<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs Frederick B. Whittemore
CHAIRMAN OF THE BOARD DIRECTOR
Warren J. Olsen James W. Grisham
PRESIDENT AND DIRECTOR VICE PRESIDENT
John D. Barrett II Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
Gerard E. Jones Joseph P. Stadler
DIRECTOR VICE PRESIDENT
Andrew McNally, IV Valerie Y. Lewis
DIRECTOR SECRETARY
Samuel T. Reeves Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
Fergus Reid James R. Rooney
DIRECTOR TREASURER
Frederick O. Robertshaw Joanna M. Haigney
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- ---------------------------------------------
LEGAL COUNSEL
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- ---------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- ---------------------------------------------
For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only to shareholders and others who have received a copy of the
prospectus of Morgan Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
EUROPEAN EQUITY PORTFOLIO
THIRD QUARTER REPORT
SEPTEMBER 30, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the European Equity Portfolio is to seek long-term
capital growth through investment in common stocks of European issuers. Common
stocks for this purpose include stocks and equivalents such as securities
convertible into common 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.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
--------- --------- -------------
<S> <C> <C> <C>
PORTFOLIO......................... 12.16% 10.10% 20.86%
INDEX............................. 17.61 18.70 16.35
</TABLE>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (assumes
dividends reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE MEASURED BY THE MSCI
EUROPE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The total return of the Portfolio for the nine month period ended September 30,
1995 was 12.16% as compared to 17.61% for the Morgan Stanley Capital
International (MSCI) Europe Index for the same period. Total return for the
twelve months ended September 30, 1995 and the average annual total return for
the period from inception on April 2, 1993 through September 30, 1995 were
10.10% and 20.86%, respectively, compared to 18.70% and 16.35% for the MSCI
Europe Index for the same periods.
For the three months ended September 30, 1995, the total return of the Portfolio
was 0.95% compared with 4.20% for the Index for the same period. The
underperformance is largely explained by the poor relative returns of value
companies following two good years in 1993 and 1994. The sectors that have
performed strongly this year include pharmaceuticals, media and technology,
areas in which we find it hard to locate good quality cheap companies. The
Portfolio also has exposure to smaller companies that are not well represented
in the MSCI Europe Index. Small capitalized stocks have underperformed the Index
for several years and this is an area where we continue to find good investment
opportunities going forward.
During the quarter, the Nordic countries were particularly strong performers up
12.3% in U.S. dollar terms, with Sweden the strongest market up 18.5% on the
MSCI Europe Index. France continued its disappointing run, down nearly 4%,
however, this is a market in which we are starting to find new investment ideas
following a long period of being underweight. Austria was the only market to
show worse returns than France during the period.
The investment environment in Europe continues to be benign. On the positive
side markets have benefitted from a generally rising U.S. dollar, the knock-on
effect of a strong U.S. equity market and the lowering of German interest rates
earlier in the quarter. Reported levels of economic growth have not been so
positive, however, particularly after the strong performance in 1994. Last year,
strong growth came from substantially increased exports and restocking. So far
this year growth levels have not lived up to expectations, particularly export
growth which has been hindered by the currency strength of the deutschemark
block. While export growth has declined there has been little economic pick
2
<PAGE>
up in the domestic sector. Consumer confidence is particularly low not helped by
continuing high levels of unemployment. The employment picture is no longer
deteriorating, however, there is also little sign of a substantial improvement.
The inflation picture in Europe remained mixed but has generally surprised on
the downside. In Germany and the other hard currency countries inflation has
continued its downward trend. The most recent figures show German inflation
falling below the Bundesbank's target of 2.0% for the first time in six years.
In other European countries inflationary pressure has proved stronger partly as
a result of weaker currencies.
During the last three months we have added the following new ideas to the
investment program.
Oerlikon-Buehrle is a diversified group with interests including Bally shoes,
vacuum technology and its traditional defense business. It has dramatically
reduced its exposure to defense and is currently restructuring its other
division that will lead to marked profit growth in 1996. It currently trades at
book value and 5x price to cash flow.
