<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
EMERGING GROWTH PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Emerging Growth Portfolio invests primarily in growth-oriented common stocks
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.
The total return of the Portfolio for the three month period ended March 31,
1995 was 6.58% as compared to 8.68% for the NASDAQ Composite Index for the same
period. Total return for the past twelve months and the average annual return
for the five year period ended March 31, 1995 and for the period from inception
in November 1989 through March 31, 1995, were 10.62%, 9.99% and 10.68%,
respectively, compared to 9.92%, 13.93% and 11.40% for the NASDAQ Composite
Index for the same periods.
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------------------
AVERAGE
AVERAGE ANNUAL ANNUAL SINCE
YTD ONE YEAR FIVE YEAR INCEPTION
---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
PORTFOLIO....... 6.58% 10.62% 9.99% 10.68%
INDEX........... 8.68 9.92 13.93 11.40
<FN>
- -------------
1. The NASDAQ Composite is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived or reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The 6.6% gain in the MSIF Emerging Growth Portfolio in the first quarter of 1995
was a continuation of the strong uptrend that was reported for the second half
of 1994. The Lipper Small Growth Fund Index was up a bit less at 5.6% in the
first quarter, so it was a good performance period on both an absolute and
relative basis.
The broader U.S. stock market was also quite buoyant in the first three months
of 1995 with a 9.0% return for the S&P 500 (excluding dividends). The sharp
rally in the bond market since last November and the consequent decline in
long-term interest rates has provided a favorable backdrop for equities.
Increasing belief that the Federal Reserve may have engineered a glidepath to a
soft landing for the U.S. economy was also a positive factor. While difficult to
quantify, the recent disappointing investment returns in foreign markets may
also be having a beneficial effect in drawing money to U.S. equity investments.
Most important of all, U.S. corporations are showing very strong earnings gains
and providing fundamental support for share prices.
One of the anomalies of the first quarter was the capitalization size effect on
performance where large capitalization stocks generally performed much better
than the smaller capitalization group. Standard & Poor's now has three indexes
that capture the large (S&P 500), mid (S&P 400), and small (S&P 600)
capitalization sectors of the market. The S&P 600 Small Cap Index was just
introduced in October 1994. Excluding dividends, the large-cap S&P 500 increased
9.0% in the first quarter, the mid-cap S&P 400 rose 7.6%, and the small-cap S&P
600 gained only 4.4%. Emerging growth stocks were the best performing small-cap
style, but still generally underperformed the large cap sectors. Part of the
reason for the large cap outperformance may have been the weakness in the U.S.
dollar. Many big companies are multinationals with 40% - 60% of their business
outside of the U.S., compared to only 5% - 25% for the typical small company.
The weak dollar results in greater currency-related earnings gains for large
companies versus small ones. The market seemed to recognize this effect in the
first quarter. As a result of the strong large-cap performance in the first
quarter, the relative valuation attractiveness of small growth stocks has been
further enhanced.
Our outlook for emerging growth stocks during 1995/1996 remains very positive.
Valuations continue to be reasonable and relative earnings gains should favor
growth stocks rather than cyclical companies. The major caveat would be if the
U.S. stock market were to enter a bear phase. We do
1
<PAGE>
not see a bear market in the near future, but the above-average beta of the
Emerging Growth Portfolio does not provide defensive characteristics in a down
market.
The performance of the Emerging Growth Portfolio in the first quarter was again
led by technology stocks, particularly semiconductors, semiconductor capital
equipment, and computer software. Some of the best performing stocks in the
Portfolio in these areas were Xilinx, gaining 14.3%, Electroglas, 31.1%, and
Progress Software, 37.7%. The healthcare sector also continued the recovery from
the bottom reached in April 1993 with first quarter gains of 35.5% in Medaphis,
27.8% for Vencor, and 20.5% for Biomet.
The restaurant stocks rebounded in the first quarter after a very poor year in
1994. Price/earnings ratios for restaurant stocks had declined to very low
levels creating attractive valuations despite some slowing in industry growth.
Sonic Corp. (gaining 29.6% in the quarter) is our largest restaurant holding
followed by Cracker Barrel Old Country Store (gaining 20.9%). We recently
eliminated our position in Brinker International since we believe there are more
attractive restaurant industry investments at the present time. While the broad
consumer part of the Portfolio was buoyed by restaurant stocks, the retailing
sector continued to be difficult. Consumer spending is erratic month-to-month
and the market is currently ignoring retail stocks. However, like the restaurant
stocks last year, specialty retail stock valuations are becoming very attractive
and we have been adding to our positions in Bed, Bath & Beyond (declining 17.5%
in the first quarter), Central Tractor Farm & Country (declining 12.1%), and
Helig Meyers (declining 12.0%).
The business services sector has been one of the Portfolio's most consistent
performers on a long term basis. Most of these companies have a high percentage
of stable, recurring revenues and rarely disappoint our earnings expectations.
They never seem to be spectacular in any one quarter, but tend to deliver more
stable returns than such highly volatile areas as technology and healthcare.
Some of our favorite businesses in this area are CUC International (credit card
enhancement services), Cintas (uniform rentals and laundry), and Viking Office
Products (Mail order office supplies).
At the end of the first quarter, the Portfolio was diversified in 71 stocks with
a cash reserve of 5.6% of net assets. The market value of the net assets of the
Portfolio was $127.4 million. The ten largest holdings in the Portfolio
comprised 23.4% of the net assets.
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
COMPANY NET ASSETS
- ------------------------------------------ -------------
<S> <C>
Xilinx.................................... 3.4%
CUC International......................... 2.7
Linear Technology......................... 2.6
Informix.................................. 2.4
Healthsource.............................. 2.2
Viking Office Products.................... 2.1
Progress Software......................... 2.0
First Financial Management................ 2.0
SunGard Data Systems...................... 2.0
R.P. Scherer.............................. 2.0
---
23.4%
---
---
</TABLE>
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
COMMON STOCKS (94.7%)
CAPITAL GOODS/CONSTRUCTION (0.6%)
ENVIRONMENTAL CONTROLS (0.6%)
50,000 Western Waste Industries $ 806
---------
CONSUMER-CYCLICAL (21.6%)
AUTOMOTIVE (1.5%)
60,000 Pep Boys-Manny, Moe & Jack 1,860
---------
FOOD SERVICE & LODGING (7.5%)
99,000 Bertucci's, Inc. 842
21,200 Brinker International, Inc. 352
80,000 Cheesecake Factory, Inc. 1,480
90,000 Cracker Barrel Old Country Store,
Inc. 2,003
50,000 Hospitality Franchise Systems,
Inc. 1,600
80,000 ShoLodge, Inc. 1,160
80,000 Sonic Corp. 2,080
---------
9,517
---------
LEISURE RELATED (0.0%)
4,740 National Gaming Corp. 40
---------
PRINTING & PUBLISHING (2.5%)
44,700 Lee Enterprises, Inc. 1,581
29,700 Scholastic Corp. 1,611
---------
3,192
---------
RETAIL-GENERAL (10.1%)
85,000 Bed, Bath & Beyond, Inc. 2,104
90,000 Central Tractor Farm & Country,
Inc. 1,148
70,000 Dress Barn, Inc. 683
70,000 General Nutrition Cos., Inc. 1,942
70,000 Heilig Meyers Co. 1,531
40,000 Kohl's Corp. 1,770
80,000 Lechters, Inc. 1,320
80,000 Sunglass Hut International, Inc. 2,340
---------
12,838
---------
TOTAL CONSUMER-CYCLICAL 27,447
---------
CONSUMER-STAPLES (25.1%)
DRUGS (5.5%)
50,000 Forest Laboratories, Inc. 2,381
40,000 Genzyme Corp. - General Division 1,550
80,000 Immucor, Inc. 540
50,000 Scherer (R.P.) Corp. 2,513
---------
6,984
---------
HEALTH CARE SUPPLIES & SERVICES (19.6%)
50,000 Arrow International, Inc. 1,712
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
41,600 Ballard Medical Products $ 525
100,000 Biomet, Inc. 1,675
80,000 Haemonetics Corp. 1,160
55,000 Health Management, Inc. 1,031
65,000 Health Management Systems, Inc. 2,372
60,000 Healthsource, Inc. 2,843
55,000 HEALTHSOUTH Rehabilitation Corp. 2,234
50,000 IDEXX Laboratories, Inc. 2,075
85,000 Mariner Health Group, Inc. 1,647
50,000 Physician Corp. of America 1,125
90,000 Quantum Health Resources, Inc. 1,868
65,000 Vencor, Inc. 2,316
75,000 Vivra, Inc. 2,419
---------
25,002
---------
TOTAL CONSUMER-STAPLES 31,986
---------
FINANCE (7.0%)
BANKING (1.1%)
45,000 State Street Boston Corp. 1,434
---------
FINANCIAL SERVICES (3.6%)
100,000 Cash America International, Inc. 700
35,000 First Financial Management Corp. 2,529
75,000 SEI Corp. 1,388
---------
4,617
---------
INSURANCE (2.3%)
50,000 Mutual Risk Management Ltd. 1,394
50,000 NAC Re Corp. 1,487
---------
2,881
---------
TOTAL FINANCE 8,932
---------
MATERIALS (3.4%)
MISCELLANEOUS MATERIALS & COMMODITIES (3.4%)
85,000 Viking Office Products, Inc. 2,592
90,000 X-Rite, Inc. 1,755
---------
TOTAL MATERIALS 4,347
---------
SERVICES (9.1%)
PROFESSIONAL SERVICES (9.1%)
60,000 Cintas Corp. 2,250
90,000 CUC International, Inc. 3,499
110,000 G & K Services, Inc., Class A 2,035
32,400 Medaphis Corp. 2,025
50,000 Premier Industrial Corp. 1,181
46,800 Vallen Corp. 655
---------
TOTAL SERVICES 11,645
---------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
TECHNOLOGY (27.9%)
ELECTRONICS (13.0%)
39,200 Electroglas, Inc. $ 1,715
55,000 Fusion Systems Corp. 1,609
24,600 Level One Communications, Inc. 400
60,000 Linear Technology, Inc. 3,330
62,000 Maxim Integrated Products, Inc. 2,248
40,000 Molex, Inc., Class A 1,350
50,000 Sensormatic Electronics 1,400
65,000 Xilinx, Inc. 4,387
---------
16,439
---------
OFFICE EQUIPMENT (13.4%)
70,000 BISYS Group, Inc. 1,584
55,000 Compuware Corp. 2,007
60,000 Concord EFS Corp. 1,635
60,000 EMC Corp. 1,005
90,000 Informix Corp. 3,094
50,000 Progress Software Corp. 2,563
50,000 SPS Transaction Services, Inc. 1,750
55,000 SunGard Data Systems, Inc. 2,516
20,000 Wall Data, Inc. 915
---------
17,069
---------
TELECOMMUNICATIONS (1.5%)
70,000 Banyan Systems, Inc. 1,032
40,000 Mobile Telecommunications
Technologies Corp. 925
---------
1,957
---------
TOTAL TECHNOLOGY 35,465
---------
TOTAL COMMON STOCKS (Cost $87,644) 120,628
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.6%)
US GOVERNMENT AND AGENCY OBLIGATION (5.6%)
$ 7,200 Federal Home Loan Bank
Discount Note, 5.92%, 4/04/95
(Cost $7,197) $ 7,197
---------
TOTAL INVESTMENTS (100.3%) (Cost $94,841) 127,825
---------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets 136
Liabilities (577)
---------
(441)
---------
NET ASSETS (100%) $ 127,384
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 7,414,386 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 17.18
---------
---------
<FN>
- -------------
Interest rate disclosed for U.S. Government & Agency Discount Note represents
effective yield.
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
INTERNATIONAL EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in common stocks of non-U.S.
issuers. Common stocks 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 three month period ended March 31, 1995 the Portfolio had a total return
of -1.10% against an increase of 1.86% for the Morgan Stanley Capital
Intenational (MSCI) EAFE Index. The total return for the one year period ended
March 31, 1995, the average annual return for the five year period ended March
31, 1995 and the average annual total return for the period from inception in
August 1989 through March 31, 1995 were 3.55%, 9.94% and 9.94%, respectively, as
compared to 6.08%, 6.46% and 2.42% for the Index for the same periods.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS2
----------------------------------------------------------
AVERAGE
ANNUAL FIVE AVERAGE ANNUAL
YTD ONE YEAR YEAR SINCE INCEPTION
---------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
PORTFOLIO... -1.10% 3.55% 9.94% 9.94%
INDEX....... 1.86 6.08 6.46 2.42
<FN>
- -------------
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Portfolio lagged its benchmark during the period under review due to a
combination of currency movements, foreign exchange hedges and weak stock
selection. The single positive feature was the beneficial effects from the
underweight position in the Japanese stock market.
The dominant feature of the first quarter was the abject weakness of the U.S.
dollar against the deutsche mark and the Japanese yen. It is noteworthy that
both the U.S. bond market and stock market regarded this development if not
positively at least with equanimity while the German and Japanese stock markets
reacted negatively as the global competitiveness of their respective
manufacturing sectors eroded significantly during the quarter. The Portfolio's
overweight position in non-U.S. global manufacturing enter-
prises and its underweighting of domestic stocks was the principal factor behind
the disappointing returns from stock selection during the quarter.
Meanwhile the notable negative contribution from currency hedging was
attributable to value driven investment decisions (forward hedges of yen and
deutsche mark bloc currencies) which, with the benefit of hindsight, took
insufficient notice of the lack of political will in the United States to defend
the dollar. The German authorities are proving similarly insouciant to the
strength of the deutsche mark, but it is our strong contention that the current
level of the yen will force the Japanese government to change monetary policy.
Simply stated, this is a socio-economic necessity and the threat to Japan's
financial system via a spate of manufacturing bankruptcies should lead to a
concerted effort to reverse the rise of the yen. If the government fails, a more
unpleasant catalyst will manifest itself in the real economy.
As to the structure of the Portfolio, after a disappointing quarter our value
work shows there to be little reason for any substantial change to either
industry or country weightings. Despite the continued weakness of the Japanese
stock
1
<PAGE>
market, outside the blue chip exporters stocks are expensive on an international
basis and business franchises are generally of a less than compelling quality.
GERMANY
The Morgan Stanley Capital International Germany Index increased by 4.0% in
U.S. dollar terms but declined by 8.2% in local currency terms in the first
quarter of 1995. As these returns illustrate it was a difficult period for the
equity market while the deutsche mark continued to be strong. Not surprisingly,
it was the companies in the export sector which were the poorest performers
while the domestic franchise companies such as retail, were the strongest. The
outlook for inflation continues to look good despite the wage deal agreed in the
engineering sector which was above expectations. Two important factors
contributing to continued low inflation are the sustained strength of the
deutsche mark and the failure of the unemployment rate to improve. The number of
unemployed is now stable at around 8.1 million. The German authorities'
confidence about the continued low level of inflation was evidenced when they
unexpectedly reduced the Discount Rate by one half of one percent in the last
week. We are taking advantage of the currency market weakness to add to some
positions in the Portfolio.
FRANCE
During the first quarter of 1995 the Morgan Stanley Capital International
France Index increased by 12.4% in U.S. dollar terms and by 1.0% in French franc
terms. These increases make it the best performing market in Europe during the
quarter, an impressive achievement when the currency volatility is taken into
consideration. Consumer spending last year was higher than in most countries due
to government created fiscal incentives. Spending decelerated markedly, however,
once these incentives were removed. Looking forward, expected substantial tax
rises following the election could further restrict consumer spending. There
has, however, been a noticeable pick up in business investment from the recent
low levels helped by high cash balances and rising order books. Although
inflation levels remain low, the relative weakness of the franc has prevented
the Banque de France from following the Germans with lower interest rates. In
the stock market in the first quarter we saw initial strength in cyclicals
followed later by outperformance by defensive sectors. Financial stocks have
continued to perform poorly due primarily to further concerns over the property
sector.
SWITZERLAND
The Morgan Stanley Capital International Switzerland Index rose by 11.8% in
U.S. dollar terms but declined by 3.8% in Swiss franc terms in the first quarter
of 1995. As noted in the 1994 annual report, the Swiss economy witnessed
stronger domestic demand than most countries in 1994. Later in the year,
however, the pace of recovery in domestic demand slowed as consumer spending
flattened. This trend has continued into 1995 and with imports slowing the net
trade balance has improved despite the strength of the franc. Domestic demand is
likely to remain subdued in coming months as any improvement in wages and
employment will be offset by the introduction of Value Added Tax eating into
real wages. We must question, however, whether the increased level of exports
can be sustained with a strengthening franc. The weakness of domestic demand in
Germany, a key export market, will also limit Swiss exports. As expected, the
Swiss authorities were quick to follow the German cut in interest rates and
Swiss policy will continue to be closely linked to moves by the Bundesbank. We
continue to find well managed cheap companies in Switzerland, particularly in
the small and medium sized ranges.
2
<PAGE>
NETHERLANDS
In the first quarter of 1995 the Morgan Stanley Capital International
Netherlands Index increased by 9.3% in U.S. dollar terms but declined by 3.6% in
local currency terms. As stated in previous quarterly reports, the downturn in
the Netherlands was less severe than the rest of Europe due primarily to the
exposure of exporters to the faster growing markets of the U.S. and Asia. This
exposure has also been the catalyst for economic recovery. Most recent
indicators continue to show that the Dutch economy is making steady progress and
the recovery is broadly based. Consumer spending is benefitting from a recovery
in real disposable incomes while the employment picture continues to improve.
With an unemployment rate of around 9%, however, income growth and hence
consumer spending will remain subdued continuing to hold down inflation. This
relatively strong economic environment allowed the Dutch authorities to follow
the German lead and cut interest rates late in the quarter. The Dutch market is
particularly sensitive to the U.S. dollar and recent weakness has hurt the
equity market. Looking forward, however, this continues to be a market offering
good value to the equity investor.
SPAIN
During the first quarter of 1995 the Morgan Stanley Capital International
Spain Index fell by 0.5% in U.S. dollar terms and by 4.8% in local currency
terms. The investment environment in Spain continues to be poor with fears over
interest rates, higher inflation and the uncertain political picture all areas
of concern. Since the beginning of the year the intervention rate has increased
by more than 1% against the trend in much of the rest of Europe. It is likely
these official interest rate rises will continue while pressures on inflation
continue to grow. Inflationary pressure is primarily a result of higher import
prices and an increase in the cost of food. There has been weakness in labor
costs, however, with the unemployment rate still around 24%. As a result of the
weak peseta the export markets are still the driving force behind the economy.
We are happy to use the weakness of the Spanish market to add to our positions
while we find particularly good value in the banking sector.
ITALY
The Morgan Stanley Capital International Italy Index fell by 8.4% in U.S.
dollar terms and by 4.2% in local currency terms in the first quarter. These
poor returns make it the worst performing market in Europe. Much like Spain,
Italy is suffering from higher interest rates, poor inflation figures and an
unstable political environment. The parliament recently passed a mini-budget of
Itl 20 trillion with the intention of paying down the national deficit. The
recent increases in interest rates, however, will mean that most of this will go
towards paying off the additional interest costs on the debt. The majority of
these funds will be raised through indirect taxes which will put further
pressure on inflation. The most recent CPI figures are already disappointing
showing a rise in the headline rate of 4.2% from 3.7%. Economic growth in Italy
is being driven by continuing strong exports aided by the weak lira. With this
weak market performance we are finding new investment opportunities as well as
adding to existing positions offering good value.
UNITED KINGDOM
In the first quarter of 1995 the Morgan Stanley Capital International (MSCI)
U.K. Index increased by 6.5% in U.S. dollar terms and by 2.3% in local currency.
The market appears to have broken out of its narrow trading range of the last
few quarters, taking pace mainly from U.S. developments. U.S. Federal Reserve
rates increased from 5.5% to 6% on February 1, 1995, with U.K. interest rates
rising the next day from 6.2% to 6.7%. The latter continues to be in line with
aggressive (compared to the U.S.) U.K. tightening to pre-empt inflation.
3
<PAGE>
Falling long gilt yields in the U.S. on hopes of peaked-out interest rates and
expectations of a "soft landing" were reciprocated in the U.K. to a lesser
extent. Short rate (June) sterling contracts fell from 8.1% at the start of the
quarter to 7.2% by the end, leading to a pick up in the U.K. market. This was
magnified in the MSCI U.K. Index in dollar terms due to dollar weakness
following fall out from the Mexican crisis.
Industrial production figures showed a continuing slowdown since mid-1994, with
manufacturing output falling to 3.3% year-on-year in January 1995 compared to
5.1% year-on-year in December 1994. Retail sales were down to 2.6% year-on-year
in February 1995, compared to 3.6% year-on-year in December 1994, reflecting the
impact of tax increases and the diversion of expenditure to the National
Lottery. At 2.7% year-on-year in February 1995 compared to 2.5% year-on-year in
December 1994, inflation is past its trough and gradual pick up should be
anticipated, albeit from a low base. These figures appear to indicate that the
U.K. economy may be slowing to a sustainable rate of long-term growth without
causing excessive inflation, with monetary policy currently on hold. The latter
may change with resultant further tightening of interest rates, should leading
indicators depart from government targets, and some question marks remain over
likely government actions -- particularly tax cuts -- as the prospect of
elections draws closer.
Electricity/Utilities was dramatically the worst performing sector -- which we
avoided -- following belated intervention by the Regulator in response to the
hostile bid by Trafalgar House for Northern Electric. As this intervention came
two days after the placing of the U.K. government's remaining interest in the
electricity generating companies, this precipitated their collapse,
institutional apoplexy and brought down the other utilities on fear of increased
regulatory and political risk.
The company results season began in February. Fears of margin erosion through
inability to pass on increased raw material costs appear to have been
exaggerated. To date, dividend growth has, in general, been better than expected
(circa 11% versus 9%) and upgrades pencilled in for both earnings and dividends
for 1995 give underpinning for market strength. Value remains scarce in this
environment.
JAPAN
During the first quarter of 1995 the Japanese stock market fell sharply with
the Morgan Stanley Capital International (MSCI) Japan Index declining 15.2% in
local currency. However, the strength of the yen was such during the quarter
that the fall of the MSCI Japan Index in U.S. dollar terms was 2.1%.
The Japanese stock market suffered two traumas during the quarter, the demise of
Barings and the Kobe earthquake. It is significant that Barings' problems
derived from a speculative presumption that Japan's stock market would remain
trading within a narrow range protected on the downside by public money. The
shock of the Kobe earthquake not only revealed the absence of this public money
but it also triggered a flood of selling from Barings' liquidators as they
sought to reduce the stricken bank's futures exposure to the fall in the
Japanese stock market. Therefore, the fall in this market can be argued to have
been substantially attributable to exceptional factors. However, the recent
strength of the yen and the inevitable depressing effect this will have on the
Japanese manufacturing sector has given fundamental backing to the stock
markets' depressed levels. Indeed, if no respite is provided by the currency
markets, there is a meaningful chance of a further fall out in the financial
sector as banks confront a new spate of bankruptcies from Japan's huge but
largely unlisted small company sector. Valuations among the export blue chips
and some domestic franchise stocks are attractive on an international basis at
current levels, but
4
<PAGE>
otherwise Japanese companies sell on premium multiples without the justification
of either competitive advantage or superior growth potential.
Now that it has been shown that this market will not necessarily be supported at
artificially high levels, it has further meaningful downside if the current
strength of the yen persists.
HONG KONG
During the first quarter the Morgan Stanley Capital International Hong Kong
Index appreciated 4.4% in U.S. dollar terms and 4.3% in Hong Kong dollar terms.
These solid, if unspectacular, returns conceal considerable volatility during
the quarter. In January the market suffered a sharp decline as the Mexican
debacle introduced an element of panic to a market already depressed by local
interest rate hikes and a weakening property market. Despite some lackluster
corporate results, the stock market has recovered sharply in recent weeks taking
heart from some better than expected prices achieved at local government land
auctions and a fall in interest rates in the U.S.
At the market's current level, we believe it is discounting a moderate recovery
in the all important local property market. We believe that this is unlikely for
the balance of the current year and that prices will remain mired 30-40% below
peak levels for some time. The reason for our skepticism is the unsustainably
high levels from which residential prices have fallen, coupled with the outlook
for sustained tight money in both Hong Kong and China. This view is that of the
minority and contrasts with the optimistic forecasts from leading developers as
they recently announced their results. However, given their working capital
problems as volumes and prices contract, one would hardly expect them not to
talk the market up.
Meanwhile, it is perhaps worth noting that Hong Kong will become a political
adjunct of China in just over two years. The nagging uncertainties this process
entails will come into ever sharper focus as June 1997 approaches.
AUSTRALIA
The Morgan Stanley Capital International Australia Index declined 4.0% in
U.S. dollar terms during the first quarter of 1995 but appreciated 1.5% in local
currency terms.
Like all minor currencies with high levels of government debt, the Australian
dollar was under siege during the quarter, with the weakness of metals prices
also weighing against sentiment. This factor was also reflected in a poor
showing from the mining stocks after a period of prolonged relative strength.
The upward move in short-term and long-term interest rates resulting from
currency weakness will slow the domestic economy from mid-year while the housing
cycle has already peaked. The profit outlook for domestic stocks, therefore,
appears worrisome especially since wage settlements are running well in excess
of any price increase achievable in the current environment.
We believe the Australian stock market is therefore correctly valued at its
current modest levels.
- ----------
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.
