we believe additional and
more permanent corporate and individual tax cuts must also be made.
The current economic woes in Japan have yet to fully discount the slowdown in
non-Japan Asia, in our view, and although some attention has been paid to bank
on non-performing loans, more drastic proposals should be implemented to provide
the necessary liquidity in real estate for sustainable economic growth.
Unfortunately, politicians seem more preoccupied with the status quo rather than
risk votes by implementing major changes. However, increasing pressure from G7
and leaders of the Japanese business community will likely grow significantly
during the coming months as the economy remains weak. A meaningful and
sustainable recovery will occur, in our view, if there is enough pressure for
such change by the G7 Summit in May or July 1998 when Upper House elections will
take place.
Meanwhile, while we are hopeful that authorities will make the necessary fiscal
stimulus changes to invigorate Japan, we will maintain our current portfolio
weighting in electronics, blue chips and globally competitive Japanese
companies. If a massive fiscal policy change is implemented, however our
strategy is to remain flexible for sector and stock selection.
The paternal guidance both politicians and bureaucrats have exercised on
governing the Japanese economy, favoring the corporate sector over individuals
since WWII, will need to change in order for new sustainable growth for Japan.
This radical departure from the past is beginning to emerge but in order for us
to become bullish for the entire market we believe additional empowerment must
be made for consumers to play a greater role in overall economic policies of
Japan.
John R. Alkire
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
COMMON STOCKS (84.7%)
APPLIANCES & HOUSEHOLD DURABLES (7.3%)
147,000 Matsushita Electric Industrial Co., Ltd.......... $ 2,152
57,400 Rinnai Corp...................................... 867
31,000 Sony Corp........................................ 2,756
---------
5,775
---------
AUTOMOBILES (5.9%)
298,000 Nissan Motor Co.................................. 1,233
146,000 Suzuki Motor Co., Ltd............................ 1,320
73,000 Toyota Motor Corp................................ 2,093
---------
4,646
---------
BANKING (0.3%)
79,000 Inabata & Co..................................... 248
---------
BUSINESS & PUBLIC SERVICES (3.0%)
76,000 Dai Nippon Printing Co., Ltd..................... 1,427
68,000 Sangetsu Co., Ltd................................ 698
70,000 Shin-Etsu Polymer Co., Ltd....................... 231
---------
2,356
---------
CHEMICALS (3.4%)
391,000 Daicel Chemical Industries Ltd................... 509
299,000 Kaneka Corp...................................... 1,350
203,000 Mitsubishi Chemical Corp......................... 291
109,000 Sekisui Chemical Co.............................. 554
---------
2,704
---------
CONSTRUCTION & HOUSING (2.4%)
116,000 Sekisui House Ltd................................ 746
312,000 Tsubakimoto Chain Co............................. 1,124
---------
1,870
---------
DATA PROCESSING & REPRODUCTION (7.5%)
90,000 Canon, Inc....................................... 2,097
285,000 Furukawa Electric Co............................. 1,221
70,000 Nissha Printing Co., Ltd......................... 422
174,000 Ricoh Co., Ltd................................... 2,160
---------
5,900
---------
ELECTRICAL & ELECTRONICS (13.7%)
297,000 Hitachi Ltd...................................... 2,117
70,000 Kyudenko Co., Ltd................................ 354
110,000 Mitsumi Electric Co., Ltd........................ 1,568
213,000 NEC Corp......................................... 2,269
24,000 Nintendo Corp., Ltd.............................. 2,354
518,000 Toshiba Corp..................................... 2,156
---------
10,818
---------
ELECTRONIC COMPONENTS & INSTRUMENTS (7.8%)
33,000 Kyocera Corp..................................... 1,497
40,000 Murata Manufacturing Co., Ltd.................... 1,006
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
29,000 TDK Corp......................................... $ 2,187
45,000 Tokyo Electron Ltd............................... 1,442
---------
6,132
---------
FINANCIAL SERVICES (1.2%)
58,000 Hitachi Credit Corp.............................. 956
---------
HEALTH & PERSONAL CARE (5.3%)
20,000 Ono Pharmaceutical Co., Ltd...................... 388
80,000 Sankyo Co., Ltd.................................. 1,809
92,000 Yamanouchi Pharmaceutical Co..................... 1,974
---------
4,171
---------
INDUSTRIAL COMPONENTS (1.3%)
146,000 Fujitec Co., Ltd................................. 806
30,000 Nifco, Inc....................................... 195
---------
1,001
---------
MACHINERY & ENGINEERING (11.4%)
288,000 Amada Co., Ltd................................... 1,071
175,000 Daifuku Co., Ltd................................. 852
242,000 Daikin Industries Ltd............................ 912
75,000 Fuji Machine Manufacturing Co.................... 1,811
207,000 Fujitsu Ltd...................................... 2,221
81,000 Kurita Water Industries Ltd...................... 826
298,000 Mitsubishi Heavy Industries Ltd.................. 1,242
---------
8,935
---------
MERCHANDISING (2.0%)
116,000 Asahi Tec Corp................................... 184
10,000 Autobacs Seven Co., Ltd.......................... 287
30,020 FamilyMart....................................... 1,077
---------
1,548
---------
METALS--NON-FERROUS (1.1%)
177,000 Sanwa Shutter Corp............................... 890
---------
MISCELLANEOUS MATERIALS & COMPONENTS (2.3%)
67,000 Lintec Corp...................................... 1,037
145,000 Nippon Pillar Packing............................ 780
---------
1,817
---------
REAL ESTATE (1.3%)
97,000 Mitsubishi Estate Co., Ltd....................... 1,056
---------
RECREATION, OTHER CONSUMER GOODS (3.8%)
54,000 Fuji Photo Film Ltd.............................. 2,069
85,000 Yamaha Corp...................................... 964
---------
3,033
---------
TELECOMMUNICATIONS (2.6%)
240 Nippon Telegraph & Telephone Corp................ 2,060
---------
TEXTILES & APPAREL (1.1%)
50,000 Shimamura Co., Ltd............................... 870
---------
TOTAL COMMON STOCKS (Cost $87,723)................................ 66,786
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Japanese Equity Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (14.2%)
REPURCHASE AGREEMENT (14.2%)
$ 11,153 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at 11,157,
collateralized by U.S. Treasury Notes, 5.25%,
due 1/31/01, valued at $11,391 (Cost
$11,153)....................................... $ 11,153
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.9%) (Cost $98,876)........................... 77,939
--------
OTHER ASSETS (6.5%)
Receivable for Investments Sold...................... $ 3,771
Receivable for Portfolio Shares Sold................. 858
Interest Receivable.................................. 252
Net Unrealized Gain on Foreign Currency Exchange
Contracts.......................................... 241
Dividends Receivable................................. 12
Other................................................ 7 5,141
----------
LIABILITIES (-5.4%)
Bank Overdraft....................................... (3,763)
Payable for Portfolio Shares Redeemed................ (242)
Investment Advisory Fees Payable..................... (233)
Administrative Fees Payable.......................... (13)
Directors' Fees & Expenses Payable................... (9)
Custodian Fees Payable............................... (7)
Distribution Fees Payable............................ (1)
Other Liabilities.................................... (23) (4,291)
---------- --------
NET ASSETS (100%).................................................. $ 78,789
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $127,549
Undistributed Net Investment Income................................ 2,109
Accumulated Net Realized Loss...................................... (30,161)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (20,708)
--------
NET ASSETS......................................................... $ 78,789
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $77,086
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,085,022 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $5.89
--------
--------
CLASS B:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $1,703
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 290,286 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $5.87
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - -------------- -------- ----------- ------------ -------- -----------
JPY 5,572,600 $ 43,759 6/11/98 U.S.$ 44,000 $ 44,000 $ 241
--------
-------- -------- -----
-------- -----
</TABLE>
- - ------------------------------------------------------------
JPY -- Japanese Yen
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Japanese Equity Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Argentina 8.4 %
Brazil 44.4 %
Chile 5.0 %
Colombia 1.1 %
Mexico 34.0 %
Peru 1.7 %
Venezuela 1.8 %
Other 3.6 %
</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
A MSCI EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
<S> <C> <C>
1/18/95* $500,000 $500,000
12/31/95 456,600 459,800
12/31/96 679,284 560,726
12/31/97 959,692 738,252
* 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 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............. 41.28% 24.70%
PORTFOLIO -- CLASS B............. 40.37 41.47
INDEX -- CLASS A................. 31.66 14.12
INDEX -- CLASS B................. 31.66 25.29
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of 41.28%
for the Class A shares and 40.37% for the Class B shares, as compared to a total
return of 31.66% for the Morgan Stanley Capital International (MSCI) Emerging
Markets Global Latin America Index (the "Index"). From inception on January 18,
1995 to December 31, 1997, the average annual total return of Class A was 24.70%
compared to 14.12% for the Index. From inception on January 2, 1996 to December
31, 1997, the average annual total return of Class B was 41.47% compared to
25.29% for the Index.
The continuation of the Asian crisis and its contagion throughout the emerging
markets resulted in poor performance across all the Latin markets. The largest
contributors to the Portfolio's outperformance relative to its benchmark were
strong stock selection in Mexico, where we are focusing on the consumer related
companies, and increasing our Brazil exposure to an overweight position at
November month-end such that we were able to take full advantage of the December
rally.
The Brazilian stock market fell 15.1% during the fourth quarter, with most of
the decline occurring during the first half of the quarter. Brazil was
particularly vulnerable to the contagion as it follows a fixed exchange rate
regime and has both a large current account and fiscal deficit. Additionally,
given the Brazilian market had performed well prior to the Asian crisis,
investors took profits as Brazil's risk premium increased.
Nevertheless Brazil was able to pull away from its recent Asian focus and look
to the strong U.S. market as well as its own good news to begin recouping its
losses. The positive moves made by the authorities which supported the equity
market included an aggressive, well thought out response to the crisis,
including the doubling of interest rates and a significant tightening of fiscal
policy. Even the Brazilian Congress lent a hand in building confidence. Not only
was the fiscal package quickly passed with few amendments but, the Asian
currency crisis provided the spur for action on the reform process.
- - --------------------------------------------------------------------------------
Latin American Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
Since the eruption of the crisis in late-October, the Lower House has passed the
administrative reform package, which allows government at all levels (federal,
state, and city) to fire workers when payroll costs exceed 60% of total costs.
Mexico was the best performing market in this region, declining 3.6% over the
fourth quarter Mexico is less vulnerable to the Asian crisis, as most of its
exports are sent to the U.S. Another positive for Mexico has been its economic
strength, as its economy expanded 8.1% during the third quarter. Additionally,
while the Mexican peso was briefly under pressure as a result of a currency
contagion from Asia, it was able to recover nicely with the aid of the central
bank.
The Chilean market fell 18.3% over the fourth quarter as a result of commodity
deflation. Given the woes in Asia, prices for copper, pulp and paper have
fallen. As Chile's economic structure is dependent on commodity prices, the
recent price cuts have negatively impacted Chile's economy and equity market.
In the other markets, none were immune to the Asian contagion. Argentina and
Colombia fell 8.3% and 6.3%, respectively, over the fourth quarter in sympathy
with the region. Venezuela fell 18.5% fueled by weakening oil prices.
Robert L. Meyer
PORTFOLIO MANAGER
Andy Skov
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
COMMON STOCKS (UNLESS OTHERWISE NOTED) (96.4%)
ARGENTINA (8.4%)
(a)178,548 Acindar, Class B................................. $ 425
(a)63,085 Banco Rio de La Plata ADR........................ 883
104,283 Banco del Suquia, Class B........................ 271
(e)8,940 Siderar ADR...................................... 304
13,190 Siderar, Class A................................. 56
21,830 Telecom Argentina ADR............................ 781
65,218 Telefonica de Argentina ADR...................... 2,429
44,975 YPF ADR.......................................... 1,538
---------
6,687
---------
BRAZIL (44.4%)
126,080,000 Banco Bradesco (Preferred)....................... 1,243
(a,d)11,847,000 Banco Nacional (Preferred)....................... 1
31,630,010 CEMIG (Preferred)................................ 1,374
(e)1,042 CEMIG ADR (Preferred)............................ 45
20,179 CEMIG ADR (Preferred)............................ 877
(a)7,274,358 CRT (Preferred).................................. 8,962
78,686 CVRD (Preferred)................................. 1,583
62,925 CVRD ADR (Preferred)............................. 1,239
(a,d)34,986 CVRD, Class B (Preferred)........................ --
1,340,000 Cia Cimento Portland Itau (Preferred)............ 258
18,290 Copel, Class B ADR (Preferred)................... 250
2,557,830 Coteminas (Preferred)............................ 848
(a,e)14,355 Coteminas ADR.................................... 238
(a)2,588,000 Encorpar......................................... 2
52,306,328 Gerdau (Preferred)............................... 656
5,000 Globex Utilidades (Preferred).................... 29
458,900 Iven (Preferred)................................. 261
10,009,300 Lojas Arapua (Preferred)......................... 36
(e)13,460 Lojas Arapua ADR (Preferred)..................... 45
17,339,000 Lojas Renner (Preferred)......................... 544
7,329,000 Petrobras (Preferred)............................ 1,714
(a,e)42,925 Petrobras ADR.................................... 1,025
(a,e)68,065 Rossi Residential GDR............................ 332
(a)101,175 Rossi Residential GDS............................ 493
44,067,400 Telebras (Preferred)............................. 5,026
37,624 Telebras ADR (Preferred)......................... 4,381
(a)124,495 Unibanco GDR (Preferred)......................... 4,007
---------
35,469
---------
CHILE (5.0%)
41,050 CCU ADR.......................................... 1,206
51,832 Chilectra ADR.................................... 1,438
77,108 Santa Isabel ADR................................. 1,349
---------
3,993
---------
COLOMBIA (1.1%)
2,523 Banco de Colombia................................ 1
88,878 Bavaria.......................................... 912
---------
913
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
MEXICO (34.0%)
(a)399,074 Banacci, Class B................................. $ 1,196
(a)78,246 Banacci, Class L................................. 202
(a)149,060 Bancomer, Class B................................ 97
(a)34,620 Cemex CPO ADR.................................... 311
(a)17,240 Cemex, Class B................................... 92
(a)45,009 Cemex, Class B ADR............................... 478
(a)205,094 Cemex CPO........................................ 929
1,120 Cifra, Class B ADR............................... 28
525,911 Cifra, Class C................................... 1,181
214,185 Cifra, Class V................................... 527
(e)46,440 FEMSA ADR........................................ 371
429,895 FEMSA, Class B................................... 3,456
44,930 Grupo Modelo, Class C............................ 377
(a)48,210 Interamericana................................... 374
668,846 Kimberly, Class A................................ 3,178
10,463 Panamco.......................................... 341
590,140 Soriana, Class B................................. 2,614
(a)114,558 TV Azteca ADR.................................... 2,585
(a)79,257 Televisa CPO GDR................................. 3,066
103,129 Telmex, Class L ADR.............................. 5,782
---------
27,185
---------
PERU (1.7%)
40,355 Banco Wiese ADR.................................. 202
48,356 Tel Peru, Class B ADR............................ 1,127
---------
1,329
---------
VENEZUELA (1.8%)
19,330 CANTV ADR........................................ 804
334,786 Electricidad de Caracas.......................... 402
67,375 Sivensa ADR...................................... 282
---------
1,488
---------
TOTAL COMMON STOCKS (Cost $73,376).................................... 77,064
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- - -----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)126,865,000 Banco Bradesco (Preferred), expiring 2/02/98
(Cost $0)...................................... 11
---------
TOTAL FOREIGN SECURITIES (96.4%) (Cost $73,376)....................... 77,075
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - -----------------
SHORT-TERM INVESTMENT (7.4%)
REPURCHASE AGREEMENT (7.4%)
$ 5,934 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $5,936,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $6,057 (Cost $5,934).... 5,934
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Latin American Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - --------------------------------------------------------------------------------
FOREIGN CURRENCY (1.1%)
ARP 148 Argentine Peso................................... $ 148
BRL 116 Brazilian Real................................... 104
COP 248,301 Colombian Peso................................... 192
MXP 28 Mexican Peso..................................... 3
PSS 1,095 Peruvian New Sol................................. 402
VEB 7,191 Venezuelan Bolivar............................... 14
--------
TOTAL FOREIGN CURRENCY (Cost $875).................................... 863
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (104.9%) (Cost $80,185)............................. 83,872
--------
OTHER ASSETS (1.6%)
Cash.................................................... $ 30
Receivable for Investments Sold......................... 823
Receivable for Portfolio Shares Sold.................... 281
Dividends Receivable.................................... 104
Interest Receivable..................................... 1
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................. 1
Other................................................... 2 1,242
----------
LIABILITIES (-6.5%)
Payable for Investments Purchased....................... (4,753)
Investment Advisory Fees Payable........................ (223)
Payable for Portfolio Shares Redeemed................... (118)
Custodian Fees Payable.................................. (39)
Administrative Fees Payable............................. (10)
Sub-Administrative Fees Payable......................... (6)
Payable for Foreign Taxes............................... (4)
Distribution Fees Payable............................... (3)
Directors' Fees and Expenses Payable.................... (3)
Other Liabilities....................................... (50) (5,209)
---------- --------
NET ASSETS (100%)..................................................... $ 79,905
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.......................................................
$ 79,340
Accumulated Net Investment Loss.......................................
(34)
Accumulated Net Realized Loss.........................................
(3,086)
Unrealized Appreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign tax of $4 on unrealized
appreciation on investments)........................................
3,685
--------
NET ASSETS............................................................
$ 79,905
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - ----------------------------------------------------------------------
NET ASSETS............................................................ $73,196
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,711,283 outstanding $0.001 par value shares
(authorized 500,000,000 shares)..................................... $10.91
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- - ----------------------------------------------------------------------
NET ASSETS............................................................ $6,709
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 621,020 outstanding $0.001 par value shares
(authorized 500,000,000 shares)..................................... $10.80
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - ----------- ------- ----------- ---------- ------- -----------
U.S.$ 460 $ 460 1/02/98 BRL 514 $ 460 $ --
U.S.$ 384 384 1/02/98 MXP 3,091 384 --
U.S.$ 695 695 1/05/98 BRL 777 696 1
------- ------- ---
$ 1,539 $ 1,540 $ 1
-------
------- ------- ---
------- ---
</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.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
- - ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- - ------------------------------------------------------------------
Capital Equipment...................... $ 2,102 2.6%
Consumer Goods......................... 11,665 14.6
Energy................................. 7,387 9.2
Finance................................ 8,113 10.1
Materials.............................. 10,596 13.3
Multi-Industry......................... 2,268 2.9
Services............................... 34,944 43.7
-------- ---
$ 77,075 96.4%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Latin American Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Capital Goods 40.4 %
Communication Services 0.5 %
Consumer Cyclicals 17.6 %
Consumer Staples 15.7 %
Energy 1.0 %
Financial 13.6 %
Technology 7.2 %
Other 4.0 %
</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 LIPPER CAPITAL APPRECIATION
PORTFOLIO--CLASS A INDEX(1) S&P 500
<S> <C> <C> <C>
3/08/95 $500,000 $500,000 $500,000
12/31/95 $706,250 $629,000 $650,860
12/31/96 $995,106 $723,098 $800,285
12/31/97 $1,326,576 $866,705 $1,067,260
* 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
SINCE
ONE YEAR INCEPTION
----------- -----------
<S> <C> <C>
PORTFOLIO -- CLASS A...................... 33.31% 41.36%
PORTFOLIO -- CLASS B...................... 32.90 36.32
LIPPER CAP. APPRECIATION INDEX -- CLASS
A....................................... 19.86 21.86
S&P 500 INDEX -- CLASS A.................. 33.36 30.90
LIPPER CAP. APPRECIATION INDEX -- CLASS
B....................................... 19.86 17.24
S&P 500 INDEX -- CLASS B.................. 33.36 27.63
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
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 year ended December 31, 1997, the Portfolio had a total return of 33.31%
for the Class A shares and 32.90% for the Class B shares, as compared to a total
return of 19.86% for the Lipper Capital Appreciation Index and 33.36% for the
S&P 500 Index. From inception on March 8, 1995 through December 31, 1997, the
average annual total return of Class A was 41.36% compared to 21.86% for the
Lipper Capital Appreciation Index and 30.90% for the S&P 500 Index. From
inception on January 2, 1996 through December 31, 1997, the average annual total
return of Class B was 36.32% compared to 17.24% for the Lipper Capital
Appreciation Index and 27.63% for the S&P 500 Index.
The Portfolio had a very strong fourth quarter, with a total return of 5.85% for
Class A and 5.68% Class B compared to 2.87% for the S&P 500 and -2.41% for the
Lipper Capital Appreciation Index.
For the year the Portfolio performed in line with the S&P 500 and outperformed
the Lipper Capital Appreciation Index dramatically. The Portfolio's mix of
"low-flying" growth and higher beta growth outperformed the S&P 500 in every
quarter last year but the second during which two of our higher beta names
underperformed (HFS and Boston Chicken). Boston Chicken was sold but we held and
added to the HFS position which subsequently surged 59% off its lows in the June
quarter to make it one of our most important contributors to performance for the
year. Another important contributor to performance was Clear Channel
Communications, which doubled.
After three heady years for the market, Wall Street futurists are, as usual,
divided firmly in the bull and bear camps. We are first and foremost bottom up
investors, focusing on companies, not markets, and tend not to care which way
the U.S. market moves in 1998. But if pushed we are bullish because the backdrop
for financial assets is so positive: 1) inflation and interest rates are at
30-year lows; 2) the U.S. budget is balanced and U.S. companies seem as strong
as ever in terms of global competitiveness; 3) the Fed has enormous flexibility,
due to dollar strength and
- - --------------------------------------------------------------------------------
Aggressive Equity Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
low inflation, so that short rates will come down quickly if the economy slows;
and 4) company managements are very focused on shareholder value creation, much
more so than in prior cycles.
There are some negatives in that the strong dollar and
disinflationary/deflationary trends are combining to put pressure on corporate
profits and valuations are high on an absolute basis.
This, in our view, sets up a classic stockpickers' market. We will take earnings
risk over upward interest rate pressure any day. If you can find companies that
are able to rise above the profit pressures and achieve significant earnings
growth, this will be richly rewarded. However, the "safe growth" part of the
U.S. market -- stocks like Coca Cola and General Electric -- look extended and
pricey to us. We do not see why these stocks need to go down, but on the other
hand they have gone up much more than their respective earnings in recent years
and should at some point enter a phase where the opposite is true. We think
there is much more money to be made in "unsafe growth," -- i.e., stocks of
companies which have strong fundamentals but where investors still have doubts.
We would divide the "unsafe growth" stocks we find compelling into two
categories: stocks infected with investor fears stemming from the turmoil in
Asia and stocks that should be insulated against the negative factors pressuring
U.S. corporate profits. In the first category we would put stocks such as United
Technologies where earnings are growing 17-18%, and Gulfstream Aerospace, the
leading producer of executive jets with a debt-free balance sheet and EPS
estimates on the rise. In the second category we would put Cendant, the new
company formed by the merger of HFS and CUC International, which should reap
tremendous revenue and margin gains from the combination of the country's
largest franchiser with the preeminent direct marketing company. We would also
include Cracker Barrel, the 300 unit chain of restaurant/gift shops which is
seeing margin improvement after several sluggish years and Lockheed Martin, the
largest defense company in the world after it closes the Northrop Grumman
acquisition, which is generating massive free cash flow.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------
COMMON STOCKS (95.4%)
CAPITAL GOODS (40.4%)
AEROSPACE/DEFENSE (15.8%)
(a)38,000 AVTEAM, Inc., Class A............................ $ 337
(a)142,200 Gulfstream Aerospace Corp. ...................... 4,159
215,700 Lockheed Martin Corp. ........................... 21,246
1 Raytheon Co., Class A............................ --
19,600 Thiokol Corp. ................................... 1,593
---------
27,335
---------
MANUFACTURING (DIVERSIFIED) (24.6%)
65,100 Loews Corp. ..................................... 6,909
93,800 ITT Industries, Inc. ............................ 2,943
450,400 United Technologies Corp. ....................... 32,795
---------
42,647
---------
TOTAL CAPITAL GOODS........................................... 69,982
---------
COMMUNICATION SERVICES (0.5%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
(a)15,800 Associated Group, Inc., Class A.................. 468
(a)13,300 Associated Group, Inc., Class B.................. 387
---------
855
---------
CONSUMER CYCLICALS (17.6%)
AUTO PARTS & EQUIPMENT (1.0%)
33,400 Borg-Warner Automotive, Inc. .................... 1,737
---------
AUTOMOBILES (1.3%)
36,300 General Motors Corp. ............................ 2,201
---------
AUTO RELATED (2.1%)
(a)114,400 Avis Rent A Car, Inc. ........................... 3,654
---------
GAMING, LOTTERY & PARI-MUTUEL COMPANIES (1.0%)
65,100 International Game Technology.................... 1,644
---------
SERVICES (COMMERCIAL & CONSUMER) (12.2%)
(a)616,162 Cendant Corp. ................................... 21,180
(a)2,600 IRI International Corp. ......................... 36
---------
21,216
---------
TOTAL CONSUMER CYCLICALS...................................... 30,452
---------
CONSUMER STAPLES (15.7%)
BEVERAGES (NON-ALCOHOLIC) (1.1%)
53,900 Coca Cola Enterprises, Inc. ..................... 1,917
---------
BROADCASTING (TV, RADIO, CABLE) (6.1%)
(a)17,200 American Radio Systems Corp. .................... 917
95,300 CBS Corp. ....................................... 2,805
(a)85,700 Clear Channel Communications, Inc. .............. 6,808
---------
10,530
---------
ENTERTAINMENT (0.6%)
(a)27,000 Viacom, Inc., Class B............................ 1,119
---------
FOODS (1.1%)
20,300 Ralston-Ralston Purina Group..................... 1,887
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------
RESTAURANTS (2.6%)
(a)72,100 Brinker International, Inc. ..................... $ 1,154
103,500 Cracker Barrel Old Country Store, Inc. .......... 3,454
---------
4,608
---------
TOBACCO (4.2%)
(a)32,500 Consolidated Cigar Holdings, Inc. ............... 896
116,600 Philip Morris Cos., Inc. ........................ 5,283
28,800 RJR Nabisco Holdings Corp. ...................... 1,080
---------
7,259
---------
TOTAL CONSUMER STAPLES........................................ 27,320
---------
ENERGY (1.0%)
OIL & GAS (DRILLING) (1.0%)
36,000 Diamond Offshore Drilling, Inc. ................. 1,732
---------
FINANCIAL (13.0%)
BANKS (MAJOR REGIONAL) (0.9%)
4,500 Wells Fargo & Co. ............................... 1,527
---------
CONSUMER FINANCE (3.1%)
38,600 SLM Holding Corp. ............................... 5,370
---------
FINANCIAL (DIVERSIFIED) (1.5%)
29,400 American Express Co. ............................ 2,624
---------
FINANCIAL SERVICES (1.2%)
39,750 Travelers Group, Inc. ........................... 2,142
---------
INSURANCE (MULTI-LINE) (2.1%)
55,900 American Bankers Insurance Group, Inc. .......... 2,568
31,000 Nationwide Financial Services, Inc.,
Class A........................................ 1,120
---------
3,688
---------
INSURANCE (PROPERTY-CASUALTY) (3.6%)
(a)114 Berkshire Hathaway, Inc., Class A................ 5,244
7,000 Cincinnati Financial Corp. ...................... 985
---------
6,229
---------
INVESTMENT BANKING & BROKERAGE (0.6%)
(a)52,600 Friedman, Billings, Ramsey Group, Inc., Class
A.............................................. 944
---------
TOTAL FINANCIAL............................................... 22,524
---------
TECHNOLOGY (7.2%)
COMPUTERS (HARDWARE) (2.1%)
34,800 International Business Machines Corp. ........... 3,639
---------
COMPUTERS (SOFTWARE SERVICES) (2.5%)
(a)33,700 Microsoft Corp. ................................. 4,356
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Aggressive Equity Portfolio
79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ---------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS (DEFENSE) (1.9%)
(a)56,700 Litton Industries, Inc. ......................... $ 3,260
---------
ELECTRONICS (SEMICONDUCTORS) (0.7%)
21,700 Linear Technology Corp. ......................... 1,250
---------
TOTAL TECHNOLOGY.............................................. 12,505
---------
TOTAL COMMON STOCKS (Cost $156,662)............................. 165,370
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- - -----------
RIGHTS (0.6%)
FINANCIAL (0.6%)
CONSUMER FINANCE (0.6%)
(a)32,300 Newcourt Credit Group, Inc., expiring 1/23/98
(Cost $1,052).................................. 1,078
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - -----------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 6,892 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $6,894,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $7,037 (Cost $6,892).... 6,892
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.0%) (Cost $164,606)....................... 173,340
--------
OTHER ASSETS (4.9%)
Cash............................................... $ 597
Receivable for Investments Sold.................... 6,077
Receivable for Securities Sold Short............... 1,104
Receivable due from Broker......................... 553
Receivable for Portfolio Shares Sold............... 165
Dividends Receivable............................... 95
Interest Receivable................................ 1
Other.............................................. 4 8,596
----------
LIABILITIES (-4.9%)
Payable for Investments Purchased.................. (6,871)
Securities Sold Short, at Value (Proceeds
$1,104).......................................... (1,078)
Investment Advisory Fees Payable................... (320)
Payable for Portfolio Shares Redeemed.............. (200)
Administrative Fees Payable........................ (22)
Custodian Fees Payable............................. (11)
Distribution Fees Payable.......................... (11)
Directors' Fees and Expenses Payable............... (4)
Other Liabilities.................................. (55) (8,572)
---------- --------
NET ASSETS (100%)................................................ $173,364
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................. $156,124
Distributions in Excess of Net Investment Income................. (3)
Accumulated Net Realized Gain.................................... 8,483
Unrealized Appreciation on Investments and Securities Sold
Short.......................................................... 8,760
--------
NET ASSETS....................................................... $173,364
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -----------------------------------------------------------------
NET ASSETS....................................................... $155,087
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,829,754 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $15.78
--------
--------
CLASS B:
NET ASSETS....................................................... $18,277
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,162,366 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $15.72
--------
--------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
SECURITIES SOLD SHORT (NOTE A-9)
VALUE
SHARES (000)
- - ---------------------------------------------------------------------------
32,300 Newcourt Credit Group, Inc.
(Total Proceeds $1,104)....................................... $ 1,078
-----------
-----------
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Aggressive Equity Portfolio
80
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Auto & Transportation 1.2 %
Consumer Discretionary 23.4 %
Consumer Staples 1.1 %
Financial Services 12.1 %
Health Care 13.2 %
Materials & Processing 0.2 %
Other Energy 8.0 %
Producer Durables 3.7 %
Technology 31.5 %
Utilities 3.0 %
Other 2.6 %
</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
12/31/97 $1,026,847 $1,781,248
* 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..................... 11.36% 8.88% 11.88%
PORTFOLIO -- CLASS
B..................... 11.13 N/A 7.30
INDEX -- CLASS A...... 21.64 18.33 16.36
INDEX -- CLASS B...... 21.64 N/A 21.86
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of 11.36%
for the Class A shares and 11.13% for the Class B shares, as compared to a total
return of 21.64% for the NASDAQ Composite Index (the "Index"). For the five year
period ended December 31, 1997, the average annual total return of Class A was
8.88% compared to 18.33% for the Index. From inception on November 1, 1989,
through December 31, 1997, the average annual total return of Class A was 11.88%
compared to 16.36% for the Index. From inception on January 2, 1996 through
December 31, 1997, the average annual total return of Class B was 7.30% compared
to 21.86% for the Index.
The fourth quarter was marked by extreme volatility with the most notable event
being the sharp decline on October 27th. In volatile markets, smaller companies
tend to underperform due to their lower liquidity and higher risk profiles. This
quarter was no exception as investors flocked into stocks represented in the S&P
500 which ended the quarter up 2.87% while the small capitalization indices all
ended in negative territory.
The market backdrop throughout the fourth quarter presented a significant
challenge to performance in the small cap arena. In our view, over the next
several quarters, liquidity concerns will gradually be supplanted as a risk
factor by a concern for reliable and strong earnings growth. We believe
investors will increasingly focus on domestic-oriented companies whose
businesses generally have minimal exposure to foreign markets and whose earnings
are therefore less at risk in the current environment.
In terms of sector weightings in the fourth quarter we reduced our exposure to
healthcare, finance and retail stocks while increasing our weighting in business
service stocks.
Overall, in the fourth quarter we have reduced the number of companies in the
Portfolio and we plan further reductions in the months ahead. As is to be
expected, the majority of the Portfolio's performance has been driven by its
largest positions. We therefore have made a concerted effort to limit the number
of names in the "farm team", i.e. names representing
- - --------------------------------------------------------------------------------
Emerging Growth Portfolio
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
less than fifty basis point positions. We believe by increasing the weighting in
our top positions through reductions in the Portfolio's bottom category we will
more fully leverage the benefits of our research effort.
Despite the uneven and generally disappointing performance of emerging growth
stocks this year we remain ardent believers that emerging growth is the place to
be invested in 1998. The relative valuation of the small cap sector of the
market versus its larger cap brethren has reached a level last seen in April of
1997, a time which represented an inflection point and was followed by five
months of strong absolute and strong relative performance.
The weakness in small cap growth stocks has presented numerous opportunities to
invest in premier growth companies at highly attractive valuation levels. We
believe that if we remain focused on company fundamentals, investing only in
companies with superior business models enjoying strong competitive positions
with the highest quality management teams, then eventually other investors will
follow our lead. By sticking to our knitting, thorough fundamental analysis, we
believe the market will come around once again and cast us a favorable eye.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
82
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
COMMON STOCKS (97.4%)
AUTO & TRANSPORTATION (1.2%)
AUTOMOBILES (1.1%)
(a)20,600 Avis Rent A Car, Inc. ........................... $ 658
---------
AUTO PARTS: AFTER MARKET (0.1%)
(a)3,100 O'Reilly Automotive, Inc. ....................... 81
---------
TOTAL AUTO & TRANSPORTATION..................................... 739
---------
CONSUMER DISCRETIONARY (23.4%)
ADVERTISING AGENCIES (0.7%)
(a)11,100 Lamar Advertising Co. ........................... 441
---------
CASINOS & GAMBLING (0.7%)
(a)12,900 GTECH Holdings Corp. ............................ 412
---------
COMMERCIAL INFORMATION SERVICES (1.2%)
(a)8,100 America Online, Inc. ............................ 723
---------
CONSUMER ELECTRONICS (0.9%)
(a)8,900 Broderbund Software, Inc. ....................... 227
(a)8,300 Electronic Arts, Inc. ........................... 314
---------
541
---------
EDUCATION SERVICES (2.6%)
(a)8,400 Apollo Group, Inc., Class A ..................... 397
(a)5,100 CBT Group plc ADR ............................... 417
(a)3,900 Computer Learning Centers, Inc. ................. 239
(a)10,400 DeVry, Inc. ..................................... 332
(a)10,400 ITI Education Corp. ............................. 63
(a)4,900 Learning Company, Inc. .......................... 79
---------
1,527
---------
HOTEL/MOTEL (0.3%)
(a)13,300 Extended Stay America, Inc. ..................... 165
---------
PUBLISHING: MISCELLANEOUS (0.5%)
(a)22,600 PRIMEDIA, Inc. .................................. 285
---------
RADIO & TV BROADCASTERS (2.8%)
(a)14,300 Clear Channel Communications, Inc. .............. 1,136
(a)4,500 HSN, Inc. ....................................... 232
(a)6,000 Heftel Broadcasting Corp., Class A .............. 280
---------
1,648
---------
RESTAURANTS (0.5%)
3,900 Cracker Barrel Old Country Store, Inc. .......... 130
(a)5,700 Papa John's International, Inc. ................. 199
---------
329
---------
RETAIL (5.4%)
(a)15,100 Abercrombie & Fitch Co., Class A ................ 472
(a)2,300 Amazon.com, Inc. ................................ 138
(a)13,300 Bed, Bath & Beyond, Inc. ........................ 510
(a)13,000 CompUSA, Inc. ................................... 403
(a)10,000 Dollar Tree Stores, Inc. ........................ 414
(a)9,100 Dress Barn, Inc. ................................ 255
(a)7,400 Gymboree Corp. .................................. 203
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
6,400 Intimate Brands, Inc. ........................... $ 154
17,100 Pier 1 Imports, Inc. ............................ 387
(a)11,000 Viking Office Products, Inc. .................... 240
---------
3,176
---------
SERVICE ORGANIZATIONS (0.2%)
(a)5,800 American Coin Merchandising, Inc. ............... 102
---------
SERVICES: COMMERCIAL (7.6%)
(a)30,039 Cendant Corp. ................................... 1,032
(a)11,800 Data Processing Resources Corp. ................. 301
3,800 G & K Services, Inc., Class A ................... 159
(a)18,000 NFO Worldwide, Inc. ............................. 377
(a)21,950 Robert Half International, Inc. ................. 878
(a)40,400 Romac International, Inc. ....................... 985
(a)12,200 TeleTech Holdings, Inc. ......................... 139
(a)11,600 Volt Information Sciences, Inc. ................. 625
---------
4,496
---------
TOTAL CONSUMER DISCRETIONARY.................................... 13,845
---------
CONSUMER STAPLES (1.1%)
DRUG & GROCERY STORE CHAINS (0.5%)
(a)5,400 Whole Foods Market, Inc. ........................ 276
---------
TOBACCO (0.6%)
(a)10,300 Consolidated Cigar Holdings, Inc. ............... 284
(a)4,300 General Cigar Holdings, Inc. .................... 92
---------
376
---------
TOTAL CONSUMER STAPLES.......................................... 652
---------
FINANCIAL SERVICES (12.1%)
BANKS: OUTSIDE NEW YORK CITY (0.5%)
1,600 Compass Bancshares, Inc. ........................ 70
3,500 Mercantile Bancorp., Inc. ....................... 215
---------
285
---------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
(a)9,200 BISYS Group, Inc. ............................... 306
1 Mutual Risk Management Ltd. ..................... --
---------
306
---------
FINANCE COMPANIES (0.7%)
(a)4,200 FIRSTPLUS Financial Group, Inc. ................. 160
4,800 Finova Group, Inc. .............................. 239
---------
399
---------
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (3.3%)
20,750 Paychex, Inc. ................................... 1,050
(a)29,700 SunGard Data Systems, Inc. ...................... 921
---------
1,971
---------
FINANCIAL MISCELLANEOUS (1.6%)
8,500 CMAC Investment Corp. ........................... 513
(a)2,200 Federal Agricultural Mortgage Corp., Class C .... 130
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Growth Portfolio
83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCIAL SERVICES (CONT.)
FINANCIAL MISCELLANEOUS (CONT.)
<TABLE>
<C> <S> <C>
(a)8,200 Ocwen Financial Corp. ........................... $ 208
(a)3,400 Triad Guaranty, Inc. ............................ 99
---------
950
---------
INVESTMENT MANAGEMENT COMPANIES (0.2%)
2,300 T. Rowe Price Associates, Inc. .................. 145
---------
REAL ESTATE INVESTMENT TRUSTS (REIT)(2.9%)
9,300 CarrAmerica Realty Corp. ........................ 294
10,000 Crescent Real Estate Equities, Inc. ............. 394
9,844 Equity Office Properties Trust .................. 311
7,600 Federal Realty .................................. 196
18,200 Taubman Centers, Inc. ........................... 236
12,200 TrizecHahn Corp. ................................ 283
---------
1,714
---------
RENTAL & LEASING SERVICES: COMMERCIAL (0.3%)
3,000 Xtra Corp. ...................................... 176
---------
SAVINGS & LOAN (1.6%)
2,700 Astoria Financial Corp. ......................... 151
2,050 Charter One Financial, Inc. ..................... 129
5,900 Dime Bancorp, Inc. .............................. 178
(a)4,700 FirstFed Financial Corp. ........................ 182
(a)3,800 Golden State Bancorp., Inc. ..................... 142
5,100 TCF Financial Corp. ............................. 173
---------
955
---------
SECURITIES BROKERAGE & SERVICES (0.5%)
3,800 A.G. Edwards, Inc. .............................. 151
2,133 Legg Mason, Inc. ................................ 119
---------
270
---------
TOTAL FINANCIAL SERVICES........................................ 7,171
---------
HEALTH CARE (13.2%)
BIOTECHNOLOGY RESEARCH & PRODUCTION (1.2%)
4,200 Genzyme Corp.-General Division .................. 116
(a)4,500 Human Genome Sciences, Inc. ..................... 179
(a)5,200 MedImmune, Inc. ................................. 223
(a)6,700 Ortec International, Inc. ....................... 87
(a)3,300 Transkaryotic Therapies, Inc. ................... 115
---------
720
---------
DRUGS & PHARMACEUTICALS (3.6%)
(a)5,400 Dura Pharmaceuticals, Inc. ...................... 248
(a)7,800 Elan Corp. plc ADR .............................. 399
8,000 Jones Medical Industries, Inc. .................. 306
(a)7,700 Medicis Pharmaceutical, Class A ................. 395
(a)4,000 Miravant Medical Technologies ................... 160
(a)15,200 SangStat Medical Corp. .......................... 614
---------
2,122
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
HEALTH CARE FACILITIES (2.5%)
(a)700 Amsurg Corp., Class A ........................... $ 5
(a)4,513 Amsurg Corp., Class B ........................... 34
(a)16,400 Chromatics Color Science International, Inc. .... 244
(a)4,200 Corrections Corp. of America .................... 156
(a)6,500 HEALTHSOUTH Corp. ............................... 180
(a)11,600 Health Management Associates, Inc., Class A ..... 293
(a)9,500 PhyCor, Inc. .................................... 257
(a)10,833 Total Renal Care Holdings, Inc. ................. 298
---------
1,467
---------
HEALTH CARE MANAGEMENT SERVICES (2.6%)
7,600 American Healthcorp, Inc. ....................... 53
(a)30,400 American Oncology Resources, Inc. ............... 486
(a)17,416 Concentra Managed Care, Inc. .................... 586
(a)9,600 Horizon Health Corp. ............................ 218
(a)5,900 Parexel International Corp. ..................... 218
---------
1,561
---------
HEALTH CARE SERVICES (1.0%)
(a)7,650 MedQuist, Inc. .................................. 264
(a)10,900 QuadraMed Corp. ................................. 300
---------
564
---------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.3%)
(a)6,800 Arterial Vascular Engineering, Inc. ............. 442
(a)8,300 Cooper Cos., Inc. ............................... 339
(a)5,000 Henry Schein, Inc. .............................. 175
(a)9,400 Inhale Therapeutic Systems ...................... 242
4,100 Mentor Corp. .................................... 150
---------
1,348
---------
TOTAL HEALTH CARE............................................... 7,782
---------
MATERIALS & PROCESSING (0.2%)
METALS & MINERALS MISC. (0.2%)
(a)9,300 Metals USA, Inc. ................................ 142
---------
OTHER ENERGY (8.0%)
MACHINERY: OIL WELL EQUIPMENT & SERVICES (2.5%)
5,400 Camco International, Inc. ....................... 344
(a)4,000 Cooper Cameron Corp. ............................ 244
(a)3,700 Dril-Quip, Inc. ................................. 130
(a)8,000 EVI, Inc. ....................................... 414
(a)5,900 J. Ray McDermott ................................ 254
(a)4,500 TransCoastal Marine Services, Inc. .............. 62
---------
1,448
---------
OFFSHORE DRILLING (2.7%)
(a)8,900 Bayard Drilling Technologies, Inc. .............. 145
9,100 ENSCO International, Inc. ....................... 305
(a)7,600 Falcon Drilling Co., Inc. ....................... 266
(a)6,900 Noble Drilling Corp. ............................ 211
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Growth Portfolio
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
OTHER ENERGY (CONT.)
OFFSHORE DRILLING (CONT.)
<TABLE>
<C> <S> <C>
(a)9,400 Patterson Energy, Inc. .......................... $ 364
(a)12,700 Precision Drilling Corp. ........................ 309
---------
1,600
---------
OIL: CRUDE PRODUCERS (2.8%)
(a)6,300 Barret Resources Corp. .......................... 191
31,000 Chesapeake Energy Corp. ......................... 234
(a)5,100 Forecenergy, Inc. ............................... 133
(a)49,600 Grey Wolf, Inc. ................................. 267
(a)13,400 Newfield Exploration Co. ........................ 312
(a)2,100 Ocean Energy, Inc. .............................. 104
(a)27,400 Unit Corp. ...................................... 264
8,200 Vintage Petroleum, Inc. ......................... 156
---------
1,661
---------
TOTAL OTHER ENERGY.............................................. 4,709
---------
PRODUCER DURABLES (3.7%)
AEROSPACE (0.2%)
(a)11,400 AVTEAM, Inc., Class A ........................... 97
---------
ELECTRICAL EQUIPMENT & COMPONENTS (1.2%)
(a)2,100 Ballard Power Systems, Inc. ..................... 159
15,237 Molex, Inc., Class A ............................ 438
(a)3,500 Triumph Group, Inc. ............................. 117
---------
714
---------
MISCELLANEOUS PRODUCER DURABLES (0.7%)
(a)14,000 JLK Direct Distribution, Inc., Class A .......... 392
---------
OFFICE FURNITURE & BUSINESS EQUIPMENT (0.2%)
(a)6,000 U.S. Office Products Co. ........................ 116
---------
POLLUTION CONTROL & ENVIRONMENTAL SERVICES (0.5%)
(a)6,200 Allied Waste Industries, Inc. ................... 144
(a)8,400 Republic Industries, Inc. ....................... 196
---------
340
---------
PRODUCTION TECHNOLOGY EQUIPMENT (0.2%)
(a)2,400 Uniphase Corp. .................................. 98
---------
TELECOMMUNICATIONS EQUIPMENT (0.7%)
(a)5,000 Excel Switching Corp. ........................... 89
5,100 Inter-Tel, Inc. ................................. 99
(a)12,900 MAS Technology Ltd. ADR ......................... 213
---------
401
---------
TOTAL PRODUCER DURABLES......................................... 2,158
---------
TECHNOLOGY (31.5%)
COMMUNICATIONS TECHNOLOGY (10.3%)
(a)23,800 ADC Telecommunications, Inc. .................... 994
(a)17,200 Advanced Fibre Communications, Inc. ............. 501
(a)23,400 Ascend Communications, Inc. ..................... 575
(a)3,700 China Telecomm (Hong Kong) Ltd. ADR ............. 124
(a)12,100 CIENA Corp. ..................................... 740
(a)3,000 Globalstar Telecommunications Ltd. .............. 147
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
(a)8,900 International Network Services .................. $ 203
(a)9,750 Level One Communications, Inc. .................. 274
(a)4,000 Orbital Sciences Corp. .......................... 119
(a)10,300 Premisys Communications, Inc. ................... 267
(a)15,600 Proxim, Inc. .................................... 177
(a)3,200 Tekelec, Inc. ................................... 98
(a)4,100 Teligent, Inc., Class A ......................... 99
(a)29,900 Tellabs, Inc. ................................... 1,575
(a)11,100 VideoServer, Inc. ............................... 176
---------
6,069
---------
COMPUTER SERVICES SOFTWARE & SYSTEMS (9.7%)
6,700 Autodesk, Inc. .................................. 246
(a)9,100 Cadence Design Systems, Inc. .................... 223
(a)6,500 Citrix Systems, Inc. ............................ 494
(a)20,400 Compuware Corp. ................................. 653
(a)6,800 ECsoft Group plc ADR ............................ 118
(a)1,800 Intersolv, Inc. ................................. 37
(a)2,600 Keane, Inc. ..................................... 106
(a)5,100 MetaCreations Corp. ............................. 56
(a)6,500 PSW Technologies, Inc. .......................... 92
(a)34,700 Peoplesoft, Inc. ................................ 1,345
(a)9,800 Progress Software Corp. ......................... 211
(a)1,518 Structural Dynamics Research Corp. .............. 34
(a)13,700 Sybase, Inc. .................................... 182
(a)6,400 Symantec Corp. .................................. 140
(a)36,000 USCS International, Inc. ........................ 612
(a)30,200 Whittman-Hart, Inc. ............................. 1,034
(a)2,100 Yahoo!, Inc. .................................... 145
---------
5,728
---------
COMPUTER TECHNOLOGY (1.5%)
(a)31,600 FORE Systems, Inc. .............................. 482
(a)7,800 Tech Data Corp. ................................. 303
(a)14,500 TranSwitch Corp. ................................ 108
---------
893
---------
ELECTRONICS (0.4%)
(a)1,200 Flextronics International Ltd. .................. 41
(a)3,000 Semtech Corp. ................................... 117
(a)27,500 Syquest Technology, Inc. ........................ 89
---------
247
---------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (9.6%)
(a)7,500 Aavid Thermal Technologies, Inc. ................ 176
(a)6,200 Altera Corp. .................................... 205
(a)17,100 FlexiInternational Software, Inc. ............... 265
(a)5,300 Fusion Systems Corp. CVR ........................ 4
(a)7,800 Integrated Process Equipment Corp. .............. 122
(a)5,900 Lattice Semiconductor Corp. ..................... 280
31,200 Linear Technology Corp. ......................... 1,794
(a)45,800 Maxim Integrated Products, Inc. ................. 1,580
(a)11,800 PMC-Sierra, Inc. ................................ 366
(a)2,000 Rambus, Inc. .................................... 92
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Growth Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (CONT.)