Sulzer is a diversified engineering company based in Switzerland. Their
businesses include medical technology, textile and paper machinery and plant and
building technology. Sulzermedica is a non-cyclical business and particularly
important contributor to group profits. The stock has underperformed a strong
Swiss market in recent months but now looks cheap and well placed for recovery.
The increased demand for paper and weaving machines is particularly important as
well as the continuing returns from medical equipment.
BNP is one of the big four French commercial banks. As is the case with the rest
of the French financial sector, its share price has showed marked
underperformance in the year-to-date, arising out of fears over the French
property market and persistent weak loan demand in the French lending market.
Lending margins in France are at structurally low levels due to historical
distortions in the market and persistent fierce competition among lenders. BNP
is subject to these pressures, along with the rest of the French banking sector.
It does however have scope to cut costs and possesses one of the largest retail
branch networks in France. Its current discount to book value shows the bank to
be undervalued on a theoretical normalized ROE basis, especially when compared
to its rival, Societe Generale.
Peugeot is a leading volume car producer with a 12% share of the European
market. The company has undergone a comprehensive restructuring program which
has led to significant improvements in production efficiency. A strong balance
sheet and a wide range of promising new models should help the company gain
market share as the European auto market recovers.
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ----------
<C> <S> <C>
COMMON STOCKS (90.0%)
BELGIUM (2.3%)
4,500 Arbed S.A. $ 597
11,000 Delhaize Freres et Cie, 'Le Lion',
S.A. 465
12,000 G.I.B. Holdings Ltd. 506
55 G.I.B. Holdings Ltd. (New) 2
----------
1,570
----------
DENMARK (1.4%)
21,300 Unidanmark A/S, Class A
(Registered) 930
----------
FINLAND (3.4%)
55,500 Amer-Yhtymae Oy, Class A 1,064
25,000 Huhtamaki Oy, Series 1 859
40,600 Kansallis-Osake Pankki 43
20,000 Pohjola Insurance Co., Ltd., Class
B 354
----------
2,320
----------
FRANCE (12.7%)
23,500 Banque Nationale de Paris 921
1,700 Bongrain S.A. 914
4,804 Cie de Saint Gobain 585
15,500 Credit Lyonnaise CDI 951
15,000 Elf Aquitaine 1,012
8,000 Eridania Beghin-Say S.A. 1,209
3,805 Legris Industries S.A. 132
3,100 Precision Mecaniques Labinal S.A. 477
4,800 PSA Peugeot Citrogen S.A. 656
45,452 Thomson CSF 988
12,000 Total S.A., Class B 726
----------
8,571
----------
GERMANY (11.9%)
6,000 BASF AG 1,312
3,260 Bayer AG 832
16,000 Bremer Vulkan Verbund AG 670
4,500 Commerzbank AG 1,023
1,800 Karstadt AG 801
2,500 Mannesmann AG 818
3,700 Varta AG 787
22,000 Veba AG 872
3,000 Volkswagen AG 972
----------
8,087
----------
ITALY (5.9%)
411,000 Editoriale L'Expresso S.p.A. 739
520,000 Impregilo S.p.A. 472
20,305 Safilo S.p.A. 184
500,000 Stet Di Risp (NCS) 1,167
205,500 Telecom Italia S.p.A. 339
210,000 Telecom Italia S.p.A. Di Risp
(NCS) 275
<CAPTION>
VALUE
SHARES (000)
- -------- ----------
<C> <S> <C>
242,200 Unicem Di Risp (NCS) $ 791
----------
3,967
----------
NETHERLANDS (11.1%)
29,000 ABN Amro Holdings N.V. 1,200
5,500 Akzo Nobel N.V. 660
7,599 Hollandsche Beton Groep N.V. 1,145
12,812 Internationale Nederlanden Groep
N.V. 744
11,000 Koninklijke Bijenkorf Beheer N.V. 804
25,000 Koninklijke Van Ommeren N.V. 797
23,500 Philips Electronics N.V. 1,146
30,000 Royal PTT Nederland N.V. 1,059
----------
7,555
----------
NORWAY (2.4%)
200,000 Den Norske Bank A/S, Class A Free 551
16,513 Hafslund Nycomed, Class B 428
53,000 Saga Petroleum A/S, Class B 646
----------
1,625
----------
PORTUGAL (0.2%)
1,905 Portuguese Investment Fund 119
----------
SPAIN (8.1%)
68,000 Asturiana del Zinc S.A. 698
17,000 Banco de Santander S.A. 712
60,000 Banco Espanol de Credito S.A. 398
11,518 Bodegas y Bebidas S.A. 303
27,870 Grupo Duro Felguera S.A. 118
110,000 Iberdrola S.A. 831
106,000 Sevillana de Electricidad S.A. 688
125,000 Telefonica Nacional de Espana S.A. 1,719
----------
5,467
----------
SWEDEN (2.0%)
140,000 Skandinaviska Enskilda Banken,
Class A 907
19,000 S.K.F. AB, Class B 419
----------
1,326
----------
SWITZERLAND (15.6%)