5
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
COMMON STOCKS (94.0%)
AUSTRALIA (4.2%)
3,300,000 Brambles Industries Ltd. $ 30,575
3,099,526 CSR Ltd. 9,769
1,500,000 McPherson's Ltd. 176
3,934,882 Westpac Banking Corp. 14,075
---------
54,595
---------
BELGIUM (1.7%)
63,700 Arbed S.A. 8,941
155,500 Delhaize Freres et Cie, 'Le
Lion', S.A. 6,263
160,000 G.I.B. Holdings, Ltd. 7,008
2,156 G.I.B. Holdings, Ltd. (New) 93
---------
22,305
---------
DENMARK (1.0%)
149,700 Danisco 5,701
169,000 Unidanmark A/S, Class A
(Registered) 6,838
---------
12,539
---------
FINLAND (1.4%)
350,000 Huhtamaki Oy, Series 1 10,416
505,400 Kansallis-Osake Pankki 478
721,000 Pohjola Insurance Co., Ltd.,
Class B 7,135
---------
18,029
---------
FRANCE (5.7%)
12,500 Bongrain S.A. 7,478
111,560 Cie de Saint Gobain 13,809
153,050 Credit Lyonnais CDI 7,097
186,724 Elf Aquitaine 14,541
15,000 PSA Peugeot Citroen S.A. 2,099
25,800 Salomon S.A., Series A 10,307
242,500 Thomson CSF 6,500
224,170 Total S.A., Class B 13,308
---------
75,139
---------
GERMANY (10.7%)
110,000 BASF AG 22,311
105,000 Bayer AG 25,784
105,000 Bremer Vulkan Verbund AG 6,047
46,200 Commerzbank AG 10,776
1,850 Hoechst AG 382
55,000 Karstadt AG 22,370
73,125 Mannesmann AG 18,884
27,050 Varta AG 5,427
75,000 Veba AG 27,110
---------
139,091
---------
HONG KONG (0.0%)
90,600 China Light & Power Co., Ltd. 410
---------
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
ITALY (3.2%)
2,560,500 Olivetti Di Risp (NCS) $ 1,881
2,568,000 SME Meridonale 6,000
9,000,000 Stet Di Risp (NCS) 18,048
4,720,000 Telecom Italia S.p.A. 10,987
2,655,000 Telecom Italia S.p.A Di Risp
(NCS) 4,935
---------
41,851
---------
JAPAN (21.2%)
570,000 Aisin Seiki Co., Ltd. 7,285
840,000 Canon, Inc. 13,831
1,300,000 Daibiru Corp. 14,519
3,000 East Japan Railway Co. 14,681
1,800,000 Fuji Photo Film Ltd. 42,694
2,134,000 Hitachi Ltd. 22,114
1,630,000 Kao Corp. 19,331
890,000 Kirin Brewery Co., Ltd. 9,633
1,700,000 Matsushita Electric Industries
Ltd. 27,404
81,000 Murata Manufacturing Co., Ltd. 3,143
2,302,000 Nichido Fire & Marine
Insurance Co. 18,580
1,460 Nippon Telegraph & Telephone
Corp. 12,574
290,000 Sony Corp. 14,525
750,000 Stanley Electric Co. 5,095
2,215,700 Sumitomo Rubber Industries 17,986
305,000 TDK Corp. 14,223
595,000 Toyo Seikan Kaisha Ltd. 18,497
---------
276,115
---------
NETHERLANDS (12.7%)
769,128 ABN Amro Holdings N.V. 28,171
112,500 Akzo Nobel N.V. 12,267
79,082 Hollandsche Beton Groep N.V. 12,589
629,362 Internationale Nederlanden
Groep N.V. 30,994
247,500 Koninklijke Bijenkorf Beheer
N.V. 17,442
153,050 Nedlloyd Groep N.V. 4,288
256,600 Oce-Van Der Grinten N.V. 13,052
1,122,000 Phillips Electronics N.V. 38,046
61,200 Randstad Holdings N.V. 3,521
39,415 Unilever N.V. (Certificate) 5,147
---------
165,517
---------
NEW ZEALAND (0.4%)
2,098,671 Fisher & Paykel Industries
Ltd. 5,471
392,500 Smith City Group Ltd. --
---------
5,471
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
NORWAY (1.4%)
2,265,000 Den Norske Bank A/S, Class A
Free $ 6,045
600,000 Hafslund Nycomed, Class B 11,791
---------
17,836
---------
SINGAPORE (2.9%)
9,000,000 Jardine Strategic Holdings,
Inc. 34,200
3,265,000 Neptune Orient Lines Ltd.
(Foreign) 4,023
---------
38,223
---------
SPAIN (3.6%)
366,300 Banco Espanol de Credito S.A. 2,497
297,500 Grupo Duro Felguera S.A. 989
2,345,000 Iberdrola S.A. 13,859
294,000 Sevillana de Electricidad S.A. 1,330
2,250,000 Telefonica Nacional de Espana
S.A. 28,458
---------
47,133
---------
SWEDEN (2.0%)
2,350,000 Skandinaviska Enskilda Banken,
Class A 12,077
473,000 S.K.F. AB, Class B 7,848
401,200 Svenska Cellulosa AB, Class B 6,332
---------
26,257
---------
SWITZERLAND (8.7%)
29,583 Alusuisse-Lonza Holdings Ltd.
(Registered) 15,997
2,605 Ascom Holdings AG (Bearer) 2,787
25,000 Ciba-Geigy AG (Registered) 16,579
8,000 Forbo Holdings AG (Registered) 7,609
1,650 Grands Magasins Jelmoli
(Bearer) 908
19,585 Grands Magasins Jelmoli
(Registered) 2,156
26,000 Holderbank Glarus (Bearer) 18,959
27,740 Moevenpick Holding AG
(Participating Certificates) 11,726
20,000 Nestle S.A. (Registered) 19,463
31,500 SwissAir (Registered) 17,338
---------
113,522
---------
UNITED KINGDOM (13.2%)
1,065,000 Associated British Foods plc 10,516
1,360,104 Automated Security Holdings
plc 1,310
1,400,000 Barclays plc 14,118
1,820,000 Bass plc 16,174
580,000 BOC Group plc 6,572
3,090,000 Christian Salvesen plc 12,454
2,300,221 Forte plc 8,489
2,138,606 Grand Metropolitan plc 13,847
4,841,985 John Mowlem & Co. plc 6,388
1,100,000 Kwik Save Group plc 9,651
843,000 McAlpine (Alfred) plc 1,897
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
1,888,978 Pilkington plc $ 5,015
1,404,000 Reckitt & Colman plc 14,113
2,074,589 Rolls-Royce plc 5,356
3,345,205 Royal Insurance Holdings plc 15,541
1,500,000 Tate & Lyle plc 10,562
755,000 Unilever plc 14,946
3,070,000 WPP Group plc 5,069
---------
172,018
---------
TOTAL COMMON STOCKS (Cost $1,003,890) 1,226,051
---------
PREFERRED STOCKS (4.8%)
GERMANY (4.8%)
30,450 Fag Kugelfischer AG 3,331
100,000 RWE AG 26,367
29,525 Spar Handels AG 7,293
125,000 Volkswagen AG 25,081
---------
TOTAL PREFERRED STOCKS (Cost $54,443) 62,072
---------
CONVERTIBLE PREFERRED SECURITIES (0.2%)
HONG KONG (0.2%)
1,863,000 Jardine Strategic Holdings,
Inc. IDR, 7.50%, 5/07/97 2,371
---------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V. 6
2,196 International Nederlanden
Groep N.V. 11
---------
17
---------
TOTAL CONVERTIBLE PREFERRED SECURITIES
(Cost $1,923) 2,388
---------
<CAPTION>
NO. OF
RIGHTS
- ----------
<C> <S> <C>
RIGHTS (0.0%)
UNITED KINGDOM (0.0%)
384,183 Rolls-Royce plc (Cost $0) 37
---------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
120 Ciba-Geigy AG, expiring
6/06/95 --
7,280 Forbo Holdings AG
(Registered), expiring
11/01/95 8
---------
TOTAL WARRANTS (Cost $1) 8
---------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENTS (1.8%)
US GOVERNMENT AND AGENCY OBLIGATIONS
(1.8%)
$ 3,600 Federal Home Loan Mortgage
Corp., 4/04/95 3,598
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- (CONTINUED)
$ 20,000 Federal Home Loan Mortgage
Corp., 4/18/95 $ 19,944
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $23,542) 23,542
---------
TOTAL FOREIGN & US SECURITIES (100.8%)
(Cost $1,083,799) 1,314,098
---------
FOREIGN CURRENCY (1.2%)
L 5,101 British Pound 8,257
DM 10,735 Deutsche Mark 7,776
SP 426 Spanish Peseta 3
CHF 38 Swiss Franc 34
---------
TOTAL FOREIGN CURRENCY (Cost $15,855) 16,070
---------
TOTAL INVESTMENTS (102.0%) (Cost
$1,099,654) 1,330,168
---------
<CAPTION>
VALUE
(000)
--
<C> <S> <C>
OTHER ASSETS AND LIABILITIES (-2.0%)
Other Assets $ 15,810
Liabilities (41,360)
---------
(25,550)
---------
NET ASSETS (100%) $1,304,618
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 90,743,965 outstanding $.001
par value shares (authorized 500,000,000
shares) $14.38
---------
---------
<FN>
- -------------
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
</TABLE>
8
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
VALUE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
Our value investment philosophy is based on the premise that a diversified
portfolio of undervalued securities will outperform the market over the
long-term and can be expected to preserve principal in a difficult market
environment.
Key aspects of our philosophy are as follows:
Reversion to mean valuation levels (return to the long-term average) is the
most consistent and powerful force in investing.
We buy companies selling at less that our research measures to be their true
worth.
Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.
We limit our universe of investments to larger, liquid stocks. This is a
list similar to the S&P 500.
Investment decisions are based on research undertaken by the Morgan Stanley
Asset Management/Chicago investment team.
The total return of the Value Equity Portfolio for the three month period ended
March 31, 1995 was 9.91% as compared to 9.73% for the S&P 500 Index and 8.40%
for the Indata Equity-Median Index, for the same periods. Total return for the
past twelve months, and the average annual return for the five year period ended
March 31, 1995 and for the period from inception in January 1990 through March
31, 1995 were 11.99%, 9.47% and 9.47%, respectively, compared to 15.54, 11.40
and 11.83% for the S&P 500, and 11.70%, 11.05% and 11.51% for the Indata
Equity-Median for the same periods.
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE INDATA EQUITY - MEDIAN
INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS2
--------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEAR INCEPTION
----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
PORTFOLIO............ 9.91% 11.99% 9.47% 9.47%
S&P 500.............. 9.73 15.54 11.40 11.83
INDATA EQUITY -
MEDIAN.............. 8.40 11.70 11.05 11.51
<FN>
- -------------
1. The Indata Equity - Median and the S&P 500 Stock Indices are unmanaged
indices of common stocks. The Indata Equity - Median Index includes an
average asset allocation of 5% cash and 95% equity based on $340 billion in
assets among 1,197 portfolios for the quarter ended March 31, 1995.
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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Portfolio, after fees and expenses, modestly outperformed the broad market
with a return of 9.91% versus the S&P 500 return of 9.73% before fees and
expenses. U.S. equity style was not a factor as the S&P/Barra Value Index
returned 9.64% and the S&P/Barra Growth Index returned 9.82% for the quarter.
The average equity fund returned 8.4% in the quarter as measured by Indata
Equity-Median, and the Value Equity Portfolio's return of 9.91% placed it in the
top quartile of U.S. equity funds. Also, for the quarter, the Value Equity
Portfolio outperformed the average U.S. equity mutual fund which returned 7.2%.
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
P/E PRICE-TO-BOOK
--- -----------------
<S> <C> <C>
VALUE EQUITY PORTFOLIO........... 13.6X 2.3X
S&P 500.......................... 16.3X 2.9X
</TABLE>
1
<PAGE>
During the quarter, the best performing sectors in the portfolio were
transportation, up 23%, technology, up 13%, insurance, up 13%, and
communications, up 9%. The sector which underperformed the most was metals down
8.0%.
There was limited turnover in the portfolio in the quarter. In January, the
Portfolio's weighting in the financial and cyclical sectors were increased with
additions to the current holdings of J.P. Morgan, Mellon, Boatmens Bancshares,
Bankers Trust, AON, Monsanto, Hanson, Deere, and Phelps Dodge. The Portfolio's
weighting in the health care, staples, and energy sectors were reduced with
partial sales of Becton Dickinson, Baxter, Merck, Heinz, CPC, Mobil and Royal
Dutch Petroleum. No new companies were added to the Portfolio in January.
In February, the technology exposure was decreased with the sale of IBM. Since
its low of $41.63, IBM is up 78% and we believe it is fairly
valued. IBM's rebound was driven by significant changes that resulted in free
cash flow improving to a positive $18 per share from a low of negative $5 per
share in 1991. The key changes were a reduction in staffing, a dividend
reduction, decreases in expenditures on research and development, decreases in
capital expenditures, and a moderate reduction in sales and administration
costs. The improved cash flow did not, however, come from improved margins which
have shrunk from 50% in 1991 to 39% in 1994. At IBM's current valuation levels,
we believe IBM is fairly valued.
Individual issues which exhibited positive excess total returns relative to the
S&P 500 in the quarter included Mellon with a 33% return; Burlington Northern
with a 23% return; Bank of America with a 22% return; Deere with a 23% return;
and, Woolworth with a 21% return. Holdings exhibiting negative relative returns
included Phelps Dodge, down 8%; Bankers Trust, down 6%; and Ford, down 4%.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------- ---------
<C> <S> <C>
COMMON STOCKS (96.7%)
AEROSPACE (2.4%)
31,800 United Technologies Corp. $ 2,198
---------
BANKING (11.3%)
33,350 BankAmerica Corp. 1,609
28,300 Bankers Trust (New York) Corp. 1,479
41,200 Boatmens Bancshares, Inc. 1,246
52,100 Chemical Banking Corp. 1,967
49,650 Mellon Bank Corp. 2,023
29,900 Morgan (J.P.) & Co., Inc. 1,824
---------
10,148
---------
CAPITAL GOODS (2.3%)
25,400 Deere & Co. 2,064
---------
CHEMICALS (4.2%)
29,675 Eastman Chemical Co. 1,651
26,600 Monsanto Co. 2,135
---------
3,786
---------
COMMUNICATIONS (7.6%)
45,100 NYNEX Corp. 1,787
40,500 SBC Communications, Inc. 1,706
64,400 Sprint Corp. 1,948
35,600 U.S. West, Inc. 1,424
---------
6,865
---------
CONSUMER--DURABLES (4.5%)
63,600 Ford Motor Co. 1,717
52,900 General Motors Corp. 2,341
---------
4,058
---------
CONSUMER--RETAIL (5.4%)
95,700 Kmart Corp. 1,316
30,800 V.F. Corp. 1,636
102,600 Woolworth Corp. 1,885
---------
4,837
---------
CONSUMER--SERVICE & GROWTH (5.9%)
65,900 Deluxe Corp. 1,878
32,000 Eastman Kodak Co. 1,700
88,700 Ogden Corp. 1,785
---------
5,363
---------
CONSUMER--STAPLES (8.9%)
43,800 American Brands, Inc. 1,719
31,500 Anheuser Busch Cos., Inc. 1,847
21,700 CPC International, Inc. 1,175
73,100 Fleming Cos., Inc. 1,654
43,000 Heinz (H.J.) Co. 1,655
---------
8,050
---------
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------- ---------
<C> <S> <C>
ENERGY (6.9%)
47,200 Ashland Oil, Inc. $ 1,681
14,550 Mobil Corp. 1,348
11,350 Royal Dutch Petroleum Co. 1,362
27,650 Texaco, Inc. 1,839
---------
6,230
---------
FINANCIAL--DIVERSIFIED (1.8%)
46,550 Student Loan Marketing Association 1,623
---------
HEALTH CARE (11.2%)
52,700 Bausch & Lomb Inc. 1,884
52,400 Baxter International, Inc. 1,716
15,600 Becton Dickinson & Co. 846
29,000 Bristol-Myers Squibb Co. 1,827
42,600 Merck & Co., Inc. 1,816
56,300 Upjohn Co. 2,013
---------
10,102
---------
INDUSTRIAL (3.8%)
80,700 Hanson plc ADR 1,523
48,800 Rockwell International Corp. 1,903
---------
3,426
---------
INSURANCE (5.8%)
48,800 American General Corp. 1,574
50,400 Aon Corp. 1,840
35,800 St. Paul Cos., Inc. 1,790
---------
5,204
---------
METALS (2.3%)
36,100 Phelps Dodge Corp. 2,053
---------
TECHNOLOGY (2.6%)
48,000 Harris Corp. 2,298
---------
TRANSPORTATION (2.6%)
39,100 Burlington Northern, Inc. 2,322
---------
UTILITIES (7.2%)
77,300 General Public Utilities Corp. 2,251
71,400 Northern Indiana Public Service Co. 2,222
64,900 Texas Utilities Co. 2,061
---------
6,534
---------
TOTAL COMMON STOCKS (Cost $83,611) 87,161
---------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.0%)
BANKING (0.0%)
Chase Manhattan Corp., expiring
23 6/30/96
(Cost $0) --
---------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.0%)
REPURCHASE AGREEMENT (3.0%)
$ 2,741 U.S. Trust, 6.00%, dated 3/31/95, due
4/03/95, to be repurchased at
$2,742, collateralized by $2,630
Government National Mortgage
Association, 9.00%-10.00%, due
12/15/01-4/15/10, valued at $2,774
(Cost $2,741) $ 2,741
-----------
TOTAL INVESTMENTS (99.7%) (Cost $86,352) 89,902
-----------
OTHER ASSETS AND LIABILITIES (0.3%)
Other Assets 379
Liabilities (133 )
-----------
246
-----------
NET ASSETS (100%) $ 90,148
-----------
-----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 7,442,025 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 12.11
-----------
-----------
<FN>
- -------------
ADR -- American Depositary Receipt
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
BALANCED PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Balanced Portfolio's value investment philosophy is based on the premise
that a diversified portfolio of undervalued stocks and bonds will outperform the
market over the long-term and can be expected to preserve principal in a
difficult market environment.
The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon Morgan Stanley Asset Management/Chicago's 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%.
The total return of the Portfolio for the three month period ended March 31,
1995 was 7.10% as compared to 6.40% for the Indata Balanced-Median Index for the
same period. Total return for the past twelve months and the average annual
return for the five year period ended March 31, 1995 and for the period from
inception in February 1990 through March 31, 1995 were 7.31%, 8.93% and 8.86%,
respectively, compared to 8.80%, 9.32% and 9.43% for the Indata Balanced-Median
Index for the same periods.
PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS2
-------------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL SINCE
YTD ONE YEAR FIVE YEAR INCEPTION
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Portfolio.. 7.10% 7.31% 8.93% 8.86%
Index..... 6.40 8.80 9.32 9.43
<FN>
- -------------
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 5% cash, 42% bonds and 53% equity based on $55.0 billion in
assets among 566 Portfolios for the quarter ended March 31, 1995 (assumes
dividends reinvested). The Index returns are gross of management fees; the
Portfolio returns are net of management fees and expenses.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
Our asset allocation, based on market value at March 31, 1995 is as follows:
<TABLE>
<S> <C>
Equities.................................... 46.6%
Fixed Income................................ 45.3
Cash and other net assets................... 8.1
----------
100.0%
----------
----------
</TABLE>
With the strong growth in corporate earnings, the market, as measured by the
Standard & Poor's 500 Stock Index (S&P 500), is in the middle of it's historical
valuation range. The current level of equity exposure is 47%, down from last
quarter's level of 50%. The 1995 Q1 decrease in equity exposure reflects the
recent strong performance of the U.S. equity market and our expectations that
the equity exposure can be increased later in the year if there is any weakness
in the market. At current valuation levels, we expect to be 50% to 55% in
equities by year end. The decrease in equity exposure to 47% was accomplished by
investing the stock dividend and bond coupon flows in cash, and modest profit
taking in a few stocks.
To put the current asset allocation in perspective, the equity exposure had been
increased in 1994 from 45% to 50%. The 1994 increase was based on increasing
earnings, and the price decline in the S&P 500. Since the 1994 Q2 increase in
equity exposure, the market is up 16%.
EQUITIES
For the quarter, the equity component of the Balanced Portfolio returned
10.23% before deducting expenses versus the S&P 500 return of 9.7%. US equity
style was not a factor as the S&P/Barra Value Index returned 9.64% and the
S&P/Barra Growth Index returned 9.82% for the quarter.
The median equity return in balanced portfolios for the quarter as measured by
Indata, was 9%
1
<PAGE>
and the top quartile was 9.9%, placing the Balanced Portfolio's equity portion
return in the top quartile.
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
P/E PRICE-TO-BOOK
----- ------------------
<S> <C> <C>
Portfolio -- equity portion..... 13.6x 2.3x
S&P 500......................... 16.3x 2.9x
</TABLE>
During the quarter, the best performing sectors in the Portfolio were
transportation, up 23%, technology, up 13%, insurance, up 13%, and
communications, up 9%. The sector that underperformed the most was metals down
8.0%.
There was limited turnover in the Portfolio in the quarter. In January, the
Portfolio's weighting in the financial and cyclical sectors were increased with
additions to the current holdings of J.P. Morgan, Mellon, Boatmens Bancshares,
Bankers Trust, AON, Monsanto, Hanson, Deere, and Phelps Dodge. The Portfolio's
weighting in the health care, staples, and energy sectors were reduced with
partial sales of Becton Dickinson, Baxter, Merck, Heinz, CPC, Mobil and Royal
Dutch. No new companies were added to the Portfolio in January.
In February, the technology exposure was decreased with the sale of IBM. Since
its low of $41.63, IBM is up 78% and we believe it is fairly valued. IBM's
rebound was driven by significant changes that resulted in free cash flow
improving to a positive $18 per share from a low of negative $5 per share in
1991. The key changes were a reduction in staffing, a dividend reduction,
decreases in expenditures on research and development, decreases in capital
expenditures, and a moderate reduction in sales and administration costs. The
improved cash flow did not, however, come from improved margins which have
shrunk from 50% in 1991 to 39% in 1994. At IBM's current valuation levels, we
believe IBM is fairly valued. We have not yet purchased a stock to replace IBM,
however, some of the proceeds were used to add to our holding of Phelps Dodge.
Individual issues which exhibited positive excess total returns relative to the
S&P 500 included Mellon with a 33% return; Burlington Northern with a 23%
return, Bank of America with a 22% return; Deere with a 23% return; and
Woolworth with a 21% return. Holdings exhibiting negative relative returns
included Phelps Dodge, down 8%; Bankers Trust, down 6%; and Ford down 4%.
FIXED INCOME
The fixed income component of the Balanced Portfolio continues to maintain
100% exposure to intermediate-term U.S. Government securities. For the three and
twelve month periods ended March 31, 1995, the fixed income portion of the
Portfolio had total returns of 4.9% and 3.8% against a return of 4.4% and 4.5%
for the Lehman Intermediate Government/Corporate Bond Index (the fixed-income
benchmark for MSAM/Chicago).
The fixed-income portion of the Portfolio began the quarter at approximately an
index neutral weighted average maturity. In the quarter, interest rates fell
across the maturity spectrum, with the biggest decreases at 2-3 years and 5
years. The Portfolio benefited from the reshaping of the yield curve as it holds
US Treasuries in maturities of 3 and 5 years. There was no change in the
maturity of the Portfolio in the quarter. With inflation at approximately the 3%
level, and intermediate yields (5 year maturity) at the 7.1% level, we are
comfortable with our current position.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- --------
<C> <S> <C>
COMMON STOCKS (46.6%)
AEROSPACE (1.1%)
3,300 United Technologies Corp. $ 228
--------
BANKING (5.4%)
3,700 BankAmerica Corp. 179
3,400 Bankers Trust (New York) Corp. 178
4,700 Boatmens Bancshares, Inc. 142
5,800 Chemical Banking Corp. 219
5,400 Mellon Bank Corp. 220
3,300 Morgan (J.P.) & Co., Inc. 201
--------
1,139
--------
CAPITAL GOODS (1.0%)
2,600 Deere & Co. 211
--------
CHEMICALS (1.9%)
3,425 Eastman Chemical Co. 190
2,700 Monsanto Co. 217
--------
407
--------
COMMUNICATIONS (4.0%)
5,500 NYNEX Corp. 218
5,000 SBC Communications, Inc. 211
7,200 Sprint Corp. 218
4,700 U.S. West, Inc. 188
--------
835
--------
CONSUMER-DURABLES (2.3%)
7,300 Ford Motor Co. 197
6,400 General Motors Corp. 283
--------
480
--------
CONSUMER-RETAIL (2.8%)
11,600 Kmart Corp. 160
3,800 V.F. Corp. 202
12,700 Woolworth Corp. 233
--------
595
--------
CONSUMER-SERVICE & GROWTH (2.9%)
8,100 Deluxe Corp. 231
3,400 Eastman Kodak Co. 181
9,600 Ogden Corp. 193
--------
605
--------
CONSUMER-STAPLES (4.1%)
4,400 American Brands, Inc. 173
3,300 Anheuser Busch Cos., Inc. 193
2,500 CPC International, Inc. 135
9,400 Fleming Cos., Inc. 213
4,000 Heinz (H.J.) Co. 154
--------
868
--------
<CAPTION>
VALUE
SHARES (000)
- -------- --------
<C> <S> <C>
ENERGY (3.3%)
5,400 Ashland Oil, Inc. $ 192
1,350 Mobil Corp. 125
1,250 Royal Dutch Petroleum Co. 150
3,500 Texaco, Inc. 233
--------
700
--------
FINANCIAL-DIVERSIFIED (0.8%)
5,100 Student Loan Marketing Association 178
--------
HEALTH CARE (5.0%)
6,400 Bausch & Lomb Inc. 229
5,100 Baxter International, Inc. 167
1,400 Becton Dickinson & Co. 76
3,100 Bristol-Myers Squibb Co. 195
4,400 Merck & Co., Inc. 188
5,300 Upjohn Co. 189
--------
1,044
--------
INDUSTRIAL (1.8%)
8,500 Hanson plc ADR 160
5,500 Rockwell International Corp. 215
--------
375
--------
INSURANCE (3.0%)
7,900 American General Corp. 255
5,300 Aon Corp. 193
3,800 St. Paul Cos., Inc. 190
--------
638
--------
METALS (1.2%)
4,300 Phelps Dodge Corp. 245
--------
TECHNOLOGY (1.2%)
5,200 Harris Corp. 249
--------
TRANSPORTATION (1.2%)
4,300 Burlington Northern, Inc. 255
--------
UTILITIES (3.6%)
8,400 General Public Utilities Corp. 245
8,500 Northern Indiana Public Service
Co. 264
7,850 Texas Utilities Co. 249
--------
758
--------
TOTAL COMMON STOCKS (Cost $8,966) 9,810
--------
<CAPTION>
FACE
AMOUNT
(000)
- --------
<C> <S> <C>
FIXED INCOME SECURITIES (45.3%)
US TREASURY NOTES (45.3%)
$ 4,875 8.25%, 7/15/98 5,053
4,803 5.50%, 4/15/00 4,484
--------
TOTAL FIXED INCOME SECURITIES (Cost $9,858) 9,537
--------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------- --------
<C> <S> <C>
SHORT-TERM INVESTMENT (7.0%)
REPURCHASE AGREEMENT (7.0%)
$ 1,473 U.S. Trust, 6.00%, dated 3/31/95,
due 4/03/95, to be repurchased at
$1,474, collateralized by $1,425
Government National Mortgage
Association, 9.50%-10.00%, due
10/15/09-11/15/09, valued at
$1,529 (Cost $1,473) $ 1,473
--------
TOTAL INVESTMENTS (98.9%) (Cost $20,297) 20,820
--------
OTHER ASSETS AND LIABILITIES (1.1%)
Other Assets 274
Liabilities (42)
--------
232
--------
NET ASSETS (100%) $ 21,052
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 2,286,131 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 9.21
--------
--------
<FN>
- -------------
ADR -- American Depositary Receipt
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
FIXED INCOME PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Fixed Income Portfolio invests primarily in a diversified portfolio of US
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 economic conditions and on a conservative investment management approach.
For the three month period ended March 31, 1995, the Fixed Income Portfolio had
a total return of 4.55% against a return of 5.04% for the Lehman Aggregate Bond
Index. The total return for the one year period ended March 31, 1995, and the
average annual return for the period from inception in May 1991 through March
31, 1995, were 4.58% and 7.47%, respectively, as compared to 4.99% and 7.87% for
the Lehman Aggregate Bond Index for the same periods. As of March 31, 1995, the
Portfolio had an SEC 30-day yield of 7.12%.