<TABLE>
<C> <S> <C>
(a)5,600 Vitesse Semiconductor Corp. ..................... $ 211
(a)16,600 Xilinx, Inc. .................................... 581
---------
5,676
---------
TOTAL TECHNOLOGY................................................ 18,613
---------
UTILITIES (3.0%)
UTILITIES: TELECOMMUNICATIONS (3.0%)
(a)2,800 ICG Communications, Inc. ........................ 76
(a)1,200 Intermedia Communications, Inc. ................. 73
(a)37,500 Mobile Telecommunications Technologies Corp. .... 825
(a)9,700 Teleport Communications Group, Inc., Class A .... 532
(a)11,000 WinStar Communications, Inc. .................... 274
---------
TOTAL UTILITIES................................................. 1,780
---------
TOTAL COMMON STOCKS (Cost $50,229)................................ 57,591
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - -------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$1,874 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $1,875,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,915 (Cost $1,874).... 1,874
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.6%) (Cost $52,103).......................... 59,465
--------
OTHER ASSETS (0.8%)
Receivable for Investments Sold...................... $ 457
Dividends Receivable................................. 12
Other................................................ 9 478
----------
LIABILITIES (-1.4%)
Payable for Portfolio Shares Redeemed................ (484)
Payable for Investments Purchased.................... (189)
Investment Advisory Fees Payable..................... (136)
Adminstrative Fees Payable........................... (8)
Directors' Fees and Expenses Payable................. (5)
Distribution Fees Payable............................ (1)
Other Liabilities.................................... (30) (853)
---------- --------
NET ASSETS (100%).................................................. $ 59,090
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 52,161
Accumulated Net Investment Loss.................................... (4)
Accumulated Net Realized Loss...................................... (429)
Unrealized Appreciation on Investments............................. 7,362
--------
NET ASSETS......................................................... $ 59,090
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $57,777
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,479,583 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $7.72
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $1,313
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 172,160 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $7.63
--------
--------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
CVR -- Contingent Value Rights
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Growth Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Basic Materials 0.5 %
Capital Goods 29.8 %
Communication Services 1.6 %
Consumer--Cyclicals 16.2 %
Consumer--Staples 15.6 %
Energy 1.4 %
Finance 17.6 %
Health Care 2.2 %
Technology 10.9 %
Transportation 2.1 %
Utilities 0.6 %
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>
EQUITY GROWTH PORTFOLIO--CLASS
A S&P 500 INDEX(1)
<S> <C> <C>
4/02/91* $500,000 $500,000
10/31/91 $533,000 $533,090
10/31/92 $582,330 $585,450
12/31/92 $604,725 $612,760
12/31/93 $630,900 $674,400
12/31/94 $651,450 $683,250
12/31/95 $944,733 $939,742
12/31/96 $1,237,317 $1,155,507
12/31/97 $1,624,845 $1,540,984
* 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 RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 31.32% 21.86% 19.07%
PORTFOLIO -- CLASS
B..................... 31.05 N/A 30.53
INDEX -- CLASS A...... 33.36 20.27 17.79
INDEX -- CLASS B...... 33.36 N/A 27.63
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 strong earnings growth.
For the year ended December 31, 1997 the Portfolio had a total return of 31.32%
for the Class A shares and 31.05% for the Class B shares, as compared to a total
return of 33.36% for the S&P 500 Index (the "Index"). For the five year period
ended December 31, 1997, the average annual total return of Class A was 21.86%
compared to 20.27% for the Index. From inception April 2, 1991, through December
31, 1997, the average annual total retrun of class A was 19.07% compared to
17.79% for the Index. From inception on January 2, 1996 through December 31,
1997 the average annual total return of Class B was 30.53% compared to 27.63%
for the Index.
After three heady years for the market, Wall Street futurists are, as usual,
divided firmly in the bull and bear camps. We are first and foremost bottom up
investors, focusing on companies, not markets, and tend not to care which way
the U.S. market moves in 1998. But if pushed we are bullish because the backdrop
for financial assets is so positive:
- inflation and interest rates are at 30-year lows
- the U.S. budget is balanced and U.S. companies seem as strong as ever in
terms of global competitiveness
- the Fed has enormous flexibility, due to dollar strength and low
inflation, so that short rates will come down quickly if the economy slows
- company managements are very focused on shareholder value creation, much
more so than in prior cycles.
There are some negatives:
- the strong dollar and disinflationary/ deflationary trends are combining
to put pressure on corporate profits
- valuations are high on an absolute basis
This, in our view, sets up a classic stockpickers' market. We will take earnings
risk over upward interest rate pressure any day. If you can find companies that
are able to rise above the profit
- - --------------------------------------------------------------------------------
Equity Growth Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
pressures and achieve significant earnings growth, this will be richly rewarded.
However, the "safe growth" part of the U.S. market -- stocks like Coca Cola and
General Electric -- look extended and pricey to us. We do not see why these
stocks need to go down, but on the other hand they have gone up much more than
their respective earnings in recent years and should at some point enter a phase
where the opposite is true. We think there is much more money to be made in
"unsafe growth," -- i.e., stocks of companies which have strong fundamentals but
where investors still have doubts.
Which brings us to our investment strategy for 1998 which may be best
characterized in terms of a Chinese restaurant menu or "two from column A and
three from column B". Column A consists of stocks infected with investor fears
of "Asian flu," currency and/or economic sensitivity. Column B consists of
stocks of companies that should be insulated against the negative factors
weighing against U.S. corporate profits.
<TABLE>
<CAPTION>
A B
- - ----------------------------- -----------------------------
<S> <C>
United Technologies Cendant
Gulfstream Aerospace Cracker Barrel
Lockheed Martin
</TABLE>
United Technologies was the largest holding of the Portfolio at December 31,
accounting for 9.6% of net assets. United Technologies has been a significant
holding of ours for several years and it has performed quite well. In late 1997,
however, investor concerns over Asian exposure (15% of profits) and cyclicality
(several competitors, such as York, blew up) combined to cause the stock to
correct very sharply. From a peak of $89, the stock declined to the high $60's
and closed out the year at $73. We responded by redoubling our research efforts
during this "breakdown" period for the stock and came away with the following:
- While Asian operations will get hit in 1998 and 1999, UTX should gain
share in that region and find it much easier to make accretive
acquisitions.
- Dramatic margin gain opportunities, strength in certain businesses (e.g.
Pratt & Whitney) and restructuring activities should more than offset the
operating profit shortfall from Asia, currency and a weakening global
economy.
- We believe the company has become more aggressive in the share repurchase
front than at any time in its history.
- In short, despite what the stock is "telling us," Earnings Per Share (EPS)
growth should be robust and above expectations in 1998 and 1999.
We believe that UTX stock is in a win-win position following the recent sharp
sell-off. If concerns over Asia fade and the global economy strengthens, the
stock could trade up quickly. If not, the company's buyback should remain
aggressive, enhancing EPS prospects in 1999 and beyond. One year out, we think
United Technologies should trade somewhere between $83 (15 times 1999 EPS of
$5.55) and $111(20 times).
Gulfstream Aerospace, a leading producer of executive jets, is enjoying robust
operating fundamentals, yet the stock has been listless over the past year as
investors fear the effects of a potential economic slowdown. Also worrying
investors is the possibility that Forstman Little, the LBO firm and owner of
about 43% of the company, will pressure the stock by selling shares. At year
end, the stock traded at only $29 1/4, despite consensus EPS expectations of
$2.50 in 1998 and $3.10 in 1999. The balance sheet had no net debt and EPS
estimates had risen over the past several months. Does this seem rather
depressed with a stock market trading at over 20 times? The company obviously
thought so, because on January 5 it announced a stock repurchase for about 10%
of shares. This is highly accretive and caused consensus EPS estimates to rise
to $2.60 and $3.25 for 1998 and 1999, respectively. The stock will probably
never get a market multiple, but if it gets up to 15 times in one year that is a
juicy $49.
On the less controversial side, we own some stocks of companies that seem
totally insulated from what the world may throw at them. First on the list is
Cendant, the new company formed by the merger of HFS and CUC International. The
merger closed in December, creating a $28 billion market cap growth company that
most investors still do not know very well. HFS became our largest holding early
last year when unfounded investor concerns drove the stock down. At its low
point in early 1997, HFS was down 13% from its 1996 close. It closed 1997 up
38%, or 59% higher than its low of the year, adjusting for the conversion into
Cendant shares.
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
While not as cheap as it was in early 1997, Cendant's valuation looks fine and
the underlying growth story is the most powerful we know of today. Cendant
combines the country's largest franchiser (HFS) with the preeminent direct
marketing company (CUC). Both companies were exciting on their own but the
combination should be incredible for a variety of reasons. Unlike most
megamergers, cost cutting is not the primary driver of this marriage. Rather,
tremendous revenue and margin gains should accrue from the combination of a huge
inbound telemarketer with the number one outbound telemarketer. Consensus EPS
estimates have drifted higher recently, and currently stand at about $1.28 and
$1.58 for 1998 and 1999, respectively. We believe $1.33 and $1.70 are more
likely, with dynamic growth off the 1999 base expected. One year out, the stock
could trade conservatively at $43 (25 times 1999) or, less conservatively, at
$51 (30 times).
Another stock which should be somewhat insulated from broader corporate profit
pressures is Cracker Barrel, a 300-unit chain of restaurant/gift shops located
largely on interstate highways throughout the east coast and Midwest. Like many
other restaurant companies and retailers, Cracker Barrel spent 1993 to 1996
battling overbuilding and margin pressure. The best companies came through this
period stronger and with a higher market share. Cracker Barrel is one of the
winners, and is beginning to see margin increases for the first time in many
years, allowing the company to return to its traditional 20% + EPS growth rate.
While the stock has done well over the past two years, it is now still only back
to where it was in mid-1993, with earnings growing every year during this
period. We think Cracker Barrel can earn $1.85 and $2.25 in calendar 1998 and
1999, respectively, and could trade between 20-25 times earnings one year out,
or $45-56.
A final example of a stock somewhat protected from generalized corporate profit
pressure is Lockheed Martin. Pending the closing of its acquisition of Northrop
Grumman, it will be the largest defense company in the world. Significant cost
savings will be achieved from the merger, while increased scale will give
Lockheed Martin an even greater advantage in bidding for large defense
contracts. At the same time, non-defense businesses are growing nicely.
Moreover, the balanced budget in the United States bodes well for defense and
space exploration spending. Finally, the company's huge free cash flow is an
ongoing major positive. Despite all this, Lockheed Martin stock under performed
the market in 1996 and 1997. In fact, in 1997 it was up a lowly 7.7%. Why? The
most important factor in our view, was the two downward revisions to EPS that
occurred in late 1997. From our perspective, however, they were "false" negative
surprises and we believe the stage has now been set for positive surprises,
hopefully in 1998 but likely in 1999.
The first downward revision came from weakness in a non-core business that will
eventually be sold. The second downward revision was an upward revision in
disguise. In order to be able to buy back GE's large stake in Lockheed Martin
(10% of the company pro forma) Lockheed was forced to change from pooling to
purchase accounting on its Northrop acquisition. This means goodwill, a phantom,
non-cash expense, must be amortized, which leads to lower reported EPS but
higher cash flow or economic earnings. Hence, while EPS in 1998 should be about
$6.50, economic earnings will exceed $9.00. We expect 12-15% compounded EPS
growth over the longer term. If we are right and consensus estimates start to
rise over the next 12 months, the valuation should improve. A reasonable one
year price target would be 18-20 times reported 1999 EPS of $7.40, or $133 to
$148.
Kurt Feuerman
PORTFOLIO MANAGER
Margaret K. Johnson
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Equity Growth Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
COMMON STOCKS (98.5%)
BASIC MATERIALS (0.5%)
CHEMICALS (0.5%)
46,300 E.I. du Pont de Nemours & Co. ................... $ 2,781
---------
CAPITAL GOODS (29.8%)
AEROSPACE & DEFENSE (10.4%)
(a)107,400 AVTEAM, Inc., Class A............................ 953
(a)386,900 Gulfstream Aerospace Corp. ...................... 11,317
(a)180,600 Howmet International, Inc. ...................... 2,709
451,000 Lockheed Martin Corp. ........................... 44,424
6,800 Nothrop Grumman Corp. ........................... 782
35 Raytheon Co., Class A............................ 2
53,600 Thiokol Corp. ................................... 4,355
---------
64,542
---------
DIVERSIFIED (18.3%)
(a)346 Berkshire Hathaway, Inc., Class A ............... 15,916
346,600 ITT Industries, Inc. ............................ 10,875
190,400 Loews Corp. ..................................... 20,206
116,000 Textron, Inc. ................................... 7,250
813,400 United Technologies Corp. ....................... 59,226
---------
113,473
---------
OFFICE EQUIPMENT & SUPPLIES (1.1%)
95,000 Xerox Corp. ..................................... 7,012
---------
TOTAL CAPITAL GOODS............................................. 185,027
---------
COMMUNICATION SERVICES (1.6%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
(a)58,000 Associated Group, Inc., Class A.................. 1,718
(a)48,700 Associated Group, Inc., Class B.................. 1,418
---------
3,136
---------
TELECOMMUNICATIONS (LONG DISTANCE) (1.1%)
51,900 AT&T Corp. ...................................... 3,179
(a)115,900 WorldCom, Inc. .................................. 3,506
---------
6,685
---------
TOTAL COMMUNICATION SERVICES.................................... 9,821
---------
CONSUMER-CYCLICALS (16.2%)
AUTO PARTS & EQUIPMENT (1.0%)
121,800 Borg-Warner Automotive, Inc. .................... 6,334
---------
AUTOMOBILES (1.9%)
(a)175,200 Avis Rent A Car, Inc. ........................... 5,595
101,300 General Motors Corp. ............................ 6,141
---------
11,736
---------
GAMING, LOTTERY & PHARMACEUTICAL COMPANIES (0.9%)
224,000 International Game Technology.................... 5,656
---------
LEISURE TIME PRODUCTS (0.8%)
(a)151,700 GTECH Holdings Corp. ............................ 4,845
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
PUBLISHING (2.3%)
(a)855,400 PRIMEDIA, Inc.................................... $ 10,799
54,200 Gannett Co., Inc. ............................... 3,350
---------
14,149
---------
RETAIL (BUILDING SUPPLIES) (1.3%)
132,950 Home Depot, Inc. ................................ 7,827
---------
RETAIL (SPECIALTY/APPAREL) (0.2%)
(a)60,900 O'Reilly Automotive, Inc......................... 1,599
---------
SERVICES (COMMERCIAL & CONSUMER) (7.8%)
(a)1,404,755 Cendant Corp. ................................... 48,288
---------
TOTAL CONSUMER-CYCLICALS........................................ 100,434
---------
CONSUMER-STAPLES (15.6%)
BEVERAGES (NON-ALCOHOLIC) (1.1%)
202,900 Coca Cola Enterprises, Inc. ..................... 7,216
---------
BROADCASTING (TV, RADIO, CABLE) (5.1%)
303,400 CBS Corp. ....................................... 8,931
(a)282,800 Clear Channel Communications, Inc. .............. 22,465
---------
31,396
---------
ENTERTAINMENT (1.2%)
55,200 Time Warner, Inc. ............................... 3,422
(a)98,200 Viacom, Inc., Class B............................ 4,069
---------
7,491
---------
FOODS (1.4%)
69,400 Kellogg Co. ..................................... 3,444
58,500 Ralston-Ralston Purina Group..................... 5,437
---------
8,881
---------
RESTAURANTS (2.4%)
(a)264,000 Brinker International, Inc. ..................... 4,224
314,700 Cracker Barrel Old Country Store, Inc. .......... 10,503
---------
14,727
---------
TOBACCO (4.4%)
(a)118,600 Consolidated Cigar Holdings, Inc. ............... 3,269
441,700 Philip Morris Cos., Inc. ........................ 20,014
105,300 RJR Nabisco Holdings Corp. ...................... 3,949
---------
27,232
---------
TOTAL CONSUMER-STAPLES.......................................... 96,943
---------
ENERGY (1.4%)
OIL & GAS (DRILLING) (1.4%)
110,900 Diamond Offshore Drilling, Inc. ................. 5,337
40,300 Schlumberger, Ltd. .............................. 3,244
---------
TOTAL ENERGY.................................................... 8,581
---------
FINANCE (17.6%)
BANKS (3.2%)
42,500 BankAmerica Corp................................. 3,103
48,668 Chase Manhattan Corp. ........................... 5,329
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Equity Growth Portfolio
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCE (CONT.)
BANKS (CONT.)
<TABLE>
<C> <S> <C>
46,100 Citicorp ........................................ $ 5,829
16,433 Wells Fargo & Co. ............................... 5,578
---------
19,839
---------
CONSUMER FINANCE (2.8%)
70,900 MBNA Corp........................................ 1,936
109,200 SLM Holding Corp. ............................... 15,192
---------
17,128
---------
FINANCIAL (DIVERSIFIED) (3.8%)
105,600 American Express Co. ............................ 9,425
30,300 Federal Home Loan Mortgage Corp. ................ 1,271
94,600 MGIC Investment Corp. ........................... 6,291
123,450 Travelers Group, Inc. ........................... 6,651
---------
23,638
---------
INSURANCE (LIFE & HEALTH) (0.5%)
(a)15,600 ESG Re Ltd. ..................................... 367
53,300 Hartford Life, Inc., Class A .................... 2,415
---------
2,782
---------
INSURANCE (MULTI-LINE) (2.7%)
187,300 American Bankers Insurance Group, Inc. .......... 8,604
(a)40,600 CNA Financial Corp. ............................. 5,187
88,100 Nationwide Financial Services, Inc., Class A .... 3,183
---------
16,974
---------
INSURANCE (PROPERTY--CASUALTY) (3.3%)
98,250 Ace Ltd. ........................................ 9,481
75,100 CMAC Investment Corp. ........................... 4,534
11,000 Cincinnati Financial Corp. ...................... 1,548
39,400 NAC Re Corp. .................................... 1,923
26,300 Progressive Corp. ............................... 3,153
---------
20,639
---------
INVESTMENT BANKING & BROKERAGE (1.3%)
(a)142,200 Friedman, Billings, Ramsey Group, Inc., Class
A ............................................. 2,551
76,700 Merrill Lynch & Co. ............................. 5,594
---------
8,145
---------
INVESTMENT MANAGEMENT (0.0%)
(a)17,100 Conning Corp. ................................... 287
---------
TOTAL FINANCE................................................... 109,432
---------
HEALTH CARE (2.2%)
HEALTH CARE (DIVERSIFIED) (0.3%)
24,800 American Home Products Corp...................... 1,897
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
HEALTH CARE (DRUGS-MAJOR PHARMS) (1.9%)
50,600 Eli Lilly & Co. ................................. $ 3,523
54,600 Merck & Co., Inc. ............................... 5,801
31,100 Pfizer, Inc. .................................... 2,319
---------
11,643
---------
TOTAL HEALTH CARE............................................... 13,540
---------
TECHNOLOGY (10.9%)
COMMUNICATION EQUIPMENT (0.9%)
(a)41,300 ADC Telecommunications, Inc. .................... 1,724
18,402 Lucent Technologies, Inc. ....................... 1,470
(a)49,500 Tellabs, Inc. ................................... 2,617
---------
5,811
---------
COMPUTERS (HARDWARE) (2.0%)
32,850 Compaq Computer Corp. ........................... 1,854
(a)35,100 Dell Computer Corp. ............................. 2,948
10,800 Hewlett Packard Co. ............................. 675
63,900 International Business Machines Corp. ........... 6,682
---------
12,159
---------
COMPUTERS (NETWORKING) (1.2%)
(a)138,150 Cisco Systems, Inc. ............................. 7,702
---------
COMPUTERS (SOFTWARE & SERVICES) (2.5%)
(a)36,400 America Online, Inc. ............................ 3,246
(a)29,600 Compuware Corp. ................................. 947
(a)76,700 Microsoft Corp. ................................. 9,914
(a)55,250 Oracle Corp. .................................... 1,233
---------
15,340
---------
ELECTRONICS (COMPONENT DISTRIBUTORS) (0.6%)
(a)130,100 Ingram Micro, Inc., Class A...................... 3,789
---------
ELECTRONICS (DEFENSE) (1.7%)
(a)183,000 Litton Industries, Inc. ......................... 10,523
---------
ELECTRONICS (SEMICONDUCTORS) (2.0%)
50,500 Intel Corp. ..................................... 3,548
79,700 Linear Technology Corp. ......................... 4,593
(a)121,200 Maxim Integrated Products, Inc. ................. 4,181
---------
12,322
---------
TOTAL TECHNOLOGY................................................ 67,646
---------
TRANSPORTATION (2.1%)
AIRLINES (2.1%)
(a)44,500 AMR Corp. ....................................... 5,718
(a)118,800 US Airways Group, Inc. .......................... 7,425
---------
TOTAL TRANSPORTATION............................................ 13,143
---------
UTILITIES (0.6%)
POWER PRODUCERS (INDEPENDENT) (0.6%)
(a)73,400 AES Corp. ....................................... 3,422
---------
TOTAL COMMON STOCKS (Cost $534,017)............................... 610,770
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Equity Growth Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 1,097 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $1,098,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,121 (Cost $1,097).... $ 1,097
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.7%) (Cost $535,114).......................... 611,867
--------
OTHER ASSETS (2.4%)
Cash................................................. $ 1
Receivable for Investments Sold...................... 13,135
Receivable for Portfolio Shares Sold................. 1,519
Dividends Receivable................................. 505
Other................................................ 17 15,177
----------
LIABILITIES (-1.1%)
Payable for Investments Purchased.................... (5,495)
Investment Advisory Fees Payable..................... (877)
Payable for Portfolio Shares Redeemed................ (768)
Administrative Fees Payable.......................... (77)
Custodian Fees Payable............................... (16)
Distribution Fees Payable............................ (15)
Directors' Fees and Expenses Payable................. (15)
Other Liabilities.................................... (113) (7,376)
---------- --------
NET ASSETS (100%).................................................. $619,668
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $529,188
Distributions in Excess of Net Investment Income................... (8)
Accumulated Net Realized Gain...................................... 13,735
Unrealized Appreciation on Investments............................. 76,753
--------
NET ASSETS......................................................... $619,668
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $591,789
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 34,957,180 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $16.93
--------
--------
CLASS B:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $27,879
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,649,100 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $16.91
--------
--------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Equity Growth Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 0.3 %
Banking 13.1 %
Building 2.5 %
Capital Goods 3.3 %
Chemicals 1.3 %
Communications 4.8 %
Computers 5.4 %
Consumer--Durables 2.9 %
Consumer--Retail 7.2 %
Consumer--Service & Growth 0.9 %
Consumer--Staples 4.3 %
Electric 1.3 %
Energy 5.9 %
Entertainment 3.2 %
Financial--Diversified 3.0 %
Health Care 3.1 %
Industrial 7.5 %
Insurance 2.7 %
Metals 2.0 %
Paper & Packaging 1.0 %
Restaurants 0.7 %
Services 3.2 %
Technology 4.5 %
Tobacco 0.6 %
Transportation 5.4 %
Utilities 5.3 %
Other 4.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY PORTFOLIO--CLASS
A RUSSELL 2500 INDEX(1)
<S> <C> <C>
12/17/92* $500,000 $500,000
12/31/92 $507,000 $515,665
12/31/93 $564,420 $601,000
12/31/94 $578,700 $595,350
12/31/95 $698,086 $784,076
12/31/96 $858,576 $933,443
12/31/97 $1,174,532 $1,160,736
* 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 INDEX
AND S&P 500 INDEX(1)
- - -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 36.80% 18.30% 18.46%
PORTFOLIO -- CLASS
B..................... 36.51 N/A 29.27
RUSSELL 2500 -- CLASS
A..................... 24.35 17.59 18.16
RUSSELL 2500 -- CLASS
B..................... 24.35 N/A 21.55
S&P 500 -- CLASS A.... 33.36 20.27 20.13
S&P 500 -- CLASS B.... 33.36 N/A 27.63
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 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 year ended December 31, 1997, the Portfolio had a total return of 36.80%
for the Class A shares and 36.51% for the Class B shares, compared to a total
return of 24.35% and 33.36% for the Russell 2500 Index and the S&P 500 Index,
respectively. For the five year period ended December 31, 1997, the average
annual total return of Class A was 18.30% compared to 17.59% for the Russell
2500 Index and 20.27% for the S&P 500 Index. From inception on December 17, 1992
through December 31, 1997, the average annual total return of Class A was 18.46%
compared to 18.16% for the Russell 2500 Index and 20.13% for the S&P 500
- - --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
Index. From inception on January 2, 1996 through December 31, 1997, the average
annual total return of Class B was 29.27% compared to 21.55% for the Russell
2500 Index and 27.63% for the S&P 500 Index.
For the three months ended December 31, 1997, the Portfolio had a total return
of -2.30% for Class A and -2.37% for Class B compared to -2.25% for the Russell
2500 Index and 2.87% for the S&P 500 Index.
Both stock and sector selection played roles in the slight underperformance for
the fourth quarter. Asian worries led to unusual market and economic events.
Electric utilities, despite high valuations, competitive risk, strict regulation
and anemic long-term growth, provided average returns of over 20% in the fourth
quarter, due to their credit sensitivity and perceived safety. Meanwhile, long
interest rates fell despite surging economic growth. Under normal circumstances
the Federal Reserve would likely have tightened rates but could not risk
draining liquidity from the market. In general, companies with stable, domestic
earnings exposure were rewarded, regardless of valuation or long-term growth
prospects. As such, food, beverage, consumer service and utility stocks faired
well. Our underweighted positions in utility and beverage stocks hurt
performance, while our overweighting in financial stocks and under weighting of
energy stocks aided performance. As value investors we continue to search for
companies with low valuations and better than average growth prospects.
Individual stocks which boosted performance included, First of America Bank
(+44.6%), Nationwide Financial Services (+29.8%) and Storage Technology
(+29.0%). Underperforming stocks included Danka Business Systems (-63.9%),
Microage (-48.1%), and Teradyne (-40.5%) .
Asian turmoil has simultaneously raised the possibility of deflation and
inflation. In the event of a worldwide financial crisis/recession commodity
prices will fall, demand will slow and interest rates and profits will decline.
Conversely, if Asian problems remain localized, the current state of low
inflation, low unemployment, falling interest rates and strong economic growth
is unsustainable. Inflation and interest rates are likely to rise. This
uncertainty has led us to increase holdings in utilities, REITs and food stocks,
while reducing Asian-exposed cyclicals and technology stocks.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMON STOCKS (95.4%)
AEROSPACE (0.3%)
(a)3,100 Coltec Industries, Inc. .......................... $ 72
(a)2,600 DONCASTERS plc ADR................................ 55
----------
127
----------
BANKING (13.1%)
2,000 Affiliated Community Bancorp, Inc. ............... 76
4,131 Associated Banc-Corp. ............................ 228
6,300 City National Corp. .............................. 233
7,400 Colonial Bancgroup, Inc. ......................... 255
5,700 Comerica, Inc. ................................... 514
7,400 Community First Bankshares, Inc. ................. 394
2,900 Compass Bancshares, Inc. ......................... 127
4,800 Crestar Financial Corp. .......................... 274
5,000 Cullen/Frost Bankers, Inc. ....................... 303
(a)8,300 First Alliance Corp. ............................. 153
5,700 Long Island Bancorp, Inc. ........................ 283
6,200 Money Store, Inc. (The)........................... 130
10,500 North Fork Bancorp, Inc. ......................... 352
4,000 Northern Trust Corp. ............................. 279
(a)2,600 PFF Bancorp, Inc. ................................ 52
(a)2,500 Silicon Valley Bancshares......................... 141
7,800 Southtrust Corp. ................................. 495
6,200 Sovereign Bancorp, Inc. .......................... 129
8,400 Summit Bancorp.................................... 447
7,200 Trans Financial, Inc. ............................ 280
5,500 Webster Financial Corp. .......................... 366
2,500 Wilmington Trust Corp. ........................... 156
----------
5,667
----------
BUILDING (2.5%)
3,450 Hughes Supply, Inc. .............................. 121
10,100 Southdown, Inc. .................................. 596
(a)7,300 USG Corp. ........................................ 358
----------
1,075
----------
CAPITAL GOODS (3.3%)
5,400 Case Corp. ....................................... 326
(a)4,300 Dril-Quip, Inc. .................................. 151
(a)3,400 Electro Scientific Industries, Inc. .............. 129
(a)11,200 Essex International, Inc. ........................ 333
5,700 Herman Miller, Inc. .............................. 311
(a)2,100 IRI International Corp. .......................... 29
(a)2,500 Lattice Semiconductor Corp. ...................... 118
(a)2,700 Stoneridge, Inc. ................................. 43
----------
1,440
----------
CHEMICALS (1.3%)
15,400 Solutia, Inc. .................................... 411
(a)4,200 USA Waste Services, Inc. ......................... 165
----------
576
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMUNICATIONS (4.8%)
(a)2,400 ADC Telecommunications, Inc. ..................... $ 100
(a)25,200 Journal Register Co. ............................. 529
1,700 New York Times Co., Class A....................... 112
(a)12,600 Nextel Communications, Inc., Class A.............. 328
(a)20,900 Valassis Communications, Inc. .................... 773
500 Washington Post Co., Class B...................... 243
----------
2,085
----------
COMPUTERS (5.4%)
(a)5,600 Altera Corp. ..................................... 186
(a)5,800 BMC Software, Inc. ............................... 381
(a)2,100 Box Hill Systems Corp. ........................... 22
(a)10,000 Cadence Design Systems, Inc. ..................... 245
(a)9,400 Computer Products, Inc. .......................... 213
6,800 Elbit Systems, Ltd. .............................. 94
(a)5,800 Fiserv, Inc. ..................................... 285
(a)2,000 HMT Technology Corp. ............................. 26
(a)6,700 MicroAge, Inc. ................................... 101
(a)3,800 Storage Technology Corp. ......................... 235
(a)6,700 Stratus Computer, Inc. ........................... 253
(a)5,700 Tech Data Corp. .................................. 222
(a)6,200 Technology Modeling Associates, Inc. ............. 66
----------
2,329
----------
CONSUMER-DURABLES (2.9%)
3,200 Arvin Industries, Inc. ........................... 107
(a)7,800 Dan River, Inc., Class A.......................... 128
(a)8,000 Datascope Corp. .................................. 207
(a)6,700 HEALTHSOUTH Corp. ................................ 186
(a)7,800 I.C Isaacs & Co. Inc. ............................ 79
6,500 Mylan Laboratories, Inc. ......................... 136
(a)8,900 Physicians Sales & Service, Inc. ................. 191
(a)11,900 VIVUS, Inc. ...................................... 126
(a)2,700 VWR Scientific Products Corp. .................... 76
----------
1,236
----------
CONSUMER-RETAIL (7.2%)
(a)6,300 Brylane, Inc. .................................... 310
4,900 CVS Corp. ........................................ 314
5,100 DIAL Corp. ....................................... 106
(a)4,400 Fred Meyer, Inc. ................................. 160
(a)6,400 Neiman Marcus Group, Inc. ........................ 194
(a)12,300 Office Depot, Inc. ............................... 294
15,250 Pier 1 Imports, Inc. ............................. 345
14,900 Ross Stores, Inc. ................................ 542
(a)5,800 ShopKo Stores, Inc. .............................. 126
20,300 TJX Cos., Inc. ................................... 698
----------
3,089
----------
CONSUMER-SERVICE & GROWTH (0.9%)
14,700 Danka Business Systems plc ADR.................... 234
(a)500 EVI, Inc. ........................................ 26
7,400 Select Appointments Holdings, plc ADR............. 135
----------
395
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (4.3%)
7,950 Arbor Drugs, Inc. ................................ $ 147
4,900 Dean Foods Co. ................................... 291
(a)4,400 ESG Re, Ltd. ..................................... 103
9,200 Interstate Bakeries Corp. ........................ 344
1,400 Lancaster Colony Corp. ........................... 79
2,700 Mack-Cali Realty Corp. REIT....................... 111
12,000 Richfood Holdings, Inc. .......................... 339
4,000 SL Green Realty Corp. REIT........................ 104
(a)5,100 Security Capital Group, Inc., Class B............. 166
(a)7,400 Stirling Cooke Brown Holdings, Ltd. .............. 181
----------
1,865
----------
ELECTRIC (1.3%)
5,100 Black Hills Corp. ................................ 180
(a)8,300 SCI Systems, Inc. ................................ 361
----------
541
----------
ENERGY (5.9%)
200 Arch Coal, Inc. .................................. 5
3,800 Columbia Gas System, Inc. ........................ 299
6,900 Diamond Offshore Drilling, Inc. .................. 332
(a)3,500 Grey Wolf, Inc. .................................. 19
(a)4,700 Marine Drilling Cos., Inc. ....................... 98
4,300 New Century Energies, Inc. ....................... 206
(a)2,600 Noble Affiliates, Inc. ........................... 92
15,800 Noble Drilling Corp. ............................. 484
2,400 Sun Co., Inc. .................................... 101
5,100 Transocean Offshore, Inc. ........................ 246
(a)4,000 United Meridian Corp. ............................ 113
4,000 Valero Energy Corp. .............................. 126
4,800 Vintage Petroleum, Inc. .......................... 91
(a)6,700 Weatherford Enterra, Inc. ........................ 293
(a)1,700 Willbros Group, Inc. ............................. 26
----------
2,531
----------
ENTERTAINMENT (3.2%)
(a)6,200 AMF Bowling, Inc. ................................ 155
(a)3,500 MGM Grand, Inc. .................................. 126
26,700 Universal Corp. .................................. 1,098
----------
1,379
----------
FINANCIAL-DIVERSIFIED (3.0%)
11,100 Bear Stearns Cos., Inc. .......................... 527
2,800 Capital One Financial Corp. ...................... 152
(a)9,400 CIT Group, Inc. (The), Class A.................... 303
2,400 Lehman Brothers Holdings, Inc. ................... 122
5,600 National Commerce Bancorp......................... 197
(a)725 Wellsford Real Properties, Inc. .................. 11
----------
1,312
----------
HEALTH CARE (3.1%)
(a)3,900 Biogen, Inc. ..................................... 142
(a)18,100 FPA Medical Management, Inc. ..................... 337
(a)1,700 Health Care & Retirement Corp. ................... 68
2,600 ICN Pharmaceuticals, Inc. ........................ 127
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
(a)4,200 Marquette Medical Systems, Class A................ $ 112
(a)4,500 Universal Health Services, Inc., Class B.......... 227
(a)3,100 Vencor, Inc. ..................................... 76
(a)6,300 Wellpoint Health Networks, Inc. .................. 266
----------
1,355
----------
INDUSTRIAL (7.5%)
5,000 AGCO Corp. ....................................... 146
(a)1,600 BJ Services Co. .................................. 115
(a)7,700 CDI Corp. ........................................ 352
4,900 Culp, Inc. ....................................... 98
6,200 Franklin Resources, Inc. ......................... 539
(a)7,000 Intevac, Inc. .................................... 68
(a)6,000 Lear Corp. ....................................... 285
4,800 Lone Star Industries, Inc. ....................... 255
20,300 MascoTech, Inc. .................................. 373
(a)2,100 NS Group, Inc. ................................... 36
(a)7,600 National Steel Corp., Class B..................... 88
(a)3,700 Precision Drilling Corp. ......................... 90
(a)7,200 Teradyne, Inc. ................................... 230
(a)11,600 Tetra Technologies, Inc. ......................... 244
4,700 Trinity Industries, Inc. ......................... 210
(a)3,800 Triumph Group, Inc. .............................. 126
----------
3,255
----------
INSURANCE (2.7%)
3,000 Ambac Financial Group, Inc. ...................... 138
4,700 CMAC Investment Corp. ............................ 284
6,200 Mercury General Corp. ............................ 343
10,800 Nationwide Financial Services, Inc., Class A...... 390
----------
1,155
----------
METALS (2.0%)
9,600 General Cable Corp. .............................. 347
5,400 Kaydon Corp. ..................................... 176
5,300 Precision Castparts Corp. ........................ 320
----------
843
----------
PAPER & PACKAGING (1.0%)
600 Central Newspapers, Inc., Class A................. 44
(a)20,600 U.S. Office Products.............................. 404
----------
448
----------
RESTAURANTS (0.7%)
8,400 Applebee's International, Inc. ................... 152
5,600 Michael Foods, Inc. .............................. 136
----------
288
----------
SERVICES (3.2%)
(a)20,200 AccuStaff, Inc. .................................. 465
(a)11,600 Interim Services, Inc. ........................... 300
(a)3,900 Personnel Group of America, Inc. ................. 129
(a)14,100 Philip Service Corp. ............................. 203
10,000 Russ Berrie & Co., Inc. .......................... 263
----------
1,360
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY (4.5%)
(a)6,100 CTB International Corp. .......................... $ 87
(a)1,600 Coherent, Inc. ................................... 56
(a)1,800 Cooper Cameron Corp. ............................. 110
(a)25,300 Healthdyne Technologies, Inc. .................... 515
(a)6,400 Inacom Corp. ..................................... 180
1,900 Linear Technology Corp. .......................... 109
(a)26,300 Symantec Corp. ................................... 577
3,300 Tektronix, Inc. .................................. 131
(a)700 Veritas DGC, Inc. ................................ 28
(a)4,200 Watson Pharmaceuticals, Inc. ..................... 136
----------
1,929
----------
TOBACCO (0.6%)
(a)900 Consolidated Cigar Holdings, Inc. ................ 25
9,600 DIMON, Inc. ...................................... 252
----------
277
----------
TRANSPORTATION (5.4%)
15,200 Air Express International Corp. .................. 464
2,000 Airborne Freight Corp. ........................... 124
14,600 Arnold Industries, Inc. .......................... 252
(a)14,700 Atlas Air, Inc. .................................. 353
11,500 CNF Transportation, Inc. ......................... 441
7,200 Harley-Davidson, Inc. ............................ 197
4,700 Hertz Corp., Class A.............................. 189
3,000 Lubrizol Corp. ................................... 111
(a)1,500 Midway Airlines Corp. ............................ 23
(a)4,100 Tower Automotive, Inc. ........................... 172
----------
2,326
----------
UTILITIES (5.3%)
12,900 Allegheny Energy, Inc. ........................... 419
4,600 CMS Energy Corp. ................................. 203
10,300 Florida Progress Corp. ........................... 404
7,500 Illinova Corp. ................................... 202
5,600 IPALCO Enterprises, Inc. ......................... 235
6,200 LG&E Energy Corp. ................................ 153
2,700 NICOR, Inc. ...................................... 114
3,000 Oneok, Inc. ...................................... 121
4,700 Pinnacle West Capital Corp. ...................... 199
7,000 TECO Energy, Inc. ................................ 197
1,000 Washington Gas Light Co. ......................... 31
----------
2,278
----------
TOTAL COMMON STOCKS (Cost $36,984)............................ 41,161
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ----------
SHORT-TERM INVESTMENT (5.1%)
REPURCHASE AGREEMENT (5.1%)
$ 2,172 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $2,173,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $2,218 (Cost $2,172)..... 2,172
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- - ----------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%) (Cost $39,156)................ $ 43,333
-----------
OTHER ASSETS (2.9%)
Receivable for Investments Sold............ $ 625
Receivable for Portfolio Shares Sold....... 603
Dividends Receivable....................... 24
Other...................................... 3 1,255
----------
LIABILITIES (-3.4%)
Payable for Investments Purchased.......... (976)
Payable for Portfolio Shares Redeemed...... (379)
Investment Advisory Fees Payable........... (58)
Administrative Fees Payable................ (6)
Distribution Fees Payable.................. (5)
Custodian Fees Payable..................... (2)
Directors' Fees and Expenses Payable....... (2)
Bank Overdraft............................. (1)
Other Liabilities.......................... (24) (1,453)
---------- -----------
NET ASSETS (100%)........................................ $ 43,135
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 37,604
Distributions in Excess of Net Investment Income.............. (6)
Accumulated Net Realized Gain................................. 1,360
Unrealized Appreciation on Investments........................ 4,177
-----------
NET ASSETS.................................................... $ 43,135
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $35,612
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,168,977 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.24
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- - --------------------------------------------------------------
NET ASSETS.................................................... $7,523
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 671,073 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.21
-----------
-----------
</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.
- - --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Communication Equipment 32.0 %
Communication Services 6.0 %
Diversified Technology 1.3 %
Other Technology 33.3 %
Software 20.7 %
Other 6.7 %
</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
A B S&P 500 INDEX(1)
<S> <C> <C> <C>
9/16/96* $250,000 $50,000 $250,000
12/31/96 267,750 53,550 272,200
12/31/97 367,540 73,310 363,006
* 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 performance of Class B shares will vary based
upon the different fees assessed to that class. The S&P 500 Index value at
December 31, 1997 assumes a minimum initial investment of $250,000; if a minimum
initial investment of $50,000 (the minimum investment for Class B shares) is
assumed the value at December 31, 1997 would be $72,601.
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE
LIPPER SCIENCE AND TECHNOLOGY FUNDS INDEX(1)
- - -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 37.27% 34.80%
PORTFOLIO -- CLASS B............. 36.90 34.52
S&P 500 INDEX.................... 33.36 33.61
LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX...................... 7.84 14.00
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 year ended December 31, 1997, the Portfolio had total returns of 37.27%
and 36.90% for Class A shares and Class B shares, respectively, compared to
33.36% for the S&P 500 Index and 7.84% for the Lipper Science and Technology
Funds Index. From inception on September 16, 1996 through December 31, 1997, the
average annual total return of Class A was 34.80% and 34.52% for Class B
compared to 33.61% for the S&P 500 Index and 14.00% for the Lipper Science and
Technology Funds Index.
Overall, we have been quite pleased with the Portfolio's performance in 1997 as
it has performed well on an absolute and relative basis in both up and down
market periods. Despite the extreme volatility in the equity markets, in
general, and in the technology sector, in particular, we managed to sustain much
of the gain recorded in the first nine months to finish the year with an
extremely strong performance. The outperformance for the fourth quarter was due
to the strength of several of our networking, telecom and software stocks
offsetting weakness in semiconductors.
It is noteworthy that we maintained our leadership throughout 1997 finishing
each quarter ahead of all our relevant benchmarks. The declines experienced in
technology in the fourth quarter were attributed to three factors (i)
bellweather technology companies such as Intel and Oracle reporting
disappointing earnings (ii) the economic crisis in Asia and its perceived and
actual spill-over impact on the tech sector and (iii) investor concern regarding
valuation levels for growth stocks in an environment where the prospect of a
U.S. recession in 1998 was increasing. Furthermore, the technology sector
experienced several major dislocations due to such developments
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
as the shift in average selling prices for PCs and overcapacity of commodity
items such as disk drives and memory.
We look forward to 1998. Despite concerns regarding a slowdown in the U.S.
economy as a result of the Asian economic crisis and some high profile earnings
disappointments, we believe overall fundamentals for technology continue to be
favorable. 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 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.
Stephen C. Sexauer
PORTFOLIO MANAGER
Terry T. Corcoran
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Technology Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMON STOCKS (92.4%)
COMMUNICATION EQUIPMENT (31.8%)
COMPUTER INTEGRATED SYSTEMS DESIGN (14.3%)
(a)22,400 Ascend Communications, Inc. ...................... $ 549
(a)6,000 Bay Networks, Inc. ............................... 153
(a)39,700 Cisco Systems, Inc. .............................. 2,213
(a)8,700 ECsoft Group plc ADR.............................. 157
(a)23,600 FORE Systems, Inc. ............................... 360
(a)11,200 Gateway 2000, Inc. ............................... 365
4,600 Hewlett-Packard Co. .............................. 288
(a)4,600 Jyra Research, Inc. .............................. 45
(a)8,400 MetaCreations Corp. .............................. 93
(a)7,200 Premisys Communications, Inc. .................... 188
(a)20,700 Secure Computing Corp. ........................... 245
(a)1,600 Storage Technology Corp. ......................... 99
(a)7,700 VideoServer, Inc. ................................ 122
----------
4,877
----------
COMPUTER PERIPHERAL EQUIPMENT (1.8%)
(a)32,900 Acclaim Entertainment, Inc. ...................... 119
(a)7,000 CompUSA, Inc. .................................... 217
(a)8,300 PMC-Sierra, Inc. ................................. 258
----------
594
----------
ELECTRICAL WORK (0.4%)
(a)1,900 Ballard Power Systems, Inc. ...................... 145
----------
ELECTRONIC COMPONENTS & ACCESSORIES (1.3%)
(a)4,000 Aavid Thermal Technologies, Inc. ................. 96
(a)400 Flextronics International Ltd. ................... 14
(a)4,500 Integrated Process Equipment Corp. ............... 71
(a)1,700 MMC Networks, Inc. ............................... 29
5,844 Molex, Inc., Class A.............................. 168
(a)20,600 Syquest Technology, Inc. ......................... 69
----------
447
----------
MISCELLANEOUS COMMUNICATION EQUIPMENT (3.5%)
(a)3,800 Cidco, Inc. ...................................... 74
(a)9,600 CIENA Corp. ...................................... 587
(a)7,700 Excell Switching Corp. ........................... 138
(a)2,200 JDS Fitel, Inc. .................................. 131
(a)6,700 MAS Technology Ltd. ADR........................... 116
(a)3,300 Uniphase Corp. ................................... 136
----------
1,182
----------
RADIO & TELEVISION BROADCASTING (0.3%)
(a)1,400 Clear Channel Communications, Inc. ............... 111
----------
SPECIAL INDUSTRY MACHINERY (0.2%)
(a)1,200 ASM Lithography Holding N.V....................... 81
----------
TELEPHONE & TELEGRAPH APPARATUS (10.0%)
(a)19,600 ADC Telecommunications, Inc. ..................... 818
(a)14,000 Advanced Fibre Communications, Inc. .............. 408
(a)4,100 Bell Canada International, Inc. .................. 63
(a)1,100 Intermedia Communications, Inc. .................. 67
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
4,600 Lucent Technologies, Inc. ........................ $ 367
(a)4,200 Newbridge Networks Corp. ......................... 146
1,900 Northern Telecommunications Ltd. ................. 169
(a)5,300 Tekelec, Inc. .................................... 162
(a)23,300 Tellabs, Inc. .................................... 1,232
----------
3,432
----------
TOTAL COMMUNICATION EQUIPMENT............................... 10,869
----------
COMMUNICATION SERVICES (6.0%)
COMPUTER PROGRAMMING (0.8%)
2,400 Electronic Data Systems Corp. .................... 105
(a)7,000 International Network Services.................... 162
----------
267
----------
DIRECT MAIL ADVERTISING SERVICE (0.2%)
(a)1,700 Tele-Communications, Inc., Class A................ 62
----------
MISCELLANEOUS COMMUNICATION SERVICES (1.2%)
(a)3,400 AirTouch Communications, Inc. .................... 141
(a)3,700 Metromedia Fiber Network, Inc., Class A........... 61
(a)1,800 RSL Communications Ltd., Class A.................. 40
(a)3,200 Teligent, Inc., Class A........................... 79
(a)1,800 Telstra Corp., Ltd. ADR........................... 75
----------
396
----------
RADIO/TELEPHONE COMMUNICATIONS (1.8%)
(a)14,800 Mobile Telecommunications Technologies Corp. ..... 325
(a)13,000 Proxim, Inc. ..................................... 147
(a)6,400 WinStar Communications, Inc. ..................... 160
----------
632
----------
TELEPHONE COMMUNICATIONS (2.0%)
(a)4,600 American Communications Services, Inc. ........... 59
(a)4,100 China Telecom (Hong Kong) Ltd. ADR................ 138
(a)3,200 France Telecom ADR................................ 115
(a)2,400 ICG Communications, Inc. ......................... 65
(a)2,200 Matav Rt. ADR..................................... 57
1,400 Sprint Corp. ..................................... 82
(a)3,200 Teleport Communications Group, Inc., Class A...... 176
----------
692
----------
TOTAL COMMUNICATION SERVICES................................ 2,049
----------
DIVERSIFIED TECHNOLOGY (1.3%)
4,900 CBS Corp. ........................................ 144
(a)4,100 ITI Education Corp. .............................. 25
(a)3,100 Tech Data Corp. .................................. 121
(a)13,500 Unisys Corp. ..................................... 187
----------
477
----------
OTHER TECHNOLOGY (32.7%)
BUSINESS SERVICES (6.5%)
(a)800 BISYS Group, Inc. ................................ 26
(a)2,700 CBT Group plc ADR................................. 222
(a)6,100 Data Processing Resources Corp. .................. 155
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Technology Portfolio
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
OTHER TECHNOLOGY (CONT.)
BUSINESS SERVICES (CONT.)
<TABLE>
<C> <S> <C>
(a)900 Dril-Quip, Inc. .................................. $ 32
1,900 ENSCO International, Inc. ........................ 64
(a)1,300 EVI, Inc. ........................................ 67
(a)100 Home Side, Inc. .................................. 3
(a)1,800 Patterson Energy, Inc. ........................... 70
6,800 Paychex, Inc. .................................... 344
(a)4,000 Precision Drilling Corp. ......................... 97
(a)100 Reading & Bates Corp. ............................ 4
(a)2,900 Robert Half International, Inc. .................. 116
(a)11,700 Romac International, Inc. ........................ 286
(a)5,100 SunGard Data Systems, Inc. ....................... 158
(a)7,800 TeleTech Holdings, Inc. .......................... 89
(a)9,700 USCS International, Inc. ......................... 165
(a)9,400 Whittman-Hart, Inc. .............................. 322
----------
2,220
----------
ELECTRONIC COMPUTERS (6.2%)
4,385 Compaq Computer Corp. ............................ 248
(a)8,000 Dell Computer Corp. .............................. 672
11,500 International Business Machines Corp. ............ 1,202
----------
2,122
----------
MISCELLANEOUS TECHNOLOGY (0.5%)
(a)7,400 Electronics For Imaging, Inc. .................... 123
(a)2,100 Orbital Sciences Corp. ........................... 63
----------
186
----------
PERSONAL SERVICE (4.4%)
(a)3,400 Amazon.com, Inc. ................................. 205
(a)11,100 America Online, Inc. ............................. 990
(a)800 At Home Corp., Series A........................... 20
(a)1,900 Cendant Corp. .................................... 65
(a)1,400 Vocaltec Communications Ltd. ..................... 29
(a)2,600 Yahoo!, Inc. ..................................... 180
----------
1,489
----------
SEMICONDUCTORS & RELATED SERVICES (15.1%)
(a)3,300 Altera Corp. ..................................... 109
(a)5,200 Applied Materials, Inc. .......................... 157
(a)8,400 Intel Corp. ...................................... 590
(a)4,800 Lattice Semiconductor Corp. ...................... 227
(a)10,000 Level One Communications, Inc. ................... 283
23,500 Linear Technology Corp. .......................... 1,354
(a)45,200 Maxim Integrated Products, Inc. .................. 1,559
(a)4,000 Rambus, Inc. ..................................... 183
(a)700 Semtech Corp. .................................... 27
(a)12,000 TranSwitch Corp. ................................. 90
(a)5,900 Vitesse Semiconductor Corp. ...................... 223
(a)10,200 Xilinx, Inc. ..................................... 358
----------
5,160
----------
TOTAL OTHER TECHNOLOGY...................................... 11,177
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
SOFTWARE (20.6%)
COMMUNICATIONS SOFTWARE (1.0%)
(a)41,600 Executone Information Systems, Inc. .............. $ 91
(a)8,300 Infoseek Corp. ................................... 89
2,400 Inter-Tel, Inc. .................................. 47
(a)5,000 Netscape Communications Corp. .................... 122
----------
349
----------
MANAGEMENT CONSULTING SERVICES(1.2%)
(a)6,300 Intersolv, Inc. .................................. 127
(a)4,900 Volt Information Sciences, Inc. .................. 264
----------
391
----------
MISCELLANEOUS SOFTWARE (1.2%)
(a)4,800 Cadence Design Systems, Inc. ..................... 117
(a)1,000 Manugistics Group, Inc. .......................... 45
(a)8,600 Progress Software Corp. .......................... 186
(a)4,100 RealNetworks, Inc. ............................... 57
----------
405
----------
PREPACKAGED SOFTWARE (17.2%)
4,400 Autodesk, Inc. ................................... 163
(a)7,400 Broderbund Software, Inc. ........................ 190
(a)5,700 Citrix Systems, Inc. ............................. 433
8,700 Computer Associates International, Inc. .......... 460
(a)18,900 Compuware Corp. .................................. 605
(a)4,700 Electronic Arts, Inc. ............................ 178
(a)10,300 FlexiInternational Software, Inc. ................ 160
(a)600 Keane, Inc. ...................................... 24
(a)1,900 Learning Company, Inc. ........................... 31
(a)14,700 Microsoft Corp. .................................. 1,900
(a)13,000 Oracle System, Corp. ............................. 290
(a)5,000 PSW Technologies, Inc. ........................... 72
(a)27,100 Peoplesoft, Inc. ................................. 1,057
(a)6,000 Quadramed Corp. .................................. 165
(a)3,200 Symantec Corp. ................................... 70
(a)2,000 Viasoft, Inc. .................................... 84
----------
5,882
----------
TOTAL SOFTWARE.............................................. 7,027
----------
TOTAL COMMON STOCKS (Cost $31,703)............................ 31,599
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
<C> <S> <C>
- - ----------
PURCHASED CALL OPTIONS (0.5%)
COMMUNICATION EQUIPMENT (0.2%)
COMPUTER INTEGRATED SYSTEMS DESIGN (0.1%)
(a)9,500 3COM Corp., expiring 1/17/98, strike price
U.S.$80......................................... --
(a)7,000 Bay Networks, Inc., expiring 2/21/98, strike price
U.S.$30......................................... 6
(a)9,900 Cisco Systems, Inc., expiring 1/17/98, strike
price U.S.$56.625............................... 16
(a)1,500 Cisco Systems, Inc., expiring 1/17/98, strike
price U.S.$53.375............................... 5
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Technology Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
CONTRACTS (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
COMMUNICATION EQUIPMENT (CONT.)