870 Alusuisse-Lonza Holdings Ltd.
(Registered) 645
800 Ascom Holdings AG (Bearer) 851
460 Bobst AG (Bearer) 708
700 Ciba-Geigy AG (Bearer) 559
800 Ciba-Geigy AG (Registered) 641
2,200 Forbo Holding AG (Registered) 927
1,030 Hero AG (Bearer) 495
1,400 Magazine Globus (Participating
Certificates) 920
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ----------
<C> <S> <C>
SWITZERLAND (CONTINUED)
1,100 Nestle S.A. (Registered) $ 1,126
16,100 Oerlikon-Buehrle Holding AG
(Registered) 1,267
1,000 Schweizerische
Industrie-Gesellschaft Holdings
(Registered) 1,073
1,000 Sulzer AG (Participating
Certificates) 550
1,200 SwissAir (Registered) 830
----------
10,592
----------
UNITED KINGDOM (13.0%)
145,500 Asprey plc 248
70,000 Associated British Foods plc 758
249,990 Automated Security Holdings plc 168
20,000 Bass plc 202
200,000 BET plc 420
70,000 BSM Group plc 180
270,000 Christian Salvesen plc 1,131
118,856 John Mowlem & Co. plc 116
75,000 Kwik Save Group plc 777
24,895 McAlpine (Alfred) plc 49
67,222 Reckitt & Colman plc 698
295,014 Rolls-Royce plc 811
174,411 Royal Insurance Holdings plc 973
136,000 Sketchley plc 269
110,220 Tate & Lyle plc 782
30,000 Unilever plc 599
2,537 Wembley plc 12
265,000 WPP Group plc 624
----------
8,817
----------
TOTAL COMMON STOCKS (Cost $57,928) 60,946
----------
PREFERRED STOCKS (3.5%)
GERMANY (3.5%)
3,000 RWE AG 814
3,000 Spar Handels AG 752
3,200 Volkswagen AG 757
----------
TOTAL PREFERRED STOCKS (Cost $2,127) 2,323
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -------- ----------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
2,500 Holderbank Financiere Glaris AG,
expiring 12/20/95 (Cost $0) $ 3
----------
TOTAL FOREIGN SECURITIES (93.5%) (Cost
$60,055) 63,272
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT (1.4%)
$ 964 Chase Manhattan Bank, N.A., 6.00%,
dated 9/29/95, due 10/02/95, to
be repurchased at $964,
collateralized by $845 United
States Treasury Bonds, 8.125%,
due 8/15/19, valued at $988 (Cost 964
$964)
---------
FOREIGN CURRENCY (11.1%)
L 1,831 British Pound 2,893
DM 6,600 Deutsche Mark 4,619
FF 22 French Franc 4
---------
TOTAL FOREIGN CURRENCY (Cost $7,346) 7,516
---------
TOTAL INVESTMENTS (106.0%) (Cost $68,365) 71,752
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS AND LIABILITIES (-6.0%)
Other Assets 353
Liabilities (4,391)
--------
(4,038)
--------
NET ASSETS (100%) $67,714
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 4,784,799 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 14.15
--------
--------
</TABLE>
- ------------------------
CDI --Certificate of Investment
NCS--Non Convertible Shares
5