PERFORMANCE COMPARED TO THE LEHMAN AGGREGATE BOND INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ------------- -----------------
<S> <C> <C> <C>
PORTFOLIO........... 4.55% 4.58% 7.47%
INDEX............... 5.04 4.99 7.87
<FN>
- -------------
1. The Lehman Aggregate Bond Index is an unmanaged index made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
During the first quarter of 1995, the bond market dramatically reversed its
course from 1994, providing its best total return performance in several years.
After delivering negative returns for 1994, the broader bond market indices
produced returns of roughly five percent over the quarter. While a combination
of factors contributed to this strong performance, three were probably most
important. These were indications of a slower rate of growth in the economy,
changing perceptions among market participants about the prospects for future
Federal Reserve tightenings of monetary policy, and the need for investors to
put to work large cash positions that had accumulated in portfolios. Against
this backdrop of very strong domestic bond market performance was the behavior
of the U.S. Dollar, which set new lows against the German Mark and Japanese Yen
over the quarter.
Entering 1995, market expectations were generally for a continuation of strong
economic growth, further tightening by the Federal Reserve, and rising interest
rates, as had occurred in 1994. While the Fed did indeed tighten at the end of
January, increasing both the Federal Funds Rate and the Discount Rate by 50
basis points, subsequent economic releases suggested that higher rates had begun
to have an effect in slowing the economy. More important, perhaps, comments made
by Federal Reserve Chairman Greenspan in February, as well as by other Fed
members, led many market participants to conclude that the Fed itself believed
it had successfully engineered a "soft landing" for the economy. As a result,
many concluded that the Fed was near the end of its tightenings for this
interest rate cycle.
This significant change in investor psychology was coupled with high cash levels
at many institutions, as well as durations that were generally below target at
the start of the year. As investors sought to put their cash to work and extend
duration, the market rallied substantially, with ten-year yields falling by over
60 basis points over the
1
<PAGE>
quarter. The drop in rates was accompanied by a sharp steepening of the yield
curve over the quarter, with the two-year to thirty-year Treasury spread
increasing from 18 basis points to 65 basis points over the period. At current
rate levels, the market appears to be pricing in no further Fed tightenings.
While U.S. interest rates were falling over the quarter, the U.S. dollar was
declining dramatically against the deutsche mark and the Japanese yen, falling
more than ten percent against each currency. Thus, foreign investors seemed to
be expressing a very different view towards U.S. financial assets than domestic
investors. Ironically, this decline in the dollar may have helped the U.S. bond
market and contributed to the steepening of the yield curve, as Central Banks
bought Treasury securities in an effort to stabilize the U.S. currency.
From a sector standpoint, non-Treasury sectors performed well versus Treasuries.
As investors sought incremental yield for their portfolios, both corporate bonds
and mortgage-backed securities tightened in spread and outperformed Treasuries.
Strong market technicals, in terms of limited issuance and generally favorable
credit trends, helped these sectors. The outperformance was particularly large
in lower rated investment grade corporates, with the split-rated sector of the
corporate market providing the best returns.
FIRST QUARTER STRATEGY REVIEW
During the first quarter, we kept our duration target very close to that of the
benchmark. Our yield curve distribution was relatively barbelled, with an
overweighting in the long end of the curve and the two-to-four-year sector of
the curve. Much of our overweighting in the two-to-four-year area was in the
adjustable rate mortgage sector, which we saw as an attractive value opportunity
relative to similar duration alternatives. We were underweighted in Treasuries
over the quarter, favoring sectors providing incremental yield spread and expect
to continue with this strategy in the second quarter.
OUTLOOK FOR SECOND QUARTER
While economic growth may be moderating and the pace of Fed tightening may be
slowing, we do not anticipate extending portfolio duration in the near-term.
Current interest rate levels appear to already discount a slowdown in the
economy and absent Fed easing, which we do not expect any time soon, we do not
see much room for rates to rally. To the extent the market does not receive
continued confirmation of the slowdown scenarios, it is vulnerable to a setback.
We continue to carry a barbell structure emphasizing adjustable rate mortgages
on the short-end and maintain an overweighting of high quality spread product to
gain incremental yield against the benchmark.
- ----------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATION 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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
FIXED INCOME SECURITIES (97.3%)
US GOVERNMENT AND AGENCY OBLIGATIONS (63.8%)
US Treasury Notes (23.1%)
$ 13,000 7.375%, 11/15/97 $ 13,142
20,000 8.25%, 7/15/98 20,731
12,500 7.25%, 8/15/04 12,502
---------
46,375
---------
Federal Home Loan Mortgage
Corporation (7.1%)
18 13.00%, 9/01/10 20
13,930 9.00%, 1/01/25-2/01/25 14,318
---------
14,338
---------
Government National Mortgage
Association (33.6%)
9 11.00%, 12/15/15 10
18 10.00%, 5/15/19 20
10,095 6.00%, 2/15/24 8,776
24,062 7.00%, 5/15/24 22,505
25,808 7.50%, 12/20/24 - 3/20/25 26,338
10,000 8.00%, 3/15/25 9,906
---------
67,555
---------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS 128,268
---------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (7.5%)
5,000 Hydro Quebec 8.05%, 7/07/24 5,013
12,500 Republic of Italy 6.875%,
9/27/23 10,039
---------
TOTAL FOREIGN GOVERNMENT AND AGENCY
OBLIGATIONS 15,052
---------
CORPORATE BONDS AND NOTES (23.4%)
FINANCE (18.4%)
6,000 CCP Insurance 10.50%, 12/15/04 5,824
7,500 Farmers Insurance 8.625%,
5/01/24 6,703
10,000 Ford Motor Credit Co. 5.625%,
3/03/97 9,711
10,000 General Motors Acceptance Corp.
7.375%, 6/22/00 9,799
5,000 Goldman Sachs 7.80%, 7/15/02 4,911
---------
36,948
---------
METALS (2.5%)
5,000 USX Corp. 9.125%, 1/15/13 5,026
---------
UTILITIES (2.5%)
5,000 Central Maine Power 7.98%,
10/04/96 5,049
---------
TOTAL CORPORATE BONDS AND NOTES 47,023
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
ASSET BACKED SECURITIES (2.6%)
$ 23 Case Equipment Loan Trust, 92-A
5.40%, 6/15/98 $ 23
35 Federal Home Loan Mortgage
Corp., REMIC 16-B 10.00%,
10/15/19 35
24 Federal National Mortgage
Association REMIC 92-59F
6.525%, 8/25/06 24
100 Ford Credit Auto Loan Master
Trust, 92-1A 6.875%, 1/15/99 100
21 General Motors Acceptance Corp.
Trust, 92-D 5.55%, 5/15/97 21
5,000 Resolution Trust Corp. 9.00%,
3/25/17 5,101
---------
TOTAL ASSET BACKED SECURITIES 5,304
---------
TOTAL FIXED INCOME SECURITIES (Cost $194,734) 195,647
---------
SHORT-TERM INVESTMENT (6.5%)
REPURCHASE AGREEMENT (6.5%)
13,042 Goldman Sachs 6.20%, dated
3/31/95, due 4/03/95, to be
repurchased at $13,049,
collateralized by $10,020
United States Treasury Bonds,
11.875%, due 11/15/03, valued
at $13,392 (Cost $13,042) 13,042
---------
TOTAL INVESTMENTS (103.8%) (Cost $207,776) 208,689
---------
OTHER ASSETS AND LIABILITIES (-3.8%)
Other Assets 4,975
Liabilities (12,616)
---------
(7,641)
---------
NET ASSETS (100%) $ 201,048
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 19,919,752 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 10.09
---------
---------
<FN>
- -------------
REMIC -- Real Estate Mortgage Investment Conduit
</TABLE>
3
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
GLOBAL EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Global Equity Portfolio is managed with the objective of obtaining a high
total return by investing in markets worldwide, including the United States.
Investments may also be made with discretion in smaller companies or emerging
markets.
The total return of the Portfolio for the three month period ended March 31,
1995 was 3.29% as compared to 4.68% for the Morgan Stanley Capital International
(MSCI) World Index for the same period. The total return for the twelve months
ended March 31, 1995 and the average annual return for the period from inception
in July 1992 through March 31, 1995 for the Portfolio were 3.68% and 17.65%,
respectively, compared to 9.32% and 11.11% for MSCI World Index for the same
periods.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS2
--------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ------------------
<S> <C> <C> <C>
PORTFOLIO....... 3.29% 3.68% 17.65%
INDEX........... 4.68 9.32 11.11
<FN>
- -------------
1. The MSCI World Index is an unmanaged index of common stocks and includes
securities listed on the stock exchanges of the U.S., Europe, Canada,
Australia, New Zealand and the Far East (assumes dividends reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The outstanding feature of the equity markets in the three months ended March
31, 1995 has been the turbulent impact of currencies, most notably the weakness
of the U.S. dollar and the strength of the deutsche mark and Japanese yen.
Returns to date for the world's stock markets clearly reflect this with the U.S.
market up 9.5% and the Japanese and German markets down 15.2% and 8.2% in local
currency terms but down 2.1% and up 4.0% in U.S. dollar terms, respectively.
Europe is experiencing a strong export-led recovery accompanied by fairly low
levels of inflation. This is clearly positive for the bond markets and thus
equity prices, although with the qualification that companies are enjoying
little or no unit pricing power. Thus, going forward, growth in corporate
profitability will continue to rely on productivity improvements. In relation to
the U.S. the recent rally in the bond market was in line with our forecast. With
current yields now fair however, we believe that the rally has run its course
and that the Dow is unlikely to get much more help from this quarter. The latest
evidence from the U.S. points to a soft landing although the high capacity
utilization in the manufacturing heartland of the mid-west does give some cause
for concern given the tightness of the labor market. If evidence of wage
inflation accumulates in the months ahead, this could oblige the Fed to tighten
monetary policy.
The outlook for the markets continues to be driven by currency concerns. We
remain concerned about the possibility of a banking crisis in Japan. With the
Japanese yen at over two standard deviations overvalued against the U.S. dollar
on a purchasing power parity basis, the competitiveness of companies exports is
substantially curtailed. The deutsche mark is also overvalued on a purchasing
power parity basis. We are concerned that while the German and the U.S. current
account deficits as a percentage of GNP are not dissimilar (1.8% and 2.1%,
respectively), Germany's budget deficit at 3.8% of GNP is significantly more
worrysome than that of the U.S. at just 2.6% of GNP. With the real yield
differential between Germany and the U.S. widening in favor of the U.S. dollar,
we believe the dollar should strengthen over time. Nevertheless, we would be the
first to admit that sentiment is running very strongly against the U.S. dollar
and
1
<PAGE>
that it is difficult to see a short-term catalyst to reverse this, other than a
financial dislocation in Japan.
In the United States market the Portfolio has had a slightly underweight
position relative to the MSCI World Index. Within the U.S., we have been
overweight in basic industrial and financial stocks, which had become
under-valued in the wake of the bond-market crash of 1994. We believe these
sectors offer further upside as we move into the second quarter.
In Europe, our overweight position relative to the World Index is concentrated
in Holland, Switzerland, and the U.K., where we have been able to find high
quality financial and consumer non-durable stocks. The continued availability of
attractive opportunities may cause our European weighting to increase in the
second quarter.
We remain significantly underweight in Japan. Despite the high relative
valuation of the overall market, certain high-quality blue chips trade at
significant discounts to their global counterparts. Accordingly, we remain
opportunistic in looking for additional opportunities in the months ahead.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
COMMON STOCKS (98.9%)
AUSTRALIA (1.7%)
50,000 Brambles Industries Ltd. $ 463
400,000 McPherson's Ltd. 47
270,000 Westpac Banking Corp. 966
---------
1,476
---------
BELGIUM (1.8%)
38,000 Delhaize Freres et Cie, 'Le Lion',
S.A. 1,530
---------
CANADA (0.4%)
200,000 Canadian Pioneer Energy 243
70,000 Northern Reef Exploration Ltd. 83
---------
326
---------
FRANCE (5.2%)
1,800 Bongrain S.A. 1,077
12,000 Credit Lyonnais CDI 556
18,573 Elf Aquitaine 1,446
7,200 Labinal S.A. 1,133
6,000 Sediver S.A. 261
---------
4,473
---------
GERMANY (8.7%)
6,500 BASF AG 1,318
5,372 Bayer AG 1,319
10,000 Bremer Vulkan Verbund AG 576
3,000 Karstadt AG 1,220
3,000 Mannesmann AG 775
2,764 Sinn AG 671
3,825 Varta AG 767
1,910 Veba AG 690
260 Volkswagen AG 66
---------
7,402
---------
IRELAND (2.7%)
737,397 Anglo Irish Bank Corp. plc 580
73,900 Arnotts plc 288
470,000 Avonmore Foods plc, Class A 892
230,000 Green Property plc 504
---------
2,264
---------
ITALY (2.7%)
500,000 Stet Di Risp (NCS) 1,003
700,000 Telecom Italia S.p.A Di Risp (NCS) 1,301
---------
2,304
---------
JAPAN (9.2%)
80,000 Fuji Photo Film Ltd. 1,898
24,000 Hitachi Ltd. 249
110,000 Kao Corp. 1,305
130,000 Nichido Fire & Marine Insurance Co. 1,049
18,000 Sony Corp. 901
30,000 Stanley Electric Co. 204
100,100 Sumitomo Rubber Industries 813
5,000 TDK Corp. 233
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
40,000 Toyo Seikan Kaisha Ltd. $ 1,243
---------
7,895
---------
NETHERLANDS (8.5%)
46,222 ABN Amro Holdings N.V. 1,693
2,050 Hollandsche Beton Groep N.V. 326
31,393 Internationale Nederlanden Groep
N.V. 1,546
40,000 Koninklijke Van Ommern N.V. 1,051
15,160 Nedlloyd Groep N.V. 425
10,000 Oce-Van Der Grinten N.V. 509
50,000 Philips Electronics N.V. 1,695
---------
7,245
---------
SPAIN (2.2%)
79,500 Iberdrola SA 470
112,300 Telefonica Nacional de Espana S.A. 1,420
---------
1,890
---------
SWEDEN (1.4%)
230,000 Skandinaviska Enskilda Banken, Class
A 1,182
---------
SWITZERLAND (7.2%)
800 Ascom Holdings AG (Bearer) 856
1,000 Bobst AG (Bearer) 1,374
1,800 Ciba-Geigy AG (Registered) 1,194
700 Forbo Holding AG (Registered) 666
195 Kuoni Riesebuero AG (Participating
Certificates) 292
1,400 Magazine Globus (Participating
Certificates) 906
900 Schweizerische
Industrie-Gesellschaft Holdings
(Registered) 832
---------
6,120
---------
UNITED KINGDOM (9.9%)
51,443 Barclays plc 519
100,000 Bass plc 889
300,000 Christian Salvesen plc 1,209
150,000 Forte plc 553
219,726 John Mowlem & Co. plc 290
150,000 Kwik Save Group plc 1,316
180,000 Matthews (Bernard) plc 323
49,900 McAlpine (Alfred) plc 112
653,333 Pentos plc --
93,333 Perry Group plc 210
259,552 Pilkington plc 689
60,674 Rolls-Royce plc 157
200,000 Tate & Lyle plc 1,408
40,000 Unilever plc 792
133,000 Wembley plc 13
---------
8,480
---------
UNITED STATES (37.3%)
89,000 Addington Resources, Inc. 845
21,000 Aluminum Company of America 869
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
UNITED STATES (CONTINUED)
30,000 American Pacific Corp. $ 204
22,050 AMR Corp. 1,428
59,975 Aviall, Inc. 397
50,500 Beazer Homes USA, Inc. 682
40,000 Brooklyn Bancorp, Inc. 1,290
150,000 Cadiz Land Co., Inc. 637
85,000 Comsat Corp. 1,583
57,000 Cray Research, Inc. 1,047
80,000 Data General Corp. 590
110,000 Egghead, Inc. 935
50,000 Enhance Financial Services Group,
Inc. 850
45,000 Finova Group, Inc. 1,485
30,000 Gap, Inc. 1,065
134,200 GenRad, Inc. 738
16,000 Georgia Pacific Corp. 1,276
220,000 Jardine Strategic Holdings, Inc. 836
60,000 Johnstown America Industries, Inc. 810
31,000 Kaiser Resources, Inc. 225
41,500 Mellon Bank Corp. 1,691
65,000 Mercer International, Inc. 942
42,500 Midlantic Corp. 1,456
21,600 MMI Cos., Inc. 373
12,000 National Gypsum Co. 603
16,000 Pacific Bank N.A. (New) 302
27,000 Paco Pharmaceutical Services, Inc. 329
24,000 Philip Morris Cos., Inc. 1,566
12,000 Prime Retail, Inc. 153
47,500 Rohr, Inc. 499
15,000 Ryder Systems, Inc. 360
52,000 Sierra Tucson Cos., Inc. 156
25,000 Sun Co., Inc. 713
17,000 Team, Inc. 29
13,100 Tecumseh Products Co., Class A 649
21,000 Unionfed Financial Corp. (New) 6
29,200 US Shoe Corp. 770
20,000 UST Corp. 215
70,000 Waban, Inc. 1,383
195,000 WorldCorp, Inc. 1,877
---------
31,864
---------
TOTAL COMMON STOCKS (Cost $81,655) 84,451
---------
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
PREFERRED STOCK (0.8%)
GERMANY (0.8%)
3,000 Volkswagen AG (Cost $647) $ 602
---------
CONVERTIBLE PREFERRED SECURITY (0.0%)
UNITED STATES (0.0%)
21,000 Jardine Strategic Holdings, Inc.
IDR, 7.50%, 5/07/97 (Cost $21) 27
---------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
500 Forbo Holdings (Registered),
expiring 11/01/95 (Cost $0) 1
---------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- ----------
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
L 1 British Pound 1
SP 14 Spanish Peseta --
---------
TOTAL FOREIGN CURRENCY (Cost $1) 1
---------
TOTAL INVESTMENTS (99.7%) (Cost $82,324) 85,082
---------
OTHER ASSETS AND LIABILITIES (0.3%)
Other Assets 516
Liabilities (225)
---------
291
---------
NET ASSETS (100%) $ 85,373
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 6,283,053 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 13.59
---------
---------
<FN>
- -------------
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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
FIRST QUARTER REPORT
MARCH 31, 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 flows, franchise, products, management
and the strategic value of the businesses' assets.
The total return of the Portfolio for the three month period ended March 31,
1995, was 1.66% as compared to 6.17% for the Morgan Stanley Capital
International (MSCI) Europe Index during the same period. Total returns for the
past twelve months and the average annual return for the period from inception
in April 1993 through March 31, 1995, were 4.13% and 20.66%, respectively,
compared to 10.25% and 14.83% for the MSCI Europe Index for the same periods.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE
INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO......... 1.66% 4.13% 20.66%
INDEX............. 6.17 10.25 14.83
<FN>
- -------------
1. The MSCI Europe Index is an unmanaged index of common stocks and includes 14
countries throughout Europe.
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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
In the first quarter of 1995 the investment environment in Europe was dominated
by currency volatility and interest rate moves. Countries in the deutsche mark
block, Germany, Switzerland and the Netherlands, have seen currency strength as
investors have moved funds to the "quality" markets. These are all markets in
which there continues to be low inflation. Towards the end of March this
environment allowed the Bundesbank to lower the discount rate by one half of one
percent. The Swiss and Dutch authorities immediately followed this lead.
In the Southern European markets the situation is quite different. In both Spain
and Italy there continues to be fears over interest rates, higher inflation and
the uncertain political picture. In both markets we have seen weak currencies
despite an increase in interest rates. In France the franc has also been under
pressure but lower rates in Germany has eased this situation.
As you can see, this was a difficult quarter for the Portfolio with nearly all
the underperformance coming in March. There was a combination of reasons for
this underperformance. Overall, this was not a good month for value investments
following two good years in 1993 and 1994. In particular, companies with
cyclical characteristics, which are cheap on price to book value, performed
badly while growth companies generally performed better. Looking at specific
markets we were hurt by our overweight position in Italy which was down 8.39% in
U.S. dollar terms. Other underperforming markets in which we are overweight
include Germany -8.7%, Switzerland -3.5% and Finland -7.8%, although the
strength of the Swiss franc and deutsche mark has offset the decline. The best
performing markets were the U.K. and France.
1
<PAGE>
Looking forward, we remain optimistic as we are finding good investment
opportunities in many of these markets. The Italian market, in particular,
appears to have overreacted to short-term political and economic sentiment.
During the quarter, we added the following new investments to the Portfolio:
Banco de Santander in Spain and BSM, Tate and Lyle in the UK.
Following its acquisition of Banesto, Santander has repositioned itself as the
main domestic bank in Spain. Recovery of non-performing loans, lower cost of
funding and aggressive cost cutting should drive Banesto earnings recovery above
Pts 40 billion, the dilutive threshold for Santander. The bank's tier ratios are
above 10%, and it consolidated coverage of doubtful loans above 100%,
substantially stronger than its European competitors. The valuation should
benefit from the trend of lower provisioning and higher productivity, both
leading to a normalized ROE above 15%.
BSM is the only nationwide driving tuition chain with a 15% market share and
strong brand recognition in a fragmented market. In total, it has 139 offices
through which the franchised driving instructors operate. The group generates
substantial amounts of free cashflow and is placed for strong growth in the
future.
Tate and Lyle is one of the world's best known sugar and sweetener brands,
operating across the globe in both regulated and unregulated markets. Unlike
some sugar companies it has expanded into related business and is particularly
strong in the U.K. and U.S. Establishing its global network has led to increased
debt levels, but the company is now producing strong cashflow to service this
debt and continue to grow the business.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
COMMON STOCKS (88.1%)
BELGIUM (3.5%)
4,500 Arbed S.A. $ 632
11,000 Delhaize Freres et Cie, 'Le Lion',
S.A. 443
5,000 G.I.B. Holdings, Ltd. 219
55 G.I.B. Holdings, Ltd. (New) 2
---------
1,296
---------
DENMARK (1.2%)
11,160 Unidanmark A/S, Class A
(Registered) 452
---------
FINLAND (3.8%)
25,500 Amer-Yhtymae Oy, Class A 432
17,500 Huhtamaki Oy, Series 1 521
40,600 Kansallis-Osake Pankki 38
40,000 Pohjola Insurance Co., Ltd., Class
B 396
---------
1,387
---------
FRANCE (12.6%)
1,200 Bongrain S.A. 718
3,700 Cie de Saint Gobain 458
15,500 Credit Lyonnais CDI 719
6,800 Elf Aquitaine 529
3,400 Eridania Beghin-Say S.A. 548
3,805 Legris Industries S.A. 286
2,700 Precision Mecaniques Labinal S.A. 425
21,000 Thomson CSF 563
7,000 Total S.A., Class B 415
---------
4,661
---------
GERMANY (9.9%)
2,700 BASF AG 548
1,760 Bayer AG 432
8,000 Bremer Vulkan Verbund AG 461
1,880 Commerzbank AG 439
800 Karstadt AG 325
1,200 Mannesmann AG 310
2,700 Varta AG 542
1,700 Veba AG 614
---------
3,671
---------
ITALY (5.4%)
250,000 Cogefar 176
110,000 Editoriale L'Expresso S.p.A. 181
20,305 Safilo S.p.A. 131
310,000 Stet Di Risp (NCS) 622
205,500 Telecom Italia S.p.A. 478
10,000 Telecom Italia S.p.A. Di Risp
(NCS) 18
130,000 Unicem Di Risp (NCS) 379
---------
1,985
---------
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
NETHERLANDS (10.5%)
20,000 ABN Amro Holdings N.V. $ 732
3,300 Akzo Nobel N.V. 360
3,500 Hollandsche Beton Groep N.V. 557
12,500 Internationale Nederlanden Groep
N.V. 616
6,000 Koninklijke Bijenkorf Beheer N.V. 423
15,000 Koninklijke Van Ommeren N.V. 394
23,500 Philips Electronics N.V. 797
---------
3,879
---------
NORWAY (2.5%)
100,000 Den Norkse Bank A/S, Class A Free 267
16,000 Hafslund Nycomed, Class B 314
28,000 Saga Petroleum A/S, Class B 349
---------
930
---------
PORTUGAL (0.4%)
@ 1,905 Portuguese Investment Fund 127
---------
SPAIN (7.1%)
63,000 Asturiana de Zinc S.A. 536
5,000 Banco de Santander S.A. 175
24,280 Banco Espanol de Credito S.A. 165
9,518 Bodegas y Bebidas S.A. 259
7,870 Grupo Duro Felguera S.A. 26
100,000 Iberdrola S.A. 591
35,500 Sevillana de Electricidad S.A. 161
57,000 Telefonica Nacional de Espana S.A. 721
---------
2,634
---------
SWEDEN (1.8%)
69,700 Skandinaviska Enskilda Banken,
Class A 358
19,000 S.K.F. AB, Class B 315
---------
673
---------
SWITZERLAND (14.2%)
870 Alusuisse-Lonza Holdings Ltd.
(Registered) 470
500 Ascom Holdings AG (Bearer) 535
360 Bobst AG (Bearer) 495
700 Ciba-Geigy AG (Bearer) 466
175 Ciba-Geigy AG (Registered) 116
100 Forbo Holding AG (Bearer) 188
500 Forbo Holding AG (Registered) 476
700 Hero AG (Bearer) 382
500 Holderbank Glarus AG (Bearer) 365
750 Magazine Globus (Participating
Certificates) 485
300 Moevenpick Holding AG
(Participating Certificates) 127
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
SWITZERLAND (CONTINUED)
670 Schweizerische
Industrie-Gesellschaft Holdings
(Registered) $ 620
950 SwissAir (Registered) 523
---------
5,248
---------
UNITED KINGDOM (15.2%)
145,500 Asprey plc 179
70,000 Associated British Foods plc 691
249,990 Automated Security Holdings plc 241
20,000 Bass plc 178
200,000 BET plc 351
70,000 BSM Group plc 173
152,550 Christian Salvesen plc 615
118,856 John Mowlem & Co. plc 157
75,000 Kwik Save Group plc 658
24,895 McAlpine (Alfred) plc 56
66,000 Reckitt & Colman plc 663
37,401 Rolls-Royce plc 97
170,000 Royal Insurance Holdings plc 790
95,165 Sketchley plc 129
85,000 Tate & Lyle plc 598
253,775 Wembley plc 25
---------
5,601
---------
TOTAL COMMON STOCKS (Cost $32,685) 32,544
---------
PREFERRED STOCKS (4.7%)
GERMANY (4.7%)
1,400 RWE AG 369
3,000 Spar Handels AG 741
3,200 Volkswagen AG 642
---------
TOTAL PREFERRED STOCKS (Cost $1,702) 1,752
---------
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- -------- ---------
<C> <S> <C>
RIGHTS (0.0%)
UNITED KINGDOM (0.0%)
6,926 Rolls-Royce plc (Cost $0) $ 1
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.8%)
REPURCHASE AGREEMENT (1.8%)
$ 646 U.S. Trust, 6.00%, dated 3/31/95,
due 4/03/95, to be repurchased at
$646, collateralized by $635
Government National Mortgage
Association 9.50% - 10.00%, due
10/15/09 - 11/15/09, valued at
$676 (Cost $646) 646
---------
FOREIGN CURRENCY (10.7%)
L 6 British Pound 10
DM 5,166 Deutsche Mark 3,742
FM 56 Finnish Markka 13
IL 310,178 Italian Lira 182
---------
TOTAL FOREIGN CURRENCY (Cost $3,863) 3,947
---------
TOTAL INVESTMENTS (105.3%) (Cost $38,896) 38,890
---------
OTHER ASSETS AND LIABILITIES (-5.3%)
Other Assets 194
Liabilities (2,152)
------
(1,958)
------
NET ASSETS (100%) $36,932
------
------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 2,858,538 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 12.92
------
------
<FN>
- -------------
NCS -- Non Convertible Shares
@ -- The fund is advised by an affiliate.