COMPUTER INTEGRATED SYSTEMS DESIGN (CONT.)
<TABLE>
<C> <S> <C>
(a)6,000 Cisco Systems, Inc., expiring 1/17/98, strike
price U.S.$60................................... $ 3
(a)10,000 Secure Computing Corp., expiring 1/17/98, strike
price U.S.$12.50................................ 13
----------
43
----------
TELEPHONE & TELEGRAPH APPARATUS (0.1%)
(a)6,500 Tellabs, Inc., expiring 1/17/98, strike price
U.S.$55......................................... 11
(a)2,000 Tellabs, Inc., expiring 3/21/98, strike price
U.S.$60......................................... 5
----------
16
----------
TOTAL COMMUNICATION EQUIPMENT............................... 59
----------
COMMUNICATION SERVICES (0.0%)
COMPUTER PROCESSING & DATA PREPARATION (0.0%)
(a)1,400 Applied Magnetics Corp., expiring 4/18/98, strike
price U.S.$20................................... 12
----------
OTHER TECHNOLOGY (0.2%)
ELECTRONIC COMPUTERS (0.0%)
(a)3,000 International Business Machines Corp., expiring
1/17/98, strike price U.S.$105.................. 9
(a)1,000 International Business Machines Corp., expiring
1/17/98, strike price U.S.$120.................. --
----------
9
----------
SEMICONDUCTORS & RELATED SERVICES (0.2%)
(a)13,600 Altera Corp., expiring 1/17/98, strike price
U.S.$35......................................... 16
(a)1,000 Intel Corp., expiring 1/17/98, strike price
U.S.$90......................................... --
(a)3,300 Linear Technology Corp., expiring 1/17/98, strike
price U.S.$60................................... 8
(a)1,000 Linear Technology Corp., expiring 2/21/98, strike
price U.S.$70................................... 1
(a)6,200 Maxim Integrated Products, Inc., expiring 1/17/98,
strike price U.S.$32.50......................... 17
(a)8,000 Maxim Intergrated Products, Inc., expiring
2/21/98, strike price U.S.$35................... 23
(a)2,800 Xilinx, Inc., expiring 1/17/98, strike price
U.S.$35......................................... 8
----------
73
----------
TOTAL OTHER TECHNOLOGY...................................... 82
----------
<CAPTION>
NO. OF VALUE
CONTRACTS (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
SOFTWARE (0.1%)
PREPACKAGED SOFTWARE (0.1%)
(a)1,000 Microsoft Corp., expiring 1/17/98, strike price
U.S.$170........................................ $ --
(a)2,000 Microsoft Corp., expiring 1/17/98, strike price
U.S.$145........................................ 1
(a)4,000 Peoplesoft, Inc., expiring 1/17/98, strike price
U.S.$35......................................... 17
----------
18
----------
TOTAL PURCHASED OPTIONS (Cost $204)........................... 171
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- - ----------
WARRANTS (0.4%)
OTHER TECHNOLOGY (0.4%)
SEMICONDUCTORS & RELATED SERVICES (0.4%)
3,000 Intel Corp., expiring 3/14/98 (Cost $150)......... 149
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (93.3%) (Cost $32,057).................... 31,919
----------
OTHER ASSETS (18.8%)
Cash.......................................... $ 1,382
Receivable for Investments Sold............... 2,252
Receivable for Securities Sold Short.......... 921
Dividends Receivable.......................... 724
Receivable due from Broker.................... 537
Receivable for Portfolio Shares Sold.......... 128
Other......................................... 456 6,400
----------
LIABILITIES (-12.1%)
Payable for Investments Purchased............. (2,804)
Securities Sold Short, at Value (Proceeds
$921)....................................... (774)
Investment Advisory Fees Payable.............. (21)
Custodian Fees Payable........................ (25)
Administrative Fees Payable................... (4)
Directors' Fees and Expenses Payable.......... (4)
Distribution Fees Payable..................... (1)
Other Liabilities............................. (504) (4,137)
---------- ----------
NET ASSETS (100%)........................................... $ 34,182
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 36,419
Distributions in Excess of Net Investment Income.............. (121)
Accumulated Net Realized Loss................................. (2,125)
Unrealized Appreciation on Investments and Securities Sold
Short....................................................... 9
----------
NET ASSETS.................................................... $ 34,182
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Technology Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
------------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $31,788
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,709,977 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.73
----------
----------
CLASS B:
- - --------------------------------------------------------------
NET ASSETS.................................................... $2,394
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 204,379 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.72
----------
----------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
4,000 3Com Corp...................................... $ 140
2,000 Adobe Systems, Inc............................. 82
9,900 Applied Magnetics Corp......................... 110
3,500 Crystal System Solutions Ltd................... 89
5,800 DSC Communications Corp........................ 139
3,600 Hutchinson Technology, Inc..................... 79
3,400 LSI Logic Corp................................. 67
3,400 Ultratech Stepper, Inc......................... 68
-----
(Total Proceeds $921)...................................... $ 774
-----
-----
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Technology Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Capital Goods--Construction 5.2 %
Consumer--Cyclical 10.2 %
Consumer--Staples 21.9 %
Diversified 2.9 %
Energy 11.3 %
Finance 16.0 %
Materials 5.1 %
Services 2.4 %
Technology 22.4 %
Other 2.6 %
</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. EQUITY PLUS--CLASS U.S. EQUITY PLUS--CLASS
A B S&P 500 INDEX(1)
<S> <C> <C> <C>
7/13/97* $500,000 $100,000 $500,000
12/31/97 519,700 103,930 512,200
* 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 performance of Class B shares will vary based
upon the different fees assessed to that class. The S&P 500 Index value at
December 31, 1997 assumes a minimum initial investment of $500,000; if a minimum
initial investment of $100,000 (the minimum investment for Class B shares) is
assumed, the value at December 31, 1997 would be $102,440.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- - -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... 3.94%
PORTFOLIO -- CLASS B(3)..................... 3.93
INDEX....................................... 2.44
</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 commenced operations on July 31, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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. Equity Plus Portfolio seeks long term capital appreciation by investing
primarily in equity securities of issuers in the S&P 500 Index. Equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks.
The Portfolio investment process utilizes systematic quantitative and
qualitative inputs. The quantitative inputs include several proprietary
valuation and momentum models, as well as a market conditions model. The
qualitative inputs include stock ratings from Morgan Stanley's Equity Research
analysts. These inputs are combined in a systematic way to produce an
attractiveness measure for every stock in the Portfolio investment universe. The
Portfolio is designed to have consistently higher returns than the S&P 500 with
a volatility of portfolio return that is approximately equal to that of the S&P
500. This is sought by using a multi-factor risk model for building the
Portfolio and by maintaining sector neutrality with respect to the S&P 500
Index. The active exposure to any single company is also kept to a modest level.
For the period from inception on July 31, 1997 to December 31, 1997, the
Portfolio had a total return of 3.94% for Class A shares and 3.93% for Class B
shares compared to 2.44% for the S&P 500 Index (the "Index").
After an exceptional performance during the first three quarters of 1997, U.S.
equity markets drifted sideways during the final three months. As investors
began to focus on the potential consequences of disinflation (and possibly even
deflation), stock and bonds began to de-couple. Bond yields eased throughout the
quarter as favorable price data continued to emerge.
The Portfolio is sector neutral to the S&P 500, so sector weights had no impact
on incremental performance. The performance of a sector in the Portfolio is
completely driven by stock selection (and relative weights) within the sector.
Based on stock selection, our best performing sectors were technology, capital
goods, consumer non-durables and basic industries. Our worst performing sectors
were consumer services, banking, telephones and airlines.
Virtually all of the differential performance between the Portfolio and the
benchmark came from active stock selection. The five largest contributions to
our performance relative to the S&P 500 came from the following stocks: 1)
Unicom, a producer and
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
distributor of electricity in the Mid-West, rose by 33% benefiting from news
about pending legislation that could result in significant cost savings and more
stable revenues in the future; 2) Sara Lee, a worldwide producer and marketer of
consumer products, rose 9% during the period responding well to the first phase
of its resturcturing programs and the reiteration of a plan to buyback $3
billion in stock. 3) Exxon, a diversified petroleum company, underperformed the
market as a result of concerns over increasing supplies of crude weighed on the
shares of major oil companies. An underweight position in Exxon contributed to
our performance. 4) Likewise, software supplier Oracle had significant troubles
during the quarter. Our underweight position in the stock was rewarded as
Oracle's shares plunged by 39% on news of weak database software sales and
failing expansion plans. 5) Eastern Enterprises, a distributor of natural gas in
New England, returned 22%. Investor interest in the sector was heightened during
the quarter as a result of takeover activity, very attractive dividend yields
and the prospect of stable returns -- a welcomed safe haven given the
uncertainties currently facing many other sectors.
On the other side, the five most negative contributions to our performance
relative to the S&P 500 came from the following stocks. 1) Amoco, a diversified
petroleum company, registered sluggish performance falling by 11% due to falling
refining margins and concerns about increasing global crude supplies. 2) USX -
US Steel, an integrated steel producer, declined by 9%. Robust demand for steel
in the U.S. was not enough to support its shares in the face of tumbling
flat-rolled prices and the threat of increased competition from Asia due to
currency realignments. 3) Phelps Dodge, a major North American producer of
copper, fell by 19%. With supply exceeding demand for copper, near-term earnings
prospects crumbled. 4) International financial service provider Chase Manhattan
Bank slipped by 7% as a flattening term structure of interest rates and Emerging
Market trading missteps hurt profit margins. 5) Entertainment giant Disney
enjoyed a strong quarter. An underweight position in this stock proved painful
as its share price climbed by 23% on the success of holiday films and optimism
about 1998 projects.
Some concluding thoughts... it is difficult to envision an economic scenario
under which U.S. stocks could put in another year like 1997. A "low interest
rate/low inflation" theme has clearly materialized. Low interest rates are
normally good news for stocks. However, the low inflation twist to the theme
makes the environment more complex. There is considerable uncertainty about what
disinflation will mean for the growth rate of corporate earnings in 1998. The
current woes in Asia only serve to further cloud the picture. As investors begin
to reign in their expectations regarding growth, stocks may be hard-pressed to
achieve any significant overall gains. The good news is that the U.S. economy
remains healthy and employment gains have been robust. This positive tone may
help to offset some of the negative influences in the months ahead.
Narayan Ramachandran
PORTFOLIO MANAGER
Eugene Flood
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMON STOCKS (97.4%)
CAPITAL GOODS-CONSTRUCTION (5.2%)
AEROSPACE & DEFENSE (1.8%)
1,200 Boeing Co. ....................................... $ 59
1,100 EG&G, Inc. ....................................... 23
100 General Dynamics Corp. ........................... 9
1,100 Goodrich (BF) Co. ................................ 46
600 Lockheed Martin Corp. ............................ 59
500 Northrop Grumman Corp. ........................... 57
96 Raytheon Co., Class A............................. 5
1,100 Raytheon Co., Class B............................. 56
800 United Technologies Corp. ........................ 58
----------
372
----------
BUILDING & CONSTRUCTION (0.8%)
2,400 Armstrong World Industries, Inc. ................. 179
----------
ELECTRICAL EQUIPMENT (0.0%)
100 Cooper Industries, Inc. .......................... 5
----------
MACHINERY (2.6%)
600 Briggs & Stratton Corp. .......................... 29
2,700 Caterpillar, Inc. ................................ 131
600 Cincinnati Milacron, Inc. ........................ 16
400 Cummins Engine Co., Inc. ......................... 23
2,500 Deere & Co. ...................................... 146
4,200 Dresser Industries, Inc. ......................... 176
450 Parker-Hannifin Corp. ............................ 21
----------
542
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 1,098
----------
CONSUMER-CYCLICAL (10.2%)
AUTOMOTIVE (2.2%)
2,600 Chrysler Corp. ................................... 91
200 Dana Corp. ....................................... 10
4,300 Ford Motor Co. ................................... 209
1,500 General Motors Corp. ............................. 91
1,100 Goodyear Tire & Rubber Co. ....................... 70
66 Meritor Automotive, Inc. ......................... 1
----------
472
----------
FOOD SERVICE & LODGING (0.2%)
1,200 Hilton Hotels Corp. .............................. 36
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.2%)
600 Maytag Corp. ..................................... 22
400 Springs Industries, Inc., Class A................. 21
100 Tupperware Corp. ................................. 3
----------
46
----------
LEISURE RELATED (0.1%)
200 The Walt Disney Co. .............................. 20
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
PRINTING & PUBLISHING (1.2%)
800 American Greetings Corp., Class A................. $ 31
3,000 Gannett Co., Inc. ................................ 185
400 New York Times Co., Class A....................... 26
----------
242
----------
RETAIL-GENERAL (6.3%)
2,000 American Stores Co. .............................. 41
4,100 Dayton Hudson Corp. .............................. 277
900 Gap, Inc. ........................................ 32
700 Harcourt General, Inc. ........................... 38
1,500 Home Depot, Inc. ................................. 88
300 Longs Drug Stores, Inc. .......................... 10
1,500 May Department Stores, Co. ....................... 79
1,400 Mercantile Stores Co. ............................ 85
400 Pep Boys-Manny, Moe & Jack........................ 10
800 Rite Aid Corp. ................................... 47
3,000 Sears Roebuck & Co. .............................. 136
2,800 SUPERVALU, Inc. .................................. 117
4,000 TJX Cos., Inc. ................................... 138
6,000 Wal-Mart Stores, Inc. ............................ 237
----------
1,335
----------
TOTAL CONSUMER-CYCLICAL..................................... 2,151
----------
CONSUMER-STAPLES (21.9%)
BEVERAGES & TOBACCO (6.2%)
1,200 Brown-Forman Corp., Class B....................... 66
7,200 Coca Cola Co. .................................... 480
700 Coors (Adolph), Inc., Class B..................... 23
900 Fortune Brands, Inc. ............................. 33
3,000 Great Atlantic & Pacific Tea Co., Inc. ........... 89
10,400 Philip Morris Cos., Inc. ......................... 471
3,800 UST, Inc. ........................................ 140
----------
1,302
----------
FOOD (3.0%)
300 Campbell Soup Co. ................................ 17
800 ConAgra, Inc. .................................... 26
100 CPC International, Inc. .......................... 11
10,100 Sara Lee Corp. ................................... 569
----------
623
----------
HEALTH CARE SUPPLIES & SERVICE (10.4%)
100 Abbott Laboratories............................... 7
3,900 American Home Products Corp. ..................... 298
1,200 Baxter International, Inc. ....................... 61
2,700 Becton Dickinson & Co. ........................... 135
1,400 Biomet, Inc. ..................................... 36
4,500 Bristol-Myers Squibb Co. ......................... 426
5,300 Columbia/HCA Healthcare Corp. .................... 157
2,000 Eli Lilly & Co. .................................. 139
4,400 Johnson & Johnson................................. 290
1,200 Mallinckrodt, Inc. ............................... 46
700 Manor Care, Inc. ................................. 25
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
CONSUMER-STAPLES (CONT.)
HEALTH CARE SUPPLIES & SERVICE (CONT.)
<TABLE>
<C> <S> <C>
200 Medtronic, Inc. .................................. $ 10
3,600 Merck & Co., Inc. ................................ 383
2,100 Pfizer, Inc. ..................................... 157
300 Shared Medical Systems Corp. ..................... 20
----------
2,190
----------
PERSONAL CARE PRODUCTS (2.3%)
400 Avon Products, Inc. .............................. 25
600 Bausch & Lomb, Inc. .............................. 24
100 International Flavors & Fragrances, Inc. ......... 5
5,200 Procter & Gamble Co. ............................. 415
----------
469
----------
TEXTILES & APPAREL (0.0%)
300 Russell Corp. .................................... 8
----------
TOTAL CONSUMER-STAPLES...................................... 4,592
----------
DIVERSIFIED (2.9%)
400 Eaton Corp. ...................................... 36
1,300 ITT Industries, Inc. ............................. 41
100 Johnson Controls, Inc. ........................... 5
1,500 Loews Corp. ...................................... 159
1,300 National Service Industries, Inc. ................ 64
2,200 Raychem, Corp. ................................... 95
1,600 Unilever NV....................................... 100
3,800 Whitman Corp. .................................... 99
----------
TOTAL DIVERSIFIED........................................... 599
----------
ENERGY (11.3%)
COAL, OIL & GAS (6.8%)
4,200 Amoco Corp. ...................................... 358
800 Burlington Resources, Inc. ....................... 36
4,200 Chevron Corp. .................................... 323
600 Coastal Corp. .................................... 37
3,000 Mobil Corp. ...................................... 217
100 Occidental Petroleum Corp. ....................... 3
300 Oneok, Inc. ...................................... 12
5,900 Phillips Petroleum Co. ........................... 287
1,200 Sun Co., Inc. .................................... 50
3,400 USX-Marathon Group................................ 115
----------
1,438
----------
UTILITIES (4.5%)
1,500 Central & South West Corp. ....................... 41
3,700 Eastern Enterprises............................... 167
6,000 Entergy Corp. .................................... 180
1,500 NICOR, Inc. ...................................... 63
1,600 PECO Energy Co. .................................. 39
900 Public Service Enterprise Group, Inc. ............ 28
5,800 Southern Co. ..................................... 150
2,100 Texas Utilities Co. .............................. 87
5,900 Unicom Corp. ..................................... 181
----------
936
----------
TOTAL ENERGY................................................ 2,374
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
FINANCE (16.0%)
BANKING (8.3%)
200 Banc One Corp. ................................... $ 11
1,500 Bank of New York Co., Inc. ....................... 87
3,000 BankAmerica Corp. ................................ 219
900 BankBoston Corp. ................................. 85
100 Barnett Banks, Inc. .............................. 7
3,600 Chase Manhattan Corp. ............................ 394
1,900 Citicorp.......................................... 240
1,400 Comerica, Inc. ................................... 126
3,300 First Union Corp. ................................ 169
2,200 KeyCorp........................................... 156
1,300 National City Corp. .............................. 85
2,100 NationsBank Corp. ................................ 128
800 Norwest Corp. .................................... 31
----------
1,738
----------
FINANCIAL SERVICES (2.5%)
1,600 American Express Co. ............................. 143
900 Federal Home Loan Mortgage Corp. ................. 38
2,900 Federal National Mortgage Association............. 165
1,600 Hartford Financial Service Group, Inc. ........... 149
600 Merrill Lynch & Co. .............................. 44
----------
539
----------
INSURANCE (5.2%)
2,100 Allstate Corp. ................................... 191
3,100 American International Group, Inc. ............... 337
600 Chubb Corp. ...................................... 45
1,500 Lincoln National Corp. ........................... 117
1,600 MBIA, Inc. ....................................... 107
5,359 Travelers Group, Inc. ............................ 289
----------
1,086
----------
TOTAL FINANCE............................................... 3,363
----------
MATERIALS (5.1%)
CHEMICALS (3.2%)
1,000 Air Products & Chemicals, Inc. ................... 82
700 Dow Chemical Co. ................................. 71
3,400 E.I. Du Pont De Nemours & Co. .................... 204
2,700 Engelhard Corp. .................................. 47
900 Hercules, Inc. ................................... 45
300 Millipore, Corp. ................................. 10
1,700 Monsanto Co. ..................................... 71
200 Perkin-Elmer Corp. ............................... 14
500 Rohm & Haas Co. .................................. 48
340 Solutia, Inc. .................................... 9
1,600 Union Carbide Corp. .............................. 69
----------
670
----------
METALS (1.9%)
2,000 Phelps Dodge Corp. ............................... 124
8,500 USX - U.S. Steel Group, Inc. ..................... 266
----------
390
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
PACKAGING & CONTAINERS (0.0%)
200 Tyco International Ltd. .......................... $ 9
----------
TOTAL MATERIALS............................................. 1,069
----------
SERVICES (2.4%)
BUSINESS SERVICES (1.3%)
600 Automatic Data Processing, Inc. .................. 37
1,000 Deluxe Corp. ..................................... 34
800 Eastman Kodak Co. ................................ 49
(a)500 Federal Express Corp. ............................ 31
200 John H. Harland Co. .............................. 4
4,700 Jostens, Inc. .................................... 108
400 Safety-Kleen Corp. ............................... 11
----------
274
----------
PROFESSIONAL SERVICES (0.1%)
500 Service Corp. International....................... 18
----------
TRANSPORTATION (1.0%)
600 Burlington Northern Santa Fe Corp. ............... 56
1,500 CSX Corp. ........................................ 81
500 Delta Air Lines, Inc. ............................ 60
150 Southwest Airlines, Co. .......................... 4
300 Union Pacific Corp. .............................. 19
----------
220
----------
TOTAL SERVICES.............................................. 512
----------
TECHNOLOGY (22.4%)
COMPUTERS (9.1%)
100 Adobe Systems, Inc. .............................. 4
(a)4,350 Cisco Systems, Inc. .............................. 242
3,200 Compaq Computer Corp. ............................ 181
3,150 Computer Associates International, Inc. .......... 167
(a)300 Dell Computer Corp. .............................. 25
(a)2,400 EMC Corp. ........................................ 66
4,500 Intel Corp. ...................................... 316
3,400 International Business Machines Corp. ............ 356
(a)3,600 Microsoft Corp. .................................. 465
(a)900 Oracle System, Corp. ............................. 20
(a)2,000 Sun Microsystems, Inc. ........................... 80
----------
1,922
----------
ELECTRONICS (4.6%)
100 AMP, Inc. ........................................ 4
(a)400 Applied Materials, Inc. .......................... 12
10,900 General Electric Co. ............................. 800
(a)400 Micron Technology, Inc. .......................... 10
400 Motorola, Inc. ................................... 23
200 Rockwell International Corp. ..................... 10
900 Scientific-Atlanta, Inc. ......................... 15
1,350 Tektronix, Inc. .................................. 53
200 Texas Instruments, Inc. .......................... 9
500 Textron, Inc. .................................... 31
----------
967
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
OFFICE EQUIPMENT (1.1%)
2,700 Hewlett Packard Co. .............................. $ 169
900 Xerox Corp. ...................................... 66
----------
235
----------
TELECOMMUNICATIONS (7.6%)
(a)1,600 3Com Corp. ....................................... 56
2,400 Alltel Corp. ..................................... 99
200 Ameritech Corp. .................................. 16
5,300 AT&T Corp. ....................................... 325
3,900 Bell Atlantic Corp. .............................. 355
600 Bellsouth Corp. .................................. 34
5,000 GTE Corp. ........................................ 261
3,200 Harris Corp. ..................................... 147
700 Lucent Technologies, Inc. ........................ 56
100 MCI Communications Corp. ......................... 4
600 SBC Communications, Inc. ......................... 44
1,800 Sprint Corp. ..................................... 105
1,600 U.S. West Communications Group.................... 72
(a)400 WorldCom, Inc. ................................... 12
----------
1,586
----------
TOTAL TECHNOLOGY............................................ 4,710
----------
TOTAL COMMON STOCKS (Cost $19,869)............................ 20,468
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.4%) (Cost $19,869)........................ 20,468
--------
OTHER ASSETS (2.7%)
Cash.............................................. $ 81
Receivable for Portfolio Shares Sold.............. 380
Due from Adviser.................................. 74
Dividends Receivable.............................. 36
Other............................................. 6 577
-----
LIABILITIES (-0.1%)
Administrative Fees Payable....................... (3)
Custodian Fees Payable............................ (1)
Directors' Fees and Expenses Payable.............. (1)
Other Liabilities................................. (24) (29)
----- --------
NET ASSETS (100%)............................................... $ 21,016
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................. $ 20,403
Undistributed Net Investment Income............................. 3
Accumulated Net Realized Gain................................... 11
Unrealized Appreciation on Investments.......................... 599
--------
NET ASSETS...................................................... $ 21,016
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- - --------------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - ----------------------------------------------------------------
NET ASSETS...................................................... $20,914
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,029,088 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $10.31
--------
--------
CLASS B:
- - ----------------------------------------------------------------
NET ASSETS...................................................... $102
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,893 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $10.31
--------
--------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Apartment 17.6 %
Diversified 2.7 %
Healthcare 6.2 %
Land 1.8 %
Lodging/Leisure 10.0 %
Manufactured Home 6.0 %
Office and
Industrial 28.9 %
Retail 18.2 %
Self Storage 3.2 %
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>
U.S. REAL ESTATE
PORTFOLIO--CLASS A NAREIT INDEX(1)
<S> <C> <C>
2/24/95* $500,000 $500,000
12/31/95 605,350 572,300
12/31/96 844,826 780,617
12/31/97 1,078,167 939,004
* 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) EQUITY INDEX(1)
- - ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 27.62% 30.92%
PORTFOLIO -- CLASS B............. 27.21 32.66
INDEX -- CLASS A................. 20.29 24.58
INDEX -- CLASS B................. 20.29 27.63
</TABLE>
1. The NARIET 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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 year ended December 31, 1997, the Portfolio had a total return of 27.62%
for the Class A shares and 27.21% for the Class B shares, compared to a total
return of 20.29% for the National Association of Real Estate Investment Trusts
(NAREIT) Equity Index (the "Index").
From inception on February 24, 1995 through December 31, 1997, the average
annual total return of Class A was 30.92% compared to 24.58% for the Index. From
inception on January 2, 1996 through December 31, 1997, the average annual total
return of Class B was 32.66% compared to 27.63% for the Index.
This past year was a very exciting one in the REIT industry and can
appropriately be characterized as a year in which REITs became much more widely
accepted in the investment community. The largest reasons for this acceptance
have been the tremendous growth of the industry, the continued strong
performance of the sector, and, potentially of equal importance, positive
attention from the business media.
Total equity capitalization of the REIT industry grew to $145 billion, which
represents a 65% increase over the previous year. The year featured a record
level of new equity issuance of approximately $23 billion. This amount of
issuance exceeded the past three years combined and was double the previous
record year of 1993 in which the market had been dominated by IPOs. Although the
majority of the issuance was for follow-on offerings by existing REITs, this
year featured a reopening of the window for IPOs with approximately $3 billion
raised in 12 separate transactions. Noteworthy IPOs included several regional
office companies: Boston Properties with a focus in the Northeast, Tower Realty
and S.L. Green Realty both with a focus on the Manhattan market and Prime Group
focused on Chicago. Potentially of greater interest were the IPOs of Equity
Office Properties and AMB Property Corporation, which involved essentially the
conversion of a pension fund advisory business to a REIT. (It is noteworthy that
the office and industrial sectors accounted for almost one half of the total
equity issuance.) We expect equity
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
issuance to continue at a high rate albeit lower than 1997's pace. We believe
that given current valuations we will continue to see a modest level of IPOs
both from regional operators and from pension fund advisors.
In 1997, we witnessed the continuation of the securitization of real estate
assets. For the private real estate companies in general, and specifically for
those active in the office and industrial sectors, there appeared to be a bit of
a frenzy in which these companies debated proposals to sell their assets, merge
into public companies or proceed with their own IPO. The growth described above
continues the evolution of properties moving from private ownership into the
publicly-listed securities arena. Beyond private real estate companies, the
other large owners of institutional real estate in the U.S. are pension funds.
This past year a number of significant events occurred to indicate that these
pension-controlled assets will also continue to move into the hands of public
companies. They include the strategy of swapping properties for shares of a
public company as well as pension fund advisors rolling-up their real estate
business and converting into public REITs, thus providing their current pension
fund clients with shares in a public company as opposed to interests in a
commingled fund which owns assets.
Participants in the REIT industry have speculated on the timing of a merger wave
as the public real estate market matures beyond its initial proliferation of
IPOs. This past year the merger wave appears to have officially commenced. The
groundbreaking deal was the friendly and surprising merger between Equity Office
Properties (the nation's largest office REIT) with Beacon Properties (Equity's
largest national rival). Generally, the majority of the other merger deals
involved a process of companies expanding to become super-regional or national
players in their sector. The multifamily sector produced the most mergers;
representative transactions include the mergers of Equity Residential Properties
(the nation's largest multifamily REIT) with both Wellsford Residential
(Southwest focus) and Evans Withycombe (regional player in Arizona), Post
Properties (Southeast focus) with Columbus Properties (Southwest focus), Camden
Property Trust (Sunbelt focus) both with Paragon Group (Sunbelt) and then Oasis
Residential (Las Vegas), and Apartment Investment and Management (national) with
Ambassador Apartments (Sunbelt).
The largest amount of media attention was generated by the two "paired share"
hotel REITs, Starwood Lodging and Patriot American Hospitality (by virtue of
being grandfathered by Congress these two REITs are able to both own their
hotels as well as the operating company which leases the hotels), with the
greatest excitement coming from the bidding war between Starwood and Hilton
Hotels to purchase ITT Corporation, a battle won by Starwood. Not wanting to be
outdone, Patriot American, which had previously announced a merger with Wyndham
Hotels, has entered into an agreement to purchase Interstate Hotels (both are
public C-corporation hotel companies).
The battle over ITT had a high profile, featuring daily articles in the Wall
Street Journal and other business publications. The maneuvering by Hilton
included an apparent dose of heavy campaigning in Washington D.C. to overturn
the grandfathered-paired share REIT structure. These events caused significant
discussion within the REIT industry and were highlighted at the annual October
NAREIT Conference in which experts discussed the potential for Congress to
tinker not only with the paired share structure but also with other aspects of
the REIT regulations.
This merger activity set off an interesting discussion involving whether it is
more favorable to own the consolidators or the targets. Given our approach of
selecting securities that offer the best value relative to their underlying net
property assets it is not surprising that we often own the targets. Although we
are not opposed to owning the consolidators, if they are in the Portfolio it
will likely be as a result of their underlying relative valuation as opposed to
a stated goal to be a large participant in a sector.
This past year also witnessed certain evolutions in the use of the REIT
structure. Several REITs have or plan to create a "paper-clipped structure"
which attempts to mirror the paired share structure through the creation of an
additional C-corporation with similar Boards and management. If investors owned
shares in both companies they would theoretically have the same effect as owning
a paired share REIT. In addition a number of companies, such as Vornado and
Crescent, have broken the basic mold of focusing on primarily one asset class.
We have also seen the REIT structure utilized for new asset types including
prisons and movie theaters. Finally there were announcements from a multitude of
REITs that have determined that they plan to supplement their current
- - --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
business plans by investing in or creating an opportunity fund. Clearly, with
healthy investor interest in REITs combined with REITs trading at significant
premiums to asset value, a number of companies are attempting to position
themselves as growth companies. While this objective may be achievable at this
stage of the real estate cycle, it may be far more difficult to implement this
type of approach to real estate investing and strategic direction in other
phases of the real estate cycle. We expect that as the current recovery in the
U.S. real estate market continues toward equilibrium we will see a decline in
the average premiums to net asset value at which the companies trade.
SECTOR REVIEW
With regard to the property markets, we are seeing evidence of an emerging
recovery in the area of new construction of real estate. Despite the disfavor
that real estate development faced in virtually every property sector in the
early 1990's, we have witnessed the financial community, once again, opening
their doors to finance development. Although the real estate market generally
remains in a favorable part of the cycle, this new supply causes us to raise the
following issues. In our modeling of companies we have implemented a negative
reversionary value calculation (to reflect our anticipation of declines in
occupancy caused by oversupply) in calculating the net asset value of companies.
This is particularly true in the limited service hotel business as well for
companies with a concentration of multifamily properties in the Southeast. In
addition we are monitoring a number of industrial markets for oversupply and the
potential for a decline in occupancy. Finally, although we have discussed our
rationale for overweighting the office and upscale full-service hotel markets
since inception of the Portfolio, we have begun shifting the Portfolio in order
to favor those companies with properties in the most supply constrained
locations, which include urban markets as well as those in California and the
Northeast.
The majority of sell-side analysts had proclaimed that 1997 would be a year for
stock-picking as opposed to sector allocation. At the beginning of the year we
declared that there was still room for outperformance through sector allocation.
The chart below outlines the total return performance of the various sectors in
the real estate industry for 1996 and 1997:
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
--------------------
SECTOR 1997 1996
- - ----------------------------------------- --------- ---------
<S> <C> <C>
Apartments 16.0% 28.4%
Manufactured Homes 18.1% 34.9%
Strip Centers 21.4% 32.8%
Regional Malls 13.7% 44.6%
Outlet Centers 0.1% 3.5%
Industrial 19.0% 37.0%
Office 29.0% 51.8%
Self Storage 3.4% 42.0%
Triple Net Lease 17.7% 30.8%
Hotel 30.1% 49.2%
Total 20.3% 35.3%
</TABLE>
Source: NAREIT
From a market perspective the office and hotel sectors provided the best
performance for the third year in a row. We believe that the increasing supply
in both these markets combined with the prevailing prices of the securities in
these sectors may cause overall returns in 1998 to be substantially less than in
previous years. The self storage and factory outlet sectors drastically
underperformed the Index for two very different reasons. The poor returns in the
factory outlet sector were the result of a continued deterioration in the
fundamentals in the market. Looking forward, we believe this market will
continue to trail due to continued weakness in occupancies and rents. The self
storage market, by contrast, is in equilibrium from a demand-supply perspective,
however share prices had run too far in 1996 and there was not any room for
appreciation in 1997. In 1998 we expect this market will likely return to be a
market performer. As we discussed last year we were unable to explain the
outperformance of the regional mall sector and despite improving occupancies and
reduced bankruptcies this sector trailed the Index in 1997. The other major
sectors in the Index provided returns similar to the market.
With respect to the performance of the Portfolio from a top down perspective, we
created outperformance through our overweighting of both the office and hotel
sectors and through the underweighting of the self storage and factory outlet
sectors. From a bottom up perspective we created significant outperformance from
our stock-picking in the apartment, manufactured home, industrial, and regional
mall sectors.
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
INVESTMENT STRATEGY
From an investment perspective we will continue to pursue a strategy of
overweighting those sectors that offer the best underlying real estate
fundamentals. We believe that in 1998 our overall sector weightings will
probably come closer to approximating market weightings. This is due to two
factors, the first and most relevant is that the relative weightings in the
Index have changed materially and are now more in line with our Portfolio. For
example we have maintained a hotel weighting ranging from 8 to 15% during the
last several years, in this time the Index weighting has progressed from 4% to a
likely weighting of 13 to 15% after the Starwood and Patriot transactions are
closed and incorporated into the Index. The other factor is that the underlying
valuations have generally adjusted to reflect the relative attractiveness of
each sector. We will continue to provide basic sector weighting guidelines but
it is important to note that we focus in great detail on sub-sectors within
those sectors. As outlined below, we describe which sub-sectors we intend to
overweight and underweight in the coming year:
<TABLE>
<CAPTION>
UNDERPERFORM MARKET PERFORMER OUTPERFORM
<S> <C> <C>
Class A Apartments Class B Apartment CBD Office
Sunbelt Self Storage Upscale Hotels
Economy Lodging Suburban Office Northeast/
Factory Outlets Industrial Pacific Coast
Class B Regional Class A Regional
Malls Malls
Midwest
Manufactured Housing
Strip Shopping
Centers
</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.
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
COMMON STOCKS (92.2%)
APARTMENT (17.6%)
33,800 Amli Residential Properties Trust REIT........... $ 752
314,200 Avalon Properties, Inc. REIT..................... 9,721
397,700 Bay Apartment Communities, Inc. REIT............. 15,510
424,200 Essex Property Trust, Inc. REIT.................. 14,847
59,700 Irvine Apartment Communities, Inc. REIT.......... 1,899
359,400 Oasis Residential, Inc. REIT..................... 8,019
457,510 Security Capital Atlantic, Inc. REIT............. 9,665
280,100 Walden Residential Properties, Inc. REIT......... 7,143
---------
67,556
---------
DIVERSIFIED (2.7%)
(a)654,898 Wellsford Real Properties, Inc. ................. 10,233
---------
HEALTHCARE (6.2%)
653,000 Nationwide Health Properties, Inc. REIT.......... 16,652
179,400 Omega Healthcare Investors, Inc. REIT............ 6,929
---------
23,581
---------
LAND (1.1%)
(a)589,684 Atlantic Gulf Communities Corp. ................. 2,654
(a)80,200 Catellus Development Corp. ...................... 1,604
---------
4,258
---------
LODGING/LEISURE (10.0%)
53,600 American General Hospitality Corp. REIT.......... 1,434
(a)308,300 CapStar Hotel Co. ............................... 10,579
(a)344,400 Extended Stay America, Inc. ..................... 4,283
(a)776,700 Host Marriott Corp. ............................. 15,243
(a)3,300 ITT Corp. ....................................... 274
(a)417,900 John Q Hammons Hotels, Inc., Class A............. 3,761
(a)126,300 Suburban Lodges of America, Inc. ................ 1,681
(a)34,400 Vail Resorts, Inc. .............................. 892
---------
38,147
---------
MANUFACTURED HOME (6.0%)
531,652 Chateau Communities, Inc. REIT................... 16,747
234,200 Manufactured Home Communities, Inc. REIT......... 6,323
---------
23,070
---------
OFFICE AND INDUSTRIAL (27.9%)
INDUSTRIAL (6.1%)
410,400 Bedford Property Investors, Inc. REIT............ 8,977
607,200 Pacific Gulf Properties, Inc. REIT............... 14,421
---------
23,398
---------
OFFICE (21.8%)
566,200 Arden Realty Group, Inc. ........................ 17,411
71,600 Brandywine Realty Trust REIT..................... 1,799
425,454 Brandywine Realty Trust REIT..................... 10,690
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - ------------------------------------------------------------------------------
512,000 Brookfield Properties Corp. ..................... $ 8,544
(a)263,200 Brookfield Properties Corp. (Installment
Receipts-second installment: CAD 6.50/Shr due
on 2/13/98).................................... 3,131
370,000 CarrAmerica Realty Corp. REIT.................... 11,724
153,427 Equity Office Properties Trust REIT.............. 4,843
610,000 Great Lakes, Inc. REIT........................... 11,857
337,800 Prime Group Realty Trust REIT.................... 6,840
78,500 Reckson Associates Realty Corp. ................. 1,992
194,182 Trizec Hahn Corp. REIT........................... 4,503
---------
83,334
---------
TOTAL OFFICE AND INDUSTRIAL...................................... 106,732
---------
RETAIL (17.5%)
REGIONAL MALL (10.3%)
367,500 CBL & Associates Properties, Inc. REIT........... 9,073
191,600 First Union Real Estate REIT..................... 3,114
1,597,800 Taubman Centers, Inc. REIT....................... 20,771
184,500 Urban Shopping Centers, Inc. REIT................ 6,434
---------
39,392
---------
SHOPPING CENTER (7.2%)
427,300 Burnham Pacific Property Trust REIT.............. 6,543
490,600 Federal Realty Investment Trust REIT............. 12,633
196,000 Pan Pacific Retail Properties, Inc. REIT......... 4,190
97,400 Pennsylvania REIT................................ 2,392
2,200 Ramco-Gershenson Properties Trust REIT........... 43
135,800 Western Investment Real Estate Trust REIT........ 1,867
---------
27,668
---------
TOTAL RETAIL..................................................... 67,060
---------
SELF STORAGE (3.2%)
89,000 Public Storage, Inc. ............................ 2,614
335,900 Shurgard Storage Centers, Inc., Series A REIT.... 9,741
---------
12,355
---------
TOTAL COMMON STOCKS (Cost $308,744)................................ 352,992
---------
PREFERRED STOCKS (0.7%)
OFFICE AND INDUSTRIAL (0.0%)
OFFICE (0.0%)
(d,e)33,150 Great Lakes, Inc. REIT........................... --
---------
RETAIL (0.7%)
SHOPPING CENTER (0.7%)
80,600 First Washington Realty Trust, Series A REIT..... 2,700
---------
TOTAL PREFERRED STOCKS (Cost $2,257)............................... 2,700
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - ------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS (0.5%)
LAND (0.5%)
(a)107,021 Atlantic Gulf Communities Corp. ................. $ 1,177
(a)75,765 Atlantic Gulf Communities Corp., Series B........ 833
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,828)................... 2,010
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- - --------------
WARRANTS (0.6%)
OFFICE AND INDUSTRIAL (0.4%)
INDUSTRIAL (0.4%)
(a)184,843 Meridian Industrial Trust, Inc. REIT, expiring
2/23/99........................................ 1,629
---------
LAND(0.2%)
(a,d)112,509 Atlantic Gulf Communities Corp., Class A,
expiring 6/24/04............................... 164
(a,d)112,509 Atlantic Gulf Communities Corp., Class B,
expiring 6/24/04............................... 164
(a,d)112,509 Atlantic Gulf Communities Corp., Class C,
expiring 6/24/04............................... 164
---------
492
---------
TOTAL WARRANTS (Cost $300)......................................... 2,121
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - --------------
CORPORATE BOND (0.6%)
OFFICE AND INDUSTRIAL (0.6%)
OFFICE (0.6%)
$ 2,934 Brookfield Properties Corp. 6.00%, 2/14/07
(Installment Receipts -- second installment:
CAD50.00 per debenture due at 2/13/98) (Cost
$1,209)........................................ 2,361
---------
SHORT-TERM INVESTMENT (5.8%)
REPURCHASE AGREEMENT (5.8%)
21,976 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at 21,983,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $22,424 (Cost
$21,976)....................................... 21,976
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- - ------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%) (Cost $336,314)........................ $ 384,160
----------
OTHER ASSETS (2.0%)
Receivable for Portfolio Shares Sold................ $ 4,255
Dividends Receivable................................ 2,512
Receivable for Investments Sold..................... 788
Interest Receivable................................. 57
Other............................................... 8 7,620
----------
LIABILITIES (-2.4%)
Payable for Investments Purchased................... (4,192)
Bank Overdraft...................................... (3,381)
Investment Advisory Fees Payable.................... (722)
Payable for Portfolio Shares Redeemed............... (537)
Administrative Fees Payable......................... (46)
Custodian Fees Payable.............................. (19)
Distribution Fees Payable........................... (12)
Directors' Fees and Expenses Payable................ (7)
Other Liabilities................................... (84) (9,000)
---------- ----------
NET ASSETS (100%)................................................. $ 382,780
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $ 328,570
Undistributed Net Investment Income............................... 38
Accumulated Net Realized Gain..................................... 6,327
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 47,845
----------
NET ASSETS........................................................ $ 382,780
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - ------------------------------------------------------------------
NET ASSETS........................................................ $361,549
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 23,506,716 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $15.38
----------
----------
CLASS B:
- - ------------------------------------------------------------------
NET ASSETS........................................................ $21,231
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,384,422 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $15.34
----------
----------
</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.
CAD -- Canadian Dollar
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 10.8 %
Banking 17.3 %
Capital Goods 5.9 %
Chemicals 1.9 %
Communications 6.9 %
Consumer--Durables 1.7 %
Consumer--Retail 6.2 %
Consumer--Staples 5.8 %
Energy 7.2 %
Financial-Diversified 3.1 %
Health Care 1.8 %
Insurance 6.8 %
Metals 1.7 %
Paper & Packaging 2.4 %
Services 1.6 %
Technology 4.6 %
Transportation 4.4 %
Utilities 7.8 %
Other 2.1 %
</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
A S&P 500 INDEX(1)
<S> <C> <C>
1/31/90* $500,000 $500,000
10/31/90 $557,460 $557,460
10/31/91 $604,880 $633,500
10/31/92 $638,765 $695,700
12/31/92 $735,485 $728,150
12/31/93 $735,485 $801,400
12/31/94 $726,000 $811,900
12/31/95 $970,589 $1,116,687
12/31/96 $1,162,086 $1,373,078
12/31/97 $1,501,415 $1,831,137
* 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
AND THE INDATA EQUITY-MEDIAN INDEX(1)
- - ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
FIVE SINCE
ONE YEAR YEARS INCEPTION
------------ ----------- ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A................ 29.20% 18.64% 14.89%
PORTFOLIO -- CLASS B................ 28.70 N/A 23.56
S&P 500 INDEX -- CLASS A............ 33.36 20.27 17.85
INDATA EQUITY-MEDIAN INDEX -- CLASS
A................................. 28.95 18.23 16.59
S&P 500 INDEX -- CLASS B............ 33.36 N/A 27.63
INDATA EQUITY-MEDIAN INDEX -- CLASS
B................................. 28.95 N/A 25.15
</TABLE>
1. The S&P 500 and the Indata Equity-Median Index are unmanaged indices of
common stocks. The Indata Equity-Median Index includes an average asset
allocation of 8.3% cash and 91.7% equity based on $491.5 billion in assets
among 979 portfolios for the period ended December 31, 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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 should outperform
the market over the long-term, and would 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.
For the year ended December 31, 1997, the Portfolio had a total return of 29.20%
for the Class A shares and 28.70% for the Class B shares, as compared to a total
return of 33.36% for the S&P 500 Index and 28.95% for the Indata Equity-Median
Index. For the five year period ended December 31, 1997, the average annual
total return of Class A was 18.64% compared to 20.27% for the S&P 500 Index and
18.23% for the Indata Equity-Median Index. From inception on January 31, 1990
through December 31, 1997, the average annual total return of Class A was 14.89%
compared to 17.85% for the S&P 500 Index and 16.59% for the Indata Equity-Median
Index. From inception a January 2, 1996 through December 31, 1997, the average
annual total return of Class B was 23.56% compared to 27.63% for the S&P 500
Index and 25.15% for the Indata Equity-Median Index.
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 BOOK
--------------- -------------
<S> <C> <C>
Portfolio 17.7x 3.3x
S&P 500 23.9x 5.5x
</TABLE>
In 1997, major market indices achieved strong double digit returns for the third
consecutive year. Large cap stocks once again significantly outperformed small
cap stocks as investors sought relative safety, liquidity and earnings
certainty. The larger cap Russell 1000 returned 32.86% compared to the smaller
cap Russell
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
2000 return of 22.28%. Growth stocks outperformed value, with the S&P/Barra
Growth Index up 36.42% for the year compared to 29.96% for the S&P/Barra Value
Index.
A progressively weak first quarter, followed by a solid rebound in the second
quarter resulted in an overall very strong first half. Major market indices
bottomed in April and then advanced to new highs through June. Sentiment in the
first quarter, including escalating fears of interest rate increases, and strong
economic growth of 4.9%, contrasted with subsiding fears of rate increases and a
moderating economy in the second quarter. The market continued to advance in the
third quarter, although it declined in August as concerns mounted about the
potential impact of the growing Southeast Asian financial crisis and currency
devaluations. These concerns intensified during the fourth quarter, as the
Southeast Asian turmoil spread to Hong Kong. As a result, the market declined
again in October, a month that saw the largest point decline ever in the Dow
Jones Industrial Average and a record volume day of 1.2 billion shares traded on
the NYSE. The market decline reflected investor concern that slowing economic
growth in Asia and imported Asian deflation would weaken U.S. economic and
earnings growth. Although the market recovered in November and December, profit
concerns overshadowed the very positive declining interest rate environment,
continued benign inflation and a moderating but growing economy.
The best performing sectors in the Portfolio for the year on an absolute basis
were financial services, up 54%, transportation, up 47%, and capital goods, up
46%. Underperforming sectors included shelter, down 8%, raw materials, up 1%,
and consumer non-durables, up 6%. Relative to the S&P 500, the Portfolio
benefited from being overweight in financial services and underweight in
consumer non-durables, while the underweight position in healthcare and in
consumer services hurt the Portfolio. The best performing stocks in 1997 were
First of America, up 98%, Mellon Bank, up 76%, Wal-Mart, up 75%, Ogden, up 57%,
and PNC Financial, also up 57%. Underperforming stocks included Fleming, down
22%, Louisiana-Pacific, down 8%, Woolworth, down 7%, and Phelps Dodge, down 5%.
The overweight position in financial services and stock selection within the
sector meaningfully contributed to performance in 1997. Banking stocks continued
to benefit from industry consolidation activity and the declining interest rate
environment, which more than offset concerns about the Asian crisis that arose
in the second half of the year. We pared back First of America after the company
agreed to merge with National City Corp. for a 36% premium. To maintain an
overweight position in banking, we added Fleet Financial and Banc One during the
year. We also increased our weighting in Sallie Mae. Shareholders of Sallie Mae
voted in new management during the year, and approved a reorganization plan to
restructure the company as a fully privatized corporation and eventually
eliminate its government charter. The company continues to generate strong
earnings growth, repurchase stock, and cut costs, and is well positioned to gain
market share in the education finance market.
We increased exposure in the transportation and aerospace/defense sectors due to
favorable industry trends and attractive valuations. The commercial airline
cycle has maintained its strength during the year, supported by the strong
economy, higher business and consumer travel spending and more rational fare
pricing. The commercial aircraft manufacturing cycle is also very favorable. To
participate, we added to the United Technologies position, and established
positions in Parker Hannifin and Continental Airlines. The aerospace/defense
sector is seeing the benefits from past industry consolidation. During the year,
we added Lockheed Martin and Litton Industries to the Portfolio. We also added
Gulfstream Aerospace, which is benefiting from a strong backlog in its business
jet aircraft manufacturing operations and a healthy annual stock repurchase
program.