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
GLOBAL FIXED INCOME PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Global Fixed Income Portfolio aims to produce an attractive rate of return
by investing in fixed income securities issued by governments, agencies,
supranational entities and corporations with varing maturities in various
currencies.
The total return of the Portfolio for the three month period ended March 31,
1995 was 6.61% as compared to 9.98% for the J.P. Morgan Traded Global Bond Index
for the same period. Total return for the past twelve months and the average
annual total return for the period from inception in May 1991 through March 31,
1995 for the Portfolio were 3.28% and 7.63%, respectively, compared to 12.08%
and 10.98% for the J.P. Morgan Traded Global Bond Index during the same periods.
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED GLOBAL BOND INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS2
------------------------------------------
AVERAGE ANNUAL
SINCE
YTD ONE YEAR INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO........... 6.61% 3.28% 7.63%
INDEX............... 9.98 12.08 10.98
<FN>
- -------------
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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
During the quarter, U.S. bonds rallied across all maturities and produced an
overall return approaching 5.0%. The three main sectors -- governments,
corporates and mortgages -- performed equally well indicating no major
misvaluations. Although the economy continued to display high capacity
utilization levels, employment rates and credit demand, bonds were encouraged by
some signs of a slowdown in activity. Confidence grew in the likelihood of the
economy achieving a "soft landing" with slowing growth and stable inflation. In
February the Federal Reserve raised interest rates by another 0.5% to 6.0% but
expectations of further monetary tightening were scaled back considerably. The
yield curve steepened with the spread between two and thirty year bonds widening
by nearly fifty basis points as shorter securities reacted more favorably to the
drop in forward rates. The Portfolio increased its weighting to U.S. bonds
during the quarter but maintained a near neutral duration in its holdings. The
Canadian bond market produced a slightly higher return than the U.S. but ten
year yield spreads over U.S. bonds fluctuated in a volatile range of 130-180
basis points. The Portfolio took opportunities to reduce Canadian exposure down
to a neutral weighting. Although the market was encouraged by a credible budget,
tighter monetary policy and continued low inflation, the threat of Quebec
separatism and credit rating downgrades, together with investors' concern over
Canada's high debt levels ensured that a sizable risk premium continued. The
Portfolio held longer dated Australian bonds which returned over 3.0% for the
quarter. Their recurring influence was an indication of slowing growth and the
government attempting to avoid further interest rate hikes by promising a tough
budget in May. The Portfolio's New Zealand bonds gained over 5.0% with the yield
curve becoming more inverse as the reserve bank reiterated its intention to
control inflation through tight monetary policy. Japanese bonds were the best
performers over the quarter despite having the world's lowest running yields.
The surge in the yen was seen as a market positive by dampening the economic
recovery and putting further downward pressure on inflation. Domestic investors'
caution about non-yen assets, a weak stock market and buoyant savings flows
ensured a strong liquidity boost to bonds. Towards quarter end key money rates
fell below 2.0% and the Bank of Japan came under increasing pressure to cut the
Official Discount Rate. The Portfolio maintained an underweight position in
1
<PAGE>
yen bonds to the detriment of relative performance. However duration was
increased in March to exploit the rally and gain yield. The Euroyen holdings
also outperformed government bonds.
The German and Dutch markets produced the top returns in Europe with both up
nearly 5.0%. German bonds were supported by a continued downward trend in
headline inflation and money supply data and the Bundesbank's unexpected 0.5%
easing of the discount rate at quarter end. Although wage agreements were higher
than anticipated, the safe haven flow of funds into bundes ensured their strong
performance. Yield spreads between the deutsche mark bloc and the high yielding
markets widened considerably in response to currency turmoil, political
uncertainty and a continuing risk averse attitude of investors. Bonds in
countries with weak currencies also began to factor in the consequent risks of
higher inflation and economic growth relative to those with strong currencies.
Strains within the Exchange Rate Mechanism brought forward interest rate
increases in France, Denmark, Belgium, Ireland and Spain and flattened their
yield curves. Outside of the ERM, Italy, Sweden and the UK also independently
raised their rates. The Portfolio benefitted from overweighting the hard core
markets with longer duration bonds.
First quarter foreign exchange developments were dominated by a significant
depreciation of the U.S. dollar, particularly against the yen and the deutsche
mark. By the end of the period the unit had fallen over 15% versus the yen to
reach a post war low of below Y87. It touched an all time of below DM1.35 versus
the deutsche mark before recovering slightly to end down over 13%.
The dollar remained hostage to the familiar structural problems of the U.S.
current account deficit, budget deficit and low level of national savings. In
addition, evidence of moderating economic growth caused the market to revise
down its expectations for the path of U.S. interest rates. The shock of the
Mexican peso devaluation and associated uncertainty was another negative. There
was disappointment that the balanced budget amendment was defeated in the Senate
at a time when polititians were discussing tax cuts. Sentiment was also dampened
by a perception of limited concern among U.S. policy makers over the dollar's
decline. (On a trade weighted basis its fall was marginal because of the weak
currencies of the U.S.'s major trading partners -- Canada and Mexico). The
dollar's status as a reserve currency was increasingly questioned as central
banks seemed inclined to diversify their currency holdings. The Portfolio
maintained a slightly overweight dollar weighting by hedging from European
currencies. Although there seems little immediate reason for a strong rebound in
confidence in the dollar, it remains cheaply valued and competitive on any
measure of purchasing power parity which will encourage direct investment into
the U.S. Gradual progress on reducing the budget and trade deficits will be
positives and the currency may benefit from an upward revision to U.S. interest
rate expectations. The Australian dollar ended its long period of appreciation
and fell by 5.4% against the U.S. over the quarter. It was undermined by the
large current account deficit, some signs of economic slowdown, a reluctance by
the authorities to raise interest rates further and a softening of base metal
prices. The Portfolio fully hedged its Australian exposure into the New Zealand
dollar which rose by 2.2% as the Reserve Bank remained hawkish on inflation and
interest rates. The Canadian dollar traded within a range of C$1.43 to C$1.38
and ended the quarter largely unchanged. Significant intervention by the Bank of
Japan did little to dent the surge in the yen, which also managed to rise
against the deutsche mark. It remained supported by the large current account
surplus, capital repatriation and a reluctance of Japanese investors to recycle
their surpluses overseas. Judging the yen to be very overvalued, the Portfolio
maintained an underweight yen currency position which was the largest factor for
performance lagging the benchmark. In Europe, deutsche mark strength against the
dollar and country specific problems led to turmoil on the cross rates and
devaluations of the Spanish peseta and Portuguese escudo.
2
<PAGE>
The deutsche mark, Swiss franc and Dutch guilder benefitted from a safe haven
status as sterling, the French franc, Italian lira, Spanish peseta, and Swedish
krona hit all time lows. Currencies were sold heavily wherever there were doubts
about governments' determination to deal with inflation and debt problems or
concerns about political stability. German rate cuts resulted in little relief.
The Portfolio maintained neutral or underweight positions in the weaker
currencies.
Bonds have staged a notable rally this year as there has been a sharp
improvement in the markets' assessment of the likely path of global interest
rates in 1995. This has been accompanied by a reduction in risk premia in many
markets and a perception that the global economic recovery has lost some
momentum. At present levels, the U.S. market is discounting much favorable news
in terms of economic slowdown, subdued inflation and an end to Fed tightening.
Consequently bond yields will correct higher if growth accelerates again. This
could however create another buying opportunity as long as the Fed reacts with
appropriate monetary tightening. European and Japanese bonds may also be in a
more consolidating phase following their gains. Within Europe higher yielding
markets discount a lot of bad news but they have limited scope to converge to
the core countries while relative fiscal, inflation and political risks remain.
From a longer term view bonds remain a very good value relative to a
structurally benign global inflation background.
- ----------
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.
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------ --------
<S> <C> <C>
FIXED INCOME SECURITIES (92.0%)
AUSTRALIAN DOLLAR (2.8%)
GOVERNMENT BONDS (2.8%)
A$ 3,800 Government of Australia 7.00%, 4/15/00 $ 2,503
--------
BRITISH POUND (3.5%)
GOVERNMENT BONDS (3.5%)
L 2,000 United Kingdom Treasury Bond 8.00%, 6/10/03 3,128
--------
CANADIAN DOLLAR (3.0%)
EUROBONDS (3.0%)
C$ 1,500 British Columbia Province 7.75%, 6/16/03 1,013
2,500 Export-Import Bank of Japan 7.75%, 10/08/02 1,659
--------
2,672
--------
DANISH KRONE (7.3%)
GOVERNMENT BONDS (7.3%)
DK 40,500 Kingdom of Denmark 7.00%, 12/15/04 6,510
--------
DEUTSCHE MARK (10.8%)
EUROBONDS (4.5%)
DM 6,000 LKB Baden-Wurttemberg 6.50%, 9/15/08 3,951
--------
GOVERNMENT BONDS (6.3%)
4,500 Deutschland Republic 6.50%, 7/15/03 3,122
3,500 Treuhandanstalt 6.75%, 5/13/04 2,462
--------
5,584
--------
9,535
--------
FINNISH MARKKA (3.0%)
GOVERNMENT BONDS (3.0%)
FM 12,000 Finnish Government 9.50%, 3/15/04 2,671
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------ --------
<S> <C> <C>
FRENCH FRANC (6.3%)
GOVERNMENT BONDS (6.3%)
FF 16,000 France O.A.T. 6.75%, 10/25/03 $ 3,075
11,800 France O.A.T. 8.50%, 12/26/12 2,516
--------
5,591
--------
ITALIAN LIRA (4.2%)
GOVERNMENT BONDS (4.2%)
IL7,395,000 Republic of Italy Treasury Bond 8.50%, 8/01/99 3,707
--------
JAPANESE YEN (5.6%)
EUROBONDS (5.6%)
Y 95,000 International Bank for Reconstruction &
Development 5.25%, 3/20/02 1,211
300,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04 3,741
--------
4,952
--------
NETHERLANDS GUILDER (8.3%)
GOVERNMENT BONDS (8.3%)
NG 11,500 Government of the Netherlands 7.25%, 1/10/04 7,412
--------
NEW ZEALAND DOLLAR (3.2%)
GOVERNMENT BONDS (3.2%)
NZ$ 4,300 New Zealand Government 8.00%, 4/15/04 2,822
--------
SPANISH PESETA (3.8%)
GOVERNMENT BONDS (3.8%)
SP 465,000 Spanish Government 10.90%, 8/30/03 3,395
--------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------ --------
<S> <C> <C>
UNITED STATES DOLLAR (30.2%)
EUROBONDS (2.4%)
$ 2,000 Republic of Italy 6.875%, 9/27/23 $ 1,616
500 Statens Bostads 8.50%, 5/30/97 510
--------
2,126
--------
US GOVERNMENT AND AGENCY OBLIGATIONS (24.5%)
US Treasury Bonds
500 12.75%, 11/15/10 693
4,330 8.125%, 8/15/19 4,591
US Treasury Notes
1,000 7.875%, 2/15/96 1,011
1,600 7.625%, 4/30/96 1,617
400 5.875%, 5/31/96 397
2,070 6.25%, 2/15/03 1,950
675 7.25%, 5/15/04 675
US Treasury STRIPS
1,600 2/15/98, Principal Only 1,316
352 5/15/03, Principal Only 197
Government National Mortgage Association
3,280 ARM 7.00%, 9/20/24 3,300
5,905 ARM 7.50%, 1/20/25 6,025
--------
21,772
--------
CORPORATE BONDS AND NOTES (2.2%)
2,000 Salomon, Inc. 6.32%, 2/05/97 1,948
--------
YANKEE BONDS (1.1%)
1,000 Hydro Quebec 8.05%, 7/07/24 1,000
--------
26,846
--------
TOTAL FIXED INCOME SECURITIES (Cost $78,523) 81,744
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------ --------
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.1%)
DEUTSCHE MARK (5.9%)
TIME DEPOSIT (5.9%)
DM 7,243 ING Bank 4.625%, 4/04/95 $ 5,247
--------
UNITED STATES DOLLAR (1.2%)
REPURCHASE AGREEMENT (1.2%)
$ 1,056 U.S. Trust, 6.00%, dated 3/31/95, due 4/03/95, to
be repurchased at $1,057, collateralized by $990
Government National Mortgage Association,
9.50%-10.00%, due 10/15/09-4/15/10, valued at
$1,067 1,056
--------
TOTAL SHORT-TERM INVESTMENTS (Cost $6,186) 6,303
--------
TOTAL INVESTMENTS (99.1%) (Cost $84,709) 88,047
--------
OTHER ASSETS AND LIABILITIES (0.9%)
Other Assets 57,068
Liabilities (56,283)
--------
785
--------
NET ASSETS (100%) $ 88,832
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 8,246,445 outstanding $.001 par value shares
(authorized 500,000,000 shares) $ 10.77
--------
--------
</TABLE>
5
<PAGE>
- -------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- --------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
EQUITY GROWTH PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting sustainable earnings growth.
The total return of the Portfolio for the three month period ended March 31,
1995 was 9.93% compared to 9.73% for the S&P 500 Index. Compared to other
domestic equity funds in general, and growth funds in particular, the
Portfolio's performance was stronger. The Lipper Growth Fund Index gained 7.23%
while the Russell 1000 Growth Index rose 9.52%. In fact, according to Lipper
Analytical Services, the S&P 500 Index beat 90% of domestic equity mutual funds
in the first quarter. This continues a trend established in 1994, when the S&P
500 Index outperformed 78% of U.S. equity funds.
PERFORMANCE COMPARED TO THE S&P 500 INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS2
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO......... 9.93% 15.08% 9.40%
INDEX............. 9.73 15.54 10.66
<FN>
- -------------
1. The S&P 500 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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
There are likely a variety of reasons for the recent underperformance of most
equity funds relative to the S&P 500. But the most compelling reason, we think,
is the return to favor of large capitalization consumer staple groups such as
foods, beverages, tobaccos, household products and pharmaceuticals. These groups
make up a very significant percentage of the S&P 500 and they tend to be
underowned by institutional investors and mutual funds.
We think this is relevant because, after underperforming the market in 1992 to
1993, the large cap consumer staple stocks began to outperform again in the
second quarter of 1994, and we believe this may continue for several years.
There are several reasons for this:
1. The economic recovery is now getting quite old by historic standards, and
even if we have a "soft landing" rather than recession, the earnings of
economically sensitive companies will ultimately falter. This is already
starting to occur, as companies in many early-cycle sectors such as autos
and housing are experiencing downward street earnings estimate revisions. By
comparison, the earnings stability of consumer staple companies looks
attractive.
2. The pricing pressures experienced by consumer staple companies -- from drugs
to foods to tobacco -- in the early 1990s, forced restructuring actions that
has led to stronger earnings growth prospects. In a more subdued pricing
environment, the quality of stated earnings is higher.
3. Many of the better positioned consumer staple companies have very large
international operations, so the weak dollar is a positive.
4. Share repurchase activity is at an all-time high for many of these
companies.
At March 31, 1995, the Portfolio had 20% of net assets in consumer staples, up
from 17% at December 31, 1994, and 16% at January 1994. We have increased our
weighting in this group since the first quarter ended. Philip Morris is by far
the largest holding in the Portfolio at 7.7% of net assets. This was our largest
holding for part of 1994 as well, but we cut it back late in the year because
the stock had a nice gain, and we felt that anticipation of the widely followed
Castano class action decision would act as a cloud and restrain investors. In
February, the judge did in fact certify a class action, but the decision is
complicated and not as bad for the industry as the media made it seem. Yet
Philip Morris stock dropped over $4 in two days and we began repurchasing it
aggressively in the high $50s and low $60s. The stock closed the quarter at
$65 3/8 and we were paid a dividend of $0.83 in March.
Despite the recent strength in Philip Morris, we believe it remains extremely
attractive. In fact, it is now only back to where it was trading four years ago,
while earnings and dividends are 50% higher. Business is very strong and
consensus
1
<PAGE>
earnings expectations have moved up consistently over the past four quarters.
Earnings should grow at least 15% annually over the next 3-5 years, but the P/E
multiple at $65 3/8 is only 10 and 8 1/2 on 1995 and 1996 estimated earnings,
respectively. The dividend yield is about 5% and we expect the dividend to be
raised at least 18% in August.
Other significant consumer staple holdings at March 31, 1995 include Coca Cola,
UST (since sold), Kellogg, Pfizer, Schering Plough and Duracell.
During late 1994 and early 1995, we pared back our large financial stock
exposure. We had substantial profits in this area and felt there was an
opportunity to redeploy these profits in more traditional growth areas --
namely, consumer staples and retail growth. Still, financial stocks made up 14%
of the Portfolio net assets at March 31, 1995 somewhat above the S&P 500
weighting. Our important holdings here include Fannie Mae, Wells Fargo,
Citicorp, JP Morgan and American Express.
We took some profits in technology early in the quarter and so far this has
proven to be a mistake. Our weighting in this sector is 11%, with the important
holdings being AT&T, Intel, IBM, Watkins Johnson, Applied Materials, Cabletron
Systems and Motorola.
Defense and defense-based conglomerates accounted for 7% of the Portfolio's net
assets at March 31, 1995. This was a big sector for us in 1994, with Grumman
being acquired and McDonnell Douglas rising 34% against a flattish overall
market. We continue to feel the downsizing of the defense industry will provide
very attractive restructuring opportunities and rapid EPS growth for the better
positioned companies. Our largest holdings here are McDonnell Douglas, Litton,
United Technologies, Allied Signal, Rockwell and General Motors Hughes. The
latter four companies are really growth cyclicals, in our view, with defense
components. Other growth cyclicals in the Portfolio include Chrysler, Ford,
Goodyear, Hercules and Gannett.
If there is one investment theme that we currently find most compelling, it is
searching for non-cyclical growth stocks that have not yet moved. Over the past
year, the stocks of powerful growth companies with high earnings visibility have
experienced significant P/E expansion. Examples include Coca Cola, up 41% in the
12 months ended March 31; Microsoft, up 68%; Pfizer, up 62%; and Intel, up 26%.
Clearly, the market is forecasting a slowdown in cyclical company earnings at
some point, and is saying that growth is valuable. The retail growth sector has
not participated in this move. Trends in the retail sector are not great --
e.g., consumer spending is spotty and labor costs are rising. But retail growth
companies are not just retailers; they are also growth companies. So, for
example, if Home Depot's same-store sales go from up 10% to up 6%, and margins
stay flat instead of rising modestly, but square footage growth is 25%, revenues
and earnings still grow at roughly 30%. Home Depot's EPS grew 23% in 1993 and
30% in 1994. While this is down from prior years, it is above the growth rate
that Coca Cola achieved in both years. Yet Coke stock is up 39% since year-end
1992 while Home Depot is down 12%. With momentum investors currently selling
retail growth stocks due to decelerating trends, we think there is an
opportunity to buy some of the best franchises in the sector at P/Es much lower
than in recent years. Our biggest bets here are Home Depot, Autozone, Lowe's,
Cracker Barrel and General Nutrition.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
COMMON STOCKS (85.9%)
CAPITAL GOODS/CONSTRUCTION (9.6%)
AEROSPACE & DEFENSE (7.3%)
6,900 Boeing Co. $ 372
28,600 General Motors Corp., Class H 1,180
22,100 Loral Corp. 939
46,100 McDonnell Douglas Corp. 2,570
25,800 Rockwell International Corp. 1,006
37,200 United Technologies Corp. 2,571
---------
8,638
---------
BUILDING & CONSTRUCTION (0.6%)
33,300 USG Corp. 766
---------
ELECTRICAL EQUIPMENT (0.9%)
20,600 General Electric Co. 1,115
---------
MACHINERY (0.8%)
16,900 Caterpillar, Inc. 940
---------
TOTAL CAPITAL GOODS/CONSTRUCTION 11,459
---------
CONSUMER-CYCLICAL (23.3%)
AUTOMOTIVE (3.1%)
43,700 Chrysler Corp. 1,830
28,600 Ford Motor Co. 772
28,600 Goodyear Tire & Rubber Co. 1,051
---------
3,653
---------
BROADCAST-RADIO & TELEVISION (2.8%)
6,940 CBS, Inc. 444
63,700 New World Communications 1,099
31,200 Turner Broadcasting System, Inc.,
Class B 546
25,918 Viacom, Inc., Class B 1,160
---------
3,249
---------
FOOD SERVICE & LODGING (3.1%)
50,850 Boston Chicken, Inc. 826
88,600 Cracker Barrel Old Country Store,
Inc. 1,982
51,000 Wendy's International, Inc. 835
---------
3,643
---------
GAMING & LODGING (0.7%)
21,450 National Gaming Corp. 182
16,100 Promus Cos., Inc. 604
---------
786
---------
HOUSEHOLD FURNISHINGS & APPLIANCES (1.1%)
29,400 Duracell International, Inc. 1,316
---------
LEISURE RELATED (1.5%)
24,700 Eastman Kodak Co. 1,312
20,800 Toy Biz, Inc. 408
---------
1,720
---------
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
PUBLISHING (2.2%)
32,800 Gannett Co., Inc. $ 1,751
22,600 Time Warner, Inc. 853
---------
2,604
---------
RETAIL-GENERAL (8.8%)
108,100 Autozone, Inc. 2,689
90,800 General Nutrition Cos., Inc. 2,520
19,800 Harcourt General, Inc. 772
57,300 Home Depot, Inc. 2,536
54,500 Lowe's Cos., Inc. 1,880
---------
10,397
---------
TOTAL CONSUMER-CYCLICAL 27,368
---------
CONSUMER-STAPLES (20.2%)
BEVERAGES & TOBACCO (12.0%)
48,100 Coca Cola Co. 2,718
26,600 PepsiCo, Inc. 1,037
139,800 Philip Morris Cos., Inc. 9,122
41,550 UST, Inc. 1,319
---------
14,196
---------
DRUGS (3.3%)
21,700 Merck & Co., Inc. 925
20,450 Pfizer, Inc. 1,754
15,800 Schering-Plough Corp. 1,175
---------
3,854
---------
FOOD (2.4%)
32,700 Kellogg Co. 1,909
19,900 Ralston Purina Group 950
---------
2,859
---------
HEALTH CARE SUPPLIES & SERVICES (1.9%)
29,400 Columbia/HCA Healthcare Corp. 1,264
20,900 United Healthcare Corp. 977
---------
2,241
---------
PERSONAL CARE PRODUCTS (0.6%)
8,100 Gillette Co. 661
---------
TOTAL CONSUMER-STAPLES 23,811
---------
DIVERSIFIED (1.1%)
32,300 AlliedSignal, Inc. 1,268
---------
ENERGY (2.9%)
COAL, GAS, & OIL (2.9%)
10,400 Exxon Corp. 694
13,900 Mobil Corp. 1,288
12,400 Royal Dutch Petroleum Co. 1,488
---------
TOTAL ENERGY 3,470
---------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
FINANCE (13.5%)
BANKING (3.6%)
21,600 Citicorp $ 918
23,000 Morgan (J.P.) & Co., Inc. 1,403
12,600 Wells Fargo & Co. 1,970
---------
4,291
---------
FINANCIAL SERVICES (8.7%)
63,200 American Express Co. 2,204
18,300 Dean Witter Discover & Co. 746
13,000 Federal Home Loan Mortgage Corp. 787
56,200 Federal National Mortgage
Association 4,573
9,700 Franklin Resources, Inc. 377
16,700 Salomon, Inc. 566
9,800 Student Loan Marketing Association 342
19,400 Travelers, Inc. 749
---------
10,344
---------
INSURANCE (1.2%)
19,900 Exel Ltd. 878
26,900 PartnerRe Holdings, Ltd. 572
---------
1,450
---------
TOTAL FINANCE 16,085
---------
MATERIALS (2.6%)
CHEMICALS (2.1%)
37,400 Hercules, Inc. 1,744
8,700 Monsanto Co. 698
---------
2,442
---------
FOREST PRODUCTS & PAPER (0.5%)
10,800 Mead Corp. 579
---------
TOTAL MATERIALS 3,021
---------
SERVICES (1.5%)
PROFESSIONAL SERVICES (0.9%)
27,800 CUC International, Inc. 1,081
---------
TRANSPORTATION (0.6%)
10,500 AMR Corp. 680
---------
TOTAL SERVICES 1,761
---------
TECHNOLOGY (11.2%)
COMPUTERS (2.0%)
21,350 Cabletron Systems, Inc. 958
16,900 International Business Machines
Corp. 1,384
---------
2,342
---------
ELECTRONICS (6.3%)
16,800 Applied Material, Inc. 926
15,850 Intel Corp. 1,345
76,900 Litton Industries, Inc. 2,759
16,600 Motorola, Inc. 907
38,400 Watkins-Johnson Co. 1,469
---------
7,406
---------
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
SOFTWARE SERVICES (0.3%)
9,400 Lotus Development Corp. $ 359
---------
TELECOMMUNICATIONS (2.6%)
41,100 Airtouch Communications 1,120
38,200 American Telephone & Telegraph Corp. 1,977
---------
3,097
---------
TOTAL TECHNOLOGY 13,204
---------
TOTAL COMMON STOCKS (COST $93,562) 101,447
---------
<CAPTION>
NO. OF
RIGHTS
- ----------
<C> <S> <C>
RIGHTS (0.0%)
BROADCAST RADIO & TELEVISION (0.0%)
38,800 Viacom, Inc., expiring 7/07/95 (Cost
$168) 46
---------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (10.4%)
REPURCHASE AGREEMENT (10.4%)
$ 12,307 Goldman Sachs 6.20%, dated 3/31/95,
due 4/3/95, to be repurchased at
$12,313, collateralized by $10,075
United States Treasury Bonds,
11.125%, due 8/15/03, valued at
$12,628 (Cost $12,307) 12,307
---------
TOTAL INVESTMENTS (96.3%) (COST $106,037) 113,800
---------
OTHER ASSETS AND LIABILITIES (3.7%)
Other Assets 8,836
Liabilities (4,417)
---------
4,419
---------
NET ASSETS (100%) $ 118,219
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 9,314,621 outstanding $.001 par
value shares (authorized 500,000,000 shares) $12.69
---------
---------
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
ASIAN EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in common stocks which are traded on
recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand, Indonesia and
the Philippines. The Portfolio may also invest in common stocks 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.
The total return of the Portfolio for the three month period ended March 31,
1995 was -2.64% as compared to -1.77% for the Morgan Stanley Capital
International (MSCI) Combined Far East Free ex-Japan Index for the same period.
Total return for the twelve months ended March 31, 1995 and the average annual
return for the period from inception in July 1991 through March 31, 1995 for the
Portfolio were 4.13% and 23.68%, respectively, compared to 2.13% and 20.18% for
the MSCI Combined Far East Free ex-Japan Index for the same periods.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) COMBINED
FAR EAST FREE EX-JAPAN INDEX1
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO........ -2.64% 4.13% 23.68%
INDEX............ -1.77 2.13 20.18
<FN>
- -------------
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, Taiwan and Thailand (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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
Asian markets continued their downward, volatile spirals for two principal
reasons. First, interest rate uncertainty lingered. Notwithstanding signs that
the Fed had ceased raising rates, there were indications that Asia's central
banks would pursue tighter monetary policies to slow their own overheating
economies. Given that most regional markets are dollar-bloc markets and,
further, that Asia remains heavily dependent on Japanese imports (22-23% of
total imports), the rapidly appreciating yen (up 13.4% versus the U.S. dollar
over 1Q95) put upward pressure on domestic inflation.
Second, a series of unrelated and unexpected events rattled Asian markets,
including a run on Asian currencies, the disruptive effects of the Kobe
earthquake, strained Sino-US relations, the Barings collapse, and, most
significantly, the sharp fall in the U.S. dollar.
Following the botched handling of the Mexican peso devaluation, investors
attempted to pinpoint similarly situated Asian currencies. Ignoring critical
differences in the composition of Asia's current account deficits -- higher
savings rates, less short-term foreign capital, less consumption spending --
investors targeted the Indonesian rupiah, the Thai baht and the Philipine peso
as candidates for devaluation. The central banks' swift and unified response
effectively stabilized the region's currencies.
Barings' collapse caused investors to question whether the recurrence of such
crises (Barings, Orange County, and Mexico) could be prevented. Asian markets
ultimately proved resilient as investors recognized that adequate safeguards
were in place and that Asia's regulators were eminently qualified to cope with
such crises.
Although the Kobe earthquake disrupted production across Asia, it unsettled
markets only
1
<PAGE>
briefly. The expected slowdown in foreign investment was welcomed by Southeast
Asia's overheating economies. However, the stronger yen may trigger a wave of
overseas investments, which could rekindle inflationary concerns.
China made concessions on intellectual property rights in order to avert a trade
war with the US, a move well received by the market and presumably by potential
investors in China.
The most significant factor impacting Asian markets over the quarter was the
sharp fall of the US dollar. In addition to the impact of the dollar's decline
on inflation, those countries saddled with yen denominated debt, such as the
Philippines, Thailand and Indonesia, were particularly hard hit.
PERFORMANCE
The Portfolio underperformed the Index because of its underweight positions in
Malaysia (2.2%) and Hongkong (3.4%). The Portfolio benefited, however, from its
underweight positions in Thailand (-10.8%), a market dominated by interest-rate
sensitive stocks, illiquid Indonesia (-6.3%), Taiwan (-8.9%) and Korea (-3.4%).
Whereas the prospect for Indonesia does look bright because of the heavy new
issues calendar, we expect rebounds in Thailand, Korea and Taiwan. Thailand
should rebound with an improvement in liquidity. Taiwan and Korea, which are
gaining export shares of the global market at the expense of Japanese exporters,
should perform reasonably well.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------- ---------
<C> <S> <C>
COMMON STOCKS (97.0%)
AUSTRALIA (0.0%)
75,000 Odin Mining & Investment Co., Ltd. $ 33
---------
CHINA (2.0%)
890,400 China Merchants Shekou Port
Services, Class B 501
5,505,000 Maanshan Iron & Steel Co.,
Class H 1,139
200,000 Shanghai Diesel Engine Co., Ltd.,
Class B 150
265,000 Shanghai Erfanji Co., Ltd., Class
B 49
313,235 Shanghai Jin Jiang Tower Ltd.,
Class B 115
1,601,600 Shanghai Jinqiao, Class B 1,038
590,900 Shanghai Phoenix Bicycle Ltd.,
Class B 171
500,000 Shanghai Refrigerator Compressor,
Class B 226
638,000 Shanghai Tyre & Rubber Co., Class
B 179
120,000 Shanghai Yaohua Pilkington Glass,
Class B 132
180,400 Shenzhen Chiwan Wharf Holdings,
Class B 82
4,965,000 Yizheng Chemical Fibre Co.,
Class H 1,766
---------
5,548
---------
HONG KONG (27.0%)
2,637,000 Cheung Kong Holdings Ltd. 11,494
580,000 China Light & Power Co., Ltd. 2,813
1,883,500 Citic Pacific Ltd. 4,653
5,600,000 C.P. Pokphand Co., Ltd. 1,666
10,622,000 Guangdong Investments Ltd. 5,152
610,000 Harbin Power Equipment Co. 175
538,000 Hong Kong & Shanghai Bank Holdings
plc 6,071
860,500 Hong Kong Electric Holdings Ltd. 2,755
5,414,000 Hong Kong Telecommunications Ltd. 10,539
1,523,000 Hopewell Holdings Ltd. 1,073
1,923,000 Hutchison Whampoa Ltd. 8,481
1,735,000 New World Development Co., Ltd. 4,724
51,000 Shandong Huaneng Power Co., Ltd.
ADR 459
200,000 Sum Cheong International 114
612,100 Sun Hung Kai Properties Ltd. 4,176
<CAPTION>
VALUE
SHARES (000)
- ----------- ---------
<C> <S> <C>
661,560 Swire Pacific Ltd., Class A $ 4,513
1,026,000 Varitronix International Ltd. 1,513
2,160,000 Wai Kee Holdings Ltd. 346
868,000 Wharf Holdings Ltd. 2,835
---------
73,552
---------
INDIA (1.0%)
38,000 Grasim Industries Ltd. GDR 779
51,000 Hindalco Industries Ltd. GDR 1,453
34,000 SIV Industries Ltd. GDR 459
---------
2,691
---------
INDONESIA (5.9%)
600,000 Asiana Imi Industries (Foreign) 375
378,000 Bank International Indonesia
(Foreign) 916
450,000 Barito Pacific Timber (Foreign) 608
621,826 Charoen Pokphand (Foreign) 1,153
517,500 Duta Pertiwi PT (Foreign) 671
125,000 Indocement Tunggal (Foreign) 394
700,000 Indosat PT (Foreign) 2,565
513,000 Jembo Cable Co. (Foreign) 458
351,600 Kalbe Farma (Foreign) 1,347
210,000 Keramika Indonesia Association
(Foreign) 253
100,750 Modern Photo Film Co. (Foreign) 412
1,000,000 Ometraco (Foreign) 804
1,068,000 Polysindo Eka Perkasa (Foreign) 525
916,800 Sona Topas Tourism (Foreign) 1,557
277,333 Sorini Corp. (Foreign) 942
85,000 Suba Indah (Foreign) 72
184,200 Tempo Scan Pacific (Foreign) 782
1,250,000 Ultra Jaya Milk (Foreign) 1,117
644,800 United Tractors (Foreign) 1,138
---------
16,089
---------
KOREA (2.5%)
44,900 Korea Electric Power (Foreign) 1,564
81,200 Pohang Iron & Steel Co., Ltd. ADR 2,345
14,100 Samsung Electronics 2,104
16,411 Samsung Electronics GDS
(non voting shares) 730
679 Samsung Electronics GDS 44
---------
6,787
---------
MALAYSIA (21.9%)
596,000 Bandar Raya Developments Bhd. 1,130
811,500 Genting Bhd. 7,312
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------- ---------
<C> <S> <C>
MALAYSIA (CONTINUED)
734,000 Land & General Holdings Bhd. $ 2,248
414,000 Magnum Corp. Bhd. 789
1,642,500 Malayan Banking Bhd. 11,099
955,316 Malaysian International Shipping
(Foreign) 2,756
1,347,000 Malaysian Resources Corp. Bhd. 2,502
447,333 Mulpha International Bhd. 640
1,000,000 Renong Bhd. 1,549
1,144,000 Resorts World Bhd. 5,922
650,000 Sime Darby Bhd. 1,618
810,000 Tan & Tan Development Bhd. 954
241,000 Tanjong plc 709
373,000 Technology Resources Industries
Bhd. 1,069
1,203,000 Telekom Malaysia Bhd. 8,320
1,106,000 Tenaga Nasional Bhd. 4,546
500,000 Time Engineering Bhd. 1,166
932,757 United Engineers Ltd. (Malaysia) 5,455
---------
59,784
---------
PAKISTAN (0.3%)
7,300 Pakistan Telecommunications GDR 672
---------
PHILIPPINES (4.5%)
1,421,000 Aboitiz Equity Ventures 261
708,000 Ayala Corp., Class B 888
1,148,500 Ayala Land Inc., Class B 1,353
366,600 International Container Terminal
Services, Class B 258
2,579,000 JG Summit Holding, Class B 697
133,300 Manila Electric Co., Class B 1,364
2,194,400 Petron Corp. 1,568
18,125 Philippine Long Distance Telephone
Co. ADR 1,097
15,430 Philippine Long Distance Telephone
Co., Class B 917
82,540 Philippine National Bank, Class B 698
244,000 San Miguel Corp., Class B 1,102
3,860,000 SM Prime Holdings, Inc., Class B 1,162
1,381,500 Universal Robina 787
---------
12,152
---------
SINGAPORE (15.5%)
252,000 British-American Tobacco Co. 1,178
875,080 City Developments Ltd. 4,803
400,000 DBS Land Ltd. 1,065
572,500 Development Bank of Singapore Ltd.
(Foreign) 6,001
248,800 Fraser & Neave Ltd. 2,643
800,000 IPC Corp. 499
93,750 Jurong Engineering Ltd. 515
<CAPTION>
VALUE
SHARES (000)
- ----------- ---------
<C> <S> <C>
738,000 Keppel Corp., Ltd. $ 5,958
717,166 Oversea-Chinese Banking Corp.
(Foreign) 7,212
183,000 Sembawang Shipyards Corp. 1,270
146,000 Singapore Airlines Ltd. (Foreign) 1,458
169,500 Singapore Press Holdings (Foreign) 2,869
1,949,000 Singapore Technologies Industrial
Corp. 2,388
532,000 Straits Steamship Land Ltd. 1,733
500,000 Straits Trading Co., Ltd. 1,204
155,000 United Overseas Bank Ltd. 1,537
---------
42,333
---------
TAIWAN (0.4%)
160,000 Taiwan Semiconductor Mfg. Co. 1,157
---------
THAILAND (16.0%)
60,000 Advanced Information Services Co.
(Foreign) 833
861,500 Bangkok Bank Ltd. (Foreign) 7,627
27,000 Banpu Public Co. Ltd. (Foreign) 502
390,000 Electricity Generating Public Co.
(Foreign) 974
870,900 Finance One Co., Ltd. (Foreign) 4,810
174,900 International Engineering Co.,
Ltd. (Foreign) 1,222
98,200 Land & House Co., Ltd. (Foreign) 1,675
324,000 MDX Co., Ltd. 602
13,000 MDX Co., Ltd. (Foreign) 27
516,800 National Finance & Securities Co.
Ltd. (Foreign) 1,669
185,800 Phatra Thanakit Co., Ltd.
(Foreign) 1,215
94,100 Shinawatra Computer Co., Ltd
(Foreign) 2,140
54,000 Siam Cement Co., Ltd. (Foreign) 3,101
105,500 Siam Commercial Bank 758
221,300 Siam Commercial Bank (Foreign) 1,869
158,100 Somprasong Land Co., Ltd.
(Foreign) 507
691,300 Telecomasia Corp. (Foreign) 2,807
991,270 Thai Farmers Bank, Ltd. (Foreign) 8,373
300,000 Thai Telephone &
Telecommunications Co. (Foreign) 2,266
375,000 Wongpaitoon Footware Co., Ltd.
(Foreign) 563
---------
43,540
---------
TOTAL COMMON STOCKS (Cost $233,219) 264,338
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- ----------- ---------
<C> <S> <C>
WARRANTS (0.2%)
HONG KONG (0.0%)
432,000 Wai Kee Holdings Ltd., expiring
12/31/96 $ 4
---------
THAILAND (0.2%)
66,050 Finance One Co., Ltd., expiring
3/15/99 408
157,200 National Finance & Securities Co.
Ltd., expiring 11/15/99 --
---------
408
---------
TOTAL WARRANTS (Cost $0) 412
---------
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.3%)
KOREA (0.3%)
$ 1,700 Daewoo Corp. 0.00%, 12/31/04
(Cost $1,730) 914
---------
SHORT-TERM INVESTMENT (0.1%)
REPURCHASE AGREEMENT (0.1%)
403 U.S. Trust, 6.00%,
dated 3/31/95, due 4/03/95,
to be repurchased at $403,
collateralized by $390 Government
National Mortgage Association,
9.50%-10.00%,
due 11/15/09-4/15/10,
valued at $421 (Cost $403) 403
---------
TOTAL FOREIGN & US SECURITIES (97.6%)
(Cost $235,352) 266,067
---------
<CAPTION>
AMOUNT VALUE
(000) (000)
- ----------- ---------
<C> <S> <C>
FOREIGN CURRENCY (2.8%)
HK$ 2,021 Hong Kong Dollar $ 261
KW 24 Korean Won --
MA 1,169 Malaysian Ringgit 462
PH 39 Philippine Peso 2
S$ 23 Singapore Dollar 16
T$ 163,523 Taiwan Dollar 6,290
TB 14,389 Thailand Baht 584
---------
TOTAL FOREIGN CURRENCY (Cost $7,605) 7,615
---------
TOTAL INVESTMENTS (100.4%)
(Cost $242,957) 273,682
---------
OTHER ASSETS AND LIABILITIES (-0.4%)
Other Assets 1,382
Liabilities (2,477)
---------
(1,095)
---------
NET ASSETS (100%) $ 272,587
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 14,643,432 outstanding $.001 par
value shares (authorized 500,000,000 shares) $18.61
---------
---------
<FN>
- -------------
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
</TABLE>
5
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
EMERGING MARKETS PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in common stocks and preferred
stocks of emerging country issuers.
The total return of the Portfolio for the three month period ended March 31,
1995 was -16.97% compared to -12.97% for the IFC Global Total Return Composite
Index during the same period. Total returns for the past twelve months and the
average annual return for the period from inception in September 1992 through
March 31, 1995 for the Portfolio were -21.54% and 15.16%, respectively, compared
to -4.91% and 18.51% for the IFC Global Total Return Composite Index for the
same periods.
PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ----------- ----------------
<S> <C> <C> <C>
PORTFOLIO........ -16.97% -21.54% 15.16%
INDEX............ -12.97 -4.91 18.51
<FN>
- -------------
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes 18 developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The correction in emerging markets has continued over the first quarter of 1995,
but by the end of March the momentum in most of the emerging markets had turned
positive. The fundamentally strong economic outlook for the emerging markets of
Asia, Europe and even Latin America has not disappeared. However, the emerging
markets have been unable to escape the dominant factor currently affecting the
global investment scene: the dislocation in the currency markets due to the
level of non-trading flows. Estimates of speculative versus commercial flows
range from 8 to 1 to 50 to 1. Whichever estimate is closer to the mark matters
less than the dwarfing of worldwide commercial transactions today by speculative
flows. So much so that commerce has ceased to be of significance in the
short-term movements of currencies.
Speculation obviously magnifies any sign of currency weakness and the Mexican
peso crisis provided ample evidence of how far down a currency can be driven
once pushed into free-fall. Thankfully, the speculators don't always win. When
the currencies in Thailand and Hong Kong were attacked recently, the strong and
immediate responses from the respective central banks successfully counteracted
the pressure. Current US dollar weakness has even had a positive impact on
emerging market exports due to the links of many of their currencies to the
dollar.
Undoubtedly the last six months have been a difficult time for emerging market
investors, but there is a silver lining. More timely and higher quality
information monitoring systems are being introduced. These will act as early
warning signals to detect dislocations such as the Mexican current account
deficit. Recent events have illustrated the strength of purpose of government
ministers, central bankers and civil servants in the emerging markets to deal
with what initially have seemed overwhelming odds. With the support of outside
agencies such as the IMF, the developing countries show strong signs of
continuing their economic reform programs. Mexico has provided a lesson for
other countries about the downside of overconfidence. Countries such as India
and South Africa will now, no doubt, be reluctant to make their currencies
freely convertible until their economies are strong enough to resist speculative
pressures.
In Latin America, the aftermath of the Mexican peso devaluation created
spillover crises in Argentina and Brazil. Mexico introduced a credible economic
program in early March which, combined with the $50 billion financial package
led by President Clinton, let the Mexican government take control of the
country's situation. Nobody doubts that the Mexican economy will
1
<PAGE>
suffer the pains of austerity, but most of the bad economic news is already
discounted by the stockmarket, and the recent trade numbers, showing a surplus,
suggest that the current account adjustment is happening rapidly.
Both Argentina and Brazil took measures to avoid "another Mexico" situation.
Brazil saw the effect of unwarranted market disappointment over the slow pace of
fiscal reform but the government also clearly signaled its priority to stem a
deteriorating trade balance by introducing tariffs on consumer goods. The
Argentinean economics Minister Domingo Cavallo combined a large financial
assistance package from abroad, with a domestic austerity package and restored
confidence to the banking sector.
The economic and financial situation in Mexico and Latin America began to
stabilize in mid-March and all the regions' markets finished the quarter with an
upward momentum.
Asia has suffered over the quarter from concerns over the succession in China
(now resolved), the decline in the Hong Kong property market (now showing signs
of stability) and fears that the Japanese earthquake would cause repatriation of
Japanese monies for the re-building process. The Indian stockmarket was
depressed by the poor results achieved by the ruling Congress party in the State
elections. The March budget was also not as fiscally stringent as foreign
investors had wished. We believe, however, that even if the Congress party loses
the general election next year the reform process in India will continue.
Economic growth will be underpinned by the amount of domestic investment in the
economy which is boosted by corporate profits growing in excess of 40% last year
and 35% this year.
The Portfolio has 28% in Latin America, 28% in Asia, 18% in Europe, 15% in the
Sub-continent and 5% in Africa/Middle East. It maintains positions in a diverse
group of companies with solid long-term growth prospects. The difference in
performance between the Portfolio and the IFC Global Index is due to several
factors.
First, Malaysia, which rose 1.9% over the quarter, is 15.5% of the Index and a
very small weighting in the Portfolio. We remain negative on the prospects for
the Malaysian stockmarket given the outlook of rising inflation and an expanding
current account deficit.
Second, the Portfolio has 14.6% in Brazil compared to 9.1% in the Index. The
Brazilian stockmarket had a volatile quarter during which it fell 31.3% overall
but also experienced a rise of more than 25% in a single day. We are extremely
upbeat about a recovery in the stockmarket given the growth prospects for the
Brazilian private sector, while the public sector has attractive assets at cheap
valuation levels. Thirdly, an underweight position in Korea had a small negative
impact.
Fourth, overweight positions in Taiwan, Morocco, Israel, Turkey, South Africa,
Indonesia and Hong Kong, and an underweight in Mexico all helped performance.
Hong Kong rose 3.4% while Turkey is the best performing emerging market in the
world year-to-date with a rise of 24.9% in dollars.
Despite predictions to the contrary, the long-term foreign direct investment
flows of the type which creates factories and employment in the emerging markets
have only slowed slightly. Companies such as General Motors, Anheuser Busch or
Chrysler are still investing in the emerging markets because they see the
potential of large domestic populations with growing middle class incomes. We
believe that the correction in emerging markets has been overdone and the
markets should rebound from here. Once again there is tremendous value. We are
back to the levels of valuation which existed before the markets surged ahead in
1993. The price to earnings ratio of the securities in the Portfolio today is
approximately 13x estimated 1995 earnings and earnings are projected to grow
around 20%.
- ------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE IFC GLOBAL TOTAL RETURN COMPOSITE INDEX AND 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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (79.0%)
ARGENTINA (4.0%)
6 Acindar Industrial S.A. $ --
81,501 Banco de Galicia y Buenos Aires,
Class B 314
468,403 Banco de Galicia y Buenos Aires
ADR 7,143
185,816 Banco del Sud Argentina, Class B 1,189
135,400 Banco Frances ADS 2,437
193,932 Banesto Banco Shaw S.A., Class B 621
83,975 Buenos Aires Embotelladora ADR 2,183
63,352 Capex S.A., Class A 348
119,200 Capex S.A. ADR 1,311
35,855 Central Puerto S.A. ADR 529
484,827 CIADEA (Renault) S.A. 2,497
893,378 Cia Naviera Perez Companc, Class B 3,323
22,700 Inversiones & Representacion S.A.
GDR 443
89,537 Massalin Particulares, Class B 734
425,335 Quilmes Industrial S.A. 7,018
3,804,600 Siderca 2,283
---------
32,373
---------
BRAZIL (4.8%)
18,483,200 Banco Nacional S.A. 329
111,995 Cia Energetica de Minas Gerais ADR 2,240
115,021,740 Cia Energetica de Sao Paulo 3,902
245,160 Cia Energetica de Sao Paulo ADR 2,881
62,407,000 Cia Paulista de Forca E Luz 2,742
132,425,000 Cia Siderurgica Nacional 3,092
34,000 Cigarros Souza Cruz 176
3,800,000 Eletrobras 748
9,400 Rhodia-Ster ADS 115
9,012,000 Servicos de Eletricdad 2,656
191,153,000 Telecomunicacoes Brasileiras 4,444
462,564 Telecomunicacoes Brasileiras ADR 12,374
5,175,000 Telecomunicacoes de Sao Paulo 604
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
251,300 Usinas Siderurgicas de Minas
Gerais ADR $ 2,890
---------
39,193
---------
CHILE (0.3%)
129,810 Banco Osorno y La Union ADR 1,655
17,555 Sociedad Quimica y Minera de Chile
S.A. ADR 527
---------
2,182
---------
CHINA (1.8%)
750,000 Beiren Printing Machine, Class H 162
3,008,400 China Merchants Shekou Port
Services, Class B 1,693
11,144,000 Maanshan Iron & Steel Co., Class H 2,306
1,862,000 Shanghai Diesel Engine Co., Ltd.,
Class B 1,397
803,000 Shanghai Erfanji Co., Ltd., Class
B 149
500,000 Shanghai Industries Sewing
Machine, Class B 142
949,975 Shanghai Jin Jiang Tower Ltd.,
Class B 348
3,618,680 Shanghai Jinqiao, Class B 2,345
1,062,750 Shanghai Outer Gaoqiao Free Zone,
Class B 574
14,550 Shanghai Petrochemical Co. ADR 429
903,800 Shanghai Phoenix Bicycle Ltd.,
Class B 262
962,000 Shanghai Refrigerator Compressor,
Class B 435
450,000 Shanghai Shangling Electric, Class
B 323
986,000 Shanghai Tyre & Rubber Co., Class
B 276
354,000 Shanghai Yaohua Pilkington Glass,
Class B 389
1,200,000 Shanghai Lujiazui Finance & Trade
Development Co., Class B 876
1,874,400 Shenzhen Chiwan Wharf Holdings,
Class B 855
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
CHINA (CONTINUED)
5,382,000 Yizheng Chemical Fibre Co., Class
H $ 1,914
---------
14,875
---------
COLOMBIA (1.0%)
17,130,000 Banco de Colombia 6,882
78,070 Cementos Paz Del Rio ADR 1,386
---------
8,268
---------
GREECE (2.6%)
298,500 Aegek 6,180
174,130 Delta Dairy S.A. 3,439
110,000 Ergo Bank S.A. 4,570
289,155 Hellenic Bottling Co. S.A. 7,077
---------
21,266
---------
HONG KONG (7.0%)
1,123,000 Cheung Kong Holdings Ltd. 4,894
1,981,000 Citic Pacific Ltd. 4,893
13,654,000 C.P. Pokphand Co., Ltd. 4,062
65,800 Great Wall Electric Ltd. ADR 243
9,008,000 Guangdong Investments Ltd. 4,369
528,000 Hang Seng Bank Ltd. 3,722
2,220,000 Harbin Power Equipment Co. 639
1,966,000 Hong Kong Telecommunications Ltd. 3,827
5,830,000 Hopewell Holdings Ltd. 4,109
1,715,000 Hutchison Whampoa Ltd. 7,564
1,789,000 New World Development Co., Ltd. 4,871
160,000 Shandong Huaneng Power Co., Ltd.