In the capital goods sector, another strong performer in 1997, we added Case
Corp. in addition to holding Deere & Co. Strong farm income and secular
worldwide growth in agricultural spending have been the major themes supporting
the industry. Deere continues to generate strong cash flow and repurchase stock.
Case possesses significant margin expansion opportunities, and trades at
attractive valuation levels. We adjusted the consumer durable sector by selling
Chrysler and adding Meritor Automotive and Borg Warner Automotive. Both of these
stocks are trading below 11 times 1998 estimated earnings. We expect them to
benefit from the continued globalization and consolidation in the auto and truck
supplier market.
We pared back on consumer staples, primarily tobacco stocks, as a preliminary
industry litigation settlement was reached mid-year. While the settlement would
provide protection from certain lawsuits, the industry
- - --------------------------------------------------------------------------------
Value Equity Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
still faces a lengthy government approval process for the agreement during 1998.
Until the settlement nears approval, the stocks will most likely remain at
attractive valuations of 12-14 times 1998 estimated earnings. In the retail
sector, we added Wal Mart at the start of 1997, which finished the year as one
of the top performers in the Portfolio. Wal Mart began generating positive free
cash flow in 1996, and subsequently announced a 30% dividend increase and a
stock buyback program in early 1997. The company then delivered both sales and
earnings growth and consistency throughout the year. In the services and growth
sector, we sold the remaining position in Eastman Kodak. The company continues
to struggle with intensified film price competition, continuing losses from new
business initiatives and an inflated cost structure. We also sold McGraw Hill
and pared back on Ogden Corp. due to strong price appreciation.
Our exposure to the telecommunications industry increased throughout the year,
as we added to U.S. WEST Communications, and as consolidation activity and
improved investor sentiment toward the group drove the stocks higher. AT&T
announced the appointment of a new CEO, and undertook several steps to improve
earnings, including cutting costs and selling non core businesses. In utilities,
we decreased the exposure to the sector by paring back on GPU, Nipsco Industries
and Texas Utilities. Regulatory concerns related to the resolution of stranded
asset costs and continued rate reductions remain a risk within the industry.
However, the sector benefited in the fourth quarter due to the extremely
favorable interest rate environment and improved investor sentiment toward the
group.
Within the commodity industry sectors, we lowered the exposure to energy and
paper and forest products, as oil prices weakened throughout the year, and as
the Asian turmoil hurt the paper cycle recovery. Within energy, we sold Exxon
and added USX-Marathon Group. Exxon, which had outperformed other integrated oil
stocks, had begun trading at a premium to the industry group and the market,
whereas Marathon traded at a more attractive valuation level. We also sold
Occidental Petroleum which had seen strong price appreciation throughout the
year, but which also has a large commodity chemical exposure. In the paper and
forest products sector, we swapped Willamette Industries for a partial position
in Georgia-Pac. Management at Georgia-Pac has taken aggressive steps toward
improving shareholder value, including cutting costs, reducing capital spending,
and repurchasing stock. We adjusted the composition of the chemicals sector by
selling Eastman Chemical and Olin, and adding DuPont. DuPont appears to be
better positioned to deliver earnings growth as it has strengthened key areas of
its business portfolio with acquisitions and has begun to build the higher
growth, higher margin life sciences business.
We maintain a cautious view going into 1998 as valuations levels remain at
fairly high levels, and as uncertainty to the earnings cycle has increased with
the Asian financial crisis. We continue to overweight financial services and
utilities, and underweight technology and healthcare.
Stephen C. Sexauer
PORTFOLIO MANAGER
Philip W. Friedman
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMON STOCKS (97.9%)
AEROSPACE (10.8%)
(a)29,700 Gulfstream Aerospace Corp. ....................... $ 869
(a)35,200 Litton Industries, Inc. .......................... 2,024
27,500 Lockheed Martin Corp. ............................ 2,709
20,500 Parker-Hannifin Corp. ............................ 940
1,639 Raytheon Co., Class A............................. 81
39,900 United Technologies Corp. ........................ 2,905
----------
9,528
----------
BANKING (17.3%)
16,500 Banc One Corp. ................................... 896
22,000 BankAmerica Corp. ................................ 1,606
17,100 BankBoston Corp. ................................. 1,606
18,300 Bankers Trust (New York) Corp. ................... 2,058
15,600 Chase Manhattan Corp. ............................ 1,708
32,900 First of America Bank Corp. ...................... 2,537
11,500 Fleet Financial Group, Inc. ...................... 862
37,800 Mellon Bank Corp. ................................ 2,292
30,000 PNC Bank Corp. ................................... 1,712
----------
15,277
----------
CAPITAL GOODS (5.9%)
17,100 Borg-Warner Automotive, Inc. ..................... 889
15,200 Case Corp. ....................................... 919
30,000 Deere & Co. ...................................... 1,749
80,166 Meritor Automotive, Inc. ......................... 1,688
----------
5,245
----------
CHEMICALS (1.9%)
28,100 E.I. du Pont de Nemours & Co. .................... 1,688
----------
COMMUNICATIONS (6.9%)
41,800 AT&T Corp. ....................................... 2,560
29,100 Sprint Corp. ..................................... 1,706
39,800 U.S. WEST Communications Group.................... 1,796
----------
6,062
----------
CONSUMER-DURABLES (1.7%)
25,100 General Motors Corp. ............................. 1,522
----------
CONSUMER-RETAIL (6.2%)
36,100 J.C. Penney Co., Inc. ............................ 2,177
32,100 Wal-Mart Stores, Inc. ............................ 1,266
(a)97,500 Woolworth Corp. .................................. 1,987
----------
5,430
----------
CONSUMER-STAPLES (5.8%)
66,200 Fleming Cos., Inc. ............................... 890
46,100 Philip Morris Cos., Inc. ......................... 2,089
56,700 RJR Nabisco Holdings Corp. ....................... 2,126
----------
5,105
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
ENERGY (7.2%)
40,000 Ashland, Inc. .................................... $ 2,147
19,900 Atlantic Richfield Co. ........................... 1,594
22,100 Mobil Corp. ...................................... 1,595
30,300 USX-Marathon Group................................ 1,023
----------
6,359
----------
FINANCIAL-DIVERSIFIED (3.1%)
19,650 SLM Holding Corp. ................................ 2,734
----------
HEALTH CARE (1.8%)
40,800 Bausch & Lomb, Inc. .............................. 1,617
----------
INSURANCE (6.8%)
32,300 American General Corp. ........................... 1,746
32,200 Lincoln National Corp. ........................... 2,516
21,400 St. Paul Cos., Inc. .............................. 1,756
----------
6,018
----------
METALS (1.7%)
23,700 Phelps Dodge Corp. ............................... 1,475
----------
PAPER & PACKAGING (2.4%)
10,500 Georgia-Pac....................................... 638
78,500 Louisiana-Pacific Corp. .......................... 1,491
----------
2,129
----------
SERVICES (1.6%)
48,900 Ogden Corp. ...................................... 1,378
----------
TECHNOLOGY (4.6%)
39,000 Harris Corp. ..................................... 1,789
17,300 Philips Electronics N.V. (New York Shares)........ 1,047
28,378 Texas Instruments, Inc. .......................... 1,277
----------
4,113
----------
TRANSPORTATION (4.4%)
(a)9,000 AMR Corp. ........................................ 1,157
(a)23,200 Continental Airlines, Inc., Class B............... 1,117
48,500 Ryder System, Inc. ............................... 1,588
----------
3,862
----------
UTILITIES (7.8%)
30,100 GPU, Inc. ........................................ 1,268
38,100 NIPSCO Industries, Inc. .......................... 1,884
48,900 Pinnacle West Capital Corp. ...................... 2,072
40,900 Texas Utilities Co. .............................. 1,700
----------
6,924
----------
TOTAL COMMON STOCKS (Cost $65,569)............................ 86,466
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Value Equity Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 1,784 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $1,785,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,824 (Cost $1,784)..... $ 1,784
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.9%) (Cost $67,353)..................... 88,250
-----------
OTHER ASSETS (0.7%)
Cash........................................... $ 239
Dividends Receivable........................... 175
Receivable for Investments Sold................ 105
Receivable for Portfolio Shares Sold........... 84
Other.......................................... 6 609
-----
LIABILITIES (-0.6%)
Payable for Investments Purchased.............. (296)
Investment Advisory Fees Payable............... (108)
Dividends Payable.............................. (91)
Administrative Fees Payable.................... (13)
Custodian Fees Payable......................... (8)
Payable for Portfolio Shares Redeemed.......... (7)
Directors' Fees & Expenses Payable............. (6)
Distribution Fees Payable...................... (1)
Other Liabilities.............................. (29) (559)
----- -----------
NET ASSETS (100%)............................................ $ 88,300
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - --------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................................. $ 62,801
Undistributed Net Investment Income.......................... 32
Accumulated Net Realized Gain................................ 4,570
Unrealized Appreciation on Investments....................... 20,897
-----------
NET ASSETS................................................... $ 88,300
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -------------------------------------------------------------
NET ASSETS................................................... $86,054
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,319,486 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $13.62
-----------
-----------
CLASS B:
- - -------------------------------------------------------------
NET ASSETS................................................... $2,246
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 165,256 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $13.59
-----------
-----------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Value Equity Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 5.5 %
Banking 9.4 %
Capital Goods 3.0 %
Chemicals 0.9 %
Communications 3.6 %
Consumer--Durables 1.1 %
Consumer--Retail 3.4 %
Consumer--Staples 2.9 %
Energy 4.2 %
Financial-Diversified 1.5 %
Health Care 0.9 %
Insurance 3.5 %
Metals 0.8 %
Paper & Packaging 1.2 %
Services 0.8 %
Technology 2.5 %
Transportation 1.9 %
Utilities 4.3 %
U.S. Treasury Notes 40.2 %
Other 8.4 %
</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 $500,000
10/31/91 601,750 582,845
10/31/92 659,000 638,635
12/31/92 680,250 656,635
12/31/93 747,350 736,015
12/31/94 743,800 718,950
12/31/95 929,081 888,838
12/31/96 1,062,776 985,988
12/31/97 1,256,414 1,156,564
* 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..................... 17.30% 11.98% 11.25%
PORTFOLIO -- CLASS
B..................... 16.94 N/A 13.56
INDEX -- CLASS A...... 18.22 13.06 12.44
INDEX -- CLASS B...... 18.22 N/A 16.34
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 0.5% cash, 37.9% bonds and 61.6% equity based on $52.5 billion
in assets among 431 portfolios for the period ended December 31, 1997
(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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 objective is to seek high total return
while preserving capital by investing in a combination of undervalued equity
securities and fixed income securities.
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, 1997, the Portfolio had a total return of 17.30%
for the Class A shares and 16.94% for the Class B shares, as compared to a total
return of 18.22% for the Indata Balanced-Median Index (the "Index"). For the
five year period ended December 31, 1997, the average annual total return of
Class A was 11.98% compared to 13.06% for the Index. From inception on February
20, 1990 through December 31, 1997, the average annual total return of Class A
was 11.25% compared to 12.44% for the Index. From inception on January 2, 1996
through December 31, 1997, the average annual total return of Class B was 13.56%
compared to 16.34% for the Index.
According to LIPPER MUTUAL FUNDS QUARTERLY, the average Balanced mutual fund
returned 19.00% for the year ended December 31, 1997.
Our asset allocation, based on market value at December 31, 1997, is as follows:
<TABLE>
<S> <C>
Equities................................. 51.4%
Fixed Income............................. 40.1
Cash..................................... 8.5
---
100%
---
---
</TABLE>
EQUITIES
For the quarter ended December 31, 1997, the equity component of the Balanced
Portfolio had a gross return of 2.80% and for year ended December 31, 1997
returned 30.23%. The S&P 500 returned 2.87% for the quarter ended December 31,
1997 and 33.36% for the year ended December 31, 1997.
In 1997, major market indices achieved strong double digit returns for the third
consecutive year. Large cap stocks once again significantly outperformed small
cap stocks as investors sought relative safety, liquidity and earnings
certainty. The larger cap Russell 1000
- - --------------------------------------------------------------------------------
Balanced Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
returned 32.86% compared to the smaller cap Russell 2000 return of 22.28%.
Growth stocks outperformed value, with the S&P/Barra Growth Index up 36.42% for
the year compared to 29.96% for the S&P/Barra Value Index.
A progressively weak first quarter, followed by a solid rebound in the second
quarter resulted in an overall very strong first half. Major market indices
bottomed in April and then advanced to new highs through June. Sentiment in the
first quarter, including escalating fears of interest rate increases, and strong
economic growth of 4.9%, contrasted with subsiding fears of rate increases and a
moderating economy in the second quarter. The market continued to advance in the
third quarter, although it declined in August as concerns mounted about the
potential impact of the growing Southeast Asian financial crisis and currency
devaluations. These concerns intensified during the fourth quarter, as the
Southeast Asian turmoil spread to Hong Kong. As a result, the market declined
again in October, a month that saw the largest point decline ever in the Dow
Jones Industrial Average and a record volume day of 1.2 billion shares traded on
the NYSE. The market decline reflected investor concern that slowing economic
growth in Asia and imported Asian deflation would weaken U.S. economic and
earnings growth. Although the market recovered in November and December, profit
concerns overshadowed the very positive declining interest rate environment,
continued benign inflation and a moderating but growing economy.
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>
PRICE PRICE
EARNINGS BREAK
------------ ------------
<S> <C> <C>
Portfolio -- equity portion............ 17.7x 3.3x
S&P 500................................ 23.9x 5.5x
</TABLE>
The best performing sectors in the equity portion of the Portfolio for the year
on an absolute basis were financial services, up 54%, transportation, up 47%,
and capital goods, up 46%. Underperforming sectors included shelter, down 8%,
raw materials, up 1%, and consumer non-durables, up 6%. Relative to the S&P 500,
the equity portion of the Portfolio benefited from being overweight in financial
services and underweight in consumer non-durables, while the underweight
position in healthcare and in consumer services hurt the equity portion of the
Portfolio. The best performing stocks in 1997 were First of America, up 98%,
Mellon Bank, up 76%, Wal Mart, up 75%, Ogden, up 57%, and PNC Financial, also up
57%. Underperforming stocks included Fleming, down 22%, Louisiana-Pacific, down
8%, Woolworth, down 7%, and Phelps Dodge, down 5%.
The overweight position in financial services and stock selection within the
sector meaningfully contributed to performance in 1997. Banking stocks continued
to benefit from industry consolidation activity and the declining interest rate
environment, which more than offset concerns about the Asian crisis that arose
in the second half of the year. We pared back First of America after the company
agreed to be acquired by National City Corp. for a 30% premium. To maintain an
overweight position in banking, we added Fleet Financial and Banc One during the
year. We also increased our weighting in Sallie Mae. Shareholders of Sallie Mae
voted in new management during the year, and approved a reorganization plan to
restructure the company as a fully privatized corporation and eventually
eliminate its government charter. The company continues to generate strong
earnings growth, repurchase stock, and cut costs, and is well positioned to gain
market share in the education finance market.
We increased exposure in the transportation and aerospace/defense due to
favorable industry trends and attractive valuations. The commercial airline
cycle has maintained its strength during the year, supported by the strong
economy, higher business and consumer travel spending and more rational fare
pricing. The commercial aircraft manufacturing cycle is also very favorable. To
participate, we added to the United Technologies position, and established
positions in Parker Hannifin and Continental Airlines. The aerospace/defense
sector is seeing the benefits from past industry consolidation. During the year,
we added Lockheed Martin and Litton Industries to the portfolio. We also added
Gulfstream Aerospace, which is benefiting from a strong backlog in its business
jet aircraft manufacturing operations and a healthy annual repurchase program.
In the capital goods sector, another strong performer in 1997, we added Case
Corp. in addition to holding Deere & Co. Strong farm income and secular
worldwide growth in agricultural spending have been the major themes supporting
the industry. Deere continues to generate strong cash flow and repurchase
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
stock. Case possesses significant margin expansion opportunities, and trades at
attractive valuation levels. We adjusted the consumer durable sector by selling
Chrysler and adding Meritor Automotive and Borg Warner Automotive. Both of these
stocks are trading below 11 times 1998 estimated earnings. We expect them to
benefit from the continued globalization and consolidation in the auto and truck
supplier market.
We pared back on consumer staples, primarily tobacco stocks, as a preliminary
industry litigation settlement was reached mid-year. While the settlement would
provide protection from certain lawsuits, the industry still faces a lengthy
government approval process for the agreement during 1998. Until a settlement
nears approval, the stocks will most likely remain at attractive valuations of
12-14 times 1998 expected earnings. In the retail sector, we added Wal Mart at
the start of 1997, which finished the year as one of the top performers in the
Portfolio. Wal Mart began generating positive free cash flow in 1996, and
subsequently announced a 30% dividend increase and a stock buyback program in
early 1997. The company then delivered both sales and earnings growth and
consistency throughout the year. In the services and growth sector, we sold the
remaining position in Eastman Kodak. The company continues to struggle with
intensified film price competition, continuing losses from new business
initiatives and an inflated cost structure. We also sold McGraw Hill and pared
back on Ogden Corp. due to strong price appreciation.
Our exposure to the telecommunications industry increased throughout the year,
as we added to US West Communications, and as consolidation activity and
improved investor sentiment toward the group drove the stocks higher. AT&T
announced the appointment of a new CEO, and undertook several steps to improve
earnings, including cutting costs and selling non core businesses. In utilities,
we decreased the exposure to the sector by paring back on GPU, Nipsco Industries
and Texas Utilities. Regulatory concerns related to the resolution of stranded
asset costs and continued rate reductions remain a risk within the industry.
However, the sector benefited in the fourth quarter due to the extremely
favorable interest rate environment and improved investor sentiment toward the
group.
Within the commodity industry sectors, we lowered the exposure to energy and
paper and forest products, as oil prices weakened throughout the year, and as
the Asian turmoil hurt the paper cycle recovery. Within energy, we sold Exxon
and added USX-Marathon Group. Exxon, which had outperformed other integrated oil
stocks, had begun trading at a premium to the industry group and the market,
whereas Marathon traded at a more attractive valuation level. We also sold
Occidental Petroleum which had seen strong price appreciation throughout the
year, but which also has a large commodity chemical exposure. In the paper and
forest products sector, we swapped Willamette Industries for a partial position
in Georgia-Pacific. Management at Georgia-Pacific has taken aggressive steps
toward improving shareholder value, including cutting costs, reducing capital
spending, and repurchasing stock. We adjusted the composition of the chemicals
sector by selling Eastman Chemical and Olin, and adding DuPont. DuPont appears
to be better positioned to deliver earnings growth as it has strengthened key
areas of its business portfolio with acquisitions and has begun to build the
higher growth, higher margin life sciences business.
We maintain a cautious view going into 1998 as valuations levels remain at
fairly high levels, and as uncertainty to the earnings cycle has increased with
the Asian financial crisis. We continue to overweight financial services and
utilities, and underweight technology and healthcare.
FIXED INCOME
The fixed income portion of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the quarter ended
December 31, 1997, the fixed income portion of the Balanced Portfolio had a
gross return of 2.33% and for the year ended December 31, 1997, returned 7.93%.
The Lehman Intermediate-Government/ Corporate Index returned 2.14% for the
quarter ended December 31, 1997, and 7.87% for the year.
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.3 years and average duration of 3.0. During the first quarter,
rates increased across all maturity spectrums, as investors anticipated the
Federal Reserve Bank's raising of the fed funds rate in late March by 25 basis
points. However, for the year, interest rates ended lower across maturity
spectrums of one year and greater. The largest decrease in rates occurred in the
five, ten and thirty year bonds, as investors anticipated the prospect of
deflation from the Asian crisis. This
- - --------------------------------------------------------------------------------
Balanced Portfolio
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
downward shift in long rates flattened the yield curve. During the third
quarter, when long bond rates approached 6.7%, we lengthened the weighted
average maturity and average duration of the portfolio to take advantage of a
temporary increase in rates. The moderation in interest rates later in the year
and the decline in long bond rates below the 6% level helped performance. At
year-end, the weighted average maturity was 3.6 years, and average duration was
3.2.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
COMMON STOCKS (51.4%)
AEROSPACE (5.5%)
(a)900 Gulfstream Aerospace Corp. ....................... $ 26
(a)1,000 Litton Industries, Inc. .......................... 58
800 Lockheed Martin Corp. ............................ 79
600 Parker-Hannifin Corp. ............................ 28
61 Raytheon Co., Class A............................. 3
1,250 United Technologies Corp. ........................ 91
----------
285
----------
BANKING (9.4%)
500 Banc One Corp. ................................... 27
700 BankAmerica Corp. ................................ 51
600 BankBoston Corp. ................................. 57
550 Bankers Trust (New York) Corp. ................... 62
550 Chase Manhattan Corp. ............................ 60
1,000 First of America Bank Corp. ...................... 77
400 Fleet Financial Group, Inc. ...................... 30
1,200 Mellon Bank Corp. ................................ 73
950 PNC Bank Corp. ................................... 54
----------
491
----------
CAPITAL GOODS (3.0%)
500 Borg-Warner Automotive, Inc. ..................... 26
400 Case Corp. ....................................... 24
1,000 Deere & Co. ...................................... 58
2,383 Meritor Automotive, Inc. ......................... 50
----------
158
----------
CHEMICALS (0.9%)
800 E.I. du Pont de Nemours & Co. .................... 48
----------
COMMUNICATIONS (3.6%)
1,400 AT&T Corp. ....................................... 86
850 Sprint Corp. ..................................... 50
1,200 U.S. WEST Communications Group.................... 54
----------
190
----------
CONSUMER-DURABLES (1.1%)
950 General Motors Corp. ............................. 58
----------
CONSUMER-RETAIL (3.4%)
1,150 J.C. Penney Co., Inc. ............................ 70
1,000 Wal-Mart Stores, Inc. ............................ 39
(a)3,400 Woolworth Corp. .................................. 69
----------
178
----------
CONSUMER-STAPLES (2.9%)
1,600 Fleming Cos., Inc. ............................... 21
1,425 Philip Morris Cos., Inc. ......................... 65
1,800 RJR Nabisco Holdings Corp. ....................... 68
----------
154
----------
ENERGY (4.2%)
1,200 Ashland, Inc. .................................... 64
600 Atlantic Richfield Co. ........................... 48
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
900 Mobil Corp. ...................................... $ 65
1,200 USX-Marathon Group................................ 41
----------
218
----------
FINANCIAL-DIVERSIFIED (1.5%)
550 SLM Holding Corp. ................................ 77
----------
HEALTH CARE (0.9%)
1,250 Bausch & Lomb, Inc. .............................. 49
----------
INSURANCE (3.5%)
850 American General Corp. ........................... 46
1,050 Lincoln National Corp. ........................... 82
700 St. Paul Cos., Inc. .............................. 57
----------
185
----------
METALS (0.8%)
650 Phelps Dodge Corp. ............................... 40
----------
PAPER & PACKAGING (1.2%)
300 Georgia-Pac....................................... 18
2,200 Louisiana-Pacific Corp. .......................... 42
----------
60
----------
SERVICES (0.8%)
1,500 Ogden Corp. ...................................... 42
----------
TECHNOLOGY (2.5%)
1,150 Harris Corp. ..................................... 53
500 Philips Electronics N.V. (New York Shares)........ 30
1,000 Texas Instruments, Inc. .......................... 45
----------
128
----------
TRANSPORTATION (1.9%)
(a)200 AMR Corp. ........................................ 26
(a)700 Continental Airlines, Inc., Class B............... 33
1,250 Ryder System, Inc. ............................... 41
----------
100
----------
UTILITIES (4.3%)
1,050 GPU, Inc. ........................................ 44
1,200 NIPSCO Industries, Inc. .......................... 59
1,500 Pinnacle West Capital Corp. ...................... 64
1,450 Texas Utilities Co. .............................. 60
----------
227
----------
TOTAL COMMON STOCKS (Cost $1,959)............................. 2,688
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ----------
FIXED INCOME SECURITIES (40.2%)
U.S. TREASURY NOTES (40.2%)
$ 1,603 5.50%, 4/15/00.................................... 1,597
500 5.875%, 11/15/05.................................. 503
----------
TOTAL FIXED INCOME SECURITIES (Cost $2,061)................... 2,100
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Balanced Portfolio
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.5%)
REPURCHASE AGREEMENT (8.5%)
$ 447 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $447,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $460 (Cost $447)......... $ 447
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.1%) (Cost $4,467).................... 5,235
----------
OTHER ASSETS (0.7%)
Cash.......................................... $ 1
Interest Receivable........................... 23
Dividends Receivable.......................... 5
Due from Adviser.............................. 5 34
----------
LIABILITIES (-0.8%)
Payable for Investments Purchased............. (12)
Custodian Fees Payable........................ (5)
Adminstrative Fees Payable.................... (1)
Directors' Fees and Expenses Payable.......... (1)
Other Liabilities............................. (23) (42)
---------- ----------
NET ASSETS (100%)........................................... $ 5,227
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 4,407
Distributions in Excess of Net Investment Income.............. (1)
Accumulated Net Realized Gain................................. 53
Unrealized Appreciation on Investments........................ 768
----------
NET ASSETS.................................................... $ 5,227
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $4,606
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 609,718 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $7.55
----------
----------
CLASS B:
- - --------------------------------------------------------------
NET ASSETS.................................................... $621
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 82,499 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $7.53
----------
----------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Balanced Portfolio
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Argentina 14.6 %
Brazil 24.0 %
Bulgaria 3.4 %
Cayman Islands 4.3 %
Ecuador 1.4 %
Ivory Coast 2.9 %
Jamaica 5.3 %
Mauritius 1.0 %
Mexico 16.6 %
Morocco 2.2 %
Netherlands 0.6 %
Panama 1.5 %
Peru 2.8 %
Russia 15.3 %
United Kingdom 1.8 %
Venezuela 11.4 %
Other -9.1 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
JP MORGAN EMERGING EMERGING MARKETS DEBT
<S> <C> <C>
Markets Bond Plus Index (1) Portfolio--Class A
2/1/94* $500,000 $500,000
12/31/94 $406,550 $429,500
12/31/95 $518,514 $550,748
12/31/96 $694,653 $828,986
12/31/97 $785,097 $978,950
* 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 PLUS INDEX(1)
- - ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 18.29% 18.77%
PORTFOLIO -- CLASS B............. 18.05 32.46
INDEX -- CLASS A................. 13.02 13.18
INDEX -- CLASS B................. 13.02 24.83
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 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, 1997, the Portfolio had a total return of 18.29%
for the Class A shares and 18.05% for the Class B shares as compared to a total
return of 13.02% for the J.P. Morgan Emerging Markets Bond Plus Index (the
"Index"). From inception on February 1, 1994 through December 31, 1997, the
average annual total return of Class A was 18.77% compared to 13.18% for the
Index. From inception on January 2, 1996, through December 31, 1997, the average
annual total return of Class B was 32.46% compared to 24.83% for the Index. As
of December 31, 1997, the Portfolio had a 30-day yield of 10.24% for the Class A
shares and 9.95% for the Class B shares. This yield has been computed using the
SEC formula modifed to exclude the effect of the Portfolio's per share amount of
realized gains distributed during December 1997. Including this amount, the
30-day yield would be 13.38% for Class A shares and 13.00% for Class B shares.
1997 was another remarkable year for the emerging debt markets, in several ways.
While the asset class matured, and credit improvements in the broad emerging
world were the order for most of the year, the Asian financial crisis unfolding
at mid-year abruptly changed the risk profile for nearly all emerging countries,
changing investor perceptions as to the proper risk premium for emerging
markets. The weakness across Asia reached full pitch at the end of the fourth
quarter, with sharp sell-offs in the Hong Kong and Korean markets. It continues
into January with serious fears over the solvency of Indonesia. The spill-over
effects into emerging debt have been devastating, and in the last quarter of the
year the EMD markets experienced their first significant down quarter for the
first time since early 1995.
Broad gains in the monetary, foreign exchange and fiscal areas characterized
many emerging countries for the better part of 1997. The result was a pick-up in
real growth, accompanied by significant declines in inflation, along with
reasonable fiscal and current account balances. In Brazil, inflation came
solidly into annualized single-digit range, as tight monetary policy and fiscal
reform continued. In Russia, progress on the privatization front and sound money
policy also
- - --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
brought inflation close to G10 levels, and allowed interest rates to fall to
real rates of 8-10%, alongside a steady ruble. Venezuelan reforms and buoyant
crude oil prices improved that country's debt profile, and Mexico continued
along the path of accelerating growth and improved trade accounts.
A significant theme in 1997 was active external debt management by several large
sovereigns, including Argentina, Brazil, Venezuela and Panama. A declining U.S.
interest rate environment and ample global liquidity allowed these countries to
achieve real present value savings through re-financing relatively expensive
"Brady" (restructured) debt, by issuing new "global" bonds. This trend
significantly improved these borrowers' debt profiles going forward.
For much of the year our Portfolio maintained healthy exposure to the large
Latin and Eastern European markets, while avoiding exposure to Asian borrowers.
During the first half of the year we held overweight positions in Venezuela,
Argentina, Russia and Bulgaria and shifted the Portfolio to an overweight
interest rate posture following the back-up in U.S. rates in the first quarter.
These country overweights helped the Portfolio return 17.2% by mid-year, versus
the index return of 10.3%, with Russia and Bulgaria leading the way. As spreads
on the benchmark index tightened into 375 basis points over the U.S. yield
curve, the portfolio switched positions out of higher-risk, higher-yielding
markets into better quality credits. By the end of the third quarter the
emerging markets bond index spread had reached a "full value" level of 350 basis
points over Treasuries, and we reduced duration in the Portfolio accordingly.
The final quarter of the year brought a crisis atmosphere in Asia, and severe
downturns in Hong Kong, Korea and Indonesia hammered prices and pushed up
volatility in the debt markets. Spreads widened out to as far as 800 basis
points over the U.S. curve, before ending the year at roughly 500 basis points
over the curve.
The Portfolio's weak performance versus its benchmark during the quarter came as
a result of an overweight position in Venezuela, as well as an underweight
position against U.S. interest rates.
The Asian financial crisis will continue to impact all emerging markets into
1998. Severe dislocations in Asia have created several areas of value for our
Portfolio, and for the first time since the inception of the Portfolio we are
(gradually) building exposure in Asia to what we consider solid sovereign and
corporate issuers with good medium-term prospects. The ripple effects of Asia
will likely keep the overall risk spreads in the broad emerging debt universe
high, as fair value may be deemed to be 400-500 basis points of spread, rather
than 300-400 basis points. More yield is in the market today, and importantly
several non-Asian countries, e.g. Brazil, Mexico, Russia, have been forced by
the Asian crisis to address more forcefully and accelerate long overdue
structural reform. While the stabilization and recovery process in Asia will
take many quarters to materialize, the re-pricing of the overall debt market
over the past four months, along with a re-commitment to a proper policy mix in
many countries, makes the 1998 outlook attractive from a total return
standpoint.
Paul Ghaffari
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -------------------------------------------------------------------------------
DEBT INSTRUMENTS (102.4%)
ARGENTINA (14.6%)
BONDS (14.6%)
U.S.$ (e)1,900 Acindar Industria, (Floating Rate), 11.656%,
11/12/98........................................ $ 1,910
ARP (e)6,810 CIA International Telecommunications, 10.375%,
8/01/04......................................... 5,517
U.S.$ 7,392 Republic of Argentina, (Floating Rate), 6.688%,
3/31/05......................................... 6,614
ARP 2,800 Republic of Argentina, 'Euro', 8.75%, 7/10/02..... 2,437
(e)700 Republic of Argentina, 'Euro', 11.75%, 2/12/07.... 665
1,300 Republic of Argentina, 'Euro', 11.75%, 2/12/07.... 1,235
U.S.$ 2,850 Republic of Argentina Global Bond, 9.75%,
9/19/27......................................... 2,731
----------
21,109
----------
BRAZIL (19.1%)
BONDS (19.1%)
2,000 CSN Iron, 9.125%, 6/01/07......................... 1,728
5,268 Federative Republic of Brazil, C Bond, (Floating
Rate), (Bearer) PIK, 8.00%, 4/15/14............. 4,142
(n)4,700 Federative Republic of Brazil Front Loaded
Interest Reduction Bond, Series L, 4.50%,
4/15/09......................................... 3,478
(s)8,620 Federative Republic of Brazil Global Bond,
10.125%, 5/15/27................................ 8,092
(s)6,123 Federative Republic of Brazil, Series A, (Floating
Rate), 6.875%, 1/01/01.......................... 5,844
2,509 Federative Republic of Brazil, Series C, (Floating
Rate), (Registered) PIK, 8.00%, 4/15/14......... 1,972
3,000 Federative Republic of Brazil, Series L, (Floating
Rate), 6.75%, 4/15/09........................... 2,424
----------
27,680
----------
BULGARIA (3.4%)
BONDS (3.4%)
(n)5,200 Republic of Bulgaria Front Loaded Interest
Reduction Bond, Series A, 2.25%, 7/28/12........ 3,167
2,275 Republic of Bulgaria Interest Arrears PDI Bond,
(Floating Rate), 6.688%, 7/28/11................ 1,669
----------
4,836
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -------------------------------------------------------------------------------
CAYMAN ISLANDS (4.3%)
BONDS (4.3%)
ZAR 8,000 Nacional Financiera SNC, 'Euro', 17.00%,
2/26/99......................................... $ 1,641
U.S.$ (e)4,900 Pera Financial Services Co., 9.375%, 10/15/02..... 4,606
----------
6,247
----------
ECUADOR (1.4%)
BONDS (1.3%)
1,500 Conecel, 14.00%, 5/01/02.......................... 1,500
525 Republic of Ecuador PDI Bond, (Floating Rate),
(Registered) PIK, 6.688%, 2/27/15............... 344
----------
1,844
----------
NOTES (0.1%)
(e)100 Consorcio Ecuatorian Notes, 14.00%, 5/01/02....... 100
----------
1,944
----------
IVORY COAST (2.9%)
LOAN AGREEMENTS (2.9%)
DEM (l)2,295 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00 (Participation: Paribas
Corp.).......................................... 504
FRF (l)41,600 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00 (Participation: Salomon
Brothers, Paribas Corp., and Chase Securities,
Inc.)........................................... 3,007
U.S.$ (l)1,800 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00 (Participation: Salomon
Brothers)....................................... 711
----------
4,222
----------
JAMAICA (5.3%)
BONDS (5.3%)
4,000 Government of Jamaica, 9.625%, 7/02/02............ 3,800
(e)4,000 Mechala Group, Jamaica, Series B, 12.75%,
12/30/99........................................ 3,800
----------
7,600
----------
MAURITIUS (1.0%)
BONDS (1.0%)
(e)1,650 Pindo Deli Financial Mauritius, 10.75%,
10/01/07........................................ 1,345
50 Pindo Deli Financial Mauritus, 'Euro', 10.75%,
10/01/07........................................ 41
----------
1,386
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - -------------------------------------------------------------------------------
<C> <S> <C>
MEXICO (16.6%)
BONDS (15.5%)
U.S.$ 1,540 Bancomex Global Bond, 7.25%,
2/02/04......................................... $ 1,423
(e)3,000 Bufete Industrial, 11.375%, 7/15/99............... 3,094
4,500 Empresas ICA Sociedad Controladora, (Registered),
11.875%, 5/30/01................................ 4,883
600 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.693%, 12/31/19............... 556
250 United Mexican States Discount Bond, Series B,
(Floating Rate), 6.617%, 12/31/19............... 232
(s)4,400 United Mexican States Discount Bond, Series D,
(Floating Rate), 6.75%, 12/31/19................ 4,078
2,100 United Mexican States Global Bond, 11.375%,
9/15/16......................................... 2,411
(s)4,450 United Mexican States Global Bond, 11.50%,
5/15/26......................................... 5,284
650 United Mexican States Par Bond, Series W-A, 6.25%,
12/31/19........................................ 543
----------
22,504
----------
NOTES (1.1%)
(e)1,550 Innova S De R.L. Senior Notes, 12.875%, 4/01/07... 1,554
----------
24,058
----------
MOROCCO (2.2%)
LOAN AGREEMENTS (2.2%)
(l)3,700 Kingdom of Morocco
Restructuring & Consolidation Agreement, Tranche
A,
(Floating Rate), 6.656%, 1/01/09
(Participation: J.P. Morgan and Salomon
Brothers)....................................... 3,211
----------
NETHERLANDS (0.6%)
BONDS (0.6%)
(e)1,000 UnExim International Finance BV, 9.875%,
8/01/00......................................... 885
----------
PANAMA (1.5%)
BONDS (1.5%)
2,000 Republic of Panama Global Bonds, 8.875%,
9/30/27......................................... 1,882
259 Republic of Panama PDI Bond, (Floating Rate), PIK,
6.688%, 7/17/16................................. 211
----------
2,093
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -------------------------------------------------------------------------------
PERU (2.8%)
BONDS (2.8%)
U.S.$ (n)1,050 Republic of Peru Front Loaded Interest Reduction
Bond, Series US, 3.25%, 3/07/17................. $ 625
(e,n)5,798 Republic of Peru Front Loaded Interest Reduction
Bond, Series US, 3.25%, 3/07/17................. 3,450
----------
4,075
----------
RUSSIA (15.3%)
LOAN AGREEMENTS (10.4%)
DEM (l)6,200 International Bank for Economic Cooperation,
12/31/99 (Participation: Salomon
Brothers)....................................... 2,016
U.S.$ (l)4,600 International Bank for Economic Cooperation,
12/31/00 (Participation: Salomon
Brothers)....................................... 2,691
(l)14,150 Russian Principal Loans, (Floating Rate), 6.719%,
12/15/20 (Participation: J.P. Morgan)........... 8,791
(l)2,500 Russia Principal Notes IIB, 12/31/99
(Participation: Salomon
Brothers)....................................... 1,525
----------
15,023
----------
NOTES (4.9%)
10,066 Russian Interest Arrears Note, (Floating Rate),
6.719%,
12/15/15........................................ 7,147
----------
22,170
----------
VENEZUELA (11.4%)
BONDS (11.4%)
(s)8,571 Republic of Venezuela Debt Conversion Bond, Series
DL, (Floating Rate), 6.813%,
12/18/07........................................ 7,693
(s)9,832 Republic of Venezuela Debt Conversion Bond, 9.25%,
9/15/27......................................... 8,841
----------
16,534
----------
TOTAL DEBT INSTRUMENTS (Cost $154,119)............................. 148,050
----------
STRUCTURED INVESTMENTS (6.7%)
BRAZIL (4.9%)
7,500 Salomon Brothers Federative Republic of Brazil
Credit Linked Enhanced Note, 9.00%, 1/05/99..... 7,155
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - -------------------------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (1.8%)
U.S.$ (e)2,600 ING Bank N.V. Libor or T-Bill Linked Note,
8/14/98......................................... $ 2,542
----------
TOTAL STRUCTURED INVESTMENTS (Cost $10,160)........................ 9,697
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- - ---------------
RIGHTS (0.0%)
MEXICO (0.0%)
8,077 United Mexican States, Value Recovery Rights,
expiring 6/30/03 (Cost $0)...................... --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ---------------
SHORT-TERM INVESTMENT (7.0%)
REPURCHASE AGREEMENT (7.0%)
U.S.$ 10,116 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98 to be repuchased at $10,119,
collateralized by U.S. Treasury Notes, 5.25%,
due 1/31/01, valued at $10,330 (Cost $10,116)... 10,116
----------
FOREIGN CURRENCY (0.0%)
FRF 2 French Franc (Cost $0)............................ --
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (116.1%) (Cost $174,395)............... 167,863
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (6.9%)
Receivable for Investments Sold...................... $ 6,035
Interest Receivable.................................. 4,003
Dividends Receivable................................. 7
Other................................................ 11 10,056
----------
LIABILITIES (-23.0%)
Payable for Reverse Repurchase Agreement............. (29,740)
Payable for Portfolio Shares Redeemed................ (1,843)
Payable for Investments Purchased.................... (886)
Investment Advisory Fees Payable..................... (402)
Bank Overdraft....................................... (154)
Custodian Fees Payable............................... (77)
Administrative Fees Payable.......................... (21)
Directors' Fees and Expenses Payable................. (9)
Distribution Fees Payable............................ (2)
Other Liabilities.................................... (122) (33,256)
---------- ----------
NET ASSETS (100%).................................................. $ 144,663
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 154,427
Distributions in Excess of Net Investment Income................... (8)
Accumulated Net Realized Loss...................................... (3,138)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (6,618)
----------
NET ASSETS......................................................... $ 144,663
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $142,382
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 24,696,655 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $5.77
----------
----------
CLASS B:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $2,281
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 395,394 outstanding $0.001 par value
shares(authorized 500,000,000 shares)............................ $5.77
----------
----------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
(e) -- 144A security -- certain conditions for public sale may exist.
(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, 1997. Maturity date disclosed is the
ultimate maturity.
(s) -- Denotes all or portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1997 -- see note A-4
to financial statements.
ARP -- Argentine Peso
DEM -- German Mark
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 on December 31, 1997.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Asset Backed Securities 6.6 %
Corporate Bonds & Notes 18.4 %
Foreign Government & Agency Obligation 4.1 %
U.S. Government & Agency Obligation 60.2 %
Other 10.7 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO--CLASS
LEHMAN AGGREGATE BOND INDEX (1) A
<S> <C> <C>
5/15/91* $500,000 $500,000
10/31/91 $537,100 $535,590
10/31/92 $589,900 $592,415
12/31/92 $599,400 $598,440
12/31/93 $657,800 $652,710
12/31/94 $638,650 $632,500
12/31/95 $756,673 $751,157
12/31/96 $784,140 $785,785
12/31/97 $859,810 $860,749
* 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 AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------- ------------------ ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 9.54% 7.54% 8.53%
PORTFOLIO -- CLASS
B..................... 9.48 N/A 6.89
INDEX -- CLASS A...... 9.65 7.48 8.52
INDEX -- CLASS B...... 9.65 N/A 6.62
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of 9.54%
for the Class A shares and 9.48% for the Class B shares as compared to a total
return of 9.65% for the Lehman Aggregate Bond Index (the "Index"). For the five
year period ended December 31, 1997, the average annual total return of Class A
was 7.54% compared to 7.48% for the Index. From inception on May 15, 1991
through December 31, 1997, the average annual total return of Class A was 8.53%
compared to 8.52% for the Index. From inception on January 2, 1996 through
December 31, 1997, the average annual total return of Class B was 6.89% compared
to 6.62% for the Index. As of December 31, 1997, the Portfolio had an SEC 30-day
yield of 5.95% for the Class A shares and 5.80% for the Class B shares.
The fixed income markets again provided solid returns during the fourth quarter
of 1997. Benefiting from turmoil in the broader global marketplace, long U.S.
Treasury yields fell by almost 50 basis points over the quarter, the third
consecutive quarter in which they have declined. The Lehman Aggregate Bond Index
returned 2.94% and the Lehman Government Corporate Index returned 3.21% for the
quarter. While a weak first quarter prevented full-year returns from reaching
double digits, these returns were still a very respectable 9.65% and 9.76% for
the Lehman Aggregate and Lehman Government Corporate Indices, respectively.
Unlike prior quarters in which domestic economic considerations had been the
prime determinant of bond market returns, global events were a far more
important influence during the fourth quarter. Severe financial stress in
various parts of Asia produced a strong preference in the financial markets for
the perceived quality and safety of the U.S. Treasury markets. The Asian
problems involved a vicious circle of rapidly declining currency and equity
markets, banking system deterioration, falling foreign exchange reserves and
ultimately questions about the ability of some countries to service foreign
currency debt. Despite efforts by the International Monetary Fund to
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
contain the crisis initially to Thailand, it quickly spread to other parts of
Southeast Asia and then to Korea, the world's 11(th) largest economy.
The Asian problems should have a sizable effect on the global economy. Beyond
the direct contractionary effects on the growth rates of the impacted countries,
secondary effects could be sizable for those countries with significant trade or
lending exposure to the region, particularly for Japan, which already had a weak
economy and a fragile banking system. In terms of the response of the Federal
Reserve to the Asian problems, from a price perspective, the collapse in Asian
currency values relative to the dollar should have a restraining effect on U.S.
inflation. Perhaps most importantly, given the close integration of the global
financial system, the Fed is concerned that balance of payment crises in one
region can spread rapidly through the global financial system, causing serious
problems for the real economy. As a result, the primary focus of the Federal
Reserve appears to have shifted from a concern with the strength of the U.S.
domestic economy, to one of closely monitoring the situation in Asia and
assuring that it does not adversely impact the global financial system. Thus,
despite the lowest unemployment rates since 1970 and strong GDP growth, the Fed
shows no inclination to tighten monetary policy. Indeed, recognizing the
fragility of many global markets, should the Asian crisis worsen, the Fed's next
move could be to ease.
Recognizing these forces, the U.S. Treasury market rallied over the fourth
quarter. The yield curve flattened considerably during the rally, with long
rates falling almost 50 basis points, while two year rates fell less then 15
basis points. While the major inflation indices had already been remarkably well
behaved, the Asian crisis has further reduced inflation expectations, causing
long rates to fall. In addition, the rapid decline in the U.S. budget deficit
has reduced the outlook for future issuance of Treasury securities, further
supporting the rally.
From a sector standpoint, after an extended period of strong performance
relative to Treasuries, the corporate market performed very poorly during the
fourth quarter. Relative to Treasuries of comparable duration, the corporate
sector underperformed by roughly 90 basis points, its worst performance since
the recession of 1990. Given the turmoil in Asia, the yankee sector performed
particularly poorly, but other sectors underperformed Treasuries as well.
Surprisingly, the mortgage pass-through market managed to outperform comparable
duration Treasuries during the quarter, although only by a small margin. Given
the low level of nominal interest rates, the market remained remarkably
complacent about prepayment risk and spreads were far more stable than in the
corporate sector. Other parts of the mortgage market did not perform as well.
Both commercial mortgage-backed and asset backed securities widened in response
to heavy issuance as well as pressure from widening corporate bond spreads.
We have continued to maintain our slightly longer duration position, exceeding
the duration of our benchmark by roughly 1/2 year. While bond valuation was not
as compelling as earlier in the year, real yields still represent fair value and
the interest rate trend has been consistently favorable. We have underweighted
mortgage-backed pass-throughs because of their rich valuations and increased
level of prepayment risk given the decline in interest rates and have been
surprised that the market has not demanded more compensation for this risk. We
remained slightly overweighted in corporate bonds and note that in general, the
credit fundamentals of U.S. corporations remain strong. While we unfortunately
had some exposure to the yankee sector, we reduced our holdings by mid-quarter
and thereby the impact of its spread widening. We continue to add asset-backed
and commercial mortgage-backed securities as spreads on these sectors remain
attractive. Given their high quality, these areas provided attractive value
relative to corporate bonds and given their better convexity, they provided
attractive value relative to mortgage pass-throughs as well.
We begin 1998 still long in duration by about 1/2 year relative to our
benchmarks. Again our focus remains on market valuation and interest rate trend,
and we expect to maintain a long duration position until either of these becomes
unfavorable. We are overweighted in yield advantaged sectors, and we will
probably hold these positions. While the increased risk to financial markets
represented by the Asian crisis is not likely to go away quickly, and some U.S.
corporate spreads have already widened significantly, we believe long run the
credit fundamentals for these companies remain strong and yield spreads should
eventually return to tighter levels. We are generally comfortable with our
asset-backed and commercial mortgage-backed securities positions. Mortgage pass-
- - --------------------------------------------------------------------------------
Fixed Income Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
throughs, the one spread sector in which we are underweighted, appear richly
valued, and we would need to see wider spread levels before adding to this
sector.
Warren Ackerman, III
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
FIXED INCOME SECURITIES (89.3%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (60.2%)
U.S. TREASURY BOND (6.8%)
$ 12,500 6.25%, 8/15/23.................................... $ 12,875
----------
U.S. TREASURY NOTES (40.5%)
30,000 7.25%, 8/15/04.................................... 32,424
37,000 6.50%, 8/15/05.................................... 38,607
5,000 6.25%, 2/15/07.................................... 5,159
----------
76,190
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
8 13.00%, 9/01/10................................... 10
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (11.0%)
3,896 6.00%, 9/01/10.................................... 3,841
5,087 6.00%, 2/01/11.................................... 5,015
3,346 8.00%, 2/01/12.................................... 3,456
8,405 6.50%, 4/01/24.................................... 8,339
----------
20,651
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II ARM (1.9%)
3,475 6.00%, 7/20/27.................................... 3,524
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS....................... 113,250
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (4.1%)
2,000 Republic of Colombia, 8.70%, 2/15/16.............. 1,946
6,000 Republic of Poland, "Euro", (Floating Rate),
6.6875%, 10/27/24............................... 5,839
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS.................... 7,785
----------
CORPORATE BONDS AND NOTES (18.4%)
BROADCAST-RADIO & TELEVISION (1.4%)
(n)3,000 Bell Cablemedia plc, 0.00%, 9/15/05............... 2,658
----------
FINANCE (17.0%)
(e)2,500 American General Institutional Capital, Series A,
7.57%, 12/01/45................................. 2,597
(e)1,500 BT Capital Trust, Series B1, 7.90%, 1/15/27....... 1,548
(e)2,000 BankAmerica, 7.70%, 12/31/26...................... 2,059
(e)2,000 First Chicago Corp., 7.75%, 12/01/26.............. 2,087
1,500 First Plus Home Loan Trust, 97-2 M1, 7.60%,
4/10/23......................................... 1,536
3,470 First Union-Lehman Brothers Commercial Mortgage,
Series 97-C2 A1, 6.479%, 3/18/04................ 3,491
2,500 General Motors Acceptance Corp., 7.375%,
6/22/00......................................... 2,567
(e)3,000 Goldman Sachs Group, 6.25%, 2/01/03............... 3,004
(e)2,500 Hutchison Whampoa Ltd., Class B, 7.45%, 8/01/17... 2,418
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ---------------------------------------------------------------------------------
$ 1,300 Lehman Brothers Holdings, Inc., 7.375%, 5/15/04... $ 1,346
4,135 Lehman Brothers Large Loan, Series 97-LLI A1,
6.79%, 10/12/34................................. 4,223
(e)1,500 Liberty Mutual Insurance Co., 7.697%,
10/15/2097...................................... 1,580
(e)1,500 Lumbermens Mutual Casualty Co., 9.15%, 7/01/26.... 1,735
(e)1,500 USF&G Capital Corp., I, 8.50%, 12/15/45........... 1,699
----------
31,890
----------
TOTAL CORPORATE BONDS AND NOTES.................................... 34,548
----------
ASSET BACKED SECURITIES (6.6%)
7 Federal National Mortgage Association, REMIC,
Series 92-59F, (Floating Rate), 6.525%,
8/25/06......................................... 7
2,960 Mid-State Trust, Series IV A, 8.33%, 4/01/30...... 3,206
2,138 Resolution Trust Corp., Series 91-M5, Class A,
9.00%, 3/25/17.................................. 2,138
4,000 Standard Credit Card Trust, 6.75%, 6/07/00........ 4,011
(e)3,000 Team Fleet Financing Corp., 7.35%, 5/15/03........ 3,066
----------
TOTAL ASSET BACKED SECURITIES...................................... 12,428
----------
TOTAL FIXED INCOME SECURITIES (Cost $164,397)........................ 168,011
----------
SHORT-TERM INVESTMENT (8.8%)
REPURCHASE AGREEMENT (8.8%)
16,515 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $16,520,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $16,852 (Cost $16,515)... 16,515
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.1%) (Cost $180,912).............................. 184,526
--------
OTHER ASSETS (2.1%)
Cash..................................................... $ 101
Interest Receivable...................................... 3,037
Receivable for Portfolio Shares Sold..................... 754
Other.................................................... 13 3,905
----------
LIABILITIES (-0.2%)
Payable for Portfolio Shares Redeemed.................... (242)
Investment Advisory Fees Payable......................... (85)
Adminstrative Fees Payable............................... (25)
Directors' Fees and Expenses Payable..................... (8)
Custodian Fees Payable................................... (5)
Distribution Fees Payable................................ (2)
Other Liabilities........................................ (38) (405)
---------- --------
NET ASSETS (100%)...................................................... $188,026
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Fixed Income Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- - ---------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $ 187,414
Distributions in Excess of Net Investment Income..................... (6)
Accumulated Net Realized Loss........................................ (2,996)
Unrealized Appreciation on Investments............................... 3,614
----------
NET ASSETS........................................................... $ 188,026
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - ---------------------------------------------------------------------
NET ASSETS........................................................... $183,192
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,831,566 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................... $10.88
----------
----------
CLASS B:
- - ---------------------------------------------------------------------
NET ASSETS........................................................... $4,834
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 443,708 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................... $10.89
----------
----------
</TABLE>
- - ------------------------------------------------------------
(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, 1997. Maturity date disclosed is the
ultimate maturity date.
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 December 31, 1997.
REMIC -- Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Fixed Income Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australian Dollar 3.9 %
British Pound 7.9 %
Canadian Dollar 3.7 %
Danish Krone 3.0 %
Deutsche Mark 14.5 %
Irish Punt 1.9 %
Italian Lira 5.9 %
Japanese Yen 8.3 %
Spanish Peseta 3.0 %
Swedish Krona 7.1 %
United States Dollar 33.4 %
Other 7.4 %
</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 GLOBAL FIXED INCOME PORTFOLIO--CLASS
INDEX(1) A
<S> <C> <C>
5/1/91* $500,000 $500,000
10/31/91 $538,720 $530,500
10/31/92 $606,455 $585,090
12/31/92 $601,365 $577,395
12/31/93 $675,100 $665,985
12/31/94 $683,750 $625,500
12/31/95 $815,782 $746,347
12/31/96 $851,676 $794,412
12/31/97 $863,599 $806,328
* 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 AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------- ------------------ ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 1.50% 6.91% 7.42%
PORTFOLIO -- CLASS
B..................... 1.29 N/A 3.68
INDEX -- CLASS A...... 1.40 7.51 8.54
INDEX -- CLASS B...... 1.40 N/A 2.90
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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 issues
including governments, agencies, supranational entities and corporations with
varying maturities in various currencies.
For the year ended December 31, 1997, the Portfolio had a total return of 1.50%
for the Class A shares and 1.29% for the Class B shares as compared to a total
return of 1.40% for the J.P. Morgan Traded Global Bond Index (the "Index"). For
the five year period ended December 31, 1997, the average annual total return of
Class A was 6.91% compared to 7.51% for the Index. From inception on May 1, 1991
through December 31, 1997, the average annual total return of Class A was 7.42%
compared to 8.54% for the Index. From inception on January 2, 1996 through
December 31, 1997, the average annual total return of Class B was 3.68% compared
to 2.90% for the Index. As of December 31, 1997, the Portfolio had an SEC 30-day
yield of 4.87% for the Class A shares and 4.72% for the Class B shares.
All global bond markets performed well during 1997 within an environment of
improving economic growth but still benign inflation and local market indices
appreciated between 6% in Germany and 15% in the U.K. More recently, the Asian
economic crisis has given a further boost to fixed income assets given the
expectation of a significant negative impact to both global growth and
inflation.
Despite beginning the year with nominal and real yields at very low levels, the
Japanese market continued to rally, and 10-year yields fell 81 basis points
despite concerns about the stability of the financial sector. The U.S. market in
particular benefited from its safe haven status in the second half of the year
and the belief that any tightening in monetary policy by the Fed was now
delayed. 10-year treasury yields ended the year down 68 basis points with the
long bond at close to 5.90%. The core European markets also performed well and
10-year yields fell 37-47 basis points. However this was as part of an overall
flattening of the curve, as yields rose at the short end in response to monetary
tightening in the fourth quarter. The continued political momentum toward
monetary union was a dominant theme throughout the year and this was reflected
in the further convergence of the high yielding markets to Germany. Spain and
Italy rallied strongly and their 10-year yields ended the period down 125 and
192
- - --------------------------------------------------------------------------------
Global Fixed Income Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
basis points, respectively, with both markets responding positively to rate cuts
during December. Those markets which may be part of the second phase of EMU also
benefited from the convergence euphoria and yield spreads of U.K. and Swedish
bonds also contracted to Germany.
The Portfolio maintained a position of broadly neutral the dollar bloc and
European markets and underweight the Japanese market throughout the year.
On the foreign exchanges the dollar remained well supported by interest rate
differentials, the position of the U.S. economic cycle relative to Europe and
Japan, and more recently by its safe haven status. Over the year, the dollar
rose 14% against the deutschemark and 11% against the Japanese yen. The
Portfolio maintained an overweight position to the U.S. dollar over the year
largely at the expense of the yen.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
Richard B. Worley
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
FIXED INCOME SECURITIES (92.6%)
AUSTRALIAN DOLLAR (3.9%)
GOVERNMENT BONDS (2.5%)
AUD 1,800 Government of Australia 9.00%, 9/15/04........... $ 1,373
1,000 Government of Australia 7.50%, 9/15/09........... 727
--------
2,100
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS-GLOBAL (1.4%)
1,800 Federal National Mortgage Association-Global
6.50%, 7/10/02................................. 1,199
--------
3,299
--------
BRITISH POUND (7.9%)
GOVERNMENT BONDS (7.9%)
GBP 370 United Kingdom Conversion Gilt 9.00%, 7/12/11.... 754
1,080 United Kingdom Treasury Gilt 8.50%, 12/07/05..... 2,003
1,350 United Kingdom Treasury Gilt 8.50%, 7/16/07...... 2,546
700 United Kingdom Treasury Gilt 8.00%, 6/07/21...... 1,397
--------
6,700
--------
CANADIAN DOLLAR (3.7%)
GOVERNMENT BONDS (3.7%)
CAD 2,700 Government of Canada 7.50%, 3/01/01.............. 2,005
1,400 Government of Canada 8.75%, 12/01/05............. 1,175
--------
3,180
--------
DANISH KRONE (3.0%)
GOVERNMENT BONDS (3.0%)
DKK 15,400 Kingdom of Denmark 8.00%, 5/15/03................ 2,538
--------
GERMAN MARK (14.5%)
EUROBONDS (3.4%)
DEM 1,300 KFW International Finance, Inc. 7.50%, 1/24/00... 766
3,500 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 2,082
--------
2,848
--------
GOVERNMENT BONDS (11.1%)
4,450 German Unity Bond 8.00%, 1/21/02................. 2,768
800 Government of Germany 6.875%, 5/12/05............ 491
1,100 Government of Germany 6.25%, 1/04/24............. 642
4,800 Treuhandanstalt 7.00%, 11/25/99.................. 2,825
4,300 Treuhandanstalt 7.50%, 9/09/04................... 2,709
--------
9,435
--------
12,283
--------
IRISH PUNT (1.9%)
GOVERNMENT BONDS (1.9%)
IEP 980 Irish Government 8.00%, 8/18/06.................. 1,626
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - -----------------------------------------------------------------------------
ITALIAN LIRA (5.9%)
GOVERNMENT BONDS (5.9%)
ITL 3,700,000 BTPS 10.00%, 8/01/03............................. $ 2,552
1,450,000 BTPS 9.50%, 1/01/05.............................. 1,006
2,100,000 BTPS 9.50%, 2/01/06.............................. 1,486
--------
5,044
--------
JAPANESE YEN (8.3%)
EUROBONDS (8.3%)
JPY 100,000 European Investment Bank 6.625%, 3/15/00......... 866
230,000 Export Import Bank of Japan 4.375%, 10/01/03..... 2,043
215,000 International Bank for Reconstruction &
Development 4.50%, 6/20/00..................... 1,799
100,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 925
145,000 Republic of Austria 6.25%, 10/16/03.............. 1,404
--------
7,037
--------
SPANISH PESETA (3.0%)
GOVERNMENT BONDS (3.0%)
ESP 380,000 Spanish Government 8.30%, 12/15/98............... 2,578
--------
SWEDISH KRONA (7.1%)
GOVERNMENT BONDS (7.1%)
SEK 19,300 Swedish Government 13.00%, 6/15/01............... 2,986
24,000 Swedish Government 6.00%, 2/09/05................ 3,044
--------
6,030
--------
UNITED STATES DOLLAR (33.4%)
ASSET BACKED SECURITIES (4.0%)
U.S.$ 750 Asset Securitization Corp., CMO,
Series 1996-D3 A1 B 7.21%, 10/13/26............ 780
540 Asset Securitization Corp., CMO,
Series 1995-MD4 A1 7.10%, 8/13/29.............. 561
130 CISCE Series 1997-1 Class A7 Seq, 6.42%,
12/26/09....................................... 131
460 Delta Funding Home Equity Loan Trust, Series
1997-1 7.21%, 4/25/29.......................... 473
819 LB Commercial Conduit Mortgage Trust, (Floating
Rate), CMO 7.14%, 8/25/04...................... 842
540 Mid-State Trust, Series IV A 8.33%, 4/01/30...... 584
--------
3,371
--------
CORPORATE BONDS AND NOTES (2.6%)
(e)500 BankAmerica, 7.70%, 12/31/26..................... 516
(e)150 First Chicago Corp., 7.75%, 12/01/26............. 156
(e)385 Goldman Sachs Group, 6.25%, 2/01/03.............. 386
(e)400 Liberty Mutual Insurance Co., 7.697%,
10/15/2097..................................... 421
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26........................................ 350
365 NB Capital Trust II 7.83%, 12/15/26.............. 384
--------
2,213
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Global Fixed Income Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - -----------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (26.8%)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (1.0%)
U.S.$ 890 6.00%, 8/20/27................................... $ 902
--------
U.S. TREASURY BONDS (8.9%)
670 9.25%, 2/15/16................................... 909
4,660 8.125%, 8/15/19.................................. 5,832
800 6.25%, 8/15/23................................... 825
--------
7,566
--------
U.S. TREASURY NOTES (16.9%)
1,000 6.375%, 5/15/99.................................. 1,009
2,000 5.75%, 10/31/00.................................. 2,003
4,110 6.375%, 3/31/01.................................. 4,187
1,612 3.625%, 7/15/02 (Inflation Indexed).............. 1,605
2,990 7.25%, 5/15/04................................... 3,227
1,300 7.50%, 2/15/05................................... 1,428
905 6.25%, 2/15/07................................... 934
--------
14,393
--------
22,861
--------
28,445
--------
TOTAL FIXED INCOME SECURITIES (92.6%) (Cost $79,699)............. 78,760
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
3,991 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $3,992,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,077 (Cost $3,991).... 3,991
--------
FOREIGN CURRENCY (0.7%)
ITL 966 Italian Lira..................................... 1
JPY 74,840 Japanese Yen..................................... 574
--------
TOTAL FOREIGN CURRENCY (Cost $576)................................. 575
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.0%) (Cost $84,266)........................... 83,326
--------
OTHER ASSETS (2.6%)
Cash................................................. $ 134
Interest Receivable.................................. 1,859
Net Unrealized Gain on Foreign Currency Exchange
Contracts.......................................... 176
Foreign Withholding Tax Reclaim Receivable........... 26
Other................................................ 8 2,203
----------
LIABILITIES (-0.6%)
Payable for Portfolio Shares Redeemed................ (403)
Investment Advisory Fees Payable..................... (46)
Dividend Payable..................................... (21)
Administrative Fees Payable.......................... (12)
Custodian Fees Payable............................... (8)
Directors' Fees and Expenses Payable................. (6)
Other Liabilities.................................... (32) (528)
---------- --------
NET ASSETS (100%).................................................. $ 85,001
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 89,647
Undistributed Net Investment Income................................ 323
Accumulated Net Realized Loss...................................... (4,164)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (805)
--------
NET ASSETS....................................................... $ 85,001
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $ 84,635
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,590,467 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.15
--------
--------
CLASS B:
- - -------------------------------------------------------------------
NET ASSETS......................................................... $ 366
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 32,886 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.13
--------
--------
</TABLE>
- - ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
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
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- - ------------- -------- ---------- ------------- -------- --------
ESP 125,000 $ 821 1/16/98 U.S.$ 832 $ 832 $ 11
AUD 3,675 2,395 1/16/98 U.S.$ 2,484 2,484 89
IEP 1,065 1,515 1/16/98 U.S.$ 1,565 1,565 50
SEK 17,750 2,236 1/16/98 U.S.$ 2,292 2,292 56
GBP 478 785 1/16/98 U.S.$ 803 803 18
U.S.$ 689 689 1/16/98 CAD 975 682 (7)
U.S.$ 1,273 1,273 1/16/98 DEM 2,245 1,249 (24)
U.S.$ 838 838 1/16/98 ESP 125,000 821 (17)
-------- -------- --------
$ 10,552 $ 10,728 $ 176
--------
-------- -------- --------
-------- --------
</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, 1997.
InflationIndex Security -- Security includes principal adjustment feature in
which par amount adjusts with the Consumer Price Index to insulate
bonds from the effects of inflation. The face amount shown is that in
effect on December 31, 1997.
- - ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- - ---------------------------------------------------------------
Finance................................ $ 15,469 18.2%
Foreign Government and Agency
Obligations.......................... 39,231 46.1
U.S. Government and Agency
Obligations.......................... 24,060 28.3
-------- ---
$ 78,760 92.6%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Global Fixed Income Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace & Defense 3.5 %
Banking 1.6 %
Broadcast-Radio & Television 10.9 %
Building Materials and Components 2.2 %
Chemicals 2.3 %
Computers 2.4 %
Electrical Equipment 0.2 %
Electronics 0.8 %
Energy 3.2 %
Entertainment & Leisure 3.4 %
Environmental Controls 2.2 %
Financial Services 10.2 %
Food Services & Lodging 0.5 %
Foreign Government Bonds 1.8 %
Forest Products & Paper 1.4 %
Gaming & Lodging 4.5 %
Health Care Supplies & Services 1.5 %
Hospital Management 1.0 %
Multi-Industry 3.8 %
Packaging & Container 1.2 %
Printing & Publishing 0.8 %
Real Estate 1.1 %
Retail-General 6.0 %
Telecommunications 21.2 %
Technology 0.4 %
Utilities 2.1 %
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>
CS FIRST BOSTON HIGH YIELD
PORTFOLIO--CLASS
HIGH YIELD INDEX(1) A
<S> <C> <C>
9/28/92* $500,000 $500,000
10/31/92 $490,500 $494,800
12/31/92 $503,435 $507,897
12/31/93 $593,400 $616,865
12/31/94 $598,050 $591,000
12/31/95 $701,991 $729,122
12/31/96 $789,038 $838,563
12/31/97 $888,851 $971,643
* 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 AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 15.87% 13.98% 13.46%
PORTFOLIO -- CLASS
B..................... 15.48 N/A 14.94
INDEX -- CLASS A...... 12.65 11.84 11.56
INDEX -- CLASS B...... 12.65 N/A 12.49
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 15.87%
for the Class A shares and 15.48% for the Class B shares, as compared to a total
return of 12.65% for the CS First Boston High Yield Index (the "Index"). For the
five year period ended December 31, 1997, the average annual total return of
Class A was 13.98% compared to 11.84% for the Index. From inception on September
28, 1992 through December 31, 1997, the average annual total return of Class A
was 13.46% compared to 11.56% for the Index. From inception on January 2, 1996
through December 31, 1997, the average annual total return of Class B was 14.94%
compared to 12.49% for the Index. As of December 31, 1997, the Portfolio had an
SEC 30-day yield of 8.34% for the Class A shares and 8.10% for the Class B
shares.
The high yield bond market had another good year in 1997. The Salomon Brothers
High-Yield Market Index returned 13.54% compared to the 10.14% return registered
by the Salomon Brothers Broad Investment Grade Index. Declining long term
interest rates and a strong stock market provided a favorable backdrop to high
yield market.
Ten year Treasury rates declined 67 basis points and thirty year rates declined
72 basis points from the beginning to the end of the year. However short term
interest rates rose resulting in a relatively flat yield curve. The Federal
Reserve boosted short term rates in March because of the fear of future
inflation given the strong economy and tight labor market. These fears have not
materialized so far however and the market retreat in March was short lived.
Inflation reports continue to be excellent and the problems in Asia will only
help keep inflation down.
The strong stock market also supported the high yield market. The S&P 500's 33%
rise increased investors' confidence that earnings will continue upwards and
that companies will have ready access to capital. Portfolio holdings such as
Qwest and Outdoor Systems benefited from IPOs and equity issuance.
The merger and acquisition activity also continued at a high pace.
Stock-for-stock transactions and mergers into high grade companies effectively
delevered many
- - --------------------------------------------------------------------------------
High Yield Portfolio
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
high yield companies and boosted bond prices. Portfolio holdings Brooks Fiber
and recently Teleport were beneficiaries in this category.
The telecommunications sector was by far the best performer during 1997. The
sector benefited from acquisition activity and from the fact that many of the
securities in the industry tend to have a high duration, so declining rates
helped performance also. This was by far our most heavily weighted sector.
We also did a good job avoiding many landmines in 1997. The supermarket
industry, generally a popular one in the market, had several high profile credit
problems which we avoided. Subprime finance companies and auto suppliers were
also sectors that experienced problems that we successfully avoided.
Emerging markets is another area of importance to our Portfolio. We started the
year with nearly a twenty percent weighting in emerging markets debt. This area
performed spectacularly and as spreads narrowed dramatically we cut our position
by approximately a third. Our timing was fortunate in that this was accomplished
shortly before the Asian crisis. Although we had little exposure to Asia at the
time, Latin credits were also hammered during the rout. Latin bonds rebounded
fairly quickly as opposed to the Asians, but volatility still is evident in
these markets. We have increased our exposure to the Asians as we believe the
IMF bailouts will enable the sovereigns and some of the major corporates to
avoid default.
We are well positioned for 1998. We currently have little exposure to cyclical
credits. We maintain a high allocation to the telecommunications sector where
fundamentals continue to appear very positive. The emerging markets sector is
where we hope for more aggressive returns, but we acknowledge the potential
risks. We attempt to mitigate this risk by investing primarily in what we
consider world class companies or those that have very strong sponsorship and in
sovereign issues where we believe there is significant value.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (71.3%)
BANKING (1.6%)
$ 355 Korea Development Bank, 7.375%, 9/17/04........... $ 286
1,660 Western Financial Bank, 8.875%, 8/01/07........... 1,648
----------
1,934
----------
BROADCAST-RADIO & TELEVISION (10.9%)
2,360 Cablevision Systems Corp., 9.875%, 5/15/06........ 2,593
(e)625 Fox/Liberty Networks LLC, 8.875%, 8/15/07......... 626
(e,n)1,545 Fox/Liberty Networks LLC, 0.00%, 8/15/07.......... 989
390 Lenfest Communications, Inc., 8.375%, 11/01/05.... 402
1,050 Multicanal, 10.50%, 2/01/07....................... 1,040
1,850 Paramount Communications, Inc., 8.25%, 8/01/22.... 1,865
(e)1,100 RBS Participacoes, 11.00%, 4/01/07................ 1,015
1,500 Rogers Cantel, Inc., 8.30%, 10/01/07.............. 1,491
200 Rogers Cablesystems of America, 10.125%,
9/01/12......................................... 219
(e)1,015 Sinclair Broadcast Group, Inc., 9.00%, 7/15/07.... 1,035
1,770 TV Azteca, 10.50%, 2/15/07........................ 1,830
----------
13,105
----------
BUILDING MATERIALS & COMPONENTS (2.2%)
2,505 Outdoor Systems, Inc., 8.875%, 6/15/07............ 2,611
----------
CHEMICALS (2.3%)
(e)1,075 Huntsman Corp., (Floating Rate), 9.09375%,
7/01/07......................................... 1,123
1,620 ISP Holdings, Inc., Series B, 9.00%, 10/15/03..... 1,682
----------
2,805
----------
COMPUTERS (2.4%)
2,405 Advanced Micro Devices, Inc., 11.00%, 8/01/03..... 2,585
(e)300 Concentric Network Corp., 12.75%, 12/15/07........ 308
----------
2,893
----------
ELECTRONICS (0.8%)
(e)1,060 Hyundai Semiconductor, 8.625%, 5/15/07............ 779
(e)200 Samsung Electronics Co., 7.45%, 10/01/02.......... 154
----------
933
----------
ENERGY (3.2%)
(e)950 Newpark Resources, Inc., 8.625%, 12/15/07......... 967
1,000 Nuevo Energy Co., 9.50%, 4/15/06.................. 1,068
1,250 Snyder Oil Corp., 8.75%, 6/15/07.................. 1,272
(e,n)675 Transamerican Energy, 0.00%, 6/15/02.............. 533
----------
3,840
----------
ENVIRONMENTAL CONTROLS (2.2%)
(n)2,300 Norcal Waste Systems, Inc., Series B, 13.50%,
11/15/05........................................ 2,674
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
FINANCIAL SERVICES (1.8%)
$ 500 Criimi Mae, Inc., 9.125%, 12/01/02................ $ 503
415 Navistar Financial Corp., 9.00%, 6/01/02.......... 427
(e,n)1,835 PTC International Finance BV, 0.00%, 7/01/07...... 1,184
----------
2,114
----------
FOOD SERVICE & LODGING (0.5%)
(e)550 AmeriServ Food Co., 10.125%, 7/15/07.............. 571
----------
FOREST PRODUCTS & PAPER (1.4%)
(n)2,020 APP Fin II Mauritius Ltd., 12.00%, 2/15/04........ 1,702
----------
GAMING & LODGING (4.5%)
1,740 Grand Casinos, Inc., 10.125%, 12/01/03............ 1,879
(e)1,230 Horseshoe Gaming LLC, Series B, 9.375%, 6/15/07... 1,285
496 Louisiana Casino Cruises, Inc., 11.50%,
12/01/98........................................ 501
1,690 Station Casinos, Inc., 10.125%, 3/15/06........... 1,779
----------
5,444
----------
HEALTH CARE SUPPLIES & SERVICES (1.5%)
1,730 Tenet Healthcare Corp., 8.625%, 1/15/07........... 1,784
----------
HOSPITAL MANAGEMENT (1.0%)
(e)1,200 Vencor, Inc., 8.625%, 7/15/07..................... 1,202
----------
MULTI-INDUSTRY (3.8%)
(e)355 Hermes Europe Railtel BV, 11.50%, 8/15/07......... 392
(e)900 HYLSA S.A. de C.V., 9.25%, 9/15/07................ 883
(e)1,905 Murrin Murrin Holdings, PTY, 9.375%, 8/31/07...... 1,898
2,100 Revlon Worldwide Corp., Series B, Zero Coupon,
3/15/01......................................... 1,449
----------
4,622
----------
PACKAGING & CONTAINER (1.2%)
1,245 SD Warren Co., 12.00%, 12/15/04................... 1,391
----------
PRINTING & PUBLISHING (0.8%)
(e)1,000 Big Flower Holdings, Inc., 8.875%, 7/01/07........ 1,010
----------
REAL ESTATE (1.1%)
1,250 HMC Acquisition Properties, Series B, 9.00%,
12/15/07........................................ 1,303
----------
RETAIL-GENERAL (6.0%)
(e)1,205 Fleming Cos., Inc., 10.50%, 12/01/04.............. 1,261
(e)385 Fleming Cos., Inc., 10.625%, 7/31/07.............. 406
1,900 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05......................................... 2,014
650 Kmart Corp., 7.75%, 10/01/12...................... 632
3,285 Southland Corp., 5.00%, 12/15/03.................. 2,874
----------
7,187
----------
TECHNOLOGY (0.4%)
665 AST Research, Inc., 7.45%, 10/01/02............... 513
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
High Yield Portfolio
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (19.6%)
$ (e)1,840 Comcast Cellular Corp., Series B, 9.50%,
5/01/07......................................... $ 1,918
810 Comcast Corp., 1.125%, 4/15/07.................... 534
(n)2,175 Dial Call Communications, 0.00%, 4/15/04.......... 2,077
650 Esprit Telecom Group plc, 11.50%, 12/15/07........ 671
(e)1,195 Globalstar Capital Corp., 11.375%, 2/15/04........ 1,216
(e)680 Globo Communicacoes e Participacoes Ltd., 10.50%,
12/20/06........................................ 653
600 InterAmericas Communications Corp., 14.00%,
10/27/07........................................ 606
605 Iridium LLC/Capital Corp., Series A, 13.00%,
7/15/05......................................... 635
1,655 IXC Communications, Inc., Series B, 12.50%,
10/01/05........................................ 1,903
(e,n)2,985 Nextel Communications, Inc., 0.00%, 8/15/04....... 2,649
(n)2,275 Occidente y Caribe Cellular, 0.00%, 3/15/04
(Colombia)...................................... 1,706
555 Qwest Communications International, Inc., Series
B, 10.875%, 4/01/07............................. 627
690 Rogers Communications, Inc., 9.125%, 1/15/06...... 701
925 Rogers Communications, Inc., 8.875%, 7/15/07...... 926
(e,n)3,420 TCI Satellite Entertainment, Inc., 0.00%,
2/15/07......................................... 2,283
(n)3,025 Teleport Communications Group, Inc., 0.00%,
7/01/07......................................... 2,473
(e,n)1,855 Telesystem International Wireless, Inc., 0.00%,
11/01/07........................................ 1,039
1,010 Teligent, Inc., 11.50%, 12/01/07.................. 1,014
----------
23,631
----------
UTILITIES (2.1%)
(e)1,135 AES Corp., 8.50%, 11/01/07........................ 1,138
541 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................. 579
650 Midland Funding II, Series A, 11.75%, 7/23/05..... 764
----------
2,481
----------
TOTAL CORPORATE BONDS AND NOTES (Cost $83,567)................ 85,750
----------
ASSET BACKED SECURITIES (10.7%)
AEROSPACE & DEFENSE (3.5%)
1,945 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06...... 2,101
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14........................................ 701
(e)1,050 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13......................................... 1,414
----------
4,216
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - --------------------------------------------------------------------------
BANKING (0.0%)
$ 1 PNC Mortgage Securities Corp., Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................. $ --
----------
FINANCIAL SERVICES (7.2%)
(e)979 CA FM Lease Trust, 8.50%, 7/15/17................. 1,031
1,277 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10.............................. 1,182
2,537 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07.............................. 2,492
1,175 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................. 1,154
(e)879 FMAC Loan Receivables Trust, Series 1996-B, Class
C, (Floating Rate), 7.929%, 11/01/18............ 787
(e)904 Long Beach Auto, Series 1997-1, Class B, 14.22%,
10/26/03........................................ 905
(e)1,000 Riggs Capital Trust II, 8.875%, 3/15/27........... 1,106
----------
8,657
----------
TOTAL ASSET BACKED SECURITIES (Cost $11,662).................. 12,873
----------
FOREIGN GOVERNMENT BONDS (1.8%)
(n)2,375 Republic of Argentina Par Bonds, Series L, Euro,
5.50%, 3/31/23.................................. 1,745
14 Republic of Argentina, Series L, Euro, (Floating
Rate), 6.6875%, 3/31/05......................... 13
400 Republic of Colombia, 8.70%, 2/15/16.............. 388
----------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $1,954).................. 2,146
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- - ----------
COMMON STOCKS (0.3%)
FINANCIAL SERVICES (0.0%)
(a,d) WestFed Holdings, Inc., Class B................... --
1,268
----------
FOOD SERVICE & LODGING (0.0%)
(a,e) Motels of America, Inc............................ 14
1,300
----------
TELECOMMUNICATIONS (0.3%)
(a) 10,689 Nextel Communications, Inc., Class A.............. 278
----------
TOTAL COMMON STOCKS (Cost $258)............................... 292
----------
PREFERRED STOCKS (5.7%)
ENTERTAINMENT & LEISURE (3.4%)
3,576 Time Warner Inc., Series M, 10.25%, 7/01/16....... 4,028
----------
FINANCIAL SERVICES (1.2%)
13,500 Sinclair Capital, 11.625%, 3/15/09................ 1,485
3,239 WestFed Holdings, Inc., Series A, PIK, Zero
Coupon, 1/01/01................................. --
----------
1,485
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
High Yield Portfolio
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - --------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (1.1%)
(a) 1,189 IXC Communications, Inc., PIK, 12.50%, 8/15/09.... $ 1,367
----------
TOTAL PREFERRED STOCKS (Cost $6,403).......................... 6,880
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- - ----------
WARRANTS (0.4%)
AEROSPACE & DEFENSE (0.0%)
(a) 500 Sabreliner Corp., expiring 4/15/03................ --
----------
ELECTRICAL EQUIPMENT (0.2%)
(a,e) Protection One Alarm, Inc., expiring 11/01/03..... 185
28,000
----------
GAMING & LODGING (0.0%)
(a) 1,725 Louisiana Casino Cruises, Inc., expiring
12/01/98........................................ --
----------
INSURANCE (0.0%)
(a,d) 500 Horace Mann Educators Corp., expiring 8/15/99..... 7
----------
PACKAGING & CONTAINER (0.0%)
(a,e) Crown Packaging Holdings, Ltd., expiring
1,000 11/01/03........................................ --
----------
TELECOMMUNICATIONS (0.2%)
(a,e) Globalstar Telecommunications Ltd., expiring
1,830 2/15/04......................................... 201
(a,e) 605 Iridium World Communications, Inc., expiring
07/15/05........................................ 73
(a,d) Nextel Communications, Inc., expiring 4/25/99..... --
3,000
(a,d) Occidente y Caribe Cellular, expiring 3/15/04..... --
9,100
----------
274
----------
TOTAL WARRANTS (Cost $154).................................... 466
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- - ----------
SHORT-TERM INVESTMENT (13.7%)
REPURCHASE AGREEMENT (13.7%)
$ 16,502 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $16,507,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $16,842 (Cost $16,502)... 16,502
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
------------------------------------------------------------------------
TOTAL INVESTMENTS (103.9%) (Cost $120,500).................. $ 124,909
----------
OTHER ASSETS (1.8%)
Interest Receivable........................... $ 1,890
Receivable for Portfolio Shares Sold.......... 236
Other......................................... 8 2,134
----------
LIABILITIES (-5.7%)
Payable for Investments Purchased............. (6,486)
Payable for Portfolio Shares Redeemed......... (142)
Investment Advisory Fees Payable.............. (82)
Bank Overdraft................................ (28)
Administrative Fees Payable................... (14)
Directors' Fees & Expenses Payable............ (5)
Custodian Fees Payable........................ (4)
Distribution Fees Payable..................... (4)
Other Liabilities............................. (59) (6,824)
---------- ----------
NET ASSETS (100.0%)......................................... $ 120,219
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSISTS OF:
Paid in Capital............................................... $ 114,934
Undistributed Net Investment Income........................... 90
Accumulated Net Realized Gain................................. 786
Unrealized Appreciation on Investments........................ 4,409
----------
NET ASSETS.................................................... $ 120,219
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $113,006
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,760,251 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.58
----------
----------
CLASS B:
- - --------------------------------------------------------------
NET ASSETS.................................................... $7,213
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 624,162 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.56
----------
----------
</TABLE>
- - ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair market 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, 1997. Maturity date disclosed is the
ultimate maturity date.
PIK -- Payment-In-Kind. Income may be received 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, 1997.
At December 31, 1997, approximately 87% 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
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
%
Daily Variable Rate Bonds 1.5
Fixed Rate Instruments 97.7
Other 0.8
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- - ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LEHMAN 7-YEAR MUNICIPAL MUNICIPAL BOND
PORTFOLIO--CLASS
BOND INDEX(1) A
<S> <C> <C>
1/18/95* $500,000 $500,000
12/31/95 $560,150 $544,000
12/31/96 $584,629 $563,965
12/31/97 $629,470 $604,852
* 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 LEHMAN 7-YEAR
MUNICIPAL BOND INDEX(1)
- - ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 7.25% 6.66%
INDEX............................ 7.67 8.12
</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.
- - ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE 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, 1997, the Portfolio had a total return of 7.25%
for the Class A shares compared to a total return of 7.67% for the Lehman 7-Year
Municipal Bond Index (the "Index"). From inception on January 18, 1995 through
December 31, 1997, the average annual total return of Classs A was 6.66%
compared to 8.12% for the Index. As of December 31, 1997, the Portfolio had an
SEC 30-day yield of 4.20% for the Class A shares.
The municipal bond market produced another quarter of solid returns during the
fourth quarter of 1997. Benefitting from turmoil in the broader global
marketplace, Municipals, while lagging Treasuries, still produced the third
consecutive quarter in which yields have declined. The municipal yield curve
flattened considerably during the quarter, with long rates falling almost
twenty-five basis points, while two year rates were unchanged to five basis
points lower. While the major inflationary measures had already been remarkably
well behaved, the Asian crisis further reduced inflation expectations, causing
long rates to fall. In addition, the rapid decline in the U.S. budget deficit
has reduced the outlook for future issuance of Treasury securities, further
supporting the Treasury rally which spilled over into the municipal bond market.
Unlike prior quarters in which domestic economic considerations had been the
prime determinant of bond market returns, global events were a far more
important influence during the fourth quarter. Severe financial stress in
various parts of Asia produced a strong preference in the financial markets for
the perceived quality and safety of the U.S. fixed income markets. The Asian
problems involved a vicious cycle of rapidly declining currency and equity
markets, banking system deterioration, falling foreign exchange reserves and
ultimately questions about the ability of some countries to service foreign
currency debt. Despite efforts by the International Monetary Fund to contain the
crisis initially to Thailand, it quickly spread to other parts of Southeast Asia
and then to Korea, the world's 11th largest economy.
- - --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
The Asian problems should have a sizeable effect on the global economy. Beyond
the direct contractionary effects on the growth rates of the impacted countries,
secondary effects could be sizeable for those countries with significant trade
or lending exposure to the region. In terms of the response of the Federal
Reserve to the Asian problems, from a price perspective, the collapse in Asian
currency values relative to the dollar should have a restraining effect on U.S.
inflation. Perhaps most importantly, given the close integration of the global
financial system, the Fed is concerned that balance of payment crises in one
region can spread rapidly through the global financial system, causing serious
problems for the real economy. As a result, the primary focus of the Federal
Reserve appears to have shifted from a concern with the strength of the U.S.
domestic economy, to one of closely monitoring the situation in Asia and
assuring that it does not adversely impact the global financial system. Thus,
despite the lowest unemployment rates since 1970 and strong GDP growth, the Fed
shows no inclination to tighten monetary policy. Indeed, recognizing the
fragility of many global markets, should the Asian crisis worsen, the Fed's next
move could potentially be to ease.
The low interest rate levels in 1997 led to an increase in both new money and
refunding issuance in the municipal bond market. Total 1997 new issue supply of
$220.4 billion was a 19% increase from 1996 levels and the third busiest year
ever. The portion representing new money (vs. refundings) of $140.2 billion was
the biggest year ever for new money issuance. The growing demand for public
works along with lower absolute interest rates and improving state and local
finances together combined to fuel the increase. Bonds issued for educational
purposes led the stampede of issuance, followed by the health care and
transportation sectors. With primary and secondary school enrollments across the
country continuing to grow, the pressure on school districts to construct
additional educational facilities has been strong. We expect 1998 total new
issue supply to be slightly lower than 1997 issuance levels. The demand side of
the equation was led by the healthy appetite of insurance companies spurred on
by attractive Municipal/Treasury ratios and individual investors who became
enamored with bonds as they were not so subtly reminded that equity markets can
go down.
The Portfolio ended the year with an average maturity of 7.89 years, slightly
longer than the Index. The Portfolio is largely comprised of high credit quality
premium coupon bonds, with an emphasis placed on the current income of the
Portfolio. Going into 1998, we intend to maintain this emphasis, and will
continue to look for opportunities to enhance the value of the Portfolio.
Lori A. Cohane
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Municipal Bond Portfolio
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ---------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (99.2%)
DAILY VARIABLE RATE BONDS (1.5%)
$ 400 Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, Series 84-D,
5.10%, 11/01/14................................ $ 400
300 New York City, New York, General Obligation
Bonds, Sub. Series A-4, 5.00%, 8/01/22......... 300
200 Ohio State, Air Quality Development Authority
Revenue Bonds, Series 95-B, 4.50%, 12/01/15.... 200
-------
TOTAL DAILY VARIABLE RATE BONDS (Cost $900)............... 900
-------
FIXED RATE INSTRUMENTS (97.7%)
825 Albuquerque, New Mexico, General Obligation
Bonds, Series B, 4.70%, 7/01/98................ 829
1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05........................................ 1,628
1,000 California State, Department of Water Revenue
Bonds, Series Q, 6.00%, 12/01/10............... 1,140
1,920 City of Dallas, Texas, General Obligation Bonds,
6.00%, 2/15/06................................. 2,137
100 Connecticut State, General Obligation Bonds,
Series A, 4.75%, 11/15/01...................... 103
250 Connecticut State, General Obligation Bonds,
Series A, 9.875%, 3/01/01...................... 293
250 Connecticut State, General Obligation Bonds,
Series C, 5.50%, 3/15/03....................... 265
175 Connecticut State, General Obligation Bonds,
Series C, 6.15%, 11/15/03...................... 190
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12....................... 1,689
1,565 Connecticut State, Housing Finance Authority,
Revenue Bonds, Sub. Series D-1, 6.20%,
5/15/17........................................ 1,639
1,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102..................... 1,095
500 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 544
500 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22, Prerefunded 4/01/07 at
102............................................ 565
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,631
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.............................. 1,066
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 581
1,000 Gwinnett County, Georgia, General Obligation
Bonds, 6.00%, 1/01/11.......................... 1,085
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- - ---------------------------------------------------------------------
$ 1,000 Hawaii State, General Obligation Bonds, Series
CJ, 6.20%, 1/01/12, Prerefunded 1/01/05 at
100............................................ $ 1,111
450 Houston, Texas, Water & Sewer Systems, Revenue
Bonds, Series B, 6.25%, 12/01/05............... 506
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,052
1,000 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.60%, 11/01/00................................ 1,054
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded 11/01/99 at 102... 1,235
1,000 Massachusetts State Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded 3/01/00 at 102..... 1,090
500 Massachusetts State General Obligation Bonds,
Series A, 7.625%, 6/01/08, Prerefunded 6/01/01
at 102......................................... 564
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,745
1,590 Minnesota State Infrastructure Development,
General Obligation Bonds, 6.80%, 8/01/03,
Prerefunded 8/01/00 at 100..................... 1,698
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09, Prerefunded 2/01/05 at 100..... 1,537
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13........................................ 1,585
2,000 Municipal Assistance Corp. for City of New York,
NY, Revenue Bonds, 6.00%, 7/01/04.............. 2,196
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....................... 1,057
1,475 Ohio State, General Obligation Bonds, 6.65%,
8/01/05........................................ 1,699
1,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14........................................ 1,068
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds, Series D, 6.75%,
10/01/17....................................... 1,224
500 Palm Beach County, Florida, General Obligation
Bonds, Series B, 6.75%, 7/01/11................ 605
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.......... 1,093
600 Salt Lake City, Utah, General Obligation Bonds,
6.375%, 6/15/11................................ 637
1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14, Prerefunded 8/01/04 at 100..... 1,516
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Bond Portfolio
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - ---------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Shelby County, Tennessee, General Obligation
Bonds, Series A, 5.50%, 3/01/08................ $ 1,088
1,385 Shelby County, Tennessee, General Obligation
Bonds, Series B, 5.50%, 8/01/10................ 1,503
1,250 Texas A & M University, Revenue Bonds, Series B,
6.00%, 7/01/11................................. 1,327
1,500 Texas State, Public Finance Authority, Series A,
5.95%, 10/01/15................................ 1,611
1,500 Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, Series Y, 6.00%, 1/01/12........ 1,690
1,000 Utah State, Housing Financing Agency, Single
Family Mortgage Revenue Bonds, Series G-1,
Class I, 5.50%, 7/01/16........................ 1,020
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10.......................... 1,099
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 546
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,094
1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... 1,170
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102.................... 551
1,440 Wisconsin State, Clean Water Revenue Bond, Series
1, 6.875%, 6/01/11............................. 1,746
1,115 Wisconsin State, General Obligation Bonds, Series
2, 5.125%, 11/01/11............................ 1,162
-------
TOTAL FIXED RATE INSTRUMENTS (Cost $56,725)............... 59,148
-------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $57,625)................. 60,048
-------
TOTAL INVESTMENTS (99.2%) (Cost $57,625).................... 60,048
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.9%)
Cash....................................... $ 91
Interest Receivable........................ 1,057
Other...................................... 1 1,149
----------
LIABILITIES (-1.1%)
Payable for Investments Purchased.......... (599)
Investment Advisory Fees Payable........... (14)
Adminstrative Fees Payable................. (8)
Director's Fees & Expenses Payable......... (3)
Custodian Fees Payable..................... (2)
Other...................................... (30) (656)
---------- --------
NET ASSETS (100%)........................................ $ 60,541
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 58,120
Distributions in Excess of Net Investment Income.............. (1)
Accumulated Net Realized Loss................................. (1)
Unrealized Appreciation on Investments........................ 2,423
--------
NET ASSETS.................................................... $ 60,541
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- - ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- - --------------------------------------------------------------
NET ASSETS.................................................... $ 60,541
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,761,908 outstanding $0.001 par value
shares (authorized 500,000,000 shares)...................... $10.51
----------
----------
</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 agreement.
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
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- - ---------------------------------------------------------------
California............................. $ 1,140 1.9%
Connecticut............................ 4,179 6.9
Delaware............................... 2,174 3.6
Florida................................ 4,553 7.5
Georgia................................ 2,732 4.5
Hawaii................................. 1,111 1.8
Kentucky............................... 1,052 1.7
Maryland............................... 3,917 6.5
Massachusetts.......................... 1,654 2.7
Michigan............................... 1,745 2.9
Minnesota.............................. 1,698 2.8
Mississippi............................ 1,537 2.5
Montana................................ 1,585 2.6
New Jersey............................. 1,057 1.8
New Mexico............................. 829 1.4
New York............................... 4,186 6.9
Ohio................................... 2,967 4.9
Puerto Rico............................ 333 0.6
Tennessee.............................. 2,591 4.3
Texas.................................. 8,473 14.0
Utah................................... 1,657 2.7
Virginia............................... 3,849 6.4
Washington............................. 1,722 2.8
Wisconsin.............................. 2,907 4.8
Wyoming................................ 400 0.7
-------- -----
$ 60,048 99.2%
-------- -----
-------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Bond Portfolio
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Certificates of Deposit 19.4%
Commercial Paper 66.0%
Corporate Floating Rate Notes 7.2%
U.S. Government Agency Discount Notes 1.0%
U.S. Government Agency Floating Rate
Notes 0.8%
Other 5.6%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- - --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 30-DAY YIELDS IBC MONEY FUND COMPARABLE YIELDS
<S> <C> <C>
Jan. 4.96% 4.84%
Feb. 4.94% 4.82%
Mar. 4.96% 4.84%
Apr. 4.99% 4.94%
May 5.06% 4.98%
Jun. 5.11% 5.02%
Jul. 5.12% 5.32%
Aug. 5.17% 5.32%
Sep. 5.17% 5.31%
Oct. 5.16% 5.30%
Nov. 5.17% 5.33%
Dec. 5.19% 5.40%
</TABLE>
- - ------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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, 1997 were 5.25% and 5.39%, 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 1997. 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 pre-emptive 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.
During the second half of 1997, the market obsessed about the relative strength
of the economy and speculated about how long the U.S. could continue functioning
at full employment and at what point inflation would begin to creep into the
equation. Market participants examined all of these factors within the framework
of the Federal Reserve and at what point they would find it necessary to
increase
- - --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
interest rates. One year Treasury bills declined as much as 20 basis points
(0.20%) in the third quarter, and the money market curve flattened quite
dramatically with the spread between three month and one year T-bills
compressing by 14 basis points to only 34 basis points by the end of the third
quarter.
The market was beginning to follow a pattern moving in one direction and then
another as data were released or a Federal Open Market Committee meeting
approached and then passed without any action on the part of the Fed. This
relative "calm" in the market halted abruptly on October 27th as currency and
market crises in Asia suddenly rattled the U.S. stock markets. Foreign stock
markets tumbled, particularly Hong Kong, and the U.S. market
followed suit. As these markets plummeted, U.S. investors concluded that the
Federal Reserve would shift their focus away from the U.S. economic fundamentals
and turn their attention toward world markets. In the face of these new
developments, the U.S. bond market rallied experiencing a flight to quality.
The November employment data was released in early December indicating that
employment remained very strong. The inflation statistics that followed were
very positive indicating that inflation still was not an issue. The market began
to discuss the Federal Reserve's need to act. If the Asian crisis had not
happened, the market's general sentiment was that the December FOMC meeting
would have resulted in a 25 basis point tightening. Instead the Fed made no
change. Through this period, market levels remained strong, and the yield curve
flattened even more than it already had in September. At the end of December the
spread between three month and one year Treasury bills was approximately 15
basis points.
With no protection against possible Federal Reserve tightening built into the
front end of the yield curve, we found little value in the market particularly
in the one year area of the money market curve. Finally, anchored by a 5.5%
funds rate, the entire yield curve has flattened, offering less opportunity to
enhance returns by rolling down the curve.
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 was positioned defensively,
slightly short of neutral for the balance of the second quarter and throughout
the third quarter. In October prior to the Asian crisis, there was a brief
period during which one year spread paper offered attractive value at 6.0%. At
this time we extended the Portfolio to 55 days. For the balance of the year we
maintain a similar weighted average maturity ultimately finishing the year at 57
days.
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 100% of the assets invested in securities rated
A1/P1 or better.
Abigail Jones Feder
PORTFOLIO MANAGER
Daniel M. Niland
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Money Market Portfolio
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - -------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (94.4%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (1.8%)
AGENCY DISCOUNT NOTES (1.0%)
$15,000 Federal Home Loan Mortgage Corporation 6.00%,
4/08/98........................................ $ 14,991
-----------
AGENCY FLOATING RATE NOTES (0.8%)
13,000 Federal National Mortgage Association 5.62%,
7/26/99........................................ 12,978
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost
$27,969).................................................. 27,969
-----------
ASSET BACKED COMMERCIAL PAPER (7.9%)
SINGLE PURPOSE CORPORATION (7.9%)
10,000 Asset Securitization Corp. 5.62%, 2/20/98........ 9,922
13,000 Asset Securitization Corp. 5.79%, 3/24/98........ 12,831
10,000 Delaware Funding 5.75%, 1/16/98.................. 9,976
25,000 Delaware Funding 5.82%, 2/12/98.................. 24,831
30,000 Eiger Capital Corp. 5.81%, 2/13/98............... 29,793
31,500 Greenwich Funding 5.93%, 1/09/98................. 31,458
-----------
TOTAL ASSET BACKED COMMERCIAL PAPER
(Cost $118,811)........................................... 118,811
-----------
COMMERCIAL PAPER (58.1%)
AUTOMOTIVE (6.7%)
20,000 Associates Corp. 5.78%, 2/06/98.................. 19,885
15,000 Associates Corp. 5.80%, 2/13/98.................. 14,897
15,850 Daimler Benz North America Corp. 5.79%,
2/18/98........................................ 15,728
17,000 Daimler Benz North America Corp. 5.60%,
3/02/98........................................ 16,843
20,000 Toyota Motor Credit Corp. 5.68%, 1/30/98......... 19,909
13,000 Toyota Motor Credit Corp. 5.82%, 3/06/98......... 12,867
-----------
100,129
-----------
BANKS (23.5%)
13,700 ABN-AMRO North American Finance, Inc. 5.61%,
2/23/98........................................ 13,588
4,000 Bank of America 5.72%, 1/20/98................... 3,988
19,700 Bank of America 5.59%, 1/29/98................... 19,615
30,000 Barclays Bank U.S. Funding Corp. 5.77%,
2/02/98........................................ 29,847
39,700 Bayerishe Landesbank 5.75%, 3/11/98.............. 39,267
15,000 Credit Suisse 5.64%, 2/10/98..................... 14,907
30,000 Dresdner U.S. Finance 5.78%, 2/03/98............. 29,842
8,000 First Chicago Finance Corp. 5.81%, 2/09/98....... 7,950
20,000 First Chicago Finance Corp. 5.75%, 2/26/98....... 19,823
6,000 First Chicago Finance Corp. 5.67%, 5/06/98....... 5,884
41,700 Internationale Nederlanden Finance 5.78%,
3/05/98........................................ 41,282
20,000 J.P. Morgan & Co. 5.79%, 6/18/98................. 19,474
38,700 Rabobank U.S. Finance Corp. 5.65%, 4/29/98....... 37,996
10,700 Royal Bank of Scotland 5.61%, 1/27/98............ 10,657
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - -------------------------------------------------------------------------
$20,000 UBS Finance, Inc. 5.96%, 1/12/98................. $ 19,964
40,000 Westdeutche Landesbank 5.55%, 1/26/98............ 39,846
-----------
353,930
-----------
CONSUMER GOODS (4.4%)
15,000 General Electric Capital Corp. 5.58%, 2/26/98.... 14,871
37,300 H.J. Heinz Co. 5.79%, 2/11/98.................... 37,056
15,000 Warner Lambert Co. 5.56%, 3/17/98................ 14,828
-----------
66,755
-----------
ELECTRONICS (5.3%)
28,700 Electronic Data Systems 5.79%, 2/13/98........... 28,503
10,000 Panasonic Finance 5.58%, 3/02/98................. 9,908
15,700 Panasonic Finance 5.61%, 3/04/98................. 15,550
26,700 Siemens Capital Corp. 5.61%, 2/19/98............. 26,497
-----------
80,458
-----------
FINANCE (6.9%)
30,000 American Express Credit Corp. 5.52%, 2/05/98..... 29,840
20,000 CIT Group Holdings 6.02%, 1/20/98................ 19,937
15,000 Commercial Credit Corp. 5.58%, 2/09/98........... 14,910
15,000 Commercial Credit Corp. 5.69%, 2/20/98........... 14,882
24,700 Transamerica Financial Corp. 5.67%, 1/23/98...... 24,615
-----------
104,184
-----------
INSURANCE (4.1%)
10,000 General Reinsurance Corp. 5.82%, 4/23/98......... 9,822
5,086 MetLife Funding Inc. 5.78%, 3/23/98.............. 5,021
10,000 Prudential Funding 5.80%, 4/02/98................ 9,855
14,000 USAA Capital Corp. 5.68%, 1/21/98................ 13,956
23,300 USAA Capital Corp. 5.60%, 2/06/98................ 23,170
-----------
61,824
-----------
INVESTMENT BANKING (2.6%)
40,000 Merrill Lynch 5.79%, 2/13/98..................... 39,725
-----------
TELECOMMUNICATIONS (3.0%)
20,000 AT&T Capital Corp. 5.79%, 3/09/98................ 19,787
14,700 Bell South Telecommunications 5.74%, 2/11/98..... 14,605
10,000 Southern New England Telephone 5.92%, 1/20/98.... 9,969
-----------
44,361
-----------
UTILITIES (1.6%)
10,000 National Rural Utilities 5.55%, 1/27/98.......... 9,960
13,700 National Rural Utilities 5.79%, 4/28/98.......... 13,447
-----------
23,407
-----------
TOTAL COMMERCIAL PAPER (Cost $874,773).................... 874,773
-----------
CORPORATE FLOATING RATE NOTES (7.2%)
BANKS (5.2%)
20,000 Bank One, Columbus 5.61%, 9/16/98................ 20,007
8,500 Bank One, Dayton 6.22%, 8/21/98.................. 8,502
20,000 Morgan Guaranty Trust New York 5.63%, 3/25/98.... 20,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Money Market Portfolio
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- - -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
CORPORATE FLOATING RATE NOTES (CONT.)