ADR 1,440
286,000 Sun Hung Kai Properties Ltd. 1,951
857,000 Swire Pacific Ltd., Class A 5,847
2,004,000 Varitronix International Ltd. 2,955
2,700,000 Wai Kee Holdings Ltd. 433
462,000 Wharf Holdings Ltd. 1,509
---------
57,328
---------
HUNGARY (0.3%)
65,000 Egis 1,179
102,500 Gedeon Richter Ltd. 1,512
---------
2,691
---------
INDIA (11.3%)
230,000 American Dry Fruits 417
120 Andhra Valley Power Supply, Class
B 4
100,000 AP Rayon, Class B 271
100,000 Aruna Sugars & Enterprises, Class
B 167
41,200 Bajaj Auto Ltd., Class A 911
975,000 Balaji Foods & Feeds 776
15,000 Ballapur Industries Ltd., Class B 110
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
20,000 Baroda Rayon Corp. $ 395
269,334 Bharat Forge Co., Ltd., Class A 1,115
3,300,000 Bharat Heavy Electricals 12,080
12,800 Bharat Petroleum Corp., Ltd. 118
375,000 Bharat Pipes & Fittings Ltd.,
Class B 283
100,000 BPL Ltd. 541
27,400 Cable Corp. of India Ltd. 126
195,000 Carrier Aircon Ltd., Class B 947
90,000 Cosmo Films Ltd. 458
25,000 Crompton Greaves 119
77,000 DCM Shriram Industries Ltd. 613
38,800 Delta Industries Ltd. 173
185,000 Essab India Ltd. 486
5,400 Fabworth (India) Ltd. 6
57,166 Flex Industries Ltd. 400
5,000 Fuller 81
371,800 Garware Plastics & Polyester,
Class A 3,255
314,500 Geekay Exim Ltd. 1,802
475,000 Godrej Soaps Ltd. 2,495
44,800 Hero Honda, Class B 321
1,700 Hindustan Petroleum Corp. 18
108,280 Housing Development Finance Corp. 6,894
78,000 India Magnum Fund, Class A 3,744
55,194 India Magnum Fund, Class B 2,649
100 Indian Rayon & Industries Ltd.,
Class A 1
40,000 Indian Seamless Steel & Alloys 24
644,650 India Organic Chemical Ltd. 1,206
60,000 Indo Gulf Fertilizer & Chemical,
Class A 134
380,800 Indo Rama Synthetic, Class B 1,136
100,000 Infosys Technology Ltd. 1,512
160,200 ITC Argotech, Class B 994
2,850 ITW Signode Ltd., Class B 22
403,200 Jai Parabolic Springs Ltd. 642
237,600 JK Synthetics Ltd. 276
98,500 Kiloskar Oil Engine, Class B 431
1,200 Lakme Ltd., Class B 14
145,000 Laser Lamp 134
150,000 Lekshima Precision 430
770,000 Mahanagar Telephone Nigam 4,228
80,484 Mahavir Spinning Mills Ltd. 500
22,300 Mahindra Ugine Steel, Class B 28
687,000 Maikaal Fibres 394
197,500 Mardia Chemicals Ltd. 802
20 Motor Industries Co., Ltd., Class
A 4
73,650 MRF Ltd., Class B 4,923
24,000 Mukand Iron & Steel Works, Class A 199
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
INDIA (CONTINUED)
21,606 Nahar Spinning Mills Ltd., Class B $ 533
15,800 Nath Pulp & Paper Mills Ltd. 31
25,000 OM Sindoori Hotels Ltd. 56
500,000 Orkay Industries Ltd. 374
250,000 Patheja Forgings & Auto, Class B 915
395,500 PCS Data Products Ltd., Class B 264
51,900 Pentafour Products Ltd., Class B 70
240,700 Philips India, Ltd. 2,069
275,000 Polar Latex 241
232,700 Priyadarshini Cement Ltd., Class B 333
14,000 Pudumjee 114
350,000 PVD Plastic Mouldings Inds. Ltd.,
Class B 348
850 Ranbaxy Laboratories Ltd., Class B 17
9,300 Raymond Synthetics Ltd., Class B 6
3,150 Reliance Industries Ltd., Class A 26
3,770 Reliance Industries Ltd. GDS 62
73,581 Reliance Industries Ltd. GDS (New) 1,140
100,000 Rossel Industries Ltd. 271
100,000 Saurashtra Cement & Chemicals,
Class B 302
415,000 SCICI Ltd., Class B 1,106
50,000 Secals Ltd. 127
30,000 Shanti Gears Ltd., Class B 162
108,000 Sharp Industries Ltd. 155
360,000 Shipping Corp. of India 530
87,818 Shree Vindhya Paper Mills 419
13,200 S.K.F. Bearings Ltd. 1,313
45,000 Sri Venkatesa Mills Ltd. 231
1,499,550 State Bank of India 8,401
21,850 Sundaram Finance, Class B 243
938,500 Super Forgings & Steels 1,344
233,300 Tata Engineering & Loco, Class A 3,119
3,935 Tata Hydro Electric Power 128
220 Tata Power Co., Ltd. 9
450,000 Titagarh Steel Ltd. 931
1,600 T.P.I. India Ltd. 3
10,000 T.V.S. Suzuki 70
205,000 Uniworth International Ltd., Class
B 251
783,000 Uttam Galva Steels Ltd., Class A 723
9,604 Videocon International Ltd., Class
A 33
81,600 Videsh Sanchar Nigam Ltd. 1,844
710,040 VXL Ltd. 932
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
34,500 Vysya Bank $ 2,993
---------
92,048
---------
INDONESIA (5.2%)
26,400 Astra International 38
72,000 Astra International (Foreign) 79
1,373,000 Bank Bali (Foreign) 3,129
1,673,000 Barito Pacific Timber (Foreign) 2,261
3,324,098 Charoen Pokphand (Foreign) 6,164
612,500 Duta Pertiwi PT (Foreign) 794
1,046,000 Indocement Tunggal (Foreign) 3,295
1,200,000 Indosat PT (Foreign) 4,397
1,308,600 Jembo Cable Co. (Foreign) 1,170
1,398,200 Kalbe Farma (Foreign) 5,357
468,000 Keramika Indonesia Association
(Foreign) 565
325,500 Modern Photo Film Co. (Foreign) 1,331
1,068,000 Polysindo Eka Perkasa (Foreign) 1,050
1,386,400 Sona Topas Tourism (Foreign) 2,354
1,203,000 Sorini Corp. (Foreign) 4,085
150,000 Suba Indah (Foreign) 241
584,000 Tempo Scan Pacific (Foreign) 2,479
2,109,000 United Tractors (Foreign) 3,722
---------
42,511
---------
ISRAEL (2.1%)
47,870 Elbit Ltd. 3,064
2,740 First International Bank 321
2,710 First International Bank of Israel 309
515,467 Israel Land Development Co. 1,670
26,470 Koor Industries Ltd. 2,067
331,778 Osem Investment Ltd. 2,195
137,336 PEC Israel Economic Corp. 3,605
54,397 Scitex Ltd. 986
153,115 Super Sol Ltd., Class B 2,662
---------
16,879
---------
MALAYSIA (0.2%)
735,000 Bandar Raya Developments Bhd. 1,394
---------
MEXICO (5.8%)
359,112 Apasco S.A., Class A 978
2,178,350 Banacci, Class B 2,565
438,912 Banacci, Class L 488
676,890 Cemex CPO ADR 2,863
12,500 Desc Sociedad de Fomento
Industrial S.A. de CV 103
3,370 FEMSA ADR 62
694,000 FEMSA, Class B 1,162
609,355 Grupo Carso ADR 5,318
21,500 Grupo Carso S.A. Class A1 94
1,654,500 Grupo Financiero Banamex Accival,
Class C 1,899
972,603 Grupo Financiero Bancomer ADR 3,526
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
MEXICO (CONTINUED)
4,423,500 Grupo Financiero Bancomer, Class B $ 710
2,386,000 Grupo Financiero Bancomer, Class C 421
1,857,000 Grupo Financiero Bancrecer, Class
B 686
69,380 Grupo Financiero GBM Atlantico ADR 200
948,360 Grupo Financiero Probursa, Class B 139
3,906,660 Grupo Financiero Probursa, Class C 575
120,800 Grupo Financiero Serfin S.A. ADR 574
2,254,000 Grupo Herdez, Class A 617
55,000 Grupo Iusacell S.A. ADR, Class D 571
5,000 Grupo Iusacell S.A. ADR, Class L 59
182,571 Grupo Mexicano Desarrollo ADR,
Class B 456
42,960 Grupo Mexicano Desarrollo, Class L 123
52,600 Grupo Sidek S.A. ADR 177
1,451,800 Grupo Sidek S.A., Class A 889
1,167,000 Grupo Sidek S.A., Class B 714
55,344 Grupo Sidek S.A., Class L 50
134,000 Grupo Televisa S.A. ADR 2,228
435,952 Grupo Tribasa S.A. ADR 2,507
68,060 Hylsamex S.A. ADR 630
310,400 Interceramica, Class C 466
30,600 Interceramica ADR 233
98,600 Panamerican Beverages, Inc., Class
A 2,576
344,125 Telefonos de Mexico S.A. ADR,
Class L 9,808
1,194,000 Tolmex S.A,. Class B2 2,720
---------
47,187
---------
MOROCCO (1.6%)
55,123 Ona Group 2,379
146,300 Sni Maroc 8,067
58,000 Wafabank 2,590
---------
13,036
---------
PAKISTAN (2.5%)
78,120 Adamjee Insurance Co., Ltd. 329
1,040,900 Bank of Punjub 970
731,314 Cherat Cement Ltd. 1,612
5,577 Crescent Investment Bank 7
36,000 Cresent Textile Mills Ltd. 29
760,500 Dewan Salman Fibre 3,106
695,800 D.G. Khan Cement Ltd. 893
3,017,900 Fauji Fertilizer Co., Ltd. 6,897
595,725 Muslim Commercial Bank Ltd. 942
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
781,191 Nishat Mills Ltd. $ 785
20,000 Pakistan State Oil Co., Ltd. 205
20,070 Pakistan Telecommunications 2,017
26,900 Pakistan Telecommunications GDR 2,475
298,000 Zahur Textile Mills 36
---------
20,303
---------
PERU (0.7%)
273,890 Cementos Norte Pacasmayo, Class T 820
497,000 Cementos Yura 3,109
12,325 Cerveceria Backus y Johnson, Class
C 225
396,386 Nacional de Cerveza, Class T 220
473,696 Southern Peru Copper, Class T 1,623
---------
5,997
---------
PHILIPPINES (2.9%)
3,133,250 Ayala Land Inc., Class B 3,690
7,772,250 JG Summit Holding, Class B 2,101
306,465 Manila Electric Co., Class B 3,136
1,000,000 Negros Navigation Co., Inc. 336
6,800,000 Petron Corp. 4,857
47,490 Philippine Long Distance Telephone
Co. ADR 2,873
2,000 Philippine Long Distance Telephone
Co., Class B 119
226,858 Philippine National Bank, Class B 1,918
419,500 San Miguel Corp., Class B 1,895
8,472,500 SM Prime Holdings, Inc., Class B 2,551
---------
23,476
---------
POLAND (0.8%)
2,350 Bank Rozwoju Eksportu S.A. 29
33,400 Eastbridge 2,245
137,620 Elektrim 456
2,028,000 International UNP Holdings 1,233
186,870 Mostostal Exports, Class A 1,024
15,000 Okocim 331
8,925 Wedel S.A. 474
15,735 Zyweic 929
---------
6,721
---------
PORTUGAL (0.1%)
13,800 Jeronimo Martins 625
8,990 Portuguese Investment Fund 598
---------
1,223
---------
RUSSIA (2.2%)
4,000 Alliance Celluose, Class B 8,045
313,000 Russian Telecom Development Corp. 3,130
400,000 SFMT Inc. 4,000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
RUSSIA (CONTINUED)
990 Storyfirst Communications, Inc.,
Class C $ 661
2,640 Storyfirst Communications, Inc.,
Class D 1,980
---------
17,816
---------
SOUTH AFRICA (3.0%)
44,000 Anglo American Industrial
Corporation Ltd. 2,243
700,000 Bidvest Group Ltd. 3,363
1,223,150 Gencor Ltd. 3,935
796,900 Liberty Life Strategic Investments 2,608
929,146 Sasol Ltd. 8,863
433,074 Trans Natal Coal Corp., Ltd. 3,196
---------
24,208
---------
SRI LANKA (0.0%)
19,575 Aitken Spence & Co., Ltd. 73
113,000 Distillers Corp. S.A. Ltd. 15
81,200 John Keells Holdings Ltd. 312
---------
400
---------
TAIWAN (4.0%)
1,896,600 Hocheng Group Corp. 8,973
1,696,000 Taiwan Semiconductor Mfg. Co. 12,265
2,223,891 United Micro Electronics Corp.,
Ltd. 11,035
---------
32,273
---------
THAILAND (7.3%)
293,250 Advanced Information Services Co.
(Foreign) 4,073
1,265,600 Bangkok Bank Ltd. 9,200
419,500 Bangkok Bank Ltd. (Foreign) 3,714
49,719 Ban Pu Coal Co. Ltd. (Foreign) 925
2,587,800 Finance One Co., Ltd. (Foreign) 14,292
131,060 International Engineering Co.,
Ltd. 915
432,740 International Engineering Co.,
Ltd. (Foreign) 2,987
144,400 Land & House Co., Ltd. (Foreign) 2,463
598,300 MDX Co., Ltd. 1,112
234,635 Phatra Thanakit Co., Ltd. 1,458
546,265 Phatra Thanakit Co., Ltd.
(Foreign) 3,571
31,100 SeaFresh Industry Co., Ltd.
(Foreign) 202
141,800 Shinawatra Computer Co., Ltd
(Foreign) 3,225
60,000 Siam Cement Co., Ltd. (Foreign) 3,445
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
1,211,000 Thai Farmers Bank Ltd. $ 7,868
---------
59,450
---------
TURKEY (6.9%)
1,548,000 Aksa 1,431
2,900,000 Borusan 2,577
13,001,600 Ege Biracilik Ve Malt Sanayii 12,170
3,878,000 Ege Seramik Sanayii Ve Ticaret
A.S. 1,815
6,776,000 Koc Yatirim Ve Sanayii Mamulleri 6,342
812,000 Migros Turk TAS 2,309
11,810,000 Sarkuysan 8,116
3,551,000 Tat Konserue 5,974
9,611,000 Tofas Turk Otomobil Fabrikasi 8,199
120,000 Tofas Turk Otomobil Fabrikasi GDR,
Class E 486
1,302,075 Turkas Petroculuk A.S. 455
1,085,600 Turkiye Garanti Bankasi ADR 3,257
31,055,000 Yapi Ve Kredi Bankasi A.S. 3,017
---------
56,148
---------
UNITED KINGDOM (0.3%)
909,844 Lonrho plc 2,231
---------
ZIMBABWE (0.3%)
1,980,000 Trans Zambezi Industries Ltd. 2,574
---------
TOTAL COMMON STOCKS (Cost $744,011) 644,051
---------
PREFERRED STOCKS (9.8%)
BRAZIL (9.8%)
1,103,022,183 Banco Bradesco 7,423
323,910,000 Banco do Brasil 3,354
18,800,000 Banco do Estado Sao Paulo 111
298,898,880 Banco Nacional S.A. 4,987
20,516,870 Bombril 490
13,825,000 Brahma (Preferred) 3,306
21,189,000 Brasmotor S.A. 4,832
118,244,284 Cia Acos Especiais Itabira 875
96,442,105 Cia Energetica de Minas Gerias 1,931
43,924,470 Cia Energetica de Sao Paulo 1,759
16,959,000 Cia Paulista de Forca E Luz 641
904,000,000 Cia Siderurgica Paulista, Class B 1,579
61,724,850 Eletrobras 11,809
33,404,000 Itaubanco 7,952
37,930,101 Lojas Americanas S.A. 717
105,758 Lojas Americanas (Bonus) 15
270,000 Multibras S.A. 247
104,153,333 Petrobras 7,241
77,529,000 Petrobras Distribuidora 2,354
12,500 Sadia Concordia 11
135,699,175 Telecomunicacoes Brasileiras 3,653
45,160,815 Telecomunicacoes de Sao Paulo 4,672
5,521,151,000 Usinas Siderurgicas de Minas
Gerias 6,326
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
BRAZIL (CONTINUED)
26,163,000 Vale Do Rio Doce $ 3,536
---------
TOTAL PREFERRED STOCKS (Cost $80,529) 79,821
---------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.0%)
INDIA (0.0%)
157,250 Geekay Exim Ltd. 275
2,500 Pentafour Products Ltd., Class B --
---------
275
---------
PAKISTAN (0.0%)
20,625 Dewan Salman Fibre --
92,643 Muslim Commercial Bank Ltd. 26
---------
26
---------
PERU (0.0%)
32,305 Southern Peru Copper, Class T --
---------
TOTAL RIGHTS (Cost $351) 301
---------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<C> <S> <C>
WARRANTS (0.0%)
HONG KONG (0.0%)
540,000 Wai Kee Holdings Ltd., expiring
12/31/96 5
---------
INDIA (0.0%)
33,571 Bharat Forge, expiring 6/95 --
27,383 Flex Industries Ltd., expiring
11/23/97 --
44,702 Garware Plastics & Polyesters,
expiring 6/22/97 --
---------
--
---------
POLAND (0.0%)
1,014,000 International UNP Holdings,
expiring 12/31/95 --
---------
THAILAND (0.0%)
10 Finance One Co., Ltd., expiring
3/15/99 --
---------
TOTAL WARRANTS (Cost $0) 5
---------
<CAPTION>
NO. OF
UNITS
- ---------------
<C> <S> <C>
UNITS (0.6%)
HUNGARY (0.5%)
42,000 Mol Magyar Olay-ES 4,233
---------
MEXICO (0.1%)
308,100 Interceramica 408
---------
TOTAL UNITS (Cost $5,800) 4,641
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
PURCHASED OPTIONS (0.0%)
BRAZIL (0.0%)
37,900,000 Cia Paulista de Forca E Luz,
strike price BRL 70, expiring
10/16/95 (Cost $2) $ 63
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
BONDS (0.3%)
ECUADOR (0.3%)
$ 3,932 Republic of Ecuador Discount
Bonds, (Floating Rate) 7.25%,
2/28/25 1,779
3,716 Republic of Ecuador PDI Bonds,
(Floating Rate) 7.25%, 2/27/15 855
---------
2,634
---------
INDIA (0.0%)
3,141 Shree Vindhya 16.00%, 4/01/95 55
---------
POLAND (0.0%)
54 Republic of Poland PDI, Zero
Coupon, 12/29/49 22
---------
TOTAL BONDS (Cost $2,846) 2,711
---------
CONVERTIBLE DEBENTURES (0.6%)
COLOMBIA (0.3%)
4,115 Banco de Colombia 5.20%, 2/01/99 2,860
---------
INDIA (0.3%)
IR 25 Bharat Pipes & Fittings Ltd.,
Series B, Zero Coupon, 12/31/99 91
336 DCM Shriram Industries, Zero
Coupon, 3/01/00 641
15 Indian Seamless, 10.00%, 10/12/99 60
134 Jai Parabolic Ltd., Series B, Zero
Coupon, 4/01/95 569
1,467 Mahavir Spinning Mills Ltd.,
Series A, Zero Coupon, 12/31/99 51
783 Uttam Galva Steels Ltd., Class B
Zero Coupon, 12/01/10 997
---------
2,409
---------
TOTAL CONVERTIBLE DEBENTURES (Cost $6,151) 5,269
---------
NON-CONVERTIBLE DEBENTURES (0.6%)
INDIA (0.6%)
34 Bharat Forge Co., Ltd.,
7.25%,3/04/00 49
341 DCM Shriram Industries Ltd.,
16.50%, 3/01/00 499
4,470 Garware Plastics & Polyester,
16.00%, 5/01/05 142
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
INDIA (CONTINUED)
IR 8 Mahavir Spinning Mills Ltd.,
Series B, Zero Coupon, 12/31/99 $ 28
500 Raymond Wollen Mills 16.00%,
12/31/99 1,693
70 Saurashtra Cement & Chemicals,
Zero Coupon, 12/31/99 2,162
---------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $5,030) 4,573
---------
LOAN AGREEMENTS (2.9%)
PANAMA (0.9%)
$ 19,402 Republic of Panama Unrestructured
Loans (Floating Rate) 7,663
---------
RUSSIA (2.0%)
CHF 1,910 Bank for Foreign Economic Affairs
(Floating Rate) 333
$ 25,657 Bank for Foreign Economic Affairs
(Floating Rate) 5,708
9,293 Bank for Foreign Economic Affairs,
Series A (Floating Rate) 2,068
32,090 Bank for Foreign Economic Affairs,
Series B (Floating Rate) 7,140
1,000 Bank for Foreign Economic Affairs,
Series C (Floating Rate) 222
1,913 Bank for Foreign Economic Affairs,
Series E (Floating Rate) 426
---------
15,897
---------
TOTAL LOAN AGREEMENTS (Cost $37,996) 23,560
---------
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
18,360 Goldman Sachs & Co., 6.05% dated
3/31/95, due 4/03/95 to be
repurchased at $18,369,
collateralized by $14,100 United
States Treasury Notes 13.375%,
due 8/15/01, valued at $18,778
(Cost $18,360) 18,360
---------
<CAPTION>
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FOREIGN CURRENCY (3.5%)
BLR 316 Brazilian Real $ 351
CP 220,527 Colombian Peso 244
HK$ 18,301 Hong Kong Dollar 2,367
IR 523,635 Indian Rupee 16,668
IN 4,996,179 Indonesian Rupiah 2,232
MA 506 Malaysian Ringgit 200
MP 2,311 Mexican Peso 340
PR 8,428 Pakistani Rupee 273
PHP 117 Philippines Peso 5
PZ 275 Polish Zloty 117
AR 332 South African Rand 93
SL 101 Sri Lankan Rupee 2
T$ 63,654 Taiwan Dollar 2,449
TB 73,480 Thailand Baht 2,984
TL 5,979,559 Turkish Lira 142
---------
TOTAL FOREIGN CURRENCY (Cost $28,468) 28,467
---------
TOTAL INVESTMENTS (99.6%) (Cost $929,544) 811,822
---------
OTHER ASSETS AND LIABILITIES (0.4%)
Other Assets 11,450
Liabilities (8,323)
---------
3,127
---------
NET ASSETS (100%) $ 814,949
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 63,899,377 outstanding $.001 par
value shares (authorized 500,000,000 shares) $12.75
---------
---------
<FN>
- ---------------
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
</TABLE>
9
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
ACTIVE COUNTRY ALLOCATION PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Active Country Allocation Portfolio invests in international equity markets,
with emphasis placed upon country, rather than stock selection. This approach
reflects an investment philosophy that a diversified selection of securities
representing exposure to each country that we find attractive is, we believe, an
effective way to maximize the return and minimize the risk associated with
global investing.
The total return of the Portfolio for the three month period ended March 31,
1995 was -4.04% as compared to 1.86% for the Morgan Stanley Capital
International (MSCI) EAFE Index for the same period. The total return for the
twelve months ended March 31, 1995, and the average annual return for the period
from inception in January 1992 through March 31, 1995 for the Portfolio were
- -2.71% and 5.77%, respectively, as compared to 6.08% and 9.51% for the Index for
the same periods.
PERFORMANCE COMPARED TO MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO............ -4.04% -2.71% 5.77%
INDEX................ 1.86 6.08 9.51
<FN>
- -------------
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
Equity markets in the first quarter generally performed poorly. Returns for the
major international markets were a disappointment and dominated by Japan
(-15.3%) and Germany (-8.2%). However, due to the strength of foreign
currencies, U.S. based investors benefitted when the equity market returns were
translated from local currency to U.S. dollars. The EAFE Index in local currency
terms lost 7.8% for the first quarter and gained 1.9% in U.S. dollars for the
same period. Our country selection this quarter added to performance,
highlighted by our overweight positions in the Netherlands, Belgium and France.
Our underweight positions in Japan and Germany were correct as the equity
returns were negative but their impact on the portfolio was muted by the
weakness of the U.S. dollar against both of these currencies. Underweight
positions in the U.K., Singapore and Malaysia detracted from performance.
In the Far East, we maintain an overweight position in Australia and are neutral
in Hong Kong and Japan. Our European holdings focus on our favored markets of
France, Belgium, the Netherlands and Italy. Spain has become a market weighting
while the U.K. and Germany are underweight.
The AUSTRALIAN equity market rose 1.5% in local currency terms but the Aussie
dollar weakened during the quarter and the return for U.S. investors was a
disappointment, -4.0%. Fears over continuing increases in interest rates from
the Reserve Bank and a deteriorating current account surplus overhung the
market. This uneasiness has subsided recently as economic growth has shown signs
of slowing and the market has responded positively. We reduced our position in
March as the market became less attractive in the valuation rankings but remain
overweight.
JAPAN became more attractive on valuations and we increased our weighting
towards a neutral stance during the quarter (although we remain slightly
underweight). The yen has further strengthened over the last three months which
continues to pressure corporate profits and to dampen economic prospects. The
government will further use fiscal policy in an effort to boost the anemic
economy. The recent cut in the ODR and the fall in real interest rates should
help make the equity market more attractive. Our equity underweight was positive
to returns as the market fell -15.3% but this was
1
<PAGE>
dampened by our underweight position in the currency. At the start of the
quarter, we reduced our hedge from the full position to hedge half of our local
currency exposure.
HONG KONG rebounded from its poor showing in the fourth quarter and performed
well this quarter, +4.3% in U.S. dollars. The equity market was relieved that
U.S. rates are near their peak. Favorable land sales and news from China that
the government may be able to achieve a soft landing as inflation and economic
growth have moderated were also positive. We have a neutral stance in the market
as we are still cautious about the quality of earnings and the uncertain
political landscape in the approaching transition.
INDONESIA is not a fantastic value when judged solely on price/book value, but
when you account for its long-term growth potential, it is the most attractive
in our investment universe. The market had a disappointing quarter, -6.2% in
U.S. dollars. GDP growth in 1994 was a robust 7.4% and is expected to be more
than 7% in 1995. A large contributor to this growth is domestic consumption
fueled by minimum wages which have increased 70% in the last two years.
Consumption should abate as interest rates continue to rise and wage concessions
become less generous. As inflation pressures subside, investors worries about
the liquidity situation should diminish.
FRANCE, a focus of the Portfolio, remains an overweight position and the market
is attractively valued. The equity market performed well in the first quarter,
+1.0% in local currency terms and +12.4% in U.S. dollars. The impact on the
Portfolio of the strong franc was softened as our currency exposure was hedged
until late February. Although the Socialist candidate Jospin led in the first
round of voting, Chirac is expected to win the second round on May 7th. Chirac's
focus is economic growth at any cost to cure the current economic ills,
especially high unemployment which remains above 12%. His agenda includes
structural changes to the economy such as making the labor market more flexible.
The risk remains that his resolve on the franc-fort policy is tested by the
markets and that the French franc is allowed to depreciate versus the deutsche
mark.
BELGIUM performed relatively well in local currency terms, -3.9% and in U.S.
dollars had a very good quarter, +8.8%. The market is one of the most
attractively valued in the EAFE Index at 1.42 on price/ book value. The prime
minister surprised the markets by calling national elections earlier than had
been anticipated which will be held on May 21st. This could be a positive if a
stronger coalition is brought in to deal effectively with the government deficit
as the new government will be responsible for negotiating and ratifying the 1996
budget. The Belgian franc, which closely follows the deutsche mark, appreciated
quite strongly since the start of the year and we recently hedged our franc
exposure back to dollars. Relative to the last five years the currency is nearly
14% overvalued on inflation and producer price adjusted measures but more
importantly is pegged to the deutsche mark, which is even more overvalued.
The NETHERLANDS rewarded U.S. investors as the market rose 9.3% this quarter.
Economic growth is strong, spurred mainly by investment spending, although
consumer demand is languid. Investment outlays are anticipated to increase
strongly this year and will be helped by government spending in response to the
destructive floods of this winter. Consumer spending, which represents 60% of
GDP, is hindered by a very low savings rate and minimal increases in real wages.
The market is attractively valued and we are overweight.
ITALY suffered from political uncertainty but we feel the bad news has been more
than fully discounted by the equity, bond and currency markets. The Dini
administration was successful in passing a mini-budget and has made progress on
pension reform. The government budget will run a primary surplus this year. If a
substantial package on pension reform is achieved, government finances could
begin to improve significantly. The major obstacle is the interest payments on
outstanding debt, especially given rising interest rates. The current government
is by definition an interim one and the uncertainty of what will follow and when
elections will be held continues to unsettle the markets. The Italian market has
moved up the valuation rankings and is one
2
<PAGE>
of the most attractive. The lira is extremely undervalued, it fell more than 4%
in the first quarter against the U.S. dollar. Relative to its five year history
on a PPI adjusted basis, the lira is nearly 17% undervalued. We are overweight
the market and expect the equity market and currency to recover from these
levels.
We scaled back our position in SPAIN this quarter. The market continued to
languish and fell 4.8% in dollars in the first quarter. Equities had a
particularly bad month in March on the back of the devaluation of the peseta,
disappointing news on inflation and the prospects for interest rates. Municipal
elections are to be held on May 28th and pose a small risk to the governing
coalition as the Socialists are expected to fare poorly. Although the market is
very attractively valued, the risks and the likelihood of continued
underperformance outweigh the potential upside. We removed our peseta hedges
this quarter.