BANKS (CONT.)
<TABLE>
<C> <S> <C>
$ 9,000 Societe Generale Bank (Yankee) 6.16%, 1/15/98.... $ 9,000
20,000 Societe Generale Bank 6.14%, 8/28/98............. 19,994
-----------
77,503
-----------
ELECTRONICS (2.0%)
30,000 IBM Credit Corp. 5.66%, 11/20/98................. 30,000
-----------
TOTAL CORPORATE FLOATING RATE NOTES
(Cost $107,503)........................................... 107,503
-----------
CERTIFICATES OF DEPOSIT (19.4%)
BANKS (19.4%)
20,000 Australia & New Zealand Bank, New York 5.68%,
2/27/98........................................ 20,000
23,000 Bank of Montreal, Chicago (Yankee) 5.80%,
11/06/98....................................... 22,990
6,000 Barclays Bank 5.94%, 6/19/98..................... 6,003
28,000 Canadian Imperial Bank, New York 5.82%,
2/09/98........................................ 28,000
12,000 Canadian Imperial Bank (Yankee) 5.94%,
10/23/98....................................... 12,007
3,000 Chase Manhattan 5.75%, 2/11/98................... 3,000
15,000 Credit Agricole (Yankee) 5.75%, 3/19/98.......... 15,000
18,000 Credit Suisse, First Boston 6.25%, 4/08/98....... 18,000
27,000 Deutsche Bank, New York 5.64%, 1/29/98........... 27,000
12,500 Deutsche Bank, New York 5.94%, 10/23/98.......... 12,494
20,000 Deutsche Bank (Yankee) 5.85%, 3/13/98............ 19,999
14,000 Landesbank Hessen Thueringen 5.94%, 10/23/98..... 13,993
20,000 National Westminster Bank 5.66%, 3/05/98......... 19,993
15,000 Societe Generale Bank, New York 6.35%, 4/15/98... 15,020
49,000 Swiss Bank, New York 5.62%, 1/21/98.............. 49,000
10,000 Westdeutsche Landesbank 5.66%, 3/02/98........... 10,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $292,499)............... 292,499
-----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $1,421,555)............ 1,421,555
-----------
SHORT TERM INVESTMENTS (5.5%)
REPURCHASE AGREEMENTS (5.5%)
49,817 Deutsche Bank 6.40%, dated 12/31/97, due 1/02/98,
to be repurchased at $49,835, collateralized by
U.S. Treasury Notes, 6.125%, due 8/31/98,
valued at $51,204.............................. 49,817
32,888 J.P. Morgan & Co. 6.20%, dated 12/31/97, due
1/02/98, to be repurchased at $32,899,
collateralized by U.S. Treasury Bonds, 6.25%,
due 8/15/23, valued at $33,761................. 32,888
-----------
TOTAL REPURCHASE AGREEMENTS (Cost $82,705)................ 82,705
-----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
COST
(000)
<S> <C> <C>
- - -------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (Cost $1,504,260).............. $1,504,260
--------
OTHER ASSETS (0.4%)
Interest Receivable........................ $ 6,945
Other...................................... 96 7,041
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (3,503)
Investment Advisory Fees Payable........... (1,106)
Administrative Fees Payable................ (197)
Bank Overdraft............................. (61)
Directors' Fees & Expenses Payable......... (57)
Custodian Fees Payable..................... (44)
Other Liabilities.......................... (123) (5,091)
---------- --------
NET ASSETS (100%)........................................ $1,506,210
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital........................ $1,506,621
Accumulated Net Realized Loss.......... (411)
----------
NET ASSETS (100%)...................... $1,506,210
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 1,506,624,942
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 December 31, 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 which are seven days or less.
Interest rates disclosed for Commercial Paper and Agency Discount Notes
represent effective yields at December 31, 1997.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Money Market Portfolio
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- - --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 47.4%
Variable/Floating Rate
Instruments 52.3%
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 IBC Municipal
30-Day Yields Money Fund Comparable Yields
Jan. 3.03% 2.90%
Feb. 2.91% 2.67%
Mar. 2.70% 2.76%
Apr. 2.89% 3.17%
May 3.31% 3.37%
Jun. 3.28% 3.28%
Jul. 3.30% 3.31%
Aug. 3.15% 3.19%
Sep. 3.14% 3.30%
Oct. 3.25% 3.34%
Nov. 3.20% 3.46%
Dec. 3.19% 3.44%
</TABLE>
- - ------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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, 1997 were 3.40% and 3.46%, respectively. The seven
day taxable equivalent yield and the seven day taxable equivalent effective
yield for the Portfolio at December 31, 1997, 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.
The municipal money market curve was flat throughout much 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. Even in October in the face
of the Asian currency and market crises, the municipal money market did not
react. In fact, except for a couple of dips and spikes in March and April and
then again in August and September, 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
- - --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
OVERVIEW
- - --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
supply forcing dealers to increase rates which in turn brought the crossover
buyers back into the tax-exempt sector.
The asset size of the Portfolio remained stable in 1997 with a modest increase
in assets in the fourth quarter; the Portfolio finished the year with net assets
of $805 million. Overall the asset allocation throughout the year remained
consistent. Commercial paper ranged from 30-45%, tax-exempt notes ranged from
3-7% (except for a brief period in August when the allocation dropped to 1%),
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 45 days. December ended with a weighted average maturity
of 32 days.
Abigail Jones Feder
PORTFOLIO MANAGER
January 1998
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (99.7%)
FIXED RATE INSTRUMENTS (47.4%)
NOTES (6.7%)
$10,000 California State, RANS, 4.50%, 6/30/98........... $ 10,032
1,300 Delaware, TRANS, 7.75%, 7/01/98.................. 1,343
2,000 Indianapolis, Indiana, Local Public Improvements
Board, Series E,
4.25%, 7/09/98................................. 2,005
3,000 Montana State, TRANS, 4.25%, 6/30/98............. 3,006
1,000 New Mexico State, General Obligation, Series B,
3.70%, 9/01/98................................. 999
3,000 New Mexico State, Severance Tax Revenue Bonds,
Series B, 4.80%, 7/01/98....................... 3,014
5,000 New Mexico State, TRANS, 4.50%, 6/30/98.......... 5,015
3,560 Tennessee State, General Obligation Bonds, Series
A, 5.00%, 5/01/98.............................. 3,574
25,200 Texas State, TRANS, Series A, 4.75%, 8/31/98..... 25,348
----------
54,336
----------
COMMERCIAL PAPER (40.7%)
Allegheny County, Pennsylvania, Industrial
Development Authority,
3,000 3.85%, 1/12/98, Series 85........................ 3,000
2,000 3.80%, 1/15/98, Series 95........................ 2,000
10,000 Baltimore County, Maryland, Series 95, BANS,
3.75%, 1/14/98................................. 10,000
4,900 Becker, Minnesota, Pollution Control Revenue
Bonds, Series 98A,
3.75%, 2/12/98................................. 4,900
2,000 Bexar, Texas, Metropolitan Water District, 3.80%,
1/21/98........................................ 2,000
2,500 City of Burlington, Kansas, Series 87A, 3.80%,
1/15/98........................................ 2,500
6,000 City of Honolulu, Hawaii, 3.80%, 2/04/98......... 6,000
2,500 City of Lincoln, Nebraska, Electric Systems
Revenue Notes, Series 95,
3.70%, 1/15/98................................. 2,500
7,200 City of San Antonio, Texas, Series A, 3.75%,
3/11/98........................................ 7,200
6,000 Commonwealth of Virginia, 3.75%, 3/10/98......... 6,000
Connecticut State, Health & Education,
1,600 3.70%, 1/15/98................................... 1,600
10,000 3.70%, 2/10/98................................... 10,000
2,400 Delta County, Michigan, Series A,
3.75%, 3/10/98................................. 2,400
2,525 Gainsville, Florida, Series C, 3.75%, 2/25/98.... 2,525
4,100 Gillette Campbell, Wyoming, 3.70%, 1/15/98....... 4,100
2,148 Harris County, Texas, Series A, 3.75%, 2/19/98... 2,148
2,500 Health & Educational Facilities, Vanderbilt
University, Tennessee, Series 89A, 3.75%,
2/18/98........................................ 2,500
Houston, Texas,
8,000 3.70%, 1/27/98, Series A......................... 8,000
10,100 3.80%, 2/24/98, Series A......................... 10,100
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - ------------------------------------------------------------------------
$ 5,500 3.75%, 1/29/98, Series B......................... $ 5,500
4,000 3.80%, 2/24/98, Series B......................... 4,000
2,400 3.75%, 3/12/98, Series B......................... 2,400
6,000 3.75%, 3/12/98, Series C......................... 6,000
Illinois Educational Facility Authority,
9,600 3.70%, 1/22/98................................... 9,600
9,000 3.75%, 2/13/98................................... 9,000
2,100 Illinois Health & Educational Facilities, 3.75%,
2/11/98........................................ 2,100
4,750 Independence, Missouri, Water Utility Revenue,
Series 86, 3.80%, 1/28/98...................... 4,750
Jacksonville, Florida, Electric Authority,
1,750 3.80%, 2/09/98................................... 1,750
9,000 3.75%, 3/05/98................................... 9,000
10,000 King County, Washington, Sewer Revenue, Series A,
BANS, 3.70%, 2/11/98........................... 10,000
Louisiana, Public Facilities Authority,
5,500 3.65%, 1/13/98................................... 5,500
3,000 3.70%, 1/29/98................................... 3,000
6,050 Louisiana State, General Obligation Bonds, Series
91A, 3.80%, 2/19/98............................ 6,050
1,300 Maricopa County, Arizona, Pollution Control,
3.75%, 3/10/98................................. 1,300
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.75%,
2/12/98........................................ 6,600
3,000 Massachusetts State Water Resource Authority,
3.75%, 1/16/98................................. 3,000
5,900 Michigan State Underground Storage Facility,
Series 1, 3.75%, 2/05/98....................... 5,900
2,000 Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
3.70%, 1/21/98................................. 2,000
2,500 Montgomery County, Alabama, Industrial
Development Bond, 3.70%, 1/16/98............... 2,500
Montgomery County, Maryland, BANS,
4,000 3.70%, 1/13/98................................... 4,000
5,000 3.85%, 2/09/98................................... 5,000
5,700 3.75%, 3/11/98................................... 5,700
15,000 New Jersey State Transportation Authority, 3.75%,
1/13/98........................................ 15,000
New York City, New York, Water Finance Authority,
3,000 3.80%, 1/21/98................................... 3,000
4,600 3.75%, 3/09/98, Series A......................... 4,600
2,990 Omaha Nebraska, Public Power District, 3.75%,
3/09/98........................................ 2,990
4,000 Petersburg, Indiana, Indiana Power & Light,
Series 91, 3.75%, 2/11/98...................... 4,000
7,700 Platte River Authority, Colorado,
3.75%, 1/20/98................................. 7,700
5,000 Puerto Rico, General Development Bond, 3.70%,
1/12/98........................................ 5,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 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>
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
$ 1,000 3.80%, 1/12/98................................... $ 1,000
1,500 3.80%, 1/12/98................................... 1,500
1,565 3.75%, 2/17/98, Series E......................... 1,565
1,500 3.75%, 2/17/98, Series 92A....................... 1,500
6,000 3.75%, 2/17/98, Series 92C....................... 6,000
Salt River, Arizona,
6,600 3.70%, 1/14/98................................... 6,600
2,800 3.80%, 1/22/98................................... 2,800
11,006 Salt River, Arizona, Agricultural & Power
District Revenue Bonds, 3.80%, 1/08/98......... 11,006
1,500 San Antonio, Texas, 3.80%, 1/09/98............... 1,500
3,600 San Antonio, Texas, Electric & Gas Revenue Bond,
3.80%, 2/09/98................................. 3,600
5,000 Shelby County, Tennessee, TANS,
3.75%, 2/18/98................................. 5,000
Sunshine State, Florida, Government Finance
Authority,
4,470 3.80%, 2/19/98................................... 4,470
3,750 3.75%, 2/20/98................................... 3,750
2,000 3.75%, 2/23/98................................... 2,000
5,000 Sweetwater County, Wyoming, 3.75%, 2/04/98....... 5,000
5,000 Texas State, Series 1997-B, 3.75%, 2/10/98....... 5,000
1,000 Texas State, Public Finance Authority, Series B,
3.75%, 1/28/98................................. 1,000
2,500 University of Michigan, 3.75%, 1/15/98........... 2,500
5,055 Wisconsin State, General Obligation, 3.70%,
1/09/98........................................ 5,055
10,000 Wisconsin State Transportation Authority, Series
A, TRANS, 3.75%, 3/09/98....................... 10,000
----------
327,259
----------
TOTAL FIXED RATE INSTRUMENTS.............................. 381,595
----------
VARIABLE/FLOATING RATE INSTRUMENTS (52.3%)
DAILY VARIABLE RATE BONDS (25.8%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil, 4.80%, 9/01/23....... 1,500
3,385 Burke County, Georgia, Pollution Control Revenue
Bonds, Georgia Power Co., Series 3, 4.80%,
9/01/25........................................ 3,385
1,000 Burke County, Georgia, Pollution Control, Revenue
Bonds, 4.80%, 7/01/24.......................... 1,000
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center,
4.90%, 10/01/17................................ 4,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Inc.,
4,200 4.90%, 12/01/17, Series A........................ 4,200
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - ------------------------------------------------------------------------
$ 3,500 4.90%, 12/01/17, Series B........................ $ 3,500
4,200 4.90%, 12/01/17, Series C........................ 4,200
3,750 4.90%, 12/01/17, Series D........................ 3,750
1,400 City of Forsyth, Montana, Pollution Control
Revenue Bonds, 3.75%, 1/01/18.................. 1,400
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 4.90%,
12/01/09....................................... 2,800
1,700 Delta County, Michigan, Environmental Improvement
Revenue Bonds, Mead Corp., 5.10%, 12/01/23..... 1,700
3,850 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 4.80%,
3/01/22........................................ 3,850
4,200 Farmington, New Mexico, Pollution Control Revenue
Bonds, Series A, 4.80%, 5/01/24................ 4,200
4,200 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
4.95%, 6/01/20................................. 4,200
1,200 Hamond, Indiana, Pollution Control Revenue Bonds,
Amoco Oil Company Project, 4.95%, 2/01/22...... 1,200
5,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 5.10%, 11/01/15.......... 5,000
Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital,
5,500 4.90%, 12/01/25.................................. 5,500
2,700 4.90%, 12/01/26.................................. 2,700
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
1,300 4.80%, 3/01/24, Series 84A....................... 1,300
2,600 4.80%, 3/01/24, Series 84B....................... 2,600
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85,
5.00%, 12/01/15................................ 5,700
1,300 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93,
4.95%, 6/01/23................................. 1,300
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 5.20%,
8/01/15........................................ 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 5.00%,
11/01/11....................................... 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project,
2,200 5.10%, 11/01/14, Series 84A...................... 2,200
1,700 5.10%, 11/01/14, Series 84B...................... 1,700
2,500 5.10%, 11/01/14, Series 84C...................... 2,500
2,500 5.10%, 11/01/14, Series 84D...................... 2,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 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>
$ 3,120 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 5.10%,
12/01/15....................................... $ 3,120
Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
5,700 4.80%, 5/01/29, Series C......................... 5,700
1,700 4.95%, 5/01/29, Series E......................... 1,700
3,600 4.90%, 5/01/29, Series F......................... 3,600
8,400 Massachusetts, State Health & Educational
Facilities Authority, Revenue Bonds, Capital
Assets Project, Series D,
5.00%, 1/01/35................................. 8,400
2,700 Metropolitan Nashville, Airport Authority,
Special Facility Revenue Bonds, American
Airlines Project, Series A, 5.00%, 10/01/12.... 2,700
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
2,400 5.00%, 9/01/30, Series A......................... 2,400
3,500 5.00%, 9/01/30, Series B......................... 3,500
New York City, New York, General Obligation
Bonds,
700 4.15%, 10/01/23, Series C........................ 700
400 5.00%, 8/01/98, Series C, Sub-Series C4.......... 400
3,400 5.00%, 8/01/22, Sub-Series A4.................... 3,400
3,650 5.00%, 8/01/23, Sub-Series A4.................... 3,650
1,500 5.10%, 8/01/15, Sub-Series A5.................... 1,500
New York City, New York, Municipal Water Finance
Authority, Water & Sewer System Revenue Bonds,
4,965 5.10%, 6/15/22, Series 92C....................... 4,965
8,800 5.10%, 6/15/23, Series 93C....................... 8,800
1,400 New York State Energy Research & Development
Authority, Pollution Control Revenue Bonds,
Niagara,
4.50%, 7/01/15................................. 1,400
1,100 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 4.75%,
7/01/25........................................ 1,100
700 New York State, Electric & Gas Revenue Bonds,
Series 94D, 5.00%, 10/01/29.................... 700
2,700 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 5.20%, 12/01/99...... 2,700
4,100 Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas & Electric,
Series 95B,
4.95%, 9/01/30................................. 4,100
2,400 Peninsula Port Authority, Virginia, Coal Revenue
Bonds, 5.00%, 7/01/16.......................... 2,400
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - ------------------------------------------------------------------------
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
$ 5,000 4.85%, 11/01/25, Series 95A...................... $ 5,000
4,500 4.85%, 11/01/29, Series 95C...................... 4,500
2,600 4.85%, 11/01/30, Series 95D...................... 2,600
3,300 Pennsylvania State Higher Educational Facilities
Authority, Colleges & Universities Revenue
Bonds,
4.95%, 10/01/09................................ 3,300
Philadelphia, Pennsylvania, Hospitals & Higher
Educational Facilities Authority, Childrens
Hospital Project,
8,100 4.85%, 3/01/27, Series 92B....................... 8,100
2,500 4.85%, 3/01/27, Series 96A....................... 2,500
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,500 4.50%, 7/01/14, Series A......................... 3,500
600 4.50%, 7/01/14, Series B......................... 600
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
2,000 5.00%, 4/01/10, Series A......................... 2,000
1,600 4.95%, 6/01/10, Series B......................... 1,600
Raleigh-Durham, North Carolina, Airport
Authority,
4,000 5.00%, 11/01/15, Series A........................ 4,000
600 5.00%, 11/01/15, Series B........................ 600
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil, Series 92B,
4.90%, 10/01/22................................ 1,400
5,600 Salt Lake County, Utah, Pollution Control
Revenue, SVC Station Holdings,
4.90%, 8/01/07................................. 5,600
3,600 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
5.00%, 7/01/15................................. 3,600
2,950 Sublette County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 4.95%,
11/01/14....................................... 2,950
700 Sweetwater County, Wyoming, Pacificorp, Series
88B, 4.50%, 1/01/14............................ 700
4,300 Texas State, Water Development Board Revenue
Bonds, Series A, 4.90%, 3/01/15................ 4,300
3,000 West Side Calhoun County, Texas, Pollution
Control Revenue Bonds, 4.90%, 12/01/15......... 3,000
----------
207,570
----------
WEEKLY VARIABLE RATE BONDS (25.8%)
1,900 Alaska State, Housing Finance Corp., Revenue
Bonds, Series C, 3.70%, 6/01/26................ 1,900
2,100 Albuquerque, New Mexico, Revenue Bonds, Series
91A, 3.70%, 7/01/22............................ 2,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 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>
$ 2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 3.65%,
9/01/20........................................ $ 2,700
300 Arkansas State, Development Finance Authority
Bond, Series B, 4.13%, 6/01/12................. 300
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc., 3.70%, 12/01/09... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 3.65%, 8/01/20, Series A......................... 1,000
1,000 3.65%, 8/01/09, Series B......................... 1,000
9,200 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 3.65%, 1/01/16......... 9,200
2,700 California Statewide Communities, Revenue Bonds,
Series A1,
3.45%, 5/15/25................................. 2,700
5,600 Charlotte, North Carolina, Airport, Series 93A,
3.65%, 7/01/16................................. 5,600
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 3.65%,
2/01/00........................................ 1,000
2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A,
3.70%, 6/01/08................................. 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 3.70%, 12/01/15..... 1,500
City of Forsyth, Montana, Pollution Control
Revenue Bonds,
300 3.75%, 6/01/13, Series B......................... 300
700 3.70%, 6/01/13, Series D......................... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds,
Box-Crow Cement Co., 3.70%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale,
3.85%, 9/15/25................................. 1,000
1,500 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 3.70%,
4/01/04........................................ 1,500
1,900 City of Seattle, Washington, Municipal Light &
Power, Revenue Bonds,
3.65%, 6/01/21................................. 1,900
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- - ------------------------------------------------------------------------
Clark County, Nevada, Airport Revenue Bonds,
$12,700 3.65%, 7/01/12, Series 93A....................... $ 12,700
2,600 3.65%, 7/01/25, Series 95-A1..................... 2,600
4,000 Clark County, Nevada, Industrial Development
Revenue Bonds, Nevada Power Co., Series C,
3.85%, 10/01/30................................ 4,000
3,000 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds,
3.65%, 12/01/00................................ 3,000
55 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, Series 88,
3.65%, 6/01/98................................. 55
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
3.65%, 8/01/00................................. 600
5,000 Connecticut State, Revenue Bonds, Series B,
3.85%, 5/15/14................................. 5,000
5,300 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1,
3.65%, 12/01/10................................ 5,300
4,600 Cook County, Illinois, General Obligation Bonds,
3.65%, 12/01/01................................ 4,600
5,000 Cuyahoga County, Ohio, Hospital Revenue Bonds,
The Cleveland Clinic, Series C, 3.65%,
1/01/16........................................ 5,000
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital, 3.65%,
9/01/25........................................ 1,800
10,000 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94,
3.65%, 10/05/22................................ 10,000
700 First Florida Government Finance Committee,
Revenue Bonds,
3.65%, 12/01/00................................ 700
3,000 Foothill/Eastern California Toll Road, Series
95C, TRANS, 3.35%, 1/02/35..................... 3,000
2,000 Franklin County, Ohio, Series 95,
3.65%, 6/01/16................................. 2,000
Georgia, Municipal Gas Authority, Gas Revenue
Bonds,
8,000 4.00%, 9/01/07, Series B......................... 8,000
8,000 3.65%, 1/01/08, Series C......................... 8,000
2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 3.65%, 8/01/16...................... 2,500
Harris County, Texas, Toll Road Revenue Bonds,
900 3.80%, 8/01/15, Series 94D....................... 900
5,000 3.65%, 8/01/20, Series 94G....................... 5,000
5,000 3.65%, 8/01/20, Series 94H....................... 5,000
2,200 Huntsville, Alabama, Healthcare Facilities
Authority, Series B, 3.60%, 6/01/24............ 2,200
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 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>
Illinois Development Finance Authority, Revenue
Bonds,
$ 5,000 3.80%, 2/01/29................................... $ 5,000
3,500 3.80%, 6/01/31................................... 3,500
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 3.65%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 3.70%, 3/01/09............................ 5,000
3,000 Illinois State, Toll Highway Authority, Series B,
3.65%, 1/01/10................................. 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center,
3.80%, 1/01/26................................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 3.80%, 12/01/15................... 900
1,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 3.80%, 12/01/00...... 1,000
2,000 Maryland Health & Higher Education Facilities,
Series A, 3.70%, 7/01/27....................... 2,000
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1,
3.45%, 1/01/19................................. 1,000
2,000 Massachusetts Health & Education Facilities
Authority, Revenue Bonds, 3.80%, 2/01/16....... 2,000
2,400 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University, 3.70%, 9/01/09..................... 2,400
3,000 Municipal Electric Authority, Georgia, Revenue
Bonds, Series 85C,
3.65%, 3/01/20................................. 3,000
2,900 New York State Local Government Assistance Corp.,
Series D,
3.55%, 4/01/25................................. 2,900
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation,
3.85%, 7/01/15................................. 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 3.90%, 11/01/19......................... 1,500
Pinellas County, Flordia, Health Facilities,
Bayfront Medical Center,
235 3.65%, 6/01/98................................... 235
1,000 3.65%, 6/01/09................................... 1,000
250 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 3.80%, 12/01/05......... 250
2,400 Port of Corpus Christi, Texas, Industrial
Development, Revenue Bonds,
3.85%, 6/01/27................................. 2,400
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 3.80%, 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, 3.85%,
3/15/14........................................ $ 600
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
3.60%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 3.80%, 8/01/14............................ 700
8,100 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 3.60%, 12/01/16..... 8,100
University of Alabama,
1,500 3.80%, 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, 3.75%,
10/01/09....................................... 1,100
2,200 University of Wisconsin, Hospitals & Clinics
Authority, Revenue Bonds, 3.70%, 4/01/26....... 2,200
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 3.60%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds,
1,900 3.60%, 7/01/17, Series 93-1A3.................... 1,900
3,300 3.75%, 7/01/17, Series 1A-2...................... 3,300
----------
207,940
----------
SEMI-ANNUAL VARIABLE RATE BONDS (0.7%)
York County, South Carolina, Pollution Control
Revenue Bonds, Carolina Electric Project,
2,500 3.70%, 9/15/14................................... 2,500
2,500 3.70%, 9/15/14................................... 2,500
----------
5,000
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................. 420,510
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $802,105)................ 802,105
----------
TOTAL INVESTMENTS (99.7%) (Cost $802,105)................... 802,105
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.6%)
Interest Receivable........................ $ 4,609
Other...................................... 70 4,679
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (1,214)
Investment Advisory Fees Payable........... (611)
Administrative Fees Payable................ (114)
Bank Overdraft............................. (75)
Director's Fees & Expenses Payable......... (33)
Custodian Fees Payable..................... (31)
Other Liabilities.......................... (99) (2,177)
---------- --------
NET ASSETS (100%)........................................ $804,607
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- - -------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital.............................. $804,629
Accumulated Net Realized Loss................ (22)
--------
NET ASSETS............................................... $804,607
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 804,603,794 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.
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
(UNAUDITED)
<TABLE>
<CAPTION>
AMORTIZED COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- - -------------------------------------------------------------------------
Alabama................................ $ 10,200 1.3%
Alaska................................. 1,900 0.2
Arizona................................ 32,706 4.1
Arkansas............................... 300 --
California............................. 15,731 2.0
Colorado............................... 8,355 1.0
Connecticut............................ 21,900 2.7
Delaware............................... 1,344 0.2
Florida................................ 37,830 4.7
Georgia................................ 40,085 5.0
Hawaii................................. 6,000 0.7
Illinois............................... 57,750 7.2
Indiana................................ 7,205 0.9
Iowa................................... 250 --
Kansas................................. 3,400 0.4
Louisiana.............................. 34,720 4.3
Maryland............................... 27,700 3.4
Massachusetts.......................... 21,000 2.6
Michigan............................... 12,500 1.6
Minnesota.............................. 17,465 2.2
Mississippi............................ 1,300 0.2
Missouri............................... 17,050 2.1
Montana................................ 5,406 0.7
Nebraska............................... 5,490 0.7
Nevada................................. 19,300 2.4
New Jersey............................. 15,000 1.9
New Mexico............................. 21,028 2.6
New York............................... 37,115 4.6
North Carolina......................... 12,800 1.6
Ohio................................... 11,100 1.4
Oregon................................. 3,600 0.5
Pennsylvania........................... 39,400 4.9
Puerto Rico............................ 5,000 0.6
South Carolina......................... 5,000 0.6
Tennessee.............................. 20,774 2.6
Texas.................................. 144,596 18.0
Utah................................... 5,600 0.7
Virginia............................... 8,400 1.0
Washington............................. 22,100 2.7
Wisconsin.............................. 17,955 2.2
Wyoming................................ 25,750 3.2
--------------- ---
$ 802,105 99.7%
--------------- ---
--------------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
Municipal Money Market Portfolio
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN ASIAN EMERGING EUROPEAN EUROPEAN GLOBAL
ALLOCATION EQUITY REAL ESTATE MARKETS EQUITY REAL ESTATE EQUITY
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 $ 3,483 $ 4,133 $ 35 $ 33,374 $ 7,658 $ 72 $ 2,077
Interest 664 635 7 4,944 426 58 143
Less: Foreign Taxes Withheld (438) (421) (2) (1,827) (998) (9) (181)
---------- --------- ----- -------- -------- ----------- ---------
Total Income 3,709 4,347 40 36,491 7,086 121 2,039
---------- --------- ----- -------- -------- ----------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,059 2,184 5 21,203 1,915 31 784
Less: Fees Waived (471) (510) (5) -- (219) (31) (111)
---------- --------- ----- -------- -------- ----------- ---------
Investment Advisory Fees -- Net 588 1,674 -- 21,203 1,696 -- 673
Administrative Fees 294 436 2 2,638 383 7 159
Sub-Administrative Fees -- -- -- 205 -- -- --
Custodian Fees 275 437 12 4,234 138 13 46
Directors' Fees and Expenses 9 17 -- 74 10 -- 5
Filing and Registration Fees 31 54 22 207 85 26 33
Foreign Tax Expense 7 141 -- 581 -- -- --
Insurance 5 13 -- 52 6 -- 3
Interest Expense -- -- -- 45 -- -- --
Professional Fees 49 68 40 240 48 40 45
Shareholder Reports 44 18 1 101 18 2 11
Distribution Fees on Class B Shares -- 12 -- 32 10 -- 11
Other Expenses 13 199 1 149 12 1 9
Expenses Reimbursed by Adviser -- -- (71) -- -- (49) --
---------- --------- ----- -------- -------- ----------- ---------
Total Expenses 1,315 3,069 7 29,761 2,406 40 995
---------- --------- ----- -------- -------- ----------- ---------
NET INVESTMENT INCOME 2,394 1,278 33 6,730 4,680 81 1,044
---------- --------- ----- -------- -------- ----------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 6,964 (69,033) (211) 85,665 24,802 (375) 8,035
Foreign Currency Transactions 7,208 (120) (33) 4,791 (192) (60) 1,280
Futures Contracts 21 -- -- -- -- -- --
---------- --------- ----- -------- -------- ----------- ---------
Total Net Realized Gain (Loss) 14,193 (69,153) (244) 90,456 24,610 (435) 9,315
---------- --------- ----- -------- -------- ----------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 1,232 (46,290)* (412) (156,039)** 9,517 (623) 10,185
Foreign Currency Translations 229 301 23 812 (152) (9) (283)
Futures Contracts 426 -- -- -- -- -- --
Swaps -- -- -- (5,232) -- -- --
---------- --------- ----- -------- -------- ----------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 1,887 (45,989) (389) (160,459) 9,365 (632) 9,902
---------- --------- ----- -------- -------- ----------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 16,080 (115,142) (633) (70,003) 33,975 (1,067) 19,217
---------- --------- ----- -------- -------- ----------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 18,474 $(113,864) $ (600) $(63,273) $ 38,655 $ (986) $ 20,261
---------- --------- ----- -------- -------- ----------- ---------
---------- --------- ----- -------- -------- ----------- ---------
- - ---------------
</TABLE>
+ The Asian Real Estate and European Real Estate Portfolios commenced
operations on October 1, 1997.
* Net of foreign taxes of $28,000 on unrealized appreciation.
** Net of foreign taxes of $2,255,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE LATIN
GOLD EQUITY MAGNUM SMALL CAP EQUITY AMERICAN
PORFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 380 $ 67,558 $ 3,441 $ 6,676 $ 1,301 $ 1,099
Interest 132 7,512 876 590 223 119
Less: Foreign Taxes Withheld (12) (7,941) (417) (802) (195) --
-------- ------------- ------ ------------- -------- --------
Total Income 500 67,129 3,900 6,464 1,329 1,218
-------- ------------- ------ ------------- -------- --------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 159 21,589 1,282 2,438 1,247 766
Basic Fees -- Sub Adviser 106 -- -- -- -- --
Less: Fees Waived -- Adviser (69) (430) (298) (170) (108) (48)
Less: Fees Waived-- Sub Adviser (46) -- -- -- -- --
-------- ------------- ------ ------------- -------- --------
Investment Advisory Fees -- Net 150 21,159 984 2,268 1,139 718
Administrative Fees 45 4,187 265 407 252 113
Sub-Administrative Fees -- -- -- -- -- 31
Custodian Fees 15 841 155 142 36 196
Filing and Registration Fees 40 211 94 23 55 50
Insurance 1 79 4 8 7 1
Directors' Fees and Expenses 3 105 7 12 9 11
Foreign Tax Expense -- -- -- -- -- 115
Professional Fees 35 195 40 59 43 47
Shareholder Reports 35 156 44 19 11 9
Distribution Fees on Class B Shares 3 8 70 -- 6 7
Other Expenses 10 71 8 13 113 23
-------- ------------- ------ ------------- -------- --------
Total Expenses 337 27,012 1,671 2,951 1,671 1,321
-------- ------------- ------ ------------- -------- --------
NET INVESTMENT INCOME (LOSS) 163 40,117 2,229 3,513 (342) (103)
-------- ------------- ------ ------------- -------- --------
NET REALIZED GAIN (LOSS):
Investments Sold (24,384) 272,106 16 10,943 (24,759) 17,417
Foreign Currency Transactions (88) 14,113 4,414 636 23,453 (132)
-------- ------------- ------ ------------- -------- --------
Total Net Realized Gain (Loss) (24,472) 286,219 4,430 11,579 (1,306) 17,285
-------- ------------- ------ ------------- -------- --------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 4,877 662 (1,419) (20,232) 3 892*
Foreign Currency Translations (16) 7,577 742 1,144 (9,225) (7)
-------- ------------- ------ ------------- -------- --------
Total Net Change in Unrealized
Appreciation (Depreciation) 4,861 8,239 (677) (19,088) (9,222) 885
-------- ------------- ------ ------------- -------- --------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (19,611) 294,458 3,753 (7,509) (10,528) 18,170
-------- ------------- ------ ------------- -------- --------
Net Increase (Decrease) in Net Assets
Resulting from Operations $(19,448) $ 334,575 $ 5,982 $ (3,996) $(10,870) $ 18,067
-------- ------------- ------ ------------- -------- --------
-------- ------------- ------ ------------- -------- --------
</TABLE>
- - ---------------
* Net of foreign tax of $4,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING EQUITY SMALL CAP U.S. EQUITY U.S. REAL
EQUITY GROWTH GROWTH VALUE EQUITY TECHNOLOGY PLUS ESTATE
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 $ 1,259 $ 129 $ 4,906 $ 473 $ 7 $ 169 $ 10,611
Interest 325 105 1,002 53 25 8 1,014
Less: Foreign Taxes Withheld -- -- -- -- -- -- (24)
---------- -------- --------- ------ ---------- ----- ---------
Total Income 1,584 234 5,908 526 32 177 11,601
---------- -------- --------- ------ ---------- ----- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,154 605 3,079 295 189 37 2,428
Less: Fees Waived (87) (47) (118) (108) (189) (37) (115)
---------- -------- --------- ------ ---------- ----- ---------
Investment Advisory Fees -- Net 1,067 558 2,961 187 -- -- 2,313
Administrative Fees 225 99 796 60 33 15 471
Custodian Fees 38 21 67 12 78 4 64
Filing and Registration Fees 48 32 139 32 72 52 77
Insurance 3 3 11 1 -- -- 7
Directors' Fees and Expenses 6 4 18 2 5 1 9
Professional Fees 31 27 53 24 30 34 38
Shareholder Reports 17 8 49 22 50 49 45
Distribution Fees on Class B Shares 33 3 28 10 4 -- 33
Other Expenses 37 14 12 11 8 5 9
Expenses Reimbursed by Adviser -- -- -- -- (41) (93) --
---------- -------- --------- ------ ---------- ----- ---------
Total Expenses 1,505 769 4,134 361 239 67 3,066
---------- -------- --------- ------ ---------- ----- ---------
NET INVESTMENT INCOME (LOSS) 79 (535) 1,774 165 (207) 110 8,535
---------- -------- --------- ------ ---------- ----- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 33,983 21,271 86,366 9,674 3,408 66 51,774
Securities Sold Short (806) -- -- -- (12) -- --
---------- -------- --------- ------ ---------- ----- ---------
Total Net Realized Gain 33,177 21,271 86,366 9,674 3,396 66 51,774
---------- -------- --------- ------ ---------- ----- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investments 6,699 (14,435) 49,579 125 (434) 599 15,493
Short Sales 197 -- -- -- 147 -- (2)
---------- -------- --------- ------ ---------- ----- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 6,896 (14,435) 49,579 125 (287) 599 15,491
---------- -------- --------- ------ ---------- ----- ---------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 40,073 6,836 135,945 9,799 3,109 665 67,265
---------- -------- --------- ------ ---------- ----- ---------
Net Increase in Net Assets Resulting from
Operations $ 40,152 $ 6,301 $ 137,719 $ 9,964 $ 2,902 $ 775 $ 75,800
---------- -------- --------- ------ ---------- ----- ---------
---------- -------- --------- ------ ---------- ----- ---------
<CAPTION>
VALUE
EQUITY
PORTFOLIO
(000)
<S> <C>
- - ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,833
Interest 92
Less: Foreign Taxes Withheld --
---------
Total Income 2,925
---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 512
Less: Fees Waived (97)
---------
Investment Advisory Fees -- Net 415
Administrative Fees 162
Custodian Fees 23
Filing and Registration Fees 27
Insurance 4
Directors' Fees and Expenses 5
Professional Fees 29
Shareholder Reports 43
Distribution Fees on Class B Shares 5
Other Expenses 13
Expenses Reimbursed by Adviser --
---------
Total Expenses 726
---------
NET INVESTMENT INCOME (LOSS) 2,199
---------
NET REALIZED GAIN (LOSS):
Investments Sold 20,470
Securities Sold Short --
---------
Total Net Realized Gain 20,470
---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investments 3,672
Short Sales --
---------
Total Net Change in Unrealized
Appreciation (Depreciation) 3,672
---------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 24,142
---------
Net Increase in Net Assets Resulting from
Operations $ 26,341
---------
---------
</TABLE>
- - ---------------
+ The U.S. Equity Plus Portfolio commenced operations on July 31, 1997.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL
MARKETS FIXED FIXED HIGH MUNICIPAL MONEY MONEY
BALANCED DEBT INCOME INCOME YIELD BOND MARKET MARKET
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 $ 90 $ 16 $ 52 $ -- $ 505 $ -- $ -- $ --
Interest 199 15,745 9,412 5,184 10,565 2,644 76,049 26,841
Less: Foreign Taxes Withheld -- (12) -- (25) -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Income 289 15,749 9,464 5,159 11,070 2,644 76,049 26,841
-------- -------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 32 1,623 504 372 489 185 4,066 2,213
Less: Fees Waived (32) -- (210) (190) -- (118) -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Investment Advisory Fees -- Net -- 1,623 294 182 489 67 4,066 2,213
Administrative Fees 14 256 229 150 186 88 2,098 1,184
Custodian Fees 11 114 18 37 17 7 136 87
Filing and Registration Fees 21 41 41 30 43 32 73 80
Insurance -- 6 5 3 3 1 40 2
Interest Expense -- 386 -- -- -- -- -- --
Directors' Fees and Expenses 2 16 7 6 13 3 47 25
Professional Fees 22 62 30 39 34 25 80 57
Shareholder Reports 8 13 13 9 11 7 34 21
Distribution Fees on Class B shares 3 8 4 1 14 -- -- --
Other Expenses 7 94 11 12 15 8 8 5
Expenses Reimbursed by Adviser (39) -- -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Expenses 49 2,619 652 469 825 238 6,582 3,674
-------- -------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME 240 13,130 8,812 4,690 10,245 2,406 69,467 23,167
-------- -------- --------- --------- --------- --------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 855 24,856 2,733 (2,147) 4,846 27 71 9
Foreign Currency Transactions -- (12) 384 268 -- -- -- --
Securities Sold Short -- (394) -- -- -- -- -- --
Written Options -- 489 -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Net Realized Gain (Loss) 855 24,939 3,117 (1,879) 4,846 27 71 9
-------- -------- --------- --------- --------- --------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (66) (13,108) 1,775 (3,162) 1,740 1,474 -- --
Foreign Currency Translations -- (7) (103) 374 -- -- -- --
Short Sales -- 355 -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) (66) (12,760) 1,672 (2,788) 1,740 1,474 -- --
-------- -------- --------- --------- --------- --------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 789 12,179 4,789 (4,667) 6,586 1,501 71 9
-------- -------- --------- --------- --------- --------- --------- ---------
Net Increase in Net Assets Resulting from
Operations $ 1,029 $ 25,309 $ 13,601 $ 23 $ 16,831 $ 3,907 $ 69,538 $ 23,176
-------- -------- --------- --------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE COUNTRY ALLOCATION
PORTFOLIO ASIAN EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net Investment Income $ 2,394 $ 2,195 $ 1,278 $ 3,107
Net Realized Gain (Loss) 14,193 26,210 (69,153) 27,596
Change in Unrealized
Appreciation
(Depreciation) 1,887 (11,503) (45,989) (23,998)
- - --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 18,474 16,902 (113,864) 6,705
- - --------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (9,445) (11,942) (42) (2,757)
In Excess of Net Investment
Income (220) (307) -- (5)
Net Realized Gain (13,378) (6,994) -- (23,408)
In Excess of Net Realized
Gain -- -- (8,471) --
CLASS B+:
Net Investment Income (1) (46) (1) (59)
In Excess of Net Investment
Income -- (1) -- --
Net Realized Gain (2) (28) -- (735)
In Excess of Net Realized
Gain -- -- (130) --
- - --------------------------------------------------------------------------------------
Total Distributions (23,046) (19,318) (8,644) (26,964)
- - --------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1)
CLASS A:
Subscribed 44,577 63,687 191,230 319,487
Distributions Reinvested 20,551 15,163 7,923 22,963
Redeemed (105,088) (63,918) (356,756) (274,658)
CLASS B+:
Subscribed 53 1,042 2,594 19,937
Distributions Reinvested 3 76 122 728
Redeemed (669) (471) (10,134) (8,582)
- - --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Capital Share Transactions (40,573) 15,579 (165,021) 79,875
- - --------------------------------------------------------------------------------------
Total Increase (Decrease) in
Net Assets (45,145) 13,163 (287,529) 59,616
NET ASSETS:
Beginning of Period 183,826 170,663 374,500 314,884
- - --------------------------------------------------------------------------------------
End of Period $ 138,681 $ 183,826 $ 86,971 $ 374,500
- - --------------------------------------------------------------------------------------
Undistributed (distribution
in excess of) net
investment income included
in end of period net
assets $ (220) $ (308) $ 2,300 $ (4)
- - --------------------------------------------------------------------------------------
(1) CAPITAL SHARE
TRANSACTIONS:
CLASS A:
Shares Subscribed 3,824 5,277 12,051 15,774
Shares Issued on
Distributions Reinvested 1,945 1,321 420 1,221
Shares Redeemed (8,432) (5,262) (22,811) (13,753)
- - --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class A Shares
Outstanding (2,663) 1,336 (10,340) 3,242
- - --------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 5 87 178 979
Shares Issued on
Distributions Reinvested -- 7 6 39
Shares Redeemed (59) (39) (615) (431)
- - --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class B Shares
Outstanding (54) 55 (431) 587
</TABLE>
- - --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASIAN REAL ESTATE
PORTFOLIO EMERGING MARKETS PORTFOLIO
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
OCTOBER 1, 1997* TO -------------------------------------
DECEMBER 31, 1997 1997 1996
(000) (000) (000)
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 33 $ 6,730 $ 8,495
Net Realized Gain (Loss) (244) 90,456 19,598
Change in Unrealized Appreciation
(Depreciation) (389) (160,459) 80,354
- - ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (600) (63,273) 108,447
- - ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (20) (7,299) (7,165)
In Excess of Net Investment Income -- (7,147) (197)
Net Realized Gain -- (70,779) --
In Excess of Net Realized Gain -- (66,329) --
CLASS B+:
Net Investment Income -- (33) (51)
In Excess of Net Investment Income -- (32) (1)
Net Realized Gain -- (462) --
In Excess of Net Realized Gain -- (433) --
- - ----------------------------------------------------------------------------------------------------------
Total Distributions (20) (152,514) (7,414)
- - ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 3,005 651,308 550,412
Distributions Reinvested -- 141,670 5,513
Redeemed -- (380,590) (229,242)
CLASS B+:
Subscribed -- 8,135 18,152
Distributions Reinvested -- 900 43
Redeemed -- (12,803) (4,283)
- - ----------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 3,005 408,620 340,595
- - ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 2,385 192,833 441,628
NET ASSETS:
Beginning of Period -- 1,318,219 876,591
- - ----------------------------------------------------------------------------------------------------------
End of Period $ 2,385 $ 1,511,052 $ 1,318,219
- - ----------------------------------------------------------------------------------------------------------
Distribution in excess of net investment
income included in end of period net
assets $ (20) $ (2,735) $ (198)
- - ----------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 301 38,730 37,330
Shares Issued on Distributions Reinvested -- 11,430 367
Shares Redeemed -- (23,303) (15,483)
- - ----------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 301 26,857 22,214
- - ----------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- 488 1,254
Shares Issued on Distributions Reinvested -- 72 3
Shares Redeemed -- (784) (288)
- - ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding -- (224) 969
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
+ The Emerging Markets Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPEAN REAL
EUROPEAN EQUITY PORTFOLIO ESTATE PORTFOLIO
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------- OCTOBER 1, 1997* TO
1997 1996 DECEMBER 31, 1997
(000) (000) (000)
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,680 $ 2,360 $ 81
Net Realized Gain (Loss) 24,610 1,760 (435)
Change in Unrealized Appreciation
(Depreciation) 9,365 22,277 (632)
- - ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 38,655 26,397 (986)
- - ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (4,297) (2,463) (12)
In Excess of Net Investment Income -- (220) --
Net Realized Gain (15,891) (364) --
CLASS B+:
Net Investment Income (78) (36) --
In Excess of Net Investment Income -- (3) --
Net Realized Gain (319) (6) --
- - ----------------------------------------------------------------------------------------------------------
Total Distributions (20,585) (3,092) (12)
- - ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 146,810 128,948 25,148
Distributions Reinvested 19,418 2,886 11
Redeemed (119,644) (46,075) (9,021)
CLASS B+:
Subscribed 4,098 3,819 826
Distributions Reinvested 374 39 --
Redeemed (2,614) (1,495) --
- - ----------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 48,442 88,122 16,964
- - ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 66,512 111,427 15,966
NET ASSETS:
Beginning of Period 181,010 69,583 --
- - ----------------------------------------------------------------------------------------------------------
End of Period $ 247,522 $ 181,010 $ 15,966
- - ----------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (74) $ (223) $ 9
- - ----------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 8,152 8,473 2,513
Shares Issued on Distributions Reinvested 1,086 177 1
Shares Redeemed (6,397) (2,969) (919)
- - ----------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 2,841 5,681 1,595
- - ----------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 222 254 83
Shares Issued on Distributions Reinvested 21 2 --
Shares Redeemed (143) (97) --
- - ----------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 100 159 83
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
+ The European Equity Portfolio began offering Class B shares on January
2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
168
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY PORTFOLIO GOLD PORTFOLIO
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,044 $ 1,086 $ 163 $ 153
Net Realized Gain (Loss) 9,315 7,313 (24,472) 493
Change in Unrealized Appreciation
(Depreciation) 9,902 7,828 4,861 (4,498)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 20,261 16,227 (19,448) (3,852)
- - ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,113) (1,075) (96) (135)
In Excess of Net Investment Income -- -- -- (29)
Net Realized Gain (5,966) (5,024) -- --
In Excess of Net Realized Gain -- -- (38) (1,681)
CLASS B+:
Net Investment Income (105) (45) (4) (4)
In Excess of Net Investment Income -- -- -- (1)
Net Realized Gain (328) (223) -- --
In Excess of Net Realized Gain -- -- (2) (89)
- - ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,512) (6,367) (140) (1,939)
- - ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 28,012 15,476 22,066 52,836
Distributions Reinvested 7,897 5,960 114 1,522
Redeemed (19,393) (42,500) (30,936) (28,491)
CLASS B+:
Subscribed 5,204 3,900 1,815 2,457
Distributions Reinvested 424 268 4 38
Redeemed (4,134) (414) (1,529) (800)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 18,010 (17,310) (8,466) 27,562
- - ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 29,759 (7,450) (28,054) 21,771
NET ASSETS:
Beginning of Period 84,225 91,675 29,180 7,409
- - ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 113,984 $ 84,225 $ 1,126 $ 29,180
- - ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 125 $ 19 $ (26) $ (30)
- - ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,503 974 3,071 4,551
Shares Issued on Distributions Reinvested 436 370 17 162
Shares Redeemed (1,047) (2,808) (5,970) (2,591)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 892 (1,464) (2,882) 2,122
- - ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 286 252 304 216
Shares Issued on Distributions Reinvested 24 17 1 4
Shares Redeemed (232) (27) (285) (72)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 78 242 20 148
</TABLE>
- - --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO INTERNATIONAL MAGNUM PORTFOLIO
<S> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------------------------- YEAR ENDED MARCH 15, 1996* TO
1997 1996 DECEMBER 31, 1997 DECEMBER 31, 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 40,117 $ 32,405 $ 2,229 $ 455
Net Realized Gain 286,219 123,116 4,430 1,365
Change in Unrealized Appreciation
(Depreciation) 8,239 200,317 (677) 3,643
- - -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 334,575 355,838 5,982 5,463
- - -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (69,608) (45,368) (5,428) (1,037)
In Excess of Net Investment Income -- -- -- (169)
Net Realized Gain (234,828) (101,435) (1,101) (87)
CLASS B+:
Net Investment Income (70) (97) (938) (273)
In Excess of Net Investment Income -- -- -- (44)
Net Realized Gain (262) (239) (212) (23)
- - -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (304,768) (147,139) (7,679) (1,633)
- - -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 593,523 508,163 108,822 82,326
Distributions Reinvested 274,428 131,405 5,026 1,117
Redeemed (339,313) (181,971) (38,220) (1,247)
CLASS B+:
Subscribed 1,717 5,025 16,947 22,789
Distributions Reinvested 297 305 1,146 311
Redeemed (4,302) (339) (13,200) (637)
- - -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 526,350 462,588 80,521 104,659
- - -----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 556,157 671,287 78,824 108,489
NET ASSETS:
Beginning of Period 2,269,817 1,598,530 108,489 --
- - -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 2,825,974 $ 2,269,817 $ 187,313 $ 108,489
- - -----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (3,083) $ (273) $ 63 $ (213)
- - -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 32,518 31,209 9,451 8,015
Shares Issued on Distributions Reinvested 16,345 7,837 462 106
Shares Redeemed (17,950) (10,975) (3,275) (117)
- - -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 30,913 28,071 6,638 8,004
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 92 321 1,466 2,211
Shares Issued on Distributions Reinvested 18 18 105 29
Shares Redeemed (249) (20) (1,149) (60)
- - -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (139) 319 422 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.
- - --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP PORTFOLIO JAPANESE EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ---------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 3,513 $ 2,830 $ (342) $ (98)
Net Realized Gain (Loss) 11,579 6,819 (1,306) 11,861
Change in Unrealized Appreciation
(Depreciation) (19,088) 23,041 (9,222) (17,205)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (3,996) 32,690 (10,870) (5,442)
- - --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (4,472) (3,001) (11,702) (11,178)
In Excess of Net Investment Income (676) -- -- (8,826)
Net Realized Gain (10,992) (5,327) -- --
CLASS B+:
Net Investment Income -- -- (257) (277)
In Excess of Net Investment Income -- -- -- (218)
- - --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (16,140) (8,328) (11,959) (20,499)
- - --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 64,122 40,108 126,168 154,108
Distributions Reinvested 14,482 7,416 11,173 16,337
Redeemed (64,267) (35,812) (190,192) (112,210)
Transaction Fees 1,151 -- -- --
CLASS B+:
Subscribed -- -- 2,478 7,701
Distributions Reinvested -- -- 256 435
Redeemed -- -- (3,925) (4,048)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 15,488 11,712 (54,042) 62,323
- - --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (4,648) 36,074 (76,871) 36,382
NET ASSETS:
Beginning of Period 234,743 198,669 155,660 119,278
- - --------------------------------------------------------------------------------------------------------------------------------
End of Period $ 230,095 $ 234,743 $ 78,789 $ 155,660
- - --------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (676) $ 323 $ 2,109 $ (9,043)
- - --------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,683 2,406 15,980 16,432
Shares Issued on Distributions Reinvested 911 444 1,916 2,042
Shares Redeemed (3,803) (2,199) (23,936) (12,218)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 791 651 (6,040) 6,256
- - --------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- -- 311 812
Shares Issued on Distributions Reinvested -- -- 44 55
Shares Redeemed -- -- (497) (435)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding -- -- (142) 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.
- - --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICAN PORTFOLIO AGGRESSIVE EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (103) $ 313 $ 79 $ 614
Net Realized Gain 17,285 6,257 33,177 15,730
Change in Unrealized Appreciation
(Depreciation) 885 2,592 6,896 4
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 18,067 9,162 40,152 16,348
- - ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (273) (107) (549)
In Excess of Net Investment Income -- (5) (3) --
Net Realized Gain (17,224) (4,475) (26,339) (9,877)
In Excess of Net Realized Gain (2,901) -- -- --
CLASS B+:
Net Investment Income -- (8) (4) (62)
Net Realized Gain (1,101) (164) (3,057) (1,265)
In Excess of Net Realized Gain (185) -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (21,411) (4,925) (29,510) (11,753)
- - ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 82,256 18,267 109,256 40,946
Distributions Reinvested 19,134 4,324 24,425 9,531
Redeemed (55,658) (11,766) (57,002) (14,822)
CLASS B+:
Subscribed 11,696 1,308 14,928 9,581
Distributions Reinvested 1,249 147 3,039 1,315
Redeemed (7,170) (151) (9,209) (2,409)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 51,507 12,129 85,437 44,142
- - ----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 48,163 16,366 96,079 48,737
NET ASSETS:
Beginning of Period 31,742 15,376 77,285 28,548
- - ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 79,905 $ 31,742 $ 173,364 $ 77,285
- - ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income/ accumulated net
investment loss included in end of period
net assets $ (34) $ (5) $ (3) $ 32
- - ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 5,947 1,557 6,957 2,748
Shares Issued on Distributions Reinvested 1,858 384 1,596 665
Shares Redeemed (3,779) (953) (3,470) (1,012)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 4,026 988 5,083 2,401
- - ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 875 118 939 672
Shares Issued on Distributions Reinvested 124 13 200 92
Shares Redeemed (496) (13) (587) (153)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 503 118 552 611
</TABLE>
- - --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GROWTH PORTFOLIO EQUITY GROWTH PORTFOLIO
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (535) $ (904) $ 1,774 $ 2,212
Net Realized Gain 21,271 36,369 86,366 40,528
Change in Unrealized Appreciation
(Depreciation) (14,435) (31,141) 49,579 10,734
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 6,301 4,324 137,719 53,474
- - ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- (1,761) (2,164)
In Excess of Net Investment Income -- -- (8) --
Net Realized Gain (30,771) (24,810) (76,181) (42,560)
CLASS B+:
Net Investment Income -- -- (15) (46)
Net Realized Gain (667) (1,588) (3,225) (1,031)
- - ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (31,438) (26,398) (81,190) (45,801)
- - ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 37,367 26,575 246,368 223,237
Distributions Reinvested 30,552 24,750 74,499 41,770
Redeemed (48,345) (87,418) (138,539) (78,208)
CLASS B+:
Subscribed 599 5,462 26,409 6,515
Distributions Reinvested 651 1,540 2,614 993
Redeemed (3,387) (1,423) (6,413) (1,891)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 17,437 (30,514) 204,938 192,416
- - ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (7,700) (52,588) 261,467 200,089
NET ASSETS:
Beginning of Period 66,790 119,378 358,201 158,112
- - ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 59,090 $ 66,790 $ 619,668 $ 358,201
- - ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income/ accumulated net
investment loss included in end of period
net assets $ (4) $ (3) $ (8) $ 2
- - ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,007 1,202 14,949 14,718
Shares Issued on Distributions Reinvested 3,708 1,845 4,569 2,776
Shares Redeemed (3,885) (3,952) (8,169) (5,067)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 2,830 (905) 11,349 12,427
- - ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 46 246 1,507 418
Shares Issued on Distributions Reinvested 81 115 161 66
Shares Redeemed (252) (64) (387) (116)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (125) 297 1,281 368
</TABLE>
- - --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY PORTFOLIO TECHNOLOGY PORTFOLIO
<S> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------------------------- YEAR ENDED SEPTEMBER 16, 1996* TO
1997 1996 DECEMBER 31, 1997 DECEMBER 31, 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 165 $ 888 $ (207) $ (11)
Net Realized Gain (Loss) 9,674 6,620 3,396 (11)
Change in Unrealized Appreciation
(Depreciation) 125 (902) (287) 296
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 9,964 6,606 2,902 274
- - ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (176) (851) (525) --
In Excess of Net Investment Income (5) -- -- --
Net Realized Gain (7,678) (5,696) (2,563) --
In Excess of Net Realized Gain -- -- (1,988) --
Return of Capital -- -- (524) --
CLASS B+:
Net Investment Income (11) (34) (34) --
In Excess of Net Investment Income (1) -- -- --
Net Realized Gain (1,619) (413) (176) --
In Excess of Net Realized Gain -- -- (137) --
Return of Capital -- -- (34) --
- - ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (9,490) (6,994) (5,981) --
- - ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 27,220 14,319 42,885 3,375
Distributions Reinvested 7,254 5,982 4,506 --
Redeemed (23,846) (48,028) (16,063) --
CLASS B+:
Subscribed 7,628 1,899 1,986 1,485
Distributions Reinvested 1,508 376 364 --
Redeemed (2,762) (420) (1,499) (52)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 17,002 (25,872) 32,179 4,808
- - ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 17,476 (26,260) 29,100 5,082
NET ASSETS:
Beginning of Period 25,659 51,919 5,082 --
- - ---------------------------------------------------------------------------------------------------------------------------------
End of Period $ 43,135 $ 25,659 $ 34,182 $ 5,082
- - ---------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (6) $ 3 $ (121) $ --
- - ---------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,198 1,157 3,154 336
Shares Issued on Distributions Reinvested 664 537 407 --
Shares Redeemed (1,895) (3,850) (1,187) --
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 967 (2,156) 2,374 336
- - ---------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 586 153 139 144
Shares Issued on Distributions Reinvested 139 34 33 --
Shares Redeemed (209) (32) (107) (5)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 516 155 65 139
</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.
- - --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. EQUITY PLUS
PORTFOLIO U.S. REAL ESTATE PORTFOLIO
<S> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
PERIOD FROM DECEMBER 31,
JULY 31, 1997* TO -------------------------------------
DECEMBER 31, 1997 1997 1996
(000) (000) (000)
<S> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 110 $ 8,535 $ 3,916
Net Realized Gain 66 51,774 17,097
Change in Unrealized Appreciation
(Depreciation) 599 15,491 28,458
- - -----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 775 75,800 49,471
- - -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (106) (8,137) (3,888)
In Excess of Net Investment Income -- -- (2)
Net Realized Gain (55) (43,130) (12,504)
In Excess of Net Realized Gain -- (5,201) --
CLASS B+:
Net Investment Income (1) (358) (148)
Net Realized Gain -- (2,418) (559)
In Excess of Net Realized Gain -- (292) --
- - -----------------------------------------------------------------------------------------------------------
Total Distributions (162) (59,536) (17,101)
- - -----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 20,231 202,155 119,585
Distributions Reinvested 71 51,583 14,340
Redeemed -- (118,383) (24,190)
CLASS B+:
Subscribed 100 18,735 8,149
Distributions Reinvested 1 2,799 514
Redeemed -- (9,475) (1,175)
- - -----------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 20,403 147,414 117,223
- - -----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 21,016 163,678 149,593
NET ASSETS:
Beginning of Period -- 219,102 69,509
- - -----------------------------------------------------------------------------------------------------------
End of Period $ 21,016 $ 382,780 $ 219,102
- - -----------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 3 $ 38 $ (2)
- - -----------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,022 13,083 9,313
Shares Issued on Distributions Reinvested 7 3,430 1,047
Shares Redeemed -- (7,604) (1,849)
- - -----------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 2,029 8,909 8,511
- - -----------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 10 1,205 662
Shares Issued on Distributions Reinvested -- 187 37
Shares Redeemed -- (614) (92)
- - -----------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 10 778 607
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
+ The U.S. Real Estate Portfolio began offering Class B Shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO BALANCED PORTFOLIO
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,199 $ 3,431 $ 240 $ 584
Net Realized Gain 20,470 15,759 855 1,846
Change in Unrealized Appreciation
(Depreciation) 3,672 2,404 (66) (1,083)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 26,341 21,594 1,029 1,347
- - ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,134) (3,374) (205) (477)
In Excess of Net Investment Income -- -- (1) (1)
Net Realized Gain (19,817) (17,256) (876) (1,690)
CLASS B+:
Net Investment Income (40) (58) (37) (108)
Net Realized Gain (509) (357) (138) (548)
- - ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (22,500) (21,045) (1,257) (2,824)
- - ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 26,077 38,132 1,474 1,205
Distributions Reinvested 19,651 19,004 1,007 1,898
Redeemed (69,683) (99,013) (3,632) (18,709)
CLASS B+:
Subscribed 1,386 2,992 -- 3,269
Distributions Reinvested 480 401 173 607
Redeemed (2,135) (747) (1,756) (1,246)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Capital Share Transactions (24,224) (39,231) (2,734) (12,976)
- - ----------------------------------------------------------------------------------------------------------------------------
Total Decrease in Net Assets (20,383) (38,682) (2,962) (14,453)
NET ASSETS:
Beginning of Period 108,683 147,365 8,189 22,642
- - ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 88,300 $ 108,683 $ 5,227 $ 8,189
- - ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 32 $ 7 $ (1) $ (1)
- - ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,781 2,649 175 121
Shares Issued on Distributions Reinvested 1,430 1,340 130 215
Shares Redeemed (4,530) (6,919) (427) (1,872)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Class A Shares Outstanding (1,319) (2,930) (122) (1,536)
- - ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 92 207 -- 327
Shares Issued on Distributions Reinvested 35 28 22 71
Shares Redeemed (146) (51) (208) (129)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (19) 184 (186) 269
</TABLE>
- - --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO FIXED INCOME PORTFOLIO
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,130 $ 21,910 $ 8,812 $ 10,061
Net Realized Gain 24,939 57,165 3,117 3,047
Change in Unrealized Appreciation
(Depreciation) (12,760) 309 1,672 (6,343)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 25,309 79,384 13,601 6,765
- - ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (12,240) (14,104) (9,164) (10,366)
In Excess of Net Investment Income -- (74) (6) (14)
Net Realized Gain (37,926) (51,244) -- --
In Excess of Net Realized Gain (1,389) -- -- --
Return of Capital (1,701) -- -- --
CLASS B+:
Net Investment Income (183) (381) (176) (73)
In Excess of Net Investment Income -- (2) -- --
Net Realized Gain (611) (1,391) -- --
In Excess of Net Realized Gain (22) -- -- --
Return of Capital (27) -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (54,099) (67,196) (9,346) (10,453)
- - ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 94,373 79,712 92,474 43,737
Distributions Reinvested 45,771 51,784 7,836 8,559
Redeemed (121,535) (173,915) (52,011) (83,396)
CLASS B+:
Subscribed 2,314 4,437 5,117 2,038
Distributions Reinvested 789 1,522 100 64
Redeemed (4,654) (1,211) (1,940) (646)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 17,058 (37,671) 51,576 (29,644)
- - ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (11,732) (25,483) 55,831 (33,332)
NET ASSETS:
Beginning of Period 156,395 181,878 132,195 165,527
- - ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 144,663 $ 156,395 $ 188,026 $ 132,195
- - ----------------------------------------------------------------------------------------------------------------------------
Distribution in excess of net investment
income included in end of period net
assets $ (8) $ (76) $ (6) $ (14)
- - ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 11,924 8,356 8,608 4,156
Shares Issued on Distributions Reinvested 7,578 6,805 733 812
Shares Redeemed (14,998) (16,141) (4,871) (7,913)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 4,504 (980) 4,470 (2,945)
- - ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 288 467 478 194
Shares Issued on Distributions Reinvested 131 201 9 6
Shares Redeemed (588) (103) (182) (62)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (169) 565 305 138
</TABLE>
- - --------------------------------------------------------------------------------
+ Each 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.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME
PORTFOLIO HIGH YIELD PORTFOLIO MUNICIPAL BOND PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------- --------------------------
1997 1996 1997 1996 1997 1996
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net Investment Income $ 4,690 $ 6,007 $ 10,245 $ 8,522 $ 2,406 $ 1,840
Net Realized Gain (Loss) (1,879) 2,742 4,846 687 27 (6)
Change in Unrealized
Appreciation
(Depreciation) (2,788) (1,546) 1,740 3,436 1,474 (686)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 23 7,203 16,831 12,645 3,907 1,148
- - ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,512) (5,986) (9,705) (8,340) (2,404) (1,821)
In Excess of Net Investment
Income -- -- -- (4) (1) (16)
Net Realized Gain -- -- -- -- (21) --
In Excess of Net Realized
Gain -- -- -- -- (1) --
CLASS B+:
Net Investment Income (14) (88) (466) (333) -- (4)
- - ------------------------------------------------------------------------------------------------------------------
Total Distributions (2,526) (6,074) (10,171) (8,677) (2,427) (1,841)
- - ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1)
CLASS A:
Subscribed 18,508 53,391 93,559 48,672 32,474 18,758
Distributions Reinvested 2,096 5,288 7,844 6,490 2,356 1,724
Redeemed (46,384) (49,742) (90,405) (25,529) (15,996) (25,432)
CLASS B+:
Subscribed 257 2,353 7,925 6,981 4 171
Distributions Reinvested 13 78 369 244 -- 4
Redeemed (1,433) (902) (7,061) (1,743) (73) (105)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Capital Share Transactions (26,943) 10,466 12,231 35,115 18,765 (4,880)
- - ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in
Net Assets (29,446) 11,595 18,891 39,083 20,245 (5,573)
NET ASSETS:
Beginning of Period 114,447 102,852 101,328 62,245 40,296 45,869
- - ------------------------------------------------------------------------------------------------------------------
End of Period $ 85,001 $ 114,447 $ 120,219 $ 101,328 $ 60,541 $ 40,296
- - ------------------------------------------------------------------------------------------------------------------
Undistributed (distribution
in excess of) net
investment income included
in end of period net
assets $ 323 $ 612 $ 90 $ (4) $ (1) $ (16)
- - ------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE
TRANSACTIONS:
CLASS A:
Shares Subscribed 1,676 4,846 8,260 4,604 3,162 1,830
Shares Issued on
Distributions Reinvested 192 480 693 610 228 169
Shares Redeemed (4,264) (4,503) (7,958) (2,400) (1,554) (2,496)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class A Shares
Outstanding (2,396) 823 995 2,814 1,836 (497)
- - ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 24 213 697 662 -- 17
Shares Issued on
Distributions Reinvested 1 7 32 23 -- --
Shares Redeemed (130) (82) (625) (165) (7) (10)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class B Shares
Outstanding (105) 138 104 520 (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.
- - --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET
MONEY MARKET PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 69,467 $ 54,883 $ 23,167 $ 19,261
Net Realized Gain (Loss) 71 (469) 9 (22)
- - --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 69,538 54,414 23,176 19,239
- - --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (69,467) (54,883) (23,167) (19,261)
- - --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 13,470,057 13,167,615 6,575,839 5,869,663
Distributions Reinvested 63,629 51,181 22,255 18,242
Redeemed (13,312,180) (12,770,387) (6,514,906) (5,617,992)
- - --------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 221,506 448,409 83,188 269,913
- - --------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 221,577 447,940 83,197 269,891
NET ASSETS:
Beginning of Period 1,284,633 836,693 721,410 451,519
- - --------------------------------------------------------------------------------------------------------------------
End of Period $ 1,506,210 $ 1,284,633 $ 804,607 $ 721,410
- - --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 13,470,057 13,167,615 6,575,839 5,869,663
Shares Issued on Distributions Reinvested 63,629 51,181 22,255 18,242
Shares Redeemed (13,312,180) (12,770,387) (6,514,906) (5,617,992)
- - --------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 221,506 448,409 83,188 269,913
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- - --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
(000)
<S> <C>
- - --------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING
ACTIVITIES:
Proceeds from Sales of Investments $ 756,562
Purchases of Investments (741,898)
Net Decrease in Short Term
Investments 14,767
Net Realized Loss on Foreign Currency
Transactions (12)
Interest Income 13,096
Interest Expense Paid (684)
Operating Expenses Paid (2,478)
- - --------------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities 39,353
- - --------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase
Agreements (4,680)
Net Portfolio Share Transactions (27,662)
Cash Distributions Paid (net of
reinvestments of $46,560) (7,539)
- - --------------------------------------------------------------
Net Cash Used for Financing
Activities (39,881)
- - --------------------------------------------------------------
Net Decrease in Cash (528)
CASH AT BEGINNING OF YEAR 374
- - --------------------------------------------------------------
BANK OVERDRAFT AT END OF YEAR $ (154)
- - --------------------------------------------------------------
- - --------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH
PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
Net Investment Income $ 13,130
Proceeds from Sale of Investments 756,562
Purchase of Investments (741,898)
Net Decrease in Short Term
Investments 14,767
Net Realized Loss on Foreign Currency
Transactions (12)
Net Increase in Receivables
Pertaining to Investing and
Operating Activities (222)
Net Decrease in Payables Pertaining
to Investing and Operating
Activities (521)
(Accretion)/Amortization of
Premium/Discount (2,453)
- - --------------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities $ 39,353
- - --------------------------------------------------------------
- - --------------------------------------------------------------
</TABLE>
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:
- - --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997++ 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59
------------- ------------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.18 0.24 0.17 0.19 0.13
Net Realized and Unrealized Gain
(Loss) on Investments 0.80 0.88 1.00 (0.25) 2.75
------------- ------------- --------- --------- ---------
Total from Investment Operations 0.98 1.12 1.17 (0.06) 2.88
------------- ------------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.83) (0.81) (0.25) (0.14) (0.09)
In Excess of Net Investment Income (0.02) (0.02) (0.10) -- (0.08)
Net Realized Gain (1.18) (0.48) (0.84) (0.36) --
In Excess of Net Realized Gain -- -- -- -- (0.09)
------------- ------------- --------- --------- ---------
Total Distributions (2.03) (1.31) (1.19) (0.50) (0.26)
------------- ------------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $10.39 $11.44 $11.63 $11.65 $12.21
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
TOTAL RETURN 8.61% 9.71% 10.57% (0.52)% 30.72%
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $138,667 $183,193 $170,663 $182,977 $150,854
Ratio of Expenses to Average Net Assets
(1) 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 1.47% 1.22% 1.26% 1.43% 1.29%
Portfolio Turnover Rate 49% 65% 72% 51% 53%
Average Commission Rate Per Share# $0.0019 $0.0028 N/A N/A N/A
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.11% 0.11% N/A N/A N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.03 $0.03 $0.05 $0.03 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.10% 1.09% 1.18% 1.00% 1.33%
Net Investment Income to Average
Net Assets 1.18% 0.94% 0.88% 1.23% 0.76%
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997++ 1996
<S> <C> <C>
- - ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.44 $11.66
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08 0.06
Net Realized and Unrealized Gain on
Investments 0.87 1.00
------ ------
Total from Investment Operations 0.95 1.06
------ ------
DISTRIBUTIONS
Net Investment Income (0.71) (0.78)
In Excess of Net Investment Income (0.02) (0.02)
Net Realized Gain (1.18) (0.48)
------ ------
Total Distributions (1.91) (1.28)
------ ------
NET ASSET VALUE, END OF PERIOD $10.48 $11.44
------ ------
------ ------
TOTAL RETURN 8.35% 9.22%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 14 $ 633
Ratio of Expenses to Average Net Assets
(2) 1.05% 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.71% 1.09%**
Portfolio Turnover Rate 49% 65%
Average Commission Rate Per Share $0.0019 $0.0028
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.11% 0.11%
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.33%**
Net Investment Income to Average
Net Assets 0.45% 0.82%**
</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.
++ Per share amounts for the year ended December 31, 1997 are based on
average shares outstanding.
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:
- - --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11
------------- ------------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income(1) 0.14 0.17 0.18 0.11 0.10
Net Realized and Unrealized Gain
(Loss) on Investments (8.93) 0.50 1.11 (4.15) 13.38
------------- ------------- --------- --------- ---------
Total from Investment Operations (8.79) 0.67 1.29 (4.04) 13.48
------------- ------------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.00)+ (0.15) (0.34) (0.09) (0.01)
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 (0.51) -- -- -- (0.13)
------------- ------------- --------- --------- ---------
Total Distributions (0.51) (1.42) (3.35) (0.62) (0.39)
------------- ------------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.43 $18.73 $19.48 $21.54 $26.20
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
TOTAL RETURN (48.29)% 3.49% 6.87% (15.81)% 105.71%
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $85,503 $363,498 $314,884 $276,906 $287,136
Ratio of Expenses to Average Net Assets
(1) 1.12% 1.00% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 0.47% 0.74% 0.97% 0.52% 0.83%
Portfolio Turnover Rate 107% 69% 42% 47% 18%
Average Commission Rate Per Share# $0.0102 $0.0111 N/A N/A N/A
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.46% 0.52% N/A N/A N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.05 $0.05 $0.03 $0.04 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.31% 1.25% 1.18% 1.20% 1.38%
Net Investment Income to Average
Net Assets 0.29% 0.54% 0.79% 0.32% 0.45%
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $18.74 $19.55
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.03 0.11
Net Realized and Unrealized Gain
(Loss) on Investments (8.86) 0.46
------ ------
Total from Investment Operations (8.83) 0.57
------ ------
DISTRIBUTIONS
Net Investment Income (0.00)+ (0.11)
Net Realized Gain -- (1.27)
In Excess of Net Realized Gain (0.51) --
------ ------
Total Distributions (0.51) (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.40 $18.74
------ ------
------ ------
TOTAL RETURN (48.48)% 2.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,468 $11,002
Ratio of Expenses to Average Net Assets
(2) 1.37% 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.18% 0.58%**
Portfolio Turnover Rate 107% 69%
Average Commission Rate Per Share $0.0102 $0.0111
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.46% 0.52%
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.04 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.56% 1.52%**
Net Investment Income (Loss) to
Average Net Assets (0.01)% 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.
- - --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------
PERIOD FROM
OCTOBER 1, 1997*
TO DECEMBER 31,
1997
<S> <C>
- - -----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11
Net Realized and Unrealized Loss on
Investments (2.10)
------
Total from Investment Operations (1.99)
------
DISTRIBUTIONS
Net Investment Income (0.07)
------
Total Distributions (0.07)
------
NET ASSET VALUE, END OF PERIOD $ 7.94
------
------
TOTAL RETURN (19.92)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,385
Ratio of Expenses to Average Net Assets
(1) 1.08%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 5.21%**
Portfolio Turnover Rate 38%
Average Commission Rate Per Share $0.0061
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.43%
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.25
Ratios before expense limitation:
Expenses to Average Net Assets 12.95%**
Net Investment Loss to Average Net
Assets (6.66)%**
- - -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------
PERIOD FROM
OCTOBER 1, 1997*
TO
DECEMBER 31,
1997
<S> <C>
- - -----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income --
Net Realized and Unrealized Loss on
Investments (1.97)
-------
Total from Investment Operations (1.97)
-------
NET ASSET VALUE, END OF PERIOD $ 8.03
-------
-------
TOTAL RETURN (19.70)%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 0+
Ratio of Expenses to Average Net Assets 1.18%**
Ratio of Net Investment Income to
Average Net Assets 4.24%**
Portfolio Turnover Rate 38%
Average Commission Rate Per Share $0.0061
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.43%
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ Amount is less than $500.
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:
- - --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22
---------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.07 0.09 0.08 (0.04) (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments (0.29) 1.51 (2.05) (1.69) 8.79
---------- ---------- -------- -------- --------
Total from Investment Operations (0.22) 1.60 (1.97) (1.73) 8.78
---------- ---------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.07) (0.08) (0.06) -- --
In Excess of Net Investment Income (0.07) -- -- -- --
Net Realized Gain (0.69) -- (1.13) (0.97) --
In Excess of Net Realized Gain (0.64) -- -- -- --
---------- ---------- -------- -------- --------
Total Distributions (1.47) (0.08) (1.19) (0.97) --
---------- ---------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 12.97 $ 14.66 $ 13.14 $ 16.30 $ 19.00
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
TOTAL RETURN (1.03)% 12.19% (12.77)% (9.63)% 85.91%
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,501,386 $1,304,006 $876,591 $929,638 $735,352
Ratio of Expenses to Average Net Assets
(1) 1.75% 1.74% 1.72% 1.75% 1.75%
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.40% 0.69% 0.60% (0.26)% (0.06)%
Portfolio Turnover Rate 90% 55% 54% 32% 52%
Average Commision Rate Per Share# $0.0016 $0.0006 N/A N/A N/A
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.38% 0.42% N/A N/A N/A
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
loss N/A N/A N/A N/A $0.01
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A N/A 1.79%
Net Investment Loss to Average Net
Assets N/A N/A N/A N/A (0.10)%
- - ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.66 $ 13.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.04
Net Realized and Unrealized Gain
(Loss) on Investments (0.28) 1.42
------ ------
Total from Investment Operations (0.26) 1.46
------ ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.05)
In Excess of Net Investment Income (0.04) --
Net Realized Gain (0.69) --
In Excess of Net Realized Gain (0.64) --
------ ------
Total Distributions (1.42) (0.05)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.98 $ 14.66
------ ------
------ ------
TOTAL RETURN (1.31)% 11.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $9,666 $14,213
Ratio of Expenses to Average Net Assets 2.00% 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.11% 0.33%**
Portfolio Turnover Rate 90% 55%
Average Commision Rate Per Share $0.0016 $0.0006
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.38% 0.42%
</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.
- - --------------------------------------------------------------------------------
184
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, APRIL 2, 1993*
------------------------------------------------------- TO DECEMBER 31,
1997 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) 0.39 0.24 0.14 0.08 0.08
Net Realized and Unrealized
Gain on Investments 2.58 2.85 1.37 1.29 2.83
----------- ----------- ----------- ----------- ------
Total from Investment
Operations 2.97 3.09 1.51 1.37 2.91
----------- ----------- ----------- ----------- ------
DISTRIBUTIONS
Net Investment Income (0.37) (0.25) (0.15) (0.09) --
In Excess of Net Investment
Income -- (0.02) -- -- --
Net Realized Gain (1.34) (0.04) (1.38) (0.25) --
----------- ----------- ----------- ----------- ------
Total Distributions (1.71) (0.31) (1.53) (0.34) --
----------- ----------- ----------- ----------- ------
NET ASSET VALUE, END OF PERIOD $ 17.96 $ 16.70 $ 13.92 $ 13.94 $ 12.91
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
TOTAL RETURN 17.88% 22.29% 11.85% 10.88% 29.10%
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $242,868 $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) 1.96% 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 43% 24% 13% 79% 15%
Average Commission Rate Per
Share# $0.0207 $0.0212 N/A N/A N/A
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.20% 0.23% N/A N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.02 $0.03 $0.06 $0.09
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.09% 1.16% 1.25% 1.62% 2.43%**
Net Investment Income
(Loss) to Average Net
Assets 1.87% 1.67% 1.12% 0.25% (0.21)%**
- - ---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
---------------------------
PERIOD FROM
JANUARY 2,
1996***
YEAR ENDED TO DECEMBER
DECEMBER 31,
31, 1997 1996
<S> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $16.67 $14.05
----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.28 0.18
Net Realized and Unrealized
Gain on Investments 2.66 2.73
----------- ------
Total from Investment
Operations 2.94 2.91
----------- ------
DISTRIBUTIONS
Net Investment Income (0.33) (0.23)
In Excess of Net Investment
Income -- (0.02)
Net Realized Gain (1.34) (0.04)
----------- ------
Total Distributions (1.67) (0.29)
----------- ------
NET ASSET VALUE, END OF PERIOD $17.94 $16.67
----------- ------
----------- ------
TOTAL RETURN 17.73% 20.76%
----------- ------
----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,654 $2,654
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.55% 1.67%**
Portfolio Turnover Rate 43% 24%
Average Commission Rate Per
Share $0.0207 $0.0212
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.20% 0.23%
(2) 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 1.34% 1.40%**
Net Investment Income to
Average Net Assets 1.46% 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.
- - --------------------------------------------------------------------------------
185
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------
PERIOD FROM
OCTOBER 1, 1997* TO
DECEMBER 31,
1997
<S> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05
Net Realized and Unrealized Loss on
Investments (0.52)
------
Total from Investment Operations (0.47)
------
DISTRIBUTIONS
Net Investment Income (0.01)
------
Total Distributions (0.01)
------
NET ASSET VALUE, END OF PERIOD $ 9.52
------
------
TOTAL RETURN (4.72)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $15,177
Ratio of Expenses to Average Net Assets
(1) 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.08%**
Portfolio Turnover Rate 47%
Average Commission Rate Per Share $0.0155
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.23%
(1) 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 3.05%**
Net Investment Income to Average
Net Assets 0.03%**
- - ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------
PERIOD FROM
OCTOBER 1, 1997* TO
DECEMBER 31,
1997
<S> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.02
Net Realized and Unrealized Loss on
Investments (0.50)
------
Total from Investment Operations (0.48)
------
NET ASSET VALUE, END OF PERIOD $ 9.52
------
------
TOTAL RETURN (4.76)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $789
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.51%**
Portfolio Turnover Rate 47%
Average Commission Rate Per Share $0.0155
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.23%
(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 3.12%**
Net Investment Loss to Average Net
Assets (0.36)%**
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
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:
- - --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75
------ ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.21 0.23 0.18 0.08 0.08
Net Realized and Unrealized
Gain on Investments 3.61 3.02 2.26 0.79 4.18
------ ----------- ----------- ----------- -----------
Total from Investment
Operations 3.82 3.25 2.44 0.87 4.26
------ ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.40) (0.23) (0.22) (0.12) (0.02)
In Excess of Net Investment
Income -- -- -- -- (0.03)
Net Realized Gain (1.14) (1.09) (1.31) (1.22) (0.09)
------ ----------- ----------- ----------- -----------
Total Distributions (1.54) (1.32) (1.53) (1.34) (0.14)
------ ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $18.52 $16.24 $14.31 $13.40 $13.87
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
TOTAL RETURN 23.75% 22.83% 18.66% 6.95% 44.24%
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $108,074 $80,297 $91,675 $78,935 $19,918
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) 1.07% 1.38% 1.17% 0.87% 0.84%
Portfolio Turnover Rate 30% 26% 28% 12% 42%
Average Commission Rate Per
Share# $0.0312 $0.0299 N/A N/A N/A
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.26% 0.25% 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 $0.02 $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.11% 1.15% 1.13% 1.24% 1.66%
Net Investment Income to
Average Net Assets 0.96% 1.23% 1.04% 0.63% 0.18%
- - ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.21 $ 14.36
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.16 0.13
Net Realized and Unrealized
Gain on Investments 3.60 3.02
------ ------
Total from Investment
Operations 3.76 3.15
------ ------
DISTRIBUTIONS
Net Investment Income (0.37) (0.21)
Net Realized Gain (1.14) (1.09)
------ ------
Total Distributions (1.51) (1.30)
------ ------
NET ASSET VALUE, END OF PERIOD $ 18.46 $ 16.21
------ ------
------ ------
TOTAL RETURN 23.37% 22.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $5,910 $3,928
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 0.80% 1.29%**
Portfolio Turnover Rate 30% 26%
Average Commission Rate Per
Share $0.0312 $0.0299
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.26% 0.25%
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.36% 1.39%**
Net Investment Income to
Average Net Assets 0.69% 1.15%**
</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.
- - --------------------------------------------------------------------------------
187
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
GOLD PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
PERIOD FROM
FEBRUARY 1,
1994* TO
YEAR ENDED DECEMBER 31, DECEMBER
--------------------------------------- 31,
1997 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) 0.35 0.05 (0.07) 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (5.51) 1.41 1.22 (0.88)
----------- ----- ----- -----------
Total from Investment
Operations (5.16) 1.46 1.15 (0.85)
----------- ----- ----- -----------
DISTRIBUTIONS
Net Investment Income (0.03) (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 (0.01) (0.65) -- --
----------- ----- ----- -----------
Total Distributions (0.04) (0.71) (1.73) (0.02)
----------- ----- ----- -----------
NET ASSET VALUE, END OF PERIOD $ 4.10 $ 9.30 $ 8.55 $ 9.13
----------- ----- ----- -----------
----------- ----- ----- -----------
TOTAL RETURN (55.64)% 16.94% 13.21% (8.49)%
----------- ----- ----- -----------
----------- ----- ----- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $436 $27,810 $7,409 $30,243
Ratio of Expenses to Average
Net Assets (1) 1.27% 1.25% 1.25% 1.25%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.25% 1.25% 1.25% 1.25%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) 0.64% 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate 71% 94% 47% 56%
Average Commission Rate Per
Share# $0.0108 $0.0246 N/A N/A
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.55% 0.47% N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income (loss) $0.24 $0.04 $0.11 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.70% 1.73% 1.76% 1.72%**
Net Investment Income
(Loss) to Average Net
Assets 0.20% 0.10% (0.82)% (0.06)%**
- - -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $9.28 $8.81
------ -----
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.03 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (5.14) 1.14
------ -----
Total from Investment
Operations (5.11) 1.17
------ -----
DISTRIBUTIONS
Net Investment Income (0.02) (0.04)
In Excess of Net Investment
Income -- (0.01)
In Excess of Net Realized
Gain (0.01) (0.65)
------ -----
Total Distributions (0.03) (0.70)
------ -----
NET ASSET VALUE, END OF PERIOD $4.14 $9.28
------ -----
------ -----
TOTAL RETURN (55.17)% 13.21%
------ -----
------ -----
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $690 $1,370
Ratio of Expenses to Average
Net Assets (2) 1.52% 1.50%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.50% 1.50%**
Ratio of Net Investment Income
to Average Net Assets (2) 0.29% 0.30%**
Portfolio Turnover Rate 71% 94%
Average Commission Rate Per
Share $0.0108 $0.0246
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.55% 0.47%
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $ 0.05 $ 0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.07% 1.94%**
Net Investment Loss to
Average Net Assets (0.25)% (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.
- - --------------------------------------------------------------------------------
188
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $16.95 $15.15 $15.34 $14.09 $9.98
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.30 0.25 0.16 0.16 0.15
Net Realized and Unrealized Gain on
Investments 2.01 2.71 1.55 1.54 4.36
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 2.31 2.96 1.71 1.70 4.51
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income (0.48) (0.36) (0.06) (0.18) (0.01)
In Excess of Net Investment Income -- -- -- -- (0.13)
Net Realized Gain (1.62) (0.80) (1.84) (0.27) (0.26)
---------- ---------- ---------- ---------- ----------
Total Distributions (2.10) (1.16) (1.90) (0.45) (0.40)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $17.16 $16.95 $15.15 $15.34 $14.09
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN 13.91% 19.64% 11.77% 12.39% 46.50%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,822,900 $2,264,424 $1,598,530 $1,304,770 $947,045
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) 1.49% 1.64% 1.38% 1.12% 1.25%
Portfolio Turnover Rate 33% 18% 27% 16% 23%
Average Commission Rate Per Share# $0.0201 $0.0238 N/A N/A N/A
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.21% 0.26% 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
Ratios before expense limitation:
Expenses to Average Net Assets 1.02% 1.02% 1.03% 1.03% 1.06%
Net Investment Income to Average
Net Assets 1.47% 1.61% 1.35% 1.09% 1.19%
- - ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.93 $ 15.24
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.23 0.23
Net Realized and Unrealized
Gain on Investments 2.02 2.59
------ ------
Total from Investment
Operations 2.25 2.82
------ ------
DISTRIBUTIONS
Net Investment Income (0.43) (0.33)
Net Realized Gain (1.62) (0.80)
------ ------
Total Distributions (2.05) (1.13)
------ ------
NET ASSET VALUE, END OF PERIOD $17.13 $16.93
------ ------
------ ------
TOTAL RETURN 13.57% 18.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $3,074 $5,393
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.21% 1.68%**
Portfolio Turnover Rate 33% 18%
Average Commission Rate Per
Share $0.0201 $0.0238
- - ---------------
Average Commission Rate 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 1.27% 1.27%**
Net Investment Income to
Average Net Assets 1.19% 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.
+ Amount is less than $0.01 per share.
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:
- - --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------
PERIOD FROM
MARCH 15,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.66 $10.00
------------ -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.17 0.06
Net Realized and Unrealized
Gain on Investments 0.54 0.76
------------ -------------
Total from Investment
Operations 0.71 0.82
------------ -------------
DISTRIBUTIONS
Net Investment Income (0.41) (0.13)
In Excess of Net Investment
Income -- (0.02)
Net Realized Gain (0.09) (0.01)
------------ -------------
Total Distributions (0.50) (0.16)
------------ -------------
NET ASSET VALUE, END OF PERIOD $10.87 $10.66
------------ -------------
------------ -------------
TOTAL RETURN 6.58% 8.25%
------------ -------------
------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $159,096 $85,316
Ratio of Expenses to Average
Net Assets (1) 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.44% 0.99%**
Portfolio Turnover Rate 41% 18%
Average Commission Rate Per
Share $ 0.0198 $ 0.0211
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.27% 0.25%
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.19% 1.54%**
Net Investment Income to
Average Net Assets 1.25% 0.44%**
- - ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
MARCH 15,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.63 $10.00
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.16 0.01
Net Realized and Unrealized
Gain on Investments 0.52 0.78
------ ------
Total from Investment
Operations 0.68 0.79
------ ------
DISTRIBUTIONS
Net Investment Income (0.38) (0.13)
In Excess of Net Investment
Income -- (0.02)
Net Realized Gain (0.09) (0.01)
------ ------
Total Distributions (0.47) (0.16)
------ ------
NET ASSET VALUE, END OF PERIOD $10.84 $10.63
------ ------
------ ------
TOTAL RETURN 6.33% 7.90%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,217 $23,173
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.19% 0.60%**
Portfolio Turnover Rate 41% 18%
Average Commission Rate Per
Share $0.0198 $0.0211
- - ---------------
Average Commission Rate 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 $ 0.02 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.44% 1.69%**
Net Investment Income to
Average Net Assets 1.00% 0.15%**
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
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:
- - --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993++
<S> <C> <C> <C> <C> <C>
- - -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
----------- ----------- ----------- ----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.25 0.21 0.24 0.14 0.09
Net Realized and Unrealized
Gain (Loss) on Investments (0.42) 2.29* 0.15* 0.62* 4.48*
----------- ----------- ----------- ----------- ------
Total from Investment
Operations (0.17) 2.50 0.39 0.76 4.57
----------- ----------- ----------- ----------- ------
DISTRIBUTIONS
Net Investment Income (0.31) (0.22) (0.23) (0.03) 0.00
In Excess of Net Investment
Income (0.05) -- -- -- (0.02)
Net Realized Gain (0.77) (0.39) (0.37) (0.22) --
----------- ----------- ----------- ----------- ------
Total Distributions (1.13) (0.61) (0.60) (0.25) (0.02)
----------- ----------- ----------- ----------- ------
TRANSACTIONS FEES 0.08 -- -- -- --
----------- ----------- ----------- ----------- ------
NET ASSET VALUE, END OF PERIOD $15.61 $16.83 $14.94 $15.15 $14.64
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
TOTAL RETURN (0.55)% 16.82% 2.60% 5.25% 45.34%
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $230,095 $234,743 $198,669 $160,101 $52,834
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) 1.37% 1.29% 1.72% 1.18% 0.66%
Portfolio Turnover Rate 39% 35% 24% 8% %14
Average Commission Rate Per
Share# $0.0134 $0.0159 N/A N/A N/A
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.31% 0.30% 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
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.22% 1.23% 1.24% 1.29% 1.86%
Net Investment Income
(Loss) to Average Net
Assets 1.30% 1.20% 1.63% 1.04% (0.05)%
</TABLE>
- - --------------------------------------------------------------------------------
* Reflects a 1% transaction fee on purchases and redemptions of capital
shares.
++ Per share amounts for the year ended December 31, 1993 are based on
average shares outstanding.
# 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.
- - --------------------------------------------------------------------------------
191
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
PERIOD FROM
APRIL 25,
1994* TO
YEAR ENDED DECEMBER 31, DECEMBER
------------------------------------------- 31,
1997 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) 0.17 -- 0.04 (0.01)
Net Realized and Unrealized
Loss on Investments+ (0.94) (0.13) (0.40) (0.16)
----- ----- ----- -----------
Total from Investment
Operations (0.77) (0.13) (0.36) (0.17)
----- ----- ----- -----------
DISTRIBUTIONS
Net Investment Income (1.30) (0.66) -- --
In Excess of Net Investment
Income -- (0.52) (0.20) --
----- ----- ----- -----------
Total Distributions (1.30) (1.18) (0.20) --
----- ----- ----- -----------
NET ASSET VALUE, END OF PERIOD $ 5.89 $ 7.96 $ 9.27 $ 9.83
----- ----- ----- -----------
----- ----- ----- -----------
TOTAL RETURN (9.23)% (1.40)% (3.64)% (1.70)%
----- ----- ----- -----------
----- ----- ----- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $77,086 $152,229 $119,278 $50,332
Ratio of Expenses to Average
Net Assets (1) 1.06% 1.00% 1.00% 1.00%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.21)% (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 40% %38 52% 1%
Average Commission Rate Per
Share# $0.0425 $0.0561 N/A N/A
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.41% 0.43% N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income (loss) $0.01 $0.01 $0.06 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.14% 1.07% 1.20% 1.27%**
Net Investment Loss to
Average Net Assets (0.28)% (0.11)% (0.05)% (0.37)%**
- - -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
YEAR JANUARY 2,
ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996++
<S> <C> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.94 $ 9.25
----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(2) 0.09 (0.02)
Net Realized and Unrealized
Loss on Investments (0.89) (0.14)
----- -----
Total from Investment
Operations (0.80) (0.16)
----- -----
DISTRIBUTIONS
Net Investment Income (1.27) (0.64)
In Excess of Net Investment
Income -- (0.51)
----- -----
Total Distributions (1.27) (1.15)
----- -----
NET ASSET VALUE, END OF PERIOD $ 5.87 $ 7.94
----- -----
----- -----
TOTAL RETURN (9.64)% (1.67)%
----- -----
----- -----
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,703 $3,431
Ratio of Expenses to Average
Net Assets (2) 1.31% 1.25%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.25% 1.25%**
Ratio of Net Investment Loss
to Average Net Assets (2) (0.53)% (0.26)%**
Portfolio Turnover Rate 40% 38%
Average Commission Rate Per
Share $0.0425 $0.0561
- - ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.41% 0.43%
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income (loss) $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.38% 1.31%**
Net Investment Loss to
Average Net Assets (0.60)% (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 shares outstanding.