PORTUGUESE equities were down 6.0% in escudos but rose 3.6% in U.S. dollars for
the first quarter. The currency was devalued in March amid pressures of rising
inflation, political uncertainty and the attractiveness of the hard-core
European currencies, particularly the deutsche mark. Inflation was negatively
affected by an increase in VAT rates and the annual reset of fixed prices by the
government. Political uncertainty resulted from Prime Minister Silva's
announcement in January that he would resign as head of the Social Democratic
Party. Silva has governed for ten years and the Social Democrats hold a 59%
majority in the National Assembly. It is not anticipated that the government's
pro-Europe stance or the Social Democrats majority will be affected in the
National Assembly elections to be held in October. There was improvement in the
federal budget deficit achieved mainly by increased receipts from indirect taxes
and flat real current expenditures. The market is very attractively valued on
price/book value and has a dividend yield of almost 4%. We are maintaining our
position there.
GERMANY is expensive in relative and absolute terms and we maintain our zero
weight. The market had a tough quarter, -8.2% in local currency terms, but the
deutsche mark was quite strong and in U.S. dollar terms the market return was
+4.0%. Our underweight of the equity market was correct but the currency's safe
haven value was highly sought, and the deutsche mark appreciated strongly.
The U.K. market performed well in the first quarter, +2.3% in local currency and
6.5% in U.S. dollars. The market was buoyed by the outlook of moderate economic
growth combined with low inflation. The Bank of England raised rates 50 basis
points to 6.75% for the minimum lending rate. The Bank's proactive role along
with mixed economic news calmed fears of rising inflation. We continue to be
underweight the U.K. as the earnings cycle has peaked and valuations are not
compelling.
MEXICO plunged this quarter as the local currency MSCI EAFE Index fell 20.4% and
the currency depreciated more than 20.0%. Bad news permeated sentiment as
economic forecasts were revised (economic growth downward and inflation
expectations upward) and more allegations of political corruption unfolded. The
Zedillo administration, recovered from the earlier perceptions of
indecisiveness, is viewed more positively now. If the administration is able to
move forward on political reform the reaction would be very favorable as popular
support for these measures is very strong. We have sold down our holdings into
market strength and will continue to scale back our position as the market
rallies. The medium term will be very difficult and it is uncertain if the
political and social wills exist to see difficult reforms put into place.
BRAZIL was added to the portfolio in March following its poor performance since
the start of the year. Although Brazil must focus on the structural economic
problems, we think that the political will exists to deal with these
effectively. Inflation expectations have risen recently due to strong domestic
demand and recent weakening of the currency. The government must now rely on
domestic means to quell inflationary pressures given that demand is strong.
We added a small position to ARGENTINA in March as the market had become
extremely attractive. The market fell 8.7% in U.S. dollar terms in the first
3
<PAGE>
quarter and its price to book value during the quarter was close to one. The
country's economic fundamentals are good and the market has suffered in sympathy
with the Mexican crisis. The government secured a financing package and took
measures to achieve a fiscal surplus. There will be a Presidential election in
May and the current President Menem is anticipated to win.
In conclusion, international equity markets performed poorly during the first
quarter. This was due partly to dollar weakness and also the spillover from the
Mexican crisis. There were also lingering worries about U.S. interest rates.
However, for a dollar based investor the strength of overseas currencies offset
the equity market weakness. Looking forward we expect to see something of a
reversal in this pattern. Global markets should start to settle down -- the bear
market that started in February 1994 must be approaching its end, although
further rises in U.S. interest rates remain a possibility. At the same time we
are unlikely to see a repetition of the currency developments witnessed during
the first part of 1995. If anything we now expect international equity markets
to strengthen but would not be surprised to see the returns offset by overseas
currency weakness. The ideal stance in this environment would be long equity
markets but short currency exposure -- hence our currency hedging.
- ------------
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.
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
COMMON STOCKS (98.7%)
ARGENTINA (0.9%)
20,600 Acindar Industrial S.A. $ 11
28,000 Alpargatas S.A. 12
32,100 Astra, Class B 42
5,200 Atanor S.A. 8
10,400 Bagley S.A. Class B 27
19,000 Banco de Galicia y Buenos Aires 73
11,600 Banco Frances del Rio Plata 71
80 Buenos Aires Embotelladora, Class
B 106
4,200 Central Costanera S.A., Class B 12
2,600 Central Puerto S.A. 9
43,200 Cia Celulosa Argentina S.A. 11
7,800 CIADEA (Renault) S.A. 40
69,738 Cia Naviera Perez Companc, Class B 258
20,400 Comercial del Plata S.A. 44
17,200 Indupa S.A. 7
4,400 Industrias Petroquimicas 18
5,000 Juan Minetti S.A. 17
25,400 Ledesma S.A. 31
6,300 Molinos Rio de la Plata, Class B 32
5,600 Sevel Argentina S.A., Series C 10
97,300 Siderca 58
40,100 Telecom Argentina S.A., Class B 175
48,000 Telefonica de Argentina, Class B 117
38,100 Transportadora de Gas del Sur,
S.A., Class B 72
14,145 YPF S.A. 270
---------
1,531
---------
AUSTRALIA (5.6%)
54,400 Amcor Ltd. 373
30,700 Ampolex Ltd. 78
51,200 Australian National Industries
Ltd. 47
112,900 Boral Ltd. (Bon Shares Plan) 285
21,600 Brambles Industries Ltd. 200
149,200 Broken Hill Proprietary Co., Ltd. 1,955
58,799 Burns, Philip & Co., Ltd. 138
27,800 Coca-Cola Amatil Ltd. 169
120,300 Coles Myer Ltd. 401
45,900 CRA Ltd. 598
90,292 CSR Ltd. 285
276,700 Fosters Brewing Corp. 229
71,736 General Property Trust 123
116,500 Goodman Fielder Ltd. 100
30,900 ICI Australia Ltd. 204
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
23,000 Lend Lease Corp., Ltd. $ 280
143,890 MIM Holdings Ltd. 197
123,664 National Australia Bank Ltd. 1,044
28,600 Newcrest Mining Ltd. 109
168,600 News Corp., Ltd. 807
74,200 North Broken Hill Peko Ltd. 166
101,400 Pacific Dunlop Ltd. 222
84,600 Pioneer International Ltd. 197
26,800 Renison Goldfields Consolidated
Ltd. 81
58,400 Santos Ltd. 153
64,400 Southcorp Holdings Ltd. 134
41,800 TNT Ltd. 55
91,000 Western Mining Corp. Holdings Ltd. 458
17,057 Westfield Trust 10
6,098 Westfield Trust (New) 11
164,400 Westpac Banking Corp. 588
---------
9,697
---------
BELGIUM (5.5%)
6,300 AG Financiere et de Reassurance du
Groupe 597
420 Baekaert S.A. 282
700 Cimenteries CBR Cementbedrijven 279
9,500 Delhaize Freres et Cie, 'Le Lion',
S.A. 383
8,200 Electrabel S.A. 1,758
1,800 Electrabel S.A., Series 1 386
211 Generale de Banque (New) 62
2,700 Generale de Banque S.A. 798
4,700 Gevaert Photo-Producten S.A. 241
36 Glaverbel 5
900 Glaverbel S.A. 119
4,300 Groupe Bruxelles Lambert S.A. 522
2,500 Kredietbank S.A. 560
4,240 Petrofina S.A. 1,237
2,350 Reunies Electrobel & Tractebel
S.A. 771
2,450 Royale Belge 402
1,525 Solvay et Cie S.A. 746
4,650 Union Miniere S.A. 307
---------
9,455
---------
BRAZIL (0.3%)
2,500,000 Banco do Brasil 26
550,000 Cia Paulista de Forca E Luz 24
70,000 Cia Siderurgica de Tubarao 47
1,300,000 Cia Siderurgica Nacional 30
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
BRAZIL (CONTINUED)
1,600,000 Eletrobras $ 315
210,000 Itaubanco 50
16,000 Sadia Concordia 14
---------
506
---------
FRANCE (11.5%)
1,950 Accor S.A. 232
11,000 Alcatel Alsthom 989
11,600 AXA S.A. 589
13,600 Banque Nationale de Paris 688
600 BIC Corp. 97
2,000 Bouygues 221
5,600 B.S.N. S.A. 947
1,900 Carrefour Supermarch S.A. 953
400 Chargeurs S.A. 84
1,700 Cie Bancaire S.A. 189
6,000 Cie de Saint Gobain 743
11,700 Cie de Suez, S.A. 564
8,200 Cie Financiere de Paribas, Class A 487
8,100 Cie Generale des Eaux 819
18,100 Elf Aquitaine 1,409
6,100 Elf Sanofi 350
2,300 Eridania Beghin-Say S.A. 371
5,600 Etablissements Economiques du
Casino 175
4,000 Havas S.A. 300
6,600 Lafarge Coppee S.A. 498
5,200 L'Air Liquide 850
225 Legrand 326
4,500 L'Oreal 1,189
5,600 LVMH Moet Hennessy Louis Vuitton 1,093
5,100 Lyonnaise des Eaux Demez 470
8,100 Michelin CGDE, Class B 347
3,800 Pernod-Ricard 275
1,350 Pinault-Printemps S.A. 315
1,500 Promodes 343
3,600 PSA Peugeot Citrogen S.A. 504
18,200 Rhone-Poulenc S.A., Class A 425
375 SAGEM 211
750 Saint Louis S.A. 234
4,000 Schneider S.A. 294
2,000 Simco S.A. 177
345 Societe Eurafrance S.A. 101
6,100 Societe Generale 705
10,300 Thomson CSF 276
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
15,000 Total S.A., Class B $ 890
---------
19,730
---------
HONG KONG (2.7%)
26,000 Applied International Holdings 2
26,792 Bank of East Asia Ltd. 76
99,000 Cathay Pacific Airways Ltd. 153
73,000 Cheung Kong Holdings Ltd. 318
67,500 China Light & Power Co., Ltd. 327
52,000 Chinese Estates Holdings 38
26,000 Dickson Concepts International
Ltd. 14
22,000 Giordano Holdings Ltd. 15
41,000 Hang Lung Development Co. 62
63,300 Hang Seng Bank 446
6,400 Hong Kong Aircraft Engineering Co.
Ltd. 17
64,000 Hong Kong & China Gas Co. Ltd. 114
42,000 Hong Kong & Shanghai Hotel 49
364,000 Hong Kong Telecommunications Ltd. 708
140,000 Hopewell Holdings Ltd. 99
119,000 Hutchison Whampoa Ltd. 525
35,000 Hysan Development Ltd. 78
14,000 Johnson Electric Holdings Ltd. 33
19,000 Miramar Hotel & Investment Ltd. 37
50,065 New World Development Co., Ltd. 136
47,000 Oriental Press Group 20
46,940 Shangri-La Asia Ltd. 52
54,000 Shun Tak Holdings Ltd. 32
62,000 South China Morning Post 35
34,000 Stelux Holdings Ltd. 10
75,000 Sun Hung Kai Properties Ltd. 512
53,000 Swire Pacific Ltd., Class A 362
14,000 Television Broadcasts Ltd. 48
72,000 Wharf Holdings Ltd. 235
5,000 Wing Lung Bank Ltd. 33
---------
4,586
---------
INDONESIA (3.1%)
218,000 Bank Dagang Nasional (Foreign) 326
1,248,000 Barito Pacific Timber (Foreign) 1,687
353,000 Gadjah Tunggal (Foreign) 379
401,000 Hanajaya Mandala Sampoerna 2,123
344,000 Jakarta International Hotel &
Development 292
37,000 Matahari Putra Prima 56
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
INDONESIA (CONTINUED)
34,000 Panbrothers Tex (Foreign) $ 16
187,000 Sinar Mas Agro 203
123,000 United Tractors (Foreign) 217
---------
5,299
---------
ITALY (7.5%)
100,000 Alitalia S.p.A. 53
116,520 Assicurazioni Generali S.p.A. 2,596
266,000 Banca Commerciale Italiana 517
50,000 Banca Nazionaia Deli 43
87,000 Banco Ambrosiano Ven 271
29,000 Benetton Group S.p.A. 245
14,000 Cartiere Burgo 95
26,000 Cogefar 18
338,000 Credito Italiano 319
99,000 Edison S.p.A. 383
8,000 Falck Italian 11
368,000 Fiat S.p.A. 1,377
110,000 Fiat S.p.A. Di Risp (NCS) 256
37,500 Fidis Italian 75
40,000 Gilardini 89
109,500 Istituto Bancario San Paolo 569
13,500 Italcementi 37
30,500 Italcementi Di Risp 166
109,000 Italgas 247
73,500 Mediobanca S.p.A. 504
780,000 Montedison S.p.A. 494
135,000 Montedison S.p.A. Di Risp (NCS) 72
185,000 Olivetti S.A. 174
188,500 Parmalat Finanziaria S.p.A. 149
240,000 Pirelli S.p.A. 307
40,400 R.A.S. S.p.A. 360
15,600 R.A.S. S.p.A. Di Risp (NCS) 86
24,000 Rinascente 119
2,700 Risanamento Di Napoli 39
7,000 Saffa 21
19,000 SAI 183
65,000 Saipan 120
15,000 Sasib 61
35,500 Sirti S.p.A. 229
59,000 SME Meridonale 138
95,000 SNIA BPO S.p.A. 102
810,000 Telecom Italia S.p.A. 1,885
235,000 Telecom Italia S.p.A. Di Risp
(NCS) 437
---------
12,847
---------
JAPAN (35.1%)
3,000 Advantest Corp. 88
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
37,000 Ajinomoto Co. $ 420
19,000 Aoki Corp. 96
3,000 Aoyama Trading Co. 44
74,000 Asahi Bank Ltd. 869
19,000 Asahi Breweries Ltd. 219
56,000 Asahi Chemical Industry Co., Ltd. 405
56,000 Asahi Glass Co., Ltd. 658
56,000 Bank of Tokyo 909
18,000 Bridgestone Co. 268
55,000 Canon, Inc. 906
31,000 Casio Computer Co. 325
37,000 Chiba Bank 367
7,000 Chiyoda Corp. 82
19,000 Chugai Pharmaceuticals Co. 203
34,000 Citizen Watch Co., Ltd. 229
85,000 Dai-Ichi Kangyo Bank 1,605
19,000 Daikin Industries Ltd. 163
38,000 Dai Nippon Printing Co., Ltd. 575
8,000 Daishowa Paper Manufacturing Co.,
Ltd. 45
19,000 Daiwa House Industry 311
37,000 Daiwa Securities Co., Ltd. 423
13,000 Ebara 190
10,700 Fanuc 466
84,000 Fuji Bank 1,789
29,000 Fuji Photo Film Ltd. 688
111,000 Fujitso Ltd. 1,106
30,000 Furukawa Electric Co. 171
37,000 Hankyu Corp. 222
19,000 Hazama Corp. 95
153,000 Hitachi Ltd. 1,586
51,000 Honda Motor Co. 869
63,000 Industrial Bank of Japan 1,632
14,000 Ito Yokado Ltd. 693
74,000 Japan Airlines Co. 541
46,000 Japan Energy Corp. 173
20,000 Joyo Bank 171
18,000 Jusco Co., Ltd 344
37,000 Kajima Corp. 358
12,100 Kansai Electric Power Co. 312
37,000 Kao Corp. 439
95,000 Kawasaki Steel Corp. 373
56,000 Kinki Nippon Railway 504
37,000 Kirin Brewery Co., Ltd. 400
111,000 Kobe Steel Ltd. 308
87,000 Komatsu Ltd. 626
56,000 Kubota Corp. 391
37,000 Kumagai Gumi Co. 185
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
JAPAN (CONTINUED)
7,000 Kyocera Ltd. $ 521
19,000 Kyowa Hakko Kogyo 188
12,000 Kyushu Matsushita Electric 270
17,000 Makita Corp. 251
55,000 Marubeni Corp. 279
18,000 Marui Co. 284
80,000 Matsushita Electric Industries
Ltd. 1,290
7,600 Mitsubishi Chemical Corp. 42
51,000 Mitsubishi Corp. 617
67,000 Mitsubishi Electric Co. 492
40,000 Mitsubishi Estate Co., Ltd. 450
148,000 Mitsubishi Heavy Industries Ltd. 1,061
48,400 Mitsubishi Kasei Co. 267
37,000 Mitsubishi Materials Corp. 179
36,000 Mitsubishi Trust & Banking Co. 526
56,000 Mitsui & Co. 439
37,000 Mitsui Engineering & Shipbuilding 101
31,000 Mitsui Fudosan Co. 342
38,000 Mitsukoshi Ltd. 320
4,800 Mochida Pharmaceutical 93
13,000 Murata Manufacturing Co., Ltd. 504
94,000 NEC Corp. 1,006
38,000 New Oji Paper Co., Ltd. 382
19,000 NGK Insulators 173
108,000 NKK Corp. 287
19,000 Nippon Denso Co., Ltd. 370
37,000 Nippon Express Co., Ltd. 366
19,000 Nippon Fire & Marine Insurance Co. 135
18,000 Nippon Light Metal 95
18,000 Nippon Meat Packers, Inc. 249
55,000 Nippon Oil Co. 347
37,000 Nippon Paper Industries Co. 248
139,000 Nippon Steel Co. 536
56,000 Nippon Yusen 343
70,000 Nissan Motor Co. 533
56,000 Nomura Securities Co. 1,044
42,000 Obayashi Corp. 311
32,000 Odakyu Electric Railway Co. 247
30,000 Olympus Optical Co., Ltd. 295
111,000 Osaka Gas Co. 438
19,000 Penta-Ocean Construction 140
9,000 Pioneer Electric Corp. 181
4,000 Rohm Co. 174
92,000 Sakura Bank 1,122
20,900 Sankyo Co., Ltd 481
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
55,000 Sanyo Electric Co., Ltd. $ 317
4,000 Secom Co., Ltd. 247
4,400 Sega Enterprises 213
19,000 Sekisui House Co., Ltd. 245
9,900 Seven-Eleven Japan 694
66,000 Sharp Corp. 1,071
19,000 Shin-Etsu Chemical Co. 356
26,000 Shinizu Corp. 250
8,000 Shiseido Co., Ltd. 101
37,000 Shizuoka Bank 447
37,000 Showa Denko 124
16,000 Sony Corp. 801
93,000 Sumitomo Bank 1,981
19,000 Sumitomo Cement 90
74,000 Sumitomo Chemical Co. 392
39,000 Sumitomo Corp. Ind. 336
25,000 Sumitomo Electric Ind. 323
8,000 Sumitomo Forestry Co. 138
148,000 Sumitomo Metal Ind. 546
37,000 Taisei Corp., Ltd. 241
37,000 Takeda Chemical 486
7,000 TDK Corp. 327
37,000 Teijin Ltd. 196
37,000 Tobu Railway Co. 235
58,000 Tokai Bank 708
56,000 Tokio Marine & Fire Insurance Co. 635
9,000 Tokyo Dome Corp. 145
40,700 Tokyo Electric Power Co. 1,275
6,000 Tokyo Electron Ltd. 182
111,000 Tokyo Gas Co. 484
37,000 Tokyu Corp. 239
26,000 Toppan Printing Co., Ltd. 356
55,000 Toray Industries Inc. 373
73,000 Toshiba Corp. 495
18,000 Toto Ltd. 280
37,000 Toyobo Co. 146
86,000 Toyota Motor Corp. 1,753
37,000 Ube Industries Ltd. 153
37,000 Yamaichi Securities Co. 245
18,000 Yamanouchi Pharmaceutical Co. 394
37,000 Yasuda Trust & Banking Co. 273
---------
60,154
---------
MEXICO (1.1%)
7,800 Aerovias de Mexico S.A. CPO --
8,900 Apasco S.A., Class A 24
16,500 Banacci, Class B 19
27,400 CEMEX, Series B 60
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
MEXICO (CONTINUED)
7,100 CEMEX S.A. CPO $ 15
76,000 Cifra S.A. de C.V., Class B 95
50,400 Cifra S.A. de C.V., Class C 61
33,040 Comerci 18
6,600 Empresas ICA Sociedad Controladora
S.A. de C.V. 39
29,000 Empresas la Moderna S.A., Class
ACP 71
35,850 FEMSA, Class B 59
5,700 FEMSA, Class L 11
57,600 Grupo Carso S.A. Class A1 248
2,600 Grupo de Modelo S.A., Class C 31
29,100 Grupo Financiero Banamex Accival,
Class C 33
24,400 Grupo Financiero Bancomer, Class B 4
82,400 Grupo Financiero Bancomer, Class C 15
4,900 Grupo Financiero Banorte, Class C 4
12,200 Grupo Financiero Serfin, Class BCP 9
70,500 Grupo Gigante S.A., Class B 15
11,000 Grupo Industrial Alfa S.A., Class
A 79
26,100 Grupo Industrial Maseca, Class B2 16
10,800 Grupo Sidek S.A., Class B 7
22,082 Grupo Situr S.A., Class BCP 8
14,263 Grupo Televisa S.A. CPO 116
18,200 Grupo Tribasa S.A. CPO 51
7,359 Kimberly Clark de Mexico, Class A 60
501,400 Telefonos de Mexico S.A., Class L 711
9,300 Tolmex S.A., Class B2 21
18,900 Vitro S.A. 54
---------
1,954
---------
NETHERLANDS (7.8%)
23,100 ABN Amro Holdings N.V. 846
5,900 Akzo Nobel N.V. 644
49,500 Elsevier N.V. 519
3,000 Heineken N.V. 508
20,700 Internationale Nederlanden Groep
N.V. 1,019
6,300 KLM Royal Dutch Airlines N.V. 185
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
4,900 Koninklijke Ahold N.V. $ 169
7,800 Koninklijke KNP BT N.V. 229
2,300 Koninklijke Nederlandsche
Hoogovens N.V. 91
41,600 Koninklijke PTT Nederland N.V. 1,470
1,750 Nedlloyd Groep N.V. 49
25,000 Philips Electronics N.V. 848
40,100 Royal Dutch Petroleum Co. 4,796
2,200 Stork N.V. 58
12,000 Unilever N.V. 1,567
5,200 Wolters Kluwer N.V. 400
---------
13,398
---------
PORTUGAL (2.3%)
45,200 Banco Chemical S.A. (Registered) 475
75,000 Banco Commercial Portugues
(Registered) 1,047
25,000 Banco Portugues de Investimento
(New) 441
5,100 Companhia Portuguesa Radio Marconi
S.A. 221
5,500 Companhia Portuguesa Radio Marconi
S.A. (Registered) 238
4,900 Corticeira Amorim S.A. 77
9,000 Jeronimo Martins 408
18,300 Lisnave-Estaleiros Navais de
Lisboa S.A. 89
6,200 Mota e Companhia S.A. 138
27,000 Sonae Investmentos 648
6,600 UNICER-Uniao Cervejeira S.A. 101
---------
3,883
---------
SPAIN (4.2%)
12,000 Argentaria S.A. 349
19,700 Autopistas Concesionaria 158
1,100 Averinox S.A. 106
23,500 Banco Bilbao Vizcaya S.A. 596
15,300 Banco Central Hispano Americano
S.A. 334
15,100 Banco de Santander S.A. 529
10,033 Banco Espanol de Credito, S.A. 68
2,000 Corporacion Financiera Alba 91
272 Corporacion Mapfre 10
7,500 Dragados y Construccion S.A. 87
5,600 Ebro Agricolas S.A. 55
25,700 Empresa Nacional de Electricdad
S.A. 1,094
317 Energia E Industrias Aragonesas 1
10,200 Ercros S.A. 10
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
SPAIN (CONTINUED)
3,100 FASA Renault S.A. $ 95
1,500 Fomento Construction Contractas
S.A. 115
3,700 Gas Natural SDG S.A. 304
585 Gines Navarro Construction 8
87,700 Iberdrola S.A. 518
350 Inmobilaria Metro Vasco Central
S.A. 9
2,430 Mapfre S.A. 98
1,100 Portland Valderrivas S.A. 69
31,200 Repsol S.A. 883
3,700 Tabacalera S.A., Class A 111
92,200 Telefonica Nacional de Espana S.A. 1,166
30,600 Union Electrica Fenosa S.A. 116
4,100 Uralita S.A. 39
4,500 Vallehermoso S.A. 62
2,900 Viscofan Envolturas Celulosicas
S.A. 35
900 Zardoya Otis S.A. 82
---------
7,198
---------
THAILAND (0.1%)
12,200 CMIC Finance & Securities Co.,
Ltd. (Foreign) 45
18,300 Dhana Siam Finance & Securities
Co., Ltd. (Foreign) 89
---------
134
---------
UNITED KINGDOM (11.0%)
48,300 Abbey National plc 368
35,559 Argyll Group plc 165
33,900 Arjo Wiggins Appleton plc 140
13,700 Associated British Foods plc 135
51,981 Barclays plc 524
25,300 Bass plc 225
83,916 BAT Industries plc 596
16,100 BICC plc 87
30,232 Blue Circle Industries plc 145
15,300 BOC Group plc 173
29,700 Boots Co. plc 245
13,600 Bowater plc 99
20,400 BPB Industries plc 92
13,362 British Aerospace plc 103
27,700 British Airways plc 183
135,500 British Gas plc 628
162,586 British Petroleum Co. plc 1,129
82,200 British Steel plc 214
163,400 British Telecommunications plc 1,034
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
100,400 BTR plc $ 533
6,881 Burmah Castrol plc 97
60,662 Cable & Wireless plc 381
30,243 Cadbury Schweppes plc 217
18,600 Caradon plc 79
20,400 Coats Viyella plc 65
12,518 Commercial Union plc 110
11,900 Courtaulds plc 84
8,559 De La Rue Co. plc 120
14,400 Eastern Electricity plc 133
29,900 Forte plc 110
16,600 General Accident plc 152
90,700 General Electric plc 435
12,700 GKN plc 127
66,700 Glaxo Holdings plc 762
66,755 Grand Metropolitan plc 432
28,900 Great Universal Stores plc 262
39,184 Guardian Royal Exchange plc 115
49,200 Guinness plc 371
145,125 Hanson plc 545
29,634 Harrisons & Crossfields plc 76
56,666 HSBC Holdings plc 631
20,400 Imperial Chemical Industries plc 240
40,616 Ladbroke Group plc 111
17,800 Land Securities plc 171
25,358 Lasmo plc 66
33,280 Lloyds Bank plc 332
21,093 Lonrho plc 52
82,200 Marks and Spencer plc 555
13,600 MEPC plc 87
36,400 National Power plc 252
15,300 North West Water Group plc 136
24,600 Peninsular & Oriental Steam
Navigation Co. 236
34,215 Pilkington plc 91
61,089 Prudential Corp. plc 307
12,700 Rank Organization plc 83
19,025 Redland plc 134
22,400 Reed International plc 281
44,600 Reuters Holdings plc 344
7,600 RMC Group plc 124
26,017 Royal Bank of Scotland Group plc 171
21,400 Royal Insurance Holdings plc 99
34,700 RTZ Corp. plc 450
47,762 Sainsbury (J) plc 330
21,300 Scottish Power plc 111
44,100 Sears plc 75
19,700 Sedgwick Group plc 48
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
UNITED KINGDOM (CONTINUED)
10,200 Slough Estates plc $ 36
36,900 SmithKline Beecham plc, Class A 286
9,100 Southern Electricity plc 86
32,504 Tarmac plc 61
17,134 Taylor Woodrow plc 32
45,483 Tesco plc 197
16,362 Thames Water plc 127
14,579 THORN EMI plc 259
11,918 TI Group plc 73
30,500 Trafalgar House plc 27
18,200 Unilever plc 360
29,943 Vodafone Group plc 96
17,400 Zeneca Group plc 245
---------
18,893
---------
TOTAL COMMON STOCKS (Cost $164,491) 169,265
---------
PREFERRED STOCKS (1.1%)
AUSTRALIA (0.2%)
84,100 News Corp., Ltd. 365
---------
BRAZIL ( 0.7%)
18,666,000 Aracruz Celelose S.A., Class B 34
11,100,000 Banco Bradesco 75
1,100,000 Banco do Estado Sao Paulo 6
145,000 Brahma 35
700,000 Ceval Alimentos S.A. 9
1,050,000 Cia Brasileira de Petroleo
Ipiranga 14
2,372,500 Cia Energetica de Minas Gerais 48
60,000 Cia Energetica de Sao Paulo 2
1,550,000 Eletrobras 297
15,000 Industrias Klabin de Papel e
Celulose S.A. 17
65,000 Itausa Investimentos Itau S.A. 31
2,200,000 Petrobras 153
250,000 Servicos de Eletricdade 74
7,300,000 Telecomunicacoes Brasileiras 197
375,000 Telecomunicacoes de Sao Paulo 39
33,500,000 Usinas Siderurgicas de Minas
Gerias 38
1,150,000 Vale Do Rio Doce 155
---------
1,224
---------
ITALY (0.2%)
140,000 Fiat S.p.A. 339
---------
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
NETHERLANDS (0.0%)
453 Koninklijke KNP BT N.V. $ 2
---------
THAILAND (0.0%)
3,050 CMIC Finance & Securities Co.,
Ltd. (Foreign) 1
---------
TOTAL PREFERRED STOCKS (Cost $2,005) 1,931
---------
<CAPTION>
NO. OF
RIGHTS
- ----------
<C> <S> <C>
RIGHTS (0.1%)
PORTUGAL (0.1%)
6,600 UNICER-Uniao Cervejeira S.A. 101
---------
UNITED KINGDOM (0.0%)
4,141 Cadbury Schweppes plc 7
---------
TOTAL RIGHTS (Cost $7) 108
---------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.0%)
BELGIUM (0.0%)
347 Petrofina S.A., expiring 6/03/97 6
---------
HONG KONG (0.0%)
4,400 Applied International Holdings,
expiring 12/30/99 --
---------
ITALY (0.0%)
24,000 Credito Italiano, expiring
12/31/97 --
2,950 R.A.S. S.p.A., expiring 11/30/97 10
1,550 R.A.S. S.p.A., expiring 12/31/97 3
---------
13
---------
THAILAND (0.0%)
6,400 National Finance & Securities Co.