# 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.
- - --------------------------------------------------------------------------------
192
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------
YEAR ENDED
DECEMBER 31, PERIOD FROM
---------------- JANUARY 18, 1995* TO
1997 1996 DECEMBER 31, 1995
<S> <C> <C> <C>
- - -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.32 $ 9.06 $ 10.00
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) (0.01) 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 4.32 4.27 (0.92)
------- ------- ------
Total from Investment Operations 4.31 4.41 (0.87)
------- ------- ------
DISTRIBUTIONS
Net Investment Income -- (0.13) (0.04)
Net Realized Gain (4.04) (2.02) --
In Excess of Net Realized Gain (0.68) -- --
Return of Capital -- -- (0.03)
------- ------- ------
Total Distributions (4.72) (2.15) (0.07)
------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 10.91 $ 11.32 $ 9.06
------- ------- ------
------- ------- ------
TOTAL RETURN 41.28% 48.77% (8.68)%
------- ------- ------
------- ------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $73,196 $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.89% 1.70% 1.70%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.70% 1.70% 1.70%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.14)% 1.21% 1.62%**
Portfolio Turnover Rate 286% 192% 137%
Average Commission Rate Per Share# $0.0007 $0.0004 N/A
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.27% 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 1.96% 2.18% 3.13%**
Net Investment Income (Loss) to
Average Net Assets (0.21)% 0.75% (0.48)%**
- - -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------
PERIOD FROM
YEAR ENDED JANUARY 2, 1996***
DECEMBER 31, TO
1997 DECEMBER 31, 1996
<S> <C> <C>
- - ---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.31 $9.44
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) -- 0.09
Net Realized and Unrealized Gain on
Investments 4.21 3.90
------ ------
Total from Investment Operations 4.21 3.99
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.10)
Net Realized Gain (4.04) (2.02)
In Excess of Net Realized Gain (0.68) --
------ ------
Total Distributions (4.72) (2.12)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 11.31
------ ------
------ ------
TOTAL RETURN 40.37% 42.44%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $6,709 $1,333
Ratio of Expenses to Average Net Assets
(2) 2.14% 1.95%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.95% 1.95%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.34)% 0.89%**
Portfolio Turnover Rate 286% 192%
Average Commission Rate Per Share $0.0007 $0.0004
- - ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.27% 0.30%
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 2.21% 2.43%**
Net Investment Income (Loss) to
Average Net Assets (0.41)% 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.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
193
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
PERIOD FROM
YEAR ENDED MARCH 8,
DECEMBER 31, 1995* TO
----------------- DECEMBER 31,
1997 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 4.58 4.73 3.95
-------- ------- ------
Total from Investment Operations 4.59 4.91 4.10
-------- ------- ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.17) (0.15)
In Excess of Net Investment Income (0.00)+ -- --
Net Realized Gain (3.23) (2.48) (1.78)
-------- ------- ------
Total Distributions (3.24) (2.65) (1.93)
-------- ------- ------
NET ASSET VALUE, END OF PERIOD $15.78 $14.43 $12.17
-------- ------- ------
-------- ------- ------
TOTAL RETURN 33.31% 40.90% 41.25%
-------- ------- ------
-------- ------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $155,087 $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.02% 1.00% 1.00%**
Ratio of Expenses to Average Net Assets
Excluding Dividend Expense on
Securities Sold Short and Interest
Expense 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.08% 1.26% 1.64%**
Portfolio Turnover Rate 302% 380% 309%
Average Commission Rate Per Share# $0.0575 $0.0484 N/A
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.08% 1.24% 1.59%**
Net Investment Income to Average
Net Assets 0.02% 1.02% 1.05%**
- - ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------
PERIOD FROM
YEAR ENDED JANUARY 2, 1996***
DECEMBER 31, TO
1997 DECEMBER 31, 1996
<S> <C> <C>
- - ---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $14.42 $12.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) (0.01) 0.13
Net Realized and Unrealized Gain on
Investments 4.55 4.67
------ ------
Total from Investment Operations 4.54 4.80
------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.15)
In Excess of Net Investment Income (0.00)+ --
Net Realized Gain (3.23) (2.48)
------ ------
Total Distributions (3.24) (2.63)
------ ------
NET ASSET VALUE, END OF PERIOD $ 15.72 $ 14.42
------ ------
------ ------
TOTAL RETURN 32.90% 39.72%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,277 $8,805
Ratio of Expenses to Average Net Assets
(2) 1.27% 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Dividend Expense on
Securities Sold Short and Interest
Expense 1.25% 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.18)% 0.95%**
Portfolio Turnover Rate 302% 380%
Average Commission Rate Per Share $0.0575 $0.0484
- - ---------------
(2) Effect of voluntary expense
limitation during the period
Per share benefit to net
investment income (loss) $0.00+ $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.33% 1.47%**
Net Investment Income (Loss) to
Average Net Assets (0.24)% 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.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
194
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22
------- ------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.07) (0.19) (0.18) (0.09) (0.11)
Net Realized and Unrealized Gain
(Loss) on Investments 1.09 0.89 5.55 (0.01) 0.11
------- ------- -------- -------- --------
Total from Investment Operations 1.02 0.70 5.37 (0.10) 0.00
------- ------- -------- -------- --------
DISTRIBUTIONS
Net Realized Gain (6.80) (8.69) -- -- --
------- ------- -------- -------- --------
Total Distributions (6.80) (8.69) -- -- --
------- ------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 7.72 $ 13.50 $ 21.49 $ 16.12 $ 16.22
------- ------- -------- -------- --------
------- ------- -------- -------- --------
TOTAL RETURN 11.36% 3.72% 33.31% (0.62)% 0.00%
------- ------- -------- -------- --------
------- ------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $57,777 $62,793 $119,378 $117,669 $103,621
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of Net Investment Loss to Average
Net Assets (1) (0.87)% (0.88)% (0.76)% (0.61)% (0.77)%
Portfolio Turnover Rate 228% 33% 25% 24% 25%
Average Commission Rate Per Share# $0.0513 $0.0507 N/A N/A N/A
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment loss $ 0.01 $ 0.01 $ 0.003 $ 0.002 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.34% 1.30% 1.26% 1.26% 1.31%
Net Investment Loss to Average Net
Assets (0.95)% (0.92)% (0.77)% (0.62)% (0.83)%
- - ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $13.45 $21.47
----- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (2) (0.06) (0.15)
Net Realized and Unrealized Gain on
Investments 1.04 0.82
----- ------
Total From Operations 0.98 0.67
----- ------
DISTRIBUTIONS
Net Realized Gain (6.80) (8.69)
----- ------
Total Distributions (6.80) (8.69)
----- ------
NET ASSET VALUE, END OF PERIOD $ 7.63 $ 13.45
----- ------
----- ------
TOTAL RETURN 11.13% 3.58%
----- ------
----- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,313 $3,997
Ratio of Expenses to Average Net Assets
(2) 1.50% 1.50%**
Ratio of Net Investment Loss to Average
Net Assets (2) (1.12)% (1.09)%**
Portfolio Turnover Rate 228% 33%
Average Commission Rate Per Share $0.0513 $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 1.58% 1.54%**
Net Investment Loss to Average Net
Assets (1.21)% (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.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
195
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.06 0.17 0.22 0.17 0.22
Net Realized and Unrealized Gain on
Investments 4.48 4.07 4.93 0.21 0.28
-------- -------- -------- ------- -------
Total from Investment Operations 4.54 4.24 5.15 0.38 0.50
-------- -------- -------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.06) (0.17) (0.28) (0.13) (0.23)
In Excess of Net Investment Income (0.00)+ -- -- -- (0.01)
Net Realized Gain (2.49) (3.27) (2.75) (0.37) --
-------- -------- -------- ------- -------
Total Distributions (2.55) (3.44) (3.03) (0.50) (0.24)
-------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 16.93 $ 14.94 $ 14.14 $ 12.02 $ 12.14
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN 31.32% 30.97% 45.02% 3.26% 4.33%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $591,789 $352,703 $158,112 $97,259 $73,789
Ratio of Expenses to Average Net Assets
(1) 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 0.35% 1.12% 1.57% 1.44% 1.59%
Portfolio Turnover Rate 177% 186% 186% 146% 172%
Average Commission Rate Per Share# $0.0562 $0.0535 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
Ratios before expense limitation:
Expenses to Average Net Assets 0.82% 0.88% 0.88% 0.89% 0.93%
Net Investment Income to Average
Net Assets 0.33% 1.04% 1.49% 1.35% 1.46%
- - ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.92 $ 14.22
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.13
Net Realized and Unrealized Gain on
Investments 4.46 3.99
------ ------
Total from Investment Operations 4.50 4.12
------ ------
DISTRIBUTIONS
Net Investment Income (0.02) (0.15)
Net Realized Gain (2.49) (3.27)
------ ------
Total Distributions (2.51) (3.42)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.91 $ 14.92
------ ------
------ ------
TOTAL RETURN 31.05% 29.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $27,879 $5,498
Ratio of Expenses to Average Net Assets
(2) 1.05% 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.10% 0.91%**
Portfolio Turnover Rate 177% 186%
Average Commission Rate Per Share $0.0562 $0.0535
- - ---------------
(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 1.07% 1.12%**
Net Investment Income to Average
Net Assets 0.08% 0.84%**
</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.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
196
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.07 0.32 0.30 0.28 0.24
Net Realized and Unrealized Gain
(Loss) on Investments 3.72 2.36 1.82 (0.01) 0.90
-------- -------- -------- -------- --------
Total from Investment Operations 3.79 2.68 2.12 0.27 1.14
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.08) (0.32) (0.38) (0.27) (0.18)
In Excess of Net Investment Income (0.00)+ -- -- -- --
Net Realized Gain (3.36) (3.38) (0.63) (0.30) --
-------- -------- -------- -------- --------
Total Distributions (3.44) (3.70) (1.01) (0.57) (0.18)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.24 $ 10.89 $ 11.91 $ 10.80 $ 11.10
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 36.80% 22.99% 20.63% 2.53% 11.33%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $35,612 $23,970 $51,919 $40,033 $26,775
Ratio of Expenses to Average Net Assets
(1) 1.01% 1.00% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 0.55% 2.20% 2.60% 2.67% 2.56%
Portfolio Turnover Rate 178% 32% 36% 22% 29%
Average Commission Rate Per Share# $0.0500 $0.0402 N/A N/A N/A
- - ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income $0.04 $0.04 $0.02 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.32% 1.21% 1.26% 1.68%
Net Investment Income to Average
Net Assets 0.24% 1.89% 2.39% 2.41% 1.88%
- - ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.88 $ 11.95
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.10 0.23
Net Realized and Unrealized Gain on
Investments 3.65 2.38
------ ------
Total from Investment Operations 3.75 2.61
------ ------
DISTRIBUTIONS
Net Investment Income (0.06) (0.30)
In Excess of Net Investment Income (0.00)+ --
Net Realized Gain (3.36) (3.38)
------ ------
Total Distributions (3.42) (3.68)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.21 $ 10.88
------ ------
------ ------
TOTAL RETURN 36.51% 22.33%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $7,523 $1,689
Ratio of Expenses to Average Net Assets
(2) 1.26% 1.24%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.25% 1.24%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.06)% 1.93%**
Portfolio Turnover Rate 178% 32%
Average Commission Rate Per Share $0.0500 $0.0402
- - ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
income (loss) $0.02 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.56% 1.69%**
Net Investment Income (Loss) to
Average Net Assets (0.36)% 1.50%**
</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.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
197
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------
PERIOD FROM
SEPTEMBER 16,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.71 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.07 (0.02)
Net Realized and Unrealized Gain on
Investments 3.75 0.73
------ ------
Total from Investment Operations 3.82 0.71
------ ------
DISTRIBUTIONS
Net Investment Income (0.26) --
Net Realized Gain (1.28) --
In Excess of Net Realized Gain (1.00) --
Return of Capital (0.26) --
------ ------
Total Distributions (2.80) --
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.73 $ 10.71
------ ------
------ ------
TOTAL RETURN 37.27% 7.10%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $31,788 $3,595
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (1.07)% (0.70)%**
Portfolio Turnover Rate 622% 77%
Average Commission Rate Per Share $0.0370 $0.0374
- - ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
loss $0.08 $0.22
Ratios before expense limitation:
Expenses to Average Net Assets 2.47% 8.51%**
Net Investment Loss to Average Net
Assets (2.30)% (7.96)%**
- - -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
SEPTEMBER 16,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.71 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) 0.04 (0.02)
Net Realized and Unrealized Gain on
Investments 3.74 0.73
------ ------
Total from Investment Operations 3.78 0.71
------ ------
DISTRIBUTIONS
Net Investment Income (0.25) --
Net Realized Gain (1.28) --
In Excess of Net Realized Gain (1.00) --
Return of Capital (0.24) --
------ ------
Total Distributions (2.77) --
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.72 $ 10.71
------ ------
------ ------
TOTAL RETURN 36.90% 7.10%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,394 $1,487
Ratio of Expenses to Average Net Assets
(2) 1.50% 1.50%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (1.41)% (1.00)%**
Portfolio Turnover Rate 622% 77%
Average Commission Rate Per Share $0.0370 $0.0374
- - ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
loss $0.04 $0.19
Ratios before expense limitation:
Expenses to Average Net Assets 2.72% 9.14%**
Net Investment Loss to Average Net
Assets (2.63)% (8.65)%**
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
198
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------
PERIOD FROM
JULY 31,
1997* TO
DECEMBER 31,
1997++
<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 0.33
------
Total from Investment Operations 0.39
------
DISTRIBUTIONS
Net Investment Income (0.05)
Net Realized Gain (0.03)
------
Total Distributions (0.08)
------
NET ASSET VALUE, END OF PERIOD $ 10.31
------
------
TOTAL RETURN 3.94%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $20,914
Ratio of Expenses to Average Net Assets
(1) 0.80%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.32%**
Portfolio Turnover Rate 15%
Average Commission Rate Per Share $0.0300
- - ---------------
(1) 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 2.37%**
Net Investment Loss to Average Net
Assets (0.25)%**
- - ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------
PERIOD FROM
JULY 31,
1997* TO
DECEMBER 31,
1997++
<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 0.37
------
Total from Investment Operations 0.39
------
DISTRIBUTIONS
Net Investment Income (0.05)
Net Realized Gain (0.03)
------
Total Distributions (0.08)
------
NET ASSET VALUE, END OF PERIOD $ 10.31
------
------
TOTAL RETURN 3.93%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $102
Ratio of Expenses to Average Net Assets
(2) 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.48%**
Portfolio Turnover Rate 15%
Average Commission Rate Per Share $0.0300
- - ---------------
(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 2.63%**
Net Investment Loss to Average Net
Assets (0.32)%**
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ Amount is less than $0.01 per share.
++ Per share amounts for the period ended December 31, 1997 are based on
average shares outstanding
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
199
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
YEAR ENDED FEBRUARY 24,
DECEMBER 31, 1995* TO
------------------ DECEMBER 31,
1997 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) 0.42 0.37 0.26
Net Realized and Unrealized Gain on
Investments 3.40 4.02 1.84
-------- -------- ------
Total from Investment Operations 3.82 4.39 2.10
-------- -------- ------
DISTRIBUTIONS
Net Investment Income (0.43) (0.39) (0.24)
Net Realized Gain (2.16) (1.01) (0.44)
In Excess of Net Realized Gain (0.26) -- --
-------- -------- ------
Total DIstributions (2.85) (1.40) (0.68)
-------- -------- ------
NET ASSET VALUE, END OF PERIOD $ 15.38 $ 14.41 $ 11.42
-------- -------- ------
-------- -------- ------
TOTAL RETURN 27.62% 39.56% 21.07%
-------- -------- ------
-------- -------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $361,549 $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) 2.72% 3.08% 4.04%**
Portfolio Turnover Rate 135% 171% 158%
Average Commission Rate Per Share# $0.0593 $0.0568 N/A
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.04% 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.68% 2.93% 3.71%**
- - -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.39 $ 11.50
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.47 0.35
Net Realized and Unrealized Gain on
Investments 3.29 3.92
------ ------
Total from Investment Operations 3.76 4.27
------ ------
DISTRIBUTIONS
Net Investment Income (0.39) (0.37)
Net Realized Gain (2.16) (1.01)
In Excess of Net Realized Gain (0.26) --
------ ------
Total DIstributions (2.81) (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 15.34 $ 14.39
------ ------
------ ------
TOTAL RETURN 27.21% 38.23%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $21,231 $8,734
Ratio of Expenses to Average Net Assets
(2) 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.49% 2.91%**
Portfolio Turnover Rate 135% 171%
Average Commission Rate Per Share $0.0593 $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 1.28% 1.37%**
Net Investment Income to Average
Net Assets 3.46% 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.
- - --------------------------------------------------------------------------------
200
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31
------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.35 0.41 0.38 0.40 0.37
Net Realized and Unrealized Gain
(Loss) on Investments 3.51 2.27 3.30 (0.55) 1.31
------- -------- -------- ------- -------
Total from Investment Operations 3.86 2.68 3.68 (0.15) 1.68
------- -------- -------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.35) (0.41) (0.47) (0.40) (0.36)
Net Realized Gain (3.78) (2.32) (0.77) (0.58) -
------- -------- -------- ------- -------
Total Distributions (4.13) (2.73) (1.24) (0.98) (0.36)
------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.62 $ 13.89 $ 13.94 $ 11.50 $ 12.63
------- -------- -------- ------- -------
------- -------- -------- ------- -------
TOTAL RETURN 29.20% 19.73% 33.69% (1.29)% 15.14%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $86,054 $106,128 $147,365 $73,406 $54,598
Ratio of Expenses to Average Net Assets
(1) 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to
Average Net Assets (1) 2.15% 2.62% 3.01% 3.37% 3.23%
Portfolio Turnover Rate 36% 42% 43% 33% 51%
Average Commission Rate Per Share# $0.0411 $0.0434 N/A N/A N/A
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.01 $0.01 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.80% 0.78% 0.77% 0.80% 0.95%
Net Investment Income to Average
Net Assets 2.06% 2.55% 2.94% 3.27% 2.98%
- - --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------
PERIOD FROM
YEAR ENDED JANUARY 2,
DECEMBER 1996*** TO
31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.89 $ 14.06
----------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.28 0.29
Net Realized and Unrealized Gain on
Investments 3.51 2.25
----------- ------
Total from Investment Operations 3.79 2.54
----------- ------
DISTRIBUTIONS
Net Investment Income (0.31) (0.39)
Net Realized Gain (3.78) (2.32)
----------- ------
Total Distributions (4.09) (2.71)
----------- ------
NET ASSET VALUE, END OF PERIOD $ 13.59 $ 13.89
----------- ------
----------- ------
TOTAL RETURN 28.70% 18.57%
----------- ------
----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,246 $2,555
Ratio of Expenses to Average Net Assets
(2) 0.95% 0.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.86% 2.33%**
Portfolio Turnover Rate 36% 42%
Average Commission Rate Per Share $0.0411 $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 1.04% 1.03%**
Net Investment Income to Average
Net Assets 1.77% 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 charged, during the period.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
201
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.36 0.52 0.39 0.42 0.44
Net Realized and Unrealized Gain
(Loss) on Investments 0.99 0.54 1.62 (0.64) 0.79
--------- --------- --------- --------- ---------
Total from Investment Operations 1.35 1.06 2.01 (0.22) 1.23
--------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.36) (0.48) (0.50) (0.49) (0.41)
In Excess of Net Investment Income (0.00)+ 0.00+ -- -- (0.08)
Net Realized Gain (1.63) (2.37) (0.49) (1.46) (0.06)
In Excess of Net Realized Gain -- -- -- -- (0.86)
--------- --------- --------- --------- ---------
Total Distributions (1.99) (2.85) (0.99) (1.95) (1.41)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 7.55 $ 8.19 $ 9.98 $ 8.96 $ 11.13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 17.30% 10.93% 23.63% (2.32)% 12.09%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $4,606 $5,992 $22,642 $18,492 $29,684
Ratio of Expenses to Average Net Assets
(1) 0.71% 0.70% 0.70% 0.70% 0.70%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to
Average Net Assets (1) 3.82% 3.93% 4.10% 4.13% 3.88%
Portfolio Turnover Rate 25% 22% 26% 44% 136%
Average Commission Rate Per Share# $0.0426 $0.0397 N/A N/A N/A
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.11 $0.08 $0.03 $0.03 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.83% 1.32% 1.02% 0.95% 1.02%
Net Investment Income to Average
Net Assets 2.71% 3.31% 3.78% 3.88% 3.56%
- - -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - --------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.18 $ 10.02
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.08 0.34
Net Realized and Unrealized
Gain on Investments 1.24 0.65
------ ------
Total from Investment
Operations 1.32 0.99
------ ------
DISTRIBUTIONS
Net Investment Income (0.34) (0.46)
Net Realized Gain (1.63) (2.37)
------ ------
Total Distributions (1.97) (2.83)
------ ------
NET ASSET VALUE, END OF PERIOD $ 7.53 $ 8.18
------ ------
------ ------
TOTAL RETURN 16.94% 10.24%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $621 $2,197
Ratio of Expenses to Average
Net Assets (2) 0.96% 0.95%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 0.95% 0.95%**
Ratio of Net Investment Income
to Average Net Assets (2) 3.60% 3.73%**
Portfolio Turnover Rate 25% 22%
Average Commission Rate Per
Share $0.0426 $0.0397
- - ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.14 $0.07
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.05% 1.68%**
Net Investment Income to
Average Net Assets 2.50% 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.
- - --------------------------------------------------------------------------------
202
<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
FEBRUARY
1,
1994* TO
YEAR ENDED DECEMBER 31, DECEMBER
------------------------------- 31,
1997 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 0.74 1.54 1.36 0.50
Net Realized and Unrealized Gain
(Loss) on Investments 0.55 2.79 0.91 (1.91)
--------- --------- --------- --------
Total from Investment Operations 1.29 4.33 2.27 (1.41)
--------- --------- --------- --------
DISTRIBUTIONS
Net Investment Income (0.71) (1.17) (1.86) --
In Excess of Net Investment Income -- (0.01) -- --
Net Realized Gain (2.17) (4.20) (0.41) --
In Excess of Net Realized Gain (0.08) -- -- --
Return of Capital (0.10) -- -- --
--------- --------- --------- --------
Total Distributions (3.06) (5.38) (2.27) --
--------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD $ 5.77 $ 7.54 $ 8.59 $ 8.59
--------- --------- --------- --------
--------- --------- --------- --------
TOTAL RETURN 18.29% 50.52% 28.23% (14.10)%
--------- --------- --------- --------
--------- --------- --------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $142,382 $152,142 $181,878 $144,949
Ratio of Expenses to Average Net Assets 1.60% 2.70% 1.75% 1.49%**
Ratio of Net Investment Income to
Average Net Assets 8.06% 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 417% 560% 406% 273%
- - ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - -------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.53 $ 8.68
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.69 1.01
Net Realized and Unrealized
Gain on Investments 0.59 3.20
------ ------
Total from Investment
Operations 1.28 4.21
------ ------
DISTRIBUTIONS
Net Investment Income (0.69) (1.15)
In Excess of Net Investment
Income -- (0.01)
Net Realized Gain (2.17) (4.20)
In Excess of Net Realized
Gain (0.08) --
Return of Capital (0.10) --
------ ------
Total Distributions (3.04) (5.36)
------ ------
NET ASSET VALUE, END OF PERIOD $ 5.77 $ 7.53
------ ------
------ ------
TOTAL RETURN 18.05% 48.52%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $2,281 $4,253
Ratio of Expenses to Average
Net Assets 1.91% 2.81%**
Ratio of Net Investment Income
to Average Net Assets 7.87% 11.09%**
Portfolio Turnover Rate 417% 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.
- - --------------------------------------------------------------------------------
203
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93
------- ------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.65 0.67 0.72 0.59 0.54
Net Realized and Unrealized Gain
(Loss) on Investments 0.33 (0.20) 1.06 (0.92) 0.41
------- ------- ------- ------- --------
Total from Investment Operations 0.98 0.47 1.78 (0.33) 0.95
------- ------- ------- ------- --------
DISTRIBUTIONS
Net Investment Income (0.68) (0.70) (0.79) (0.53) (0.56)
In Excess of Net Investment Income (0.00)+ (0.00)+ -- -- (0.01)
Net Realized Gain -- -- -- (0.37) (0.26)
In Excess of Net Realized Gain -- -- -- (0.00)+ --
------- ------- ------- ------- --------
Total Distributions (0.68) (0.70) (0.79) (0.90) (0.83)
------- ------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 10.88 $ 10.58 $ 10.81 $ 9.82 $ 11.05
------- ------- ------- ------- --------
------- ------- ------- ------- --------
TOTAL RETURN 9.54% 4.61% 18.76% (3.10)% 9.07%
------- ------- ------- ------- --------
------- ------- ------- ------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $183,192 $130,733 $165,527 $209,331 $240,668
Ratio of Expenses to Average Net Assets
(1) 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets (1) 6.11% 6.30% 6.85% 5.73% 4.97%
Portfolio Turnover Rate 163% 183% 172% 388% 240%
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.02 $0.01 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.60% 0.60% 0.59% 0.58% 0.60%
Net Investment Income to Average
Net Assets 5.97% 6.15% 6.71% 5.60% 4.82%
- - --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.58 $10.81
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.64 0.64
Net Realized and Unrealized
Gain (Loss) on Investments 0.33 (0.19)
------ ------
Total from Investment
Operations 0.97 0.45
------ ------
DISTRIBUTIONS
Net Investment Income (0.66) (0.68)
------ ------
Total Distributions (0.66) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $10.89 $10.58
------ ------
------ ------
TOTAL RETURN 9.48% 4.35%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,834 $1,462
Ratio of Expenses to Average
Net Assets (2) 0.60% 0.60%**
Ratio of Net Investment Income
to Average Net Assets (2) 5.93% 6.15%**
Portfolio Turnover Rate 163% 183%
- - ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.74% 0.74%**
Net Investment Income to
Average Net Assets 5.78% 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.
- - --------------------------------------------------------------------------------
204
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997++ 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26
------ --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.56 0.61 0.76 0.70 0.69
Net Realized and Unrealized Gain
(Loss) on Investments (0.40) 0.08 1.15 (1.38) 0.90
------ --------- --------- --------- --------
Total from Investment Operations 0.16 0.69 1.91 (0.68) 1.59
------ --------- --------- --------- --------
DISTRIBUTIONS
Net Investment Income (0.31) (0.61) (0.98) (0.40) (0.79)
In Excess of Net Investment Income -- -- -- -- (0.22)
Net Realized Gain -- -- -- (0.31) (0.16)
------ --------- --------- --------- --------
Total Distributions (0.31) (0.61) (0.98) (0.71) (1.17)
------ --------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD $11.15 $ 11.30 $ 11.22 $ 10.29 $ 11.68
------ --------- --------- --------- --------
------ --------- --------- --------- --------
TOTAL RETURN 1.50% 6.44% 19.32% (6.08)% 15.34%
------ --------- --------- --------- --------
------ --------- --------- --------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $84,635 $112,888 $102,852 $130,675 $172,468
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 (1) 5.05% 5.50% 6.79% 6.34% 5.99%
Portfolio Turnover Rate 116% 258% 207% 171% 108%
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.02 $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.71% 0.72% 0.71% 0.66% 0.70%
Net Investment Income to Average
Net Assets 4.84% 5.29% 6.58% 6.18% 5.79%
- - -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997++ 1996
<S> <C> <C>
- - -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.29 $11.23
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.54 0.48
Net Realized and Unrealized Gain
(Loss) on Investments (0.40) 0.18
------ ------
Total from Investment Operations 0.14 0.66
------ ------
DISTRIBUTIONS
Net Investment Income (0.30) (0.60)
------ ------
Total Distributions (0.30) (0.60)
------ ------
NET ASSET VALUE, END OF PERIOD $11.13 $11.29
------ ------
------ ------
TOTAL RETURN 1.29% 6.12%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $366 $1,559
Ratio of Expenses to Average Net Assets
(2) 0.65% 0.65%**
Ratio of Net Investment Income to
Average Net Assets (2) 4.88% 5.28%**
Portfolio Turnover Rate 116% 258%
- - ---------------
(2) 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 0.86% 0.86%**
Net Investment Income to Average
Net Assets 4.68% 5.08%**
</TABLE>
- - --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts for the period ended December 31, 1997 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
205
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91 $ 10.46 $9.55 $ 11.16 $9.95
--------- --------- --------- ------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 1.00 1.03 1.14 0.97 0.90
Net Realized and Unrealized Gain
(Loss) on Investments 0.67 0.47 0.97 (1.40) 1.21
--------- --------- --------- ------- ---------
Total from Investment Operations 1.67 1.50 2.11 (0.43) 2.11
--------- --------- --------- ------- ---------
DISTRIBUTIONS
Net Investment Income (1.00) (1.05) (1.20) (0.97) (0.90)
In Excess of Net Investment Income -- (0.00)+ -- -- --
Net Realized Gain -- -- -- (0.21) --
--------- --------- --------- ------- ---------
Total Distributions (1.00) (1.05) (1.20) (1.18) (0.90)
--------- --------- --------- ------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.58 $ 10.91 $ 10.46 $9.55 $ 11.16
--------- --------- --------- ------- ---------
--------- --------- --------- ------- ---------
TOTAL RETURN 15.87% 15.01% 23.35% (4.18)% 22.11%
--------- --------- --------- ------- ---------
--------- --------- --------- ------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $113,006 $95,663 $62,245 $97,223 $74,500
Ratio of Expenses to Average Net Assets
(1) 0.69% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average Net Assets (1) 8.70% 9.78% 11.09% 9.42% 8.70%
Portfolio Turnover Rate 111% 117% 90% 74% 104%
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $0.01 $0.01 $ 0.001 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A 0.82% 0.83% 0.76% 0.96%
Net Investment Income to Average
Net Assets N/A 9.71% 11.01% 9.41% 8.49%
- - ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- - ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.90 $ 10.49
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.97 0.98
Net Realized and Unrealized Gain
(Loss) on Investments 0.65 0.45
------ ------
Total from Investment Operations 1.62 1.43
------ ------
DISTRIBUTIONS
Net Investment Income (0.96) (1.02)
------ ------
Total Distributions (0.96) (1.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.56 $ 10.90
------ ------
------ ------
TOTAL RETURN 15.48% 14.37%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $7,213 $5,665
Ratio of Expenses to Average Net
Assets (2) 0.93% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (2) 8.48% 9.49%**
Portfolio Turnover Rate 111% 117%
-----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $0.01
Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.05%**
Net Investment Income to Average
Net Assets N/A 9.44%**
</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.
- - --------------------------------------------------------------------------------
206
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 18,
1995* TO
---------------------------- DECEMBER 31,
1997++ 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) 0.47 0.49 0.44
Net Realized and Unrealized Gain
(Loss) on Investments 0.25 (0.12) 0.42
------ ------ ------
Total from Investment Operations 0.72 0.37 0.86
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.46) (0.49) (0.45)
In Excess of Net Investment Income (0.00)+ -- (0.00)+
Net Realized Gain (0.00)+ -- (0.04)
In Excess of Net Realized Gain (0.00)+ -- --
------ ------ ------
Total Distributions (0.46) (0.49) (0.49)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.25 $ 10.37
------ ------ ------
------ ------ ------
TOTAL RETURN 7.25% 3.67% 8.80%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $60,541 $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) 4.55% 4.77% 4.61%**
Portfolio Turnover Rate 80% 45% 180%
- - ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $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 4.33% 4.50% 4.33%**
- - ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
JANUARY 2,
PERIOD ENDED 1996*** TO
NOVEMBER 5, DECEMBER 31,
1997++ 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 Gain on
Investments 0.14 (0.08)
------ ------
Total from Investment Operations 0.22 0.36
------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.49)
------ ------
Total Distributions (0.08) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.38 $ 10.24
------ ------
------ ------
TOTAL RETURN (0.01)% 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) 4.43%** 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 0.93%** 0.98%**
Net Investment Income to Average
Net Assets 4.19%** 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.
++ Per share amounts for the year ended December 31, 1997 and for the
period ended November 5, 1997 are based on average shares outstanding.
As of November 5, 1997, and for the period from March 19 through
October 30, 1997, there were no outstanding Class B shares for the
Municipal Bond Portfolio.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
207
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- - --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <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 (1) 0.051 0.049 0.054 0.040 0.027
---------- ---------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.051) (0.049) (0.054) (0.040) (0.027)
In Excess of Net Investment Income -- -- -- -- 0.000+
---------- ---------- -------- -------- --------
Total Distributions (0.051) (0.049) (0.054) (0.040) (0.027)
---------- ---------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
TOTAL RETURN 5.20% 5.03% 5.51% 3.84% 2.76%
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,506,210 $1,284,633 $836,693 $690,503 $657,163
Ratio of Expenses to Average Net Assets
(1) 0.49% 0.52% 0.51% 0.49% 0.53%
Ratio of Net Investment Income to
Average Net Assets (1) 5.12% 4.92% 5.37% 3.77% 2.71%
- - ---------------
(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+
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A N/A 0.54%
Net Investment Income to Average
Net Assets N/A N/A N/A N/A 2.70%
</TABLE>
- - --------------------------------------------------------------------------------
+ Amount is less than $0.001 per share.
- - --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
<S> <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 (1) 0.031 0.030 0.034 0.020 0.019
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.031) (0.030) (0.034) (0.020) (0.019)
In Excess of Net Investment Income -- -- -- -- (0.000)+
-------- -------- -------- -------- --------
Total Distributions (0.031) (0.030) (0.034) (0.020) (0.019)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 3.17% 3.02% 3.44% 2.44% 1.91%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $804,607 $721,410 $451,519 $359,444 $266,524
Ratio of Expenses to Average Net Assets
(1) 0.50% 0.53% 0.52% 0.51% 0.54%
Ratio of Net Investment Income to
Average Net Assets (1) 3.14% 2.98% 3.38% 2.42% 1.89%
- - ---------------
(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+
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A N/A 0.56%
Net Investment Income to Average
Net Assets N/A N/A N/A N/A 1.87%
</TABLE>
- - --------------------------------------------------------------------------------
+ Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements.
- - --------------------------------------------------------------------------------
208
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
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, 1997, the Fund was comprised of 29 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). At December 31, 1997, 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 U.S. Equity Plus Portfolio commenced operations on July 31, 1997 and
the Asian Real Estate and European Real Estate Portfolios commenced operations
on October 1, 1997. Effective February 1998, the Money Market Portfolio began
offering Class B shares. 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. The prices provided by a pricing service are
determined without regard to bid or last sale prices, but take into account
institutional size trading in similar groups of securities and any developments
related to the specific securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. 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. Taxes may also be based on the movement of foreign currency and are
accrued based on the value of investments denominated in such currency.
3. REPURCHASE AGREEMENTS: The Portfolios 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
- - --------------------------------------------------------------------------------
209
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
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 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, 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..... $32,182,906
------------
Liability for Reverse Repurchase Agreement.... 29,740,000
Weighted Average Interest Rate................ 6.50%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the year ended December 31, 1997 was
approximately $9,397,000, at a weighted average interest rate of 5.357%.
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, the Portfolios value the foreign
shares at the closing exchange price of the local shares. Such securities are
identified as fair valued in the Statements of Net Assets.
- - --------------------------------------------------------------------------------
210
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates and, in certain situations, to gain exposure to foreign
currencies. A foreign currency exchange contract is an agreement between two
parties to buy or sell currency at a set price on a future date. The market
value of the contract will fluctuate with changes in currency exchange rates.
The contract is marked-to-market daily and the change in market value is
recorded by the Portfolios as unrealized gain or loss. The Portfolios record
realized gains or losses when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
is generally limited to the amount of the unrealized gain on the contracts, if
any, at the date of default. Risks may also arise from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar.
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
either a segregated account in which it maintains liquid assets in an amount at
least equal in value to the Portfolio's commitments to purchase such securities
or designates such assets as segregated on the custodians records for the
Portfolio's regular custody account. Purchasing securities on a forward
commitment or when-issued or delayed-delivery basis may involve a risk that the
market price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of delivery.
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: Certain 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 either designate on the custodians records in its regular
custody account or place in a segregated account with its Custodian an amount of
cash, U.S. government securities or other liquid high grade debt obligations
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash, U.S. government
securities or other liquid high grade debt obligations deposited as
- - --------------------------------------------------------------------------------
211
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
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 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 closed
are added to or offset against the proceeds or amount paid on the transaction to
determine the net realized gain or loss. By writing a covered call option, a
Portfolio, in exchange for the premium, foregoes the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase. By writing a covered put option, a Portfolio, in exchange for
the premium, accepts the risk of a decline in the market value of the underlying
security below the exercise price.
Certain Portfolios may purchase call and put options on 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 Portfolio 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 December 31, 1997 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- - -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 19,321 $ 20,612
Asian Equity.................... 6,157 7,197
International Equity............ 297,284 313,615
</TABLE>
Morgan Stanley Trust Company, an affiliate of the investment adviser,
administers the security lending program and has earned fees for its services
totaling approximately $100,000, $243,000 and $828,000 for the Active Country
Allocation, Asian Equity and International Equity Portfolios, respectively, for
the year ended December 31, 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.
- - --------------------------------------------------------------------------------
212
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
13. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, index, instrument or basket of
instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based upon
their quoted daily settlement prices; changes in initial settlement value
(represented by cash paid to or received from brokers as "variation margin") are
accounted for as unrealized appreciation (depreciation). When futures contracts
are closed, the difference between the opening value at the date of purchase and
the value at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to manage its exposure to
the stock and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs. Futures
contracts involve market risk in excess of the amounts recognized in the
Statement of Net Assets. Risks arise from the possible movements in security
values underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which may
not correlate with the change in value of the hedged investments. In addition,
there is the risk that a Portfolio may not be able to enter into a closing
transaction because of an illiquid secondary market.
14. SWAP AGREEMENTS: Certain Portfolios may enter into swap agreements to
exchange one return or cash flow for another return or cash flow in order to
hedge against unfavorable changes in the value of securities or to remain fully
invested and to reduce transaction costs. The following summarizes swaps which
may be entered into by the 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 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 and/or favorable movements in
the value of the underlying security, if any, at the date of default.
15. 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 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
- - --------------------------------------------------------------------------------
213
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
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.
Settlement and registration of foreign securities transactions may be subject to
significant risks not normally associated with investments in the United States.
In certain markets, including Russia, ownership of shares is defined according
to entries in the issuer's share register. In Russia, there currently exists no
central registration system and the share registrars may not be subject to
effective state supervision. It is possible that a Portfolio could lose its
share registration through fraud, negligence or even mere oversight. In
addition, shares being delivered for sales and cash being paid for purchases may
be delivered before the exchange is complete. This may subject the Portfolio to
further risk of loss in the event of a failure to complete the transaction by
the counterparty.
B. ADVISER: Morgan Stanley Asset Management Inc. (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...... 0.65% 0.80% 1.05%
Asian Equity................... 0.80 1.00 1.25
Asian Real Estate.............. 0.80 1.00 1.25
Emerging Markets............... 1.25 1.75 2.00
European Equity................ 0.80 1.00 1.25
European Real Estate........... 0.80 1.00 1.25
Global Equity.................. 0.80 1.00 1.25
Gold........................... 1.00 1.25 1.50
International Equity........... 0.80 1.00 1.25
International Magnum........... 0.80 1.00 1.25
International Small Cap........ 0.95 1.15 N/A
Japanese Equity................ 0.80 1.00 1.25
Latin American................. 1.10 1.70 1.95
Aggressive Equity.............. 0.80 1.00 1.25
Emerging Growth................ 1.00 1.25 1.50
Equity Growth.................. 0.60 0.80 1.05
Small Cap Value Equity......... 0.85 1.00 1.25
Technology..................... 1.00 1.25 1.50
U.S. Equity Plus............... 0.45 0.80 1.05
U.S. Real Estate............... 0.80 1.00 1.25
Value Equity................... 0.50 0.70 0.95
Balanced....................... 0.50 0.70 0.95
Emerging Markets Debt.......... 1.00 1.75 2.00
Fixed Income................... 0.35 0.45 0.60
Global Fixed Income............ 0.40 0.50 0.65
High Yield..................... 0.375 0.695 0.945
Municipal Bond................. 0.35 0.45 0.70
Money Market................... 0.30 0.55 N/A
Municipal Money Market......... 0.30 0.57 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
- - --------------------------------------------------------------------------------
214
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
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 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 applicable Portfolio, 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 year ended December 31, 1997, the following Portfolios incurred custody
fees and had amounts payable to MSTC at December 31, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 269 $ 40
Asian Equity................. 434 69
Asian Real Estate............ 12 4
Emerging Markets............. 4,223 701
European Equity.............. 132 23
European Real Estate......... 13 4
Global Equity................ 41 7
Gold......................... 8 1
International Equity......... 829 126
International Magnum......... 147 25
International Small Cap...... 136 24
Japanese Equity.............. 33 6
Latin American............... 190 38
Emerging Markets Debt........ 108 77
Global Fixed................. 28 7
</TABLE>
In addition, for the year ended December 31, 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............ $ 2 $ 3
Asian Equity.............. 6 49
Asian Real Estate......... -- 1
Emerging Markets.......... 12 100
European Equity........... 1 3
Global Equity............. -- 1
Gold...................... 1 --
International Equity...... 1 23
International Small Cap... -- 2
Japanese Equity........... -- 3
Latin American............ 2 15
Emerging Markets Debt..... 28 45
Global Fixed Income....... 1 1
</TABLE>
F. DIRECTOR'S FEES: The Fund and other funds managed by MSAM (the "Fund
Complex") pays each director, who is not an officer or affiliated person, an
aggregate annual fee of $65,000, plus out-of-pocket expenses. Such fees are
allocated among the funds in the Fund Complex in proportion of their respective
average net assets.
Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the
"Compensation Plan"). Under the Compensation Plan, such Directors may elect to
defer payment of a percentage of their total fees earned as
- - --------------------------------------------------------------------------------
215
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
a Director of the Fund. These deferred portions are treated, based on an
election by the Director, as if they were either invested in the Fund's shares
or invested in U.S. Treasury Bills, as defined under the Compensation Plan. The
deferred fees payable, under the Compensation Plan, at December 31, 1997 totaled
$341,000 and are included in Directors' Fees and Expenses Payable on the
Statement of Net Assets.
G. PURCHASES AND SALES: During the year ended December 31, 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........... $ 72,434 $ 130,797
Asian Equity........................ 282,494 456,231
Asian Real Estate................... 3,600 654
Emerging Markets.................... 1,596,417 1,416,459
European Equity..................... 129,494 96,835
European Real Estate................ 21,435 5,289
Global Equity....................... 38,473 28,024
Gold................................ 16,142 22,267
International Equity................ 1,128,971 797,313
International Magnum................ 124,939 56,934
International Small Cap............. 101,765 93,605
Japanese Equity..................... 56,342 110,909
Latin American...................... 213,690 186,620
Aggressive Equity................... 464,678 415,008
Emerging Growth..................... 134,961 148,821
Equity Growth....................... 1,018,180 869,269
Small Cap Value Equity.............. 66,767 59,716
Technology.......................... 136,400 110,293
U.S. Equity Plus.................... 22,231 2,427
U.S. Real Estate.................... 489,771 388,571
Value Equity........................ 36,138 80,487
Balanced............................ 1,024 3,089
Emerging Markets Debt............... 706,169 745,241
Fixed Income........................ 59,314 65,934
Global Fixed Income................. 59,600 80,289
High Yield.......................... 120,565 117,084
Municipal Bond...................... 61,248 41,429
</TABLE>
Purchases and sales during the year ended December 31, 1997 of long-term U.S.
Government securities occurred in the Balanced, Emerging Markets Debt, Fixed
Income and Global Fixed Income Portfolios only and totaled:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- - -------------------------------------- ----------- ---------
<S> <C> <C>
Balanced.............................. $ 482 $ 1,874
Emerging Markets Debt................. 9,900 9,944
Fixed Income.......................... 193,292 149,475
Global Fixed Income................... 35,903 33,317
</TABLE>
During the year ended December 31, 1997, the following Portfolios paid brokerage
commissions to Morgan Stanley & Co., Incorporated and Dean Witter Reynolds,
Inc., affiliated broker/dealers, of approximately:
<TABLE>
<CAPTION>
BROKERAGE COMMISSION
(000)
------------------------------------------
MORGAN STANLEY DEAN WITTER
PORTFOLIO & CO. REYNOLDS, INC.
- - ---------------------- ----------------------- -----------------
<S> <C> <C>
Asian Equity.......... $ 269 $ --
Asian Real Estate..... 2 --
Emerging Markets...... 514 --
European Equity....... 1 --
European Real
Estate............... 1 --
Global Equity......... 8 --
International
Equity............... 34 --
International
Magnum............... 4 --
International Small
Cap.................. 4 --
Japanese Equity....... 134 --
Latin American........ 49 --
Equity Growth......... -- 2
U.S. Real Estate...... 47 5
</TABLE>
H. OTHER: At December 31, 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............... $ 128,229 $ 20,499 $ (13,581) $ 6,918
Asian Equity.............. 108,383 3,096 (31,831) (28,735)
Asian Real Estate......... 2,822 18 (516) (498)
Emerging Markets.......... 1,629,382 235,979 (385,186) (149,207)
European Equity........... 200,392 40,359 (5,744) 34,615
European Real Estate...... 15,839 107 (798) (691)
Global Equity............. 85,991 31,806 (5,267) 26,539
International Equity...... 2,303,262 604,313 (129,807) 474,506
International Magnum...... 184,421 16,920 (15,591) 1,329
International Small Cap... 233,446 30,130 (36,066) (5,936)
Japanese Equity........... 99,820 3,131 (25,012) (21,881)
Latin American............ 82,649 6,117 (5,757) 360
Aggressive Equity......... 165,630 11,002 (3,292) 7,710
Emerging Growth........... 52,560 9,234 (2,329) 6,905
Equity Growth............. 536,135 80,445 (4,713) 75,732
Small Cap Value Equity.... 39,185 5,904 (1,756) 4,148
Technology................ 32,583 1,400 (2,064) (664)
U.S. Equity Plus.......... 19,912 1,393 (837) 556
U.S. Real Estate.......... 336,371 49,516 (1,727) 47,789
Value Equity.............. 67,910 21,412 (1,072) 20,340
Balanced.................. 4,475 789 (29) 760
Emerging Markets Debt..... 175,333 1,553 (9,023) (7,470)
Fixed Income.............. 180,962 3,744 (180) 3,564
Global Fixed Income....... 83,863 1,696 (2,808) (1,112)
High Yield................ 120,550 5,505 (1,146) 4,359
Municipal Bond............ 57,625 2,423 -- 2,423
Money Market.............. 1,504,260 -- -- --
Municipal Money Market.... 802,105 -- -- --
</TABLE>
- - --------------------------------------------------------------------------------
216
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
During the year ended December 31, 1997, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $790,000.
At December 31, 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 2002 2003 2004 2005 TOTAL
- - ------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Asian Equity............. $ -- $ -- $ -- $ 37,963 $ 37,963
European Real Estate..... -- -- -- 40 40
Gold..................... -- -- -- 8,248 8,248
Japanese Equity.......... -- 1,668 -- 11,325 12,993
Fixed Income............. 2,946 -- -- -- 2,946
Global Fixed Income...... 2,210 1,780 -- -- 3,990
Money Market............. -- -- 411 -- 411
Municipal Money Market... -- -- 22 -- 22
</TABLE>
During the year ended December 31, 1997, the Emerging Markets, Technology, Fixed
Income, Global Fixed Income, High Yield, Municipal Bond, Money Market and
Municipal Money Market Portfolios utilized capital loss carryforwards for U.S.
Federal income tax purposes of approximately $11,112,000, $4,000, $2,586,000,
$510,000, $3,604,000, $6,000, $71,000 and $9,000, 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.
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, 1997 to December 31, 1997 certain
Portfolios incurred and elected to defer until January 1, 1998 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>
Active Country Allocation................ $ 3,209 $ --
Asian Equity............................. 32,015 451
Asian Real Estate........................ 124 25
Emerging Markets......................... 41,323 2,054
European Equity.......................... -- 64
European Real Estate..................... 281 --
Gold..................................... 18,195 24
International Magnum..................... 211 --
Japanese Equity.......................... 16,223 --
Latin American........................... -- 31
Technology............................... 1,716 --
Emerging Markets Debt.................... 2,193 --
Municipal Bond........................... 1 --
</TABLE>
During the year ended December 31, 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..... 424 1,037
Options closed during the period...... (353) (909)
Options exercised during the period... (71) (128)
------ -----------
Options outstanding at December 31,
1997................................. $ -- $ --
------ -----------
------ -----------
</TABLE>
At December 31, 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.
- - --------------------------------------------------------------------------------
217
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
Assets and liabilities, including Portfolio securities and foreign currency
holdings were translated at the following exchange rates as of December 31,
1997:
<TABLE>
<S> <C> <C> <C>
Argentine Peso...................... 0.99981 = $1.00
Australian Dollar................... 1.53504 = $1.00
Austrian Shilling................... 12.63150 = $1.00
Belgian Franc....................... 37.05100 = $1.00
Brazilian Real...................... 1.11605 = $1.00
British Pound....................... 0.60853 = $1.00
Canadian Dollar..................... 1.42945 = $1.00
Colombian Peso...................... 1,296.65000 = $1.00
Danish Krone........................ 6.85190 = $1.00
Egyptian Pound...................... 3.40250 = $1.00
Finnish Markka...................... 5.45095 = $1.00
French Franc........................ 6.01850 = $1.00
German Mark......................... 1.79895 = $1.00
Hong Kong Dollar.................... 7.74900 = $1.00
Hungarian Forint.................... 203.95500 = $1.00
Indian Rupee........................ 39.20000 = $1.00
Indonesian Rupiah................... 5,500.00000 = $1.00
Irish Punt.......................... 0.70284 = $1.00
Israeli Shekels..................... 3.53715 = $1.00
Italian Lira........................ 1,769.00000 = $1.00
Japanese Yen........................ 130.47500 = $1.00
Malaysian Ringgit................... 3.88950 = $1.00
Mexican Peso........................ 8.06000 = $1.00
Morrocan Dhiram..................... 9.74750 = $1.00
Netherlands Guilder................. 2.02765 = $1.00
New Zealand Dollar.................. 1.72221 = $1.00
Norwegian Krone..................... 7.38580 = $1.00
Pakistani Rupees.................... 44.00600 = $1.00
Peruvian New Sole................... 2.72550 = $1.00
Philippine Peso..................... 40.50000 = $1.00
Poland Zloty........................ 3.52500 = $1.00
Portuguese Escudo................... 184.05000 = $1.00
Singapore Dollar.................... 1.68150 = $1.00
South African Rand.................. 4.86650 = $1.00
South Korean Won.................... 1,695.00000 = $1.00
Spanish Peseta...................... 152.35000 = $1.00
Sri Lankan Rupee.................... 61.75000 = $1.00
Swedish Krona....................... 7.93990 = $1.00
Swiss Franc......................... 1.46050 = $1.00
Taiwan Dollar....................... 32.62500 = $1.00
Thai Baht........................... 48.15000 = $1.00
Turkish Lira........................ 207,250.00000 = $1.00
Venezuelan Bolivar.................. 504.30000 = $1.00
Zimbabwe Dollar..................... 18.37500 = $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.
I. SUBSEQUENT EVENT: On January 9, 1998, the Fund filed a Proxy
Statement/Prospectus with the Securities and Exchange Commission for the purpose
of presenting proposals to the respective shareholders of the Balanced Portfolio
and the Small Cap Value Portfolio seeking their approval to liquidate those
Portfolios and transfer the net assets of those Portfolios to the MAS Funds
Balanced Portfolio and MAS Funds MidCap Value Portfolio, respectively. A Special
Meeting of the shareholders of those Portfolios is expected to be held during
the second quarter of 1998 to vote on the proposals.
During December 1997, the Gold Portfolio had significant shareholder redemption
activity. As a result, at December 31, 1997, all of the Portfolio's investments
have been sold. Management is in the process of winding down the Portfolio and,
accordingly, shares of the Portfolio are not available for subscription.
- - --------------------------------------------------------------------------------
218
<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, 1997, 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, 1997 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.
As explained in Note I to the financial statements, the Fund filed a proxy
statement/prospectus with the Securities and Exchange Commission for the purpose
of merging the Balanced and Small Cap Value Portfolios into Portfolios of the
MAS Funds. Subsequent to the merger, these Portfolios would cease to exist. In
addition, the Gold Portfolio is being wound down by management, and shares of
this Portfolio are no longer available for subscription.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 11, 1998
- - --------------------------------------------------------------------------------
219
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- - --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
- - --------------------------------------------------------------------------------
For the year ended December 31, 1997, the percentage of dividends paid that
qualify for the 70% dividend received deduction for corporate shareholders for
the Global Equity, Aggressive Equity, Emerging Growth, Equity Growth, Small Cap
Value, U.S. Equity Plus, Value Equity, Balanced and High Yield Portfolios are
10.6%, 4.0%, 1.3%, 7.0%, 14.4%, 76.1%, 55.6%, 24.4% and 4.9%, respectively.
For the year ended December 31, 1997, the percentage of exempt interest
dividends paid by the Municipal Bond and Municipal Money Market Portfolios are
100% and 97%, respectively.
For the year ended December 31, 1997, the following Portfolios intend to pass
through 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
PORTFOLIO (000)** (000)
- - ----------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Active Country Allocation.............................................. $ 438 $ 3,490
Asian Equity........................................................... 562 4,288
Emerging Markets....................................................... 1,827 34,575
European Equity........................................................ 998 7,678
Global Equity.......................................................... 181 1,558
International Equity*.................................................. 7,978 70,776
International Magnum................................................... 416 3,469
International Small Cap................................................ 802 6,769
Japanese Equity........................................................ 195 1,301
</TABLE>
For the year ended December 31, 1997, the following Portfolios has designated
long-term capital gains totaling:
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM
CAPITAL GAINS -- 20% CAPITAL GAINS -- 28%
PORTFOLIO (000) (000)
- - -------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Active Country Allocation..................................... $ 6,607 $ 4,174
Asian Equity.................................................. -- 8,601
Emerging Markets.............................................. 31,834 39,218
European Equity............................................... 6,629 4,554
Global Equity................................................. 3,393 564
Gold.......................................................... -- 40
International Equity*......................................... -- 92,930
International Magnum.......................................... 192 649
International Small Cap....................................... 131 9,365
Latin American................................................ 957 1,737
Aggressive Equity............................................. 50 306
Emerging Growth............................................... 3,741 22,389
Equity Growth................................................. 7,304 12,940
Small Cap Value Equity........................................ 3,168 2,750
U.S. Real Estate.............................................. 5,891 5,318
Value Equity.................................................. 7,542 9,730
Balanced...................................................... 328 577
Municipal Bond................................................ 22 --
</TABLE>
- - ------------
* Amounts based on October 31 tax year end.
** Amounts presented are 100% allowable as a foreign tax credit.
- - --------------------------------------------------------------------------------
220
<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
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief Executive Officer,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer,
LumeLite Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin & Boehm, P.C.
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 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
Stefanie V. Chang
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 Feuerman
ASSISTANT TREASURER
FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.
- - --------------------------------------------------------------------------------
221