Ltd. --
---------
TOTAL WARRANTS (Cost $0) 19
---------
<CAPTION>
NO. OF
UNITS
- ----------
<C> <S> <C>
UNITS (0.2%)
AUSTRALIA (0.1%)
85,631 Westfield Trust 149
---------
UNITED KINGDOM (0.1%)
35,700 SmithKline Beecham plc 263
---------
TOTAL UNITS (Cost $373) 412
---------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
A$ 7 Australian Dollar $ 5
L 12 British Pound 19
DM 1 Deutsche Mark 1
Y 356 Japanese Yen 4
SP 134 Spanish Peseta 1
---------
TOTAL FOREIGN CURRENCY (Cost $30) 30
---------
TOTAL INVESTMENTS (100.1%) (Cost $166,906) 171,765
---------
OTHER ASSETS AND LIABILITIES (-0.1%)
Other Assets 8,399
Liabilities (8,629)
---------
(230)
---------
NET ASSETS (100%) $ 171,535
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 15,960,317 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 10.75
---------
---------
- ----------------
ADR -- American Depositary Receipt
NCS -- Non Convertible Shares
</TABLE>
12
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
INTERNATIONAL SMALL CAP PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The International Small Cap Portfolio seeks capital appreciation by investing
primarily in the common stocks 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 US$500m is used as our
definition of "small".
The total return of the Portfolio for the three month period ended March 31,
1995 was -2.54% as compared to 1.86% for the Morgan Stanley Capital
International (MSCI) EAFE Index for the same period. Total return for the past
twelve months and the average annual total return for the period from inception
in December 1992 through March 31, 1995 were -8.57% and 19.52%, respectively,
compared to 6.08% and 17.70% for MSCI EAFE Index during the same periods.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO......... -2.54% -8.57% 19.52%
INDEX............. 1.86 6.08 17.70
<FN>
- -------------
1. The MSCI EAFE Index is an unmanaged index of common stocks, and includes
Europe, Australia and the Far East Index (assumes dividends reinvested net
of withholding taxes).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The outstanding feature of the first quarter has clearly been the turbulent
impact of currencies most notably the weakness of the U.S. dollar and the
strength of the deutsche mark and Japanese yen. Returns to date for the world's
stock markets reflect this with the MSCI EAFE Index down 1.27% in local currency
terms but up 6.2% when translated into the U.S. dollar. The significant
underperformance of the International Small Cap Portfolio in March was largely a
result of the impact of these extreme currency movements, resulting in a
reversal of the sizeable outperformance of the Index for the first two months of
the year. The benefits of being underweight in the weak Japanese market and
overweight in the strong Australian market were more than offset by the strength
of the yen and weakness of the Australian dollar. The Portfolio's overweighting
in the very weak German market also penalized performance and was not offset by
the strength of the deutsche mark. The Portfolio's Japanese yen, deutsche mark
and Swiss franc hedges all negatively impacted the quarter's return although the
Spanish peseta hedge served to protect the Portfolio's Spanish weighting during
the recent devaluation. Given the general weakness of the international markets,
we saw further evidence of safe haven investing with investors favoring more
liquid issues/blue chips rather than small caps. The rally in the U.K. equity
market in recent weeks, driven by weakness in sterling, did not feed through to
small caps. Similarly in Japan, small caps have fallen further over the quarter
than larger companies.
The Portfolio's small cap investments have continued to report a string of good
results for the 1994 financial year end and valuation levels look compelling. We
are continuing to find a surplus of strong, well managed smaller companies
selling at very depressed levels and have taken advantage of cash inflows to the
Portfolio to build a number of new positions as well as to average down on many
of the existing holdings.
Looking forward, we do not anticipate any major shift in the Portfolio's
geographic mix, which results purely from bottom-up stock selection. The
majority of new research ideas coming through in our value screens are still in
Continental Europe although following further weakness in U.K. small
1
<PAGE>
caps more value is emerging there. Given our concerns over the likely
deleterious effect of the yen/ dollar exchange rate at these levels, we do not
anticipate any change to the Portfolio's significant underweighting in Japan.
Too many of the smaller companies that appear in our screens of the Japanese
market are the very manufacturing companies way back in the supply chain that
simply cannot survive with the yen at its current level. Also, we believe the
risk of a banking crisis based on a spate of fresh bankruptcies is high.
As we have discussed in the past, as the non-tariff barriers in Japan are
steadily dismantled too few of Japan's smaller companies will find themselves
able to compete against a more international field of competitors. Given the
sizeable decline in the Japanese market, there are many new companies coming
through in our value screens but we will continue to only invest in companies
that are not only cheaply valued but also have a strong business franchise and
management and good prospects.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------- ---------
<C> <S> <C>
COMMON STOCKS (94.1%)
AUSTRALIA (8.7%)
701,440 Australian National Industries
Ltd. $ 643
990,079 Bains Harding Ltd. 348
2,655,700 BRL Hardy Ltd. 2,784
140,833 BRL Hardy Ltd. (New) 26
2,230,000 Burswood Property Trust 2,288
2,351,732 Country Road Ltd. 1,982
3,099,000 McPhersons Ltd. 364
5,138,265 Parbury Ltd. 2,034
1,249,957 S.E.A.S. Sapfor Ltd. 4,169
1,721,500 Solution 6 Holdings Ltd. 1,249
---------
15,887
---------
DENMARK (1.6%)
87,200 SYD-Sonderjylland Holdings 2,890
---------
FINLAND (2.7%)
115,000 Amer-Yhtymae Oy, Class A 1,950
180,000 Hartwall Oy, Class A 2,906
---------
4,856
---------
FRANCE (11.2%)
53,500 Dauphin O.T.A. 2,658
5,400 De Dietrich et Compagnie 3,040
10,870 Europeene de Propulsion S.A. 731
5,515 Galeries Layfayette 2,617
39,000 Legris Industries S.A. 2,930
24,500 Precision Mecaniques Labinal S.A. 3,854
14,000 Omnium de Gestion & Finance 1,884
61,700 Sediver S.A. 2,682
---------
20,396
---------
GERMANY (6.2%)
12,500 Duerr Beteiligungs AG 3,930
10,688 Sinn AG 2,593
20,000 Varta AG 4,013
2,210 Vossloh AG 789
---------
11,325
---------
HONG KONG (1.8%)
5,200,000 Pico Far East Holdings Ltd. 558
7,093,000 Tungtex Holdings Co., Ltd. 917
5,130,000 Vitasoy International Holdings
Ltd. 1,875
---------
3,350
---------
IRELAND (3.0%)
1,081,176 Anglo Irish Bank Corp. plc (Irish
Pound Shares) 851
275,110 Arnotts plc 1,071
1,070,000 Avonmore Foods plc, Class A 2,031
687,000 Green Property plc 1,505
---------
5,458
---------
<CAPTION>
VALUE
SHARES (000)
- --------- ---------
<C> <S> <C>
ITALY (1.4%)
184,000 Editoriale L'Expresso S.p.A. $ 302
30,000 Safilo S.p.A. 193
444,000 Unicem Di Risp (NCS) 1,294
44,000 Vincenzo Zucchi S.p.A. 189
212,500 Vincenzo Zucchi S.p.A. (NCS) 523
---------
2,501
---------
JAPAN (9.3%)
15,000 Daikin Manufacturing Ltd. 268
231,000 Foster Electric Co., Ltd. 1,388
707,000 Japan Oil Transportation 4,086
213,000 Japan Vilene Co., Ltd. 1,472
99,000 Kansei Corp. 800
124,000 Nifco, Inc. 1,828
358,000 Toc Co. 3,772
442,000 Tokai Senko K.K. 2,112
170,000 Toyoda Gosei Co. 1,333
---------
17,059
---------
NETHERLANDS (9.5%)
20,900 Ahrend Groep N.V. 2,670
10,790 Holdingsmij de Telegraaf N.V. 1,236
23,000 Hollandsche Beton Groep N.V. 3,661
28,885 Industriemij Welna N.V. 918
134,000 Koninklijke Van Ommeren N.V. 3,520
41,000 Konin Nijverdal Ten Carte N.V. 2,030
8,450 Polynorm N.V. 875
44,400 Randstad Holdings N.V. 2,554
---------
17,464
---------
NEW ZEALAND (2.1%)
645,592 Fisher & Paykel Industries Ltd. 1,683
359,600 Wilson & Horton Ltd. 2,130
---------
3,813
---------
NORWAY (1.7%)
11,500 Adelsten, Class B 1,655
228,020 Oceanor 498
8,450 Simrad A/S Nokio, Class A 89
90,000 Simrad A/S Nokio, Class B 946
---------
3,188
---------
SPAIN (4.8%)
285,000 Asturiana del Zinc S.A. 2,426
80,816 Bodegas Y Bebidas S.A. 2,197
90,000 Gas y Electricidad S.A. 3,730
40,285 Viscofan Envolturas Celulosicas
S.A. 484
---------
8,837
---------
SWITZERLAND (15.3%)
4,000 Bobst AG (Bearer) 5,495
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------- ---------
<C> <S> <C>
SWITZERLAND -- (CONTINUED)
8,400 Elco Looser Holding AG
(Registered) $ 3,625
885 Grands Magasins Jelmoli (Bearer) 487
4,185 Hero AG (Bearer) 2,285
995 Kuoni Riesebuero AG (Participating
Certificates) 1,490
1,650 LEM Holdings AG 468
5,424 Magazine Globus (Participating
Certificates) 3,511
375 Magazine Globus (Registered) 239
5,850 Porst Holding AG (Bearer) 1,185
590 Schweizerische Industrie-
Gesellschaft Holdings (Bearer) 1,143
4,400 Schweizerische Industrie-
Gesellschaft Holdings
(Registered) 4,069
5,800 Zellweger Uster AG (Bearer) 3,882
---------
27,879
---------
UNITED KINGDOM (14.8%)
3,631,578 Anglo Irish Bank Corp. plc
(British Pound Shares) 2,822
525,000 Asprey plc 646
31,700 Bespak plc 159
1,449,216 Blagden Industries plc 2,557
212,000 Bluebird Toys plc 772
920,000 BSM Group plc 2,279
447,000 Burtonwood Brewery plc 1,165
3,790,000 Casket plc 890
214,300 Church & Co. plc 1,578
162,120 Davis Service Group plc 556
3,045,850 Donelon Tyson plc 493
952,000 GEI International plc 1,341
212,000 Hadleigh Industries Group plc 518
390,000 Hornby Group plc 713
877,294 John Mowlem & Co. plc 1,157
206,335 Mallett plc 281
1,637,405 Matthews (Bernard) plc 2,942
22,000 Moss Bros. Group plc 124
117,905 Partridge Fine Arts plc 160
2,659,393 Pentos plc --
345,526 Perry Group plc 777
3,093,500 Shandwick plc 1,753
691,000 Sketchley plc 940
1,500,000 The 600 Group plc 1,943
418,735 Waterman Partnership Holdings plc 352
620,000 Wembley plc 60
804,695 YRM plc 85
---------
27,063
---------
TOTAL COMMON STOCKS (Cost $176,375) 171,966
---------
<CAPTION>
VALUE
SHARES (000)
- --------- ---------
<C> <S> <C>
PREFERRED STOCKS (1.9%)
GERMANY (1.9%)
2,400 Jil Sander AG $ 1,521
7,745 Shaerf AG 1,908
---------
TOTAL PREFERRED STOCKS (Cost $3,316) 3,429
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -------------
<C> <S> <C>
WARRANTS (0.0%)
HONG KONG (0.0%)
452,000 Pico Far East Holdings Ltd,
expiring 4/30/96 (Cost $0) 5
---------
<CAPTION>
FACE
AMOUNT
(000)
- -------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.1%)
ITALY (0.1%)
IL 518,000 Mediobanca S.p.A. 5.50%,
1/01/00 (Cost $328) 264
---------
TOTAL FOREIGN SECURITIES (96.1%) (Cost 175,664
$180,019)
---------
SHORT-TERM INVESTMENT (5.5%)
REPURCHASE AGREEMENT (5.5%)
$ 10,114 Goldman Sachs, 6.05%, dated
3/31/95, due 4/03/95, to be
repurchased at $10,119,
collateralized by $7,770
United States Treasury Bonds
13.375% due 8/15/01, valued
at $10,348 (Cost $10,114) 10,114
---------
FOREIGN CURRENCY (0.6%)
A$ 6 Australian Dollar 4
L 2 British Pound 3
FM 218 Finnish Markka 50
FF 477 French Franc 99
SP 105,750 Spanish Peseta 833
---------
TOTAL FOREIGN CURRENCY (Cost $978) 989
---------
TOTAL INVESTMENTS (102.2%) (Cost $191,111) 186,767
---------
OTHER ASSETS AND LIABILITIES (-2.2%)
Other Assets 847
Liabilities (4,823)
---------
(3,976)
---------
NET ASSETS (100%) $182,791
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 12,396,928 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 14.74
---------
---------
<FN>
- -------------
NCS -- Non Convertible Shares
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
HIGH YIELD PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of fixed income securities that offer a higher yield than
that offered by debt securities in the three highest rating categories.
The total return of the Portfolio for the three month period ended March 31,
1995, was 6.11% as compared to 4.71% for the CS First Boston High Yield Index
for the same period. Total returns for the past twelve months and the average
annual return for the period from inception in September 1992 through March 31,
1995, were 2.37% and 9.48%, respectively, compared to 4.80% and 9.40% for the
Index during the same periods.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------- -----------------
<S> <C> <C> <C>
PORTFOLIO......... 6.11% 2.37% 9.48%
INDEX............. 4.71 4.80 9.40
<FN>
- -------------
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 or reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The high yield market was strong in the first quarter of 1995. A strong Treasury
market and a firm equity market underpinned the good results in high yield. Ten
year Treasury bond yields declined over sixty basis points to 7.2% and the S&P
500 returned 9.7%. Technical factors in the high yield market were also
favorable. New issuance was light and mutual fund cash flows returned to
positive territory after experiencing outflows in 1994. By the end of the
quarter the CS First Boston High Yield Index spread to Treasuries stood at 429
basis points, nearly fifty basis points higher than at the beginning of the
year. If Treasuries stabilize, spreads could tighten.
At the end of the year, we stated that we felt the casino sector had been
oversold and that we would add to our exposure. This turned out to be the case
as it was the best performing sector in the market for the first quarter. As
casinos are our second largest industry holding with approximately an 8.9%
weighting, it contributed to our outperformance. We also continue to have a
meaningful position in the cable television and broadcasting sector. Pricing
re-regulation is behind the cable industry and we like the powerful cash flow
these companies generate. Furthermore we believe the cable companies are well
positioned in the emerging marketplace for video and telephone services.
Several IPOs also buoyed the market in the quarter. Two of the large leveraged
buyouts of the 1980s, Fort Howard and American Standard, finally returned to the
public markets. In addition, Bell and Howell announced its intention to sell
equity to the public.
Investors began to differentiate sector bets within the cyclicals. For example,
while paper companies performed well in the marketplace, steel credits have
weakened. Investors grew concerned when Nucor announced price reductions on
certain product lines that the steel industry had peaked. Finally, the biggest
news in the market occurred after the end of the quarter when the McCaw family
announced its intention to invest $1 billion in Nextel, a high yield credit.
Nextel and other technology bonds rallied sharply on this news and helped
highlight some of the asset values that exist in the high yield market.
The conflicting earnings outlook makes us somewhat cautious looking forward.
Also the calendar for new issues seems to be building rapidly. More of a
barbelled strategy may be appropriate at this time. That is to say, underweight
the medium quality sector that may feel pressure from new
1
<PAGE>
issue pricing and a softer economy, and overweight higher quality and selective
lower quality credits. We believe this will give us a good blend of portfolio
stability with the potential of some upside kicker.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------- --------
<C> <S> <C>
CORPORATE BONDS AND NOTES (83.2%)
AEROSPACE & DEFENSE (3.0%)
$ 500 Sabreliner Corp., Series A, 12.50%,
4/15/03 $ 435
1,500 Tracor, Inc., 10.875%, 8/15/01 1,504
--------
1,939
--------
BROADCAST-RADIO & TELEVISION (12.0%)
2,250 Ackerley Communications, Inc., Series
B, 10.75%, 10/01/03 2,256
1,000 Cablevision Systems Corp., 9.875%,
2/15/13 961
2,250 Continental Cablevision, Inc., 9.50%,
8/01/13 2,143
600 Helicon Group, Series B, 9.00% to
11/01/96, 11.00% to 11/01/03 521
400 Heritage Media, 11.00%, 10/01/02 418
500 Katz Corp., 12.75%, 11/15/02 518
850 Rogers Cablesystems, Inc., (Yankee
Bond), 10.00%, 3/15/05 846
225 SpectraVision, Inc., (Floating Rate),
11.65%, 12/01/02 27
--------
7,690
--------
BUILDING MATERIALS & COMPONENTS (4.9%)
2,000 Tarkett International, 9.00%, 3/01/02 1,882
850 USG Corp., 8.75%, 3/01/17 765
750 Walter Industries Corp., 17.00%,
1/01/96 486
--------
3,133
--------
CHEMICALS (3.7%)
1,000 General Chemical, 9.25%, 8/15/03 958
1,000 Plastic Specialties & Technologies,
Inc., 11.25%, 12/01/03 896
500 Sherritt, Inc., 10.50%, 3/31/14 498
--------
2,352
--------
COAL, GAS & OIL (2.0%)
1,300 Clark R&M Holdings, Zero Coupon,
2/15/00 751
474 Columbia Gas Systems, Inc., Employee
Thrift Plan Obligation, 9.875%,
11/30/01 512
--------
1,263
--------
ELECTRICAL EQUIPMENT (1.4%)
1,000 Protection One Alarm, Inc., 12.00%,
11/01/03 930
--------
ELECTRONICS (4.9%)
400 ADT Operations, 9.25%, 8/01/03 389
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------- --------
<C> <S> <C>
$1,500 Bell & Howell Co., Series B, 0.00% to
3/01/00, 11.50% to 3/01/05 $ 802
1,500 Imax Corp., 7.00% to 3/01/97, 10.00%
to 3/01/01 1,303
1,500 International Semi-Tech, (Yankee
Bond), 0.00% to 8/15/00, 11.50% to
8/15/03 660
--------
3,154
--------
ENVIRONMENTAL CONTROLS (0.6%)
500 Envirotest Systems Corp., 9.125%,
3/15/01 400
--------
FINANCIAL SERVICES (5.8%)
800 GPA Delaware, Inc., 8.75%, 12/15/98 635
1,209 GPA Equipment Trust, Participating
Certificates, (Floating Rate),
9.125%, 12/02/96 1,088
550 GPA Investments, 6.40%, 11/19/98 374
1,189 Tiphook Finance Corp., 8.00%, 3/15/00 904
886 Tiphook Finance Corp., 10.75%,
11/01/02 709
--------
3,710
--------
FOOD (2.7%)
750 Americold Corp. 1st Mortgage Bond,
Series B, 11.50%, 3/01/05 688
1,150 Pilgrim's Pride Corp., 10.875%,
8/01/03 1,044
--------
1,732
--------
FOOD SERVICE & LODGING (2.1%)
1,300 Motels of America, 12.00%, 4/15/04 1,319
--------
FOREST PRODUCTS & PAPER (2.0%)
1,250 Stone Consolidated, Senior Secured
Notes, 10.25%, 12/15/00 1,269
--------
GAMING & LODGING (0.7%)
300 GNF Corp. (Bally), 10.625%, 4/01/03 231
275 Louisiana Casino Cruises, 11.50%,
12/01/98 241
--------
472
--------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
625 Eyecare Centers of America, 12.00%,
10/01/03 492
--------
PACKAGING & CONTAINER (5.5%)
500 Owens-Illinois, Inc., 10.50%, 6/15/02 509
500 Owens-Illinois, Inc., 9.75%, 8/15/04 485
2,000 Owens-Illinois, Inc., 9.95%, 10/15/04 1,955
600 Stone Container Corp., 9.875%,
2/01/01 581
--------
3,530
--------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------- --------
<C> <S> <C>
PUBLISHING (7.2%)
$1,000 Marvel III Holdings Inc., Series B,
9.125%, 2/15/98 $ 893
1,900 Marvel Parent Holdings, Zero Coupon,
4/15/98 1,204
2,750 Viacom International, 8.00%, 7/07/06 2,489
--------
4,586
--------
RETAIL-GENERAL (3.3%)
625 Penn Traffic Co., 9.625%, 4/15/05 577
2,175 Southland Corp., 5.00%, 12/15/03 1,534
--------
2,111
--------
TELECOMMUNICATIONS (5.0%)
4,000 Dial Call Communications, 0.00% to
4/15/99, 12.25% to 4/15/04 1,520
450 Horizon Cellular Telephone, 0.00% to
10/01/97, 11.375% to 10/01/00 339
1,500 Telefonica de Argentina, (Yankee
Bond), 11.875%, 11/01/04 1,331
--------
3,190
--------
TEXTILES & APPAREL (4.3%)
1,000 PT Polysindo Eka Perkasa, (Yankee
Bond), 13.00%, 6/15/01 920
2,000 Westpoint Stevens, Inc., 9.375%,
12/15/05 1,835
--------
2,755
--------
TRANSPORTATION (4.9%)
393 America West Airlines, 6.00%, 3/31/97 369
2,000 Moran Transportation Co., 11.75%,
7/15/04 1,923
1,000 Venture Holdings, 9.75%, 4/01/04 866
--------
3,158
--------
UTILITIES (6.4%)
650 AES Corp., 9.75%, 6/15/00 638
1,478 Beaver Valley Funding Corp., (Lease
Obligation Bond), 9.00%, 6/01/17 1,131
2,400 First PV Funding Corp., (Lease
Obligation Bond), 10.15%, 1/15/16 2,367
--------
4,136
--------
TOTAL CORPORATE BONDS AND NOTES (Cost
$56,422) 53,321
--------
FOREIGN GOVERNMENT OBLIGATIONS (1.3%)
BONDS (1.3%)
1,500 Republic of Argentina, Series L,
(Floating Rate), 7.313%, 3/31/05
(Cost $1,057) 808
--------
<CAPTION>
VALUE
SHARES (000)
- ------- --------
<C> <S> <C>
COMMON STOCKS (0.3%)
BUILDING MATERIALS & COMPONENTS (0.1%)
3,110 Walter Industries, Inc. $ 34
--------
FINANCIAL SERVICES (0.0%)
729 Duff & Phelps Corp. 8
243 Duff & Phelps Credit Rating Co. 3
1,268 WestFed Holdings, Inc., Class B --
--------
11
--------
FOOD SERVICE & LODGING (0.2%)
1,300 Motels of America, Inc. 104
--------
GAMING & LODGING (0.0%)
500 Trump Taj Mahal, Class A 5
--------
MACHINERY (0.0%)
25 Bucyrus-Erie --
--------
TOTAL COMMON STOCKS (Cost $163) 154
--------
PREFERRED STOCKS (0.0%)
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A
(Cost $57) --
--------
CONVERTIBLE PREFERRED STOCKS (1.7%)
TRANSPORTATION (1.7%)
20,000 Delta Air Lines, Inc., Series C,
$3.50, 12/31/49 (Cost $993) 1,065
--------
<CAPTION>
NO. OF
RIGHTS
- -------
<C> <S> <C>
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
35,000 SpectraVision, Inc., expiring
10/08/97 (Cost $133) 5
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- --------
<C> <S> <C>
WARRANTS (0.3%)
AEROSPACE & DEFENSE (0.0%)
500 Sabreliner Corp., expiring 4/15/03 5
--------
ELECTRICAL EQUIPMENT (0.2%)
28,000 Protection One Alarm, Inc., expiring
11/01/03 126
--------
GAMING & LODGING (0.0%)
1,250 Capital Gaming International, Inc.,
expiring 2/01/99 --
2,700 Casino Magic Corp., expiring 10/14/96 --
825 Louisiana Casino Cruises, expiring
12/01/98 13
--------
13
--------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -------- --------
<C> <S> <C>
HEALTH CARE SUPPLIES & SERVICES (0.0%)
625 Eye Care Centers of America, expiring
10/01/03 $ 3
--------
INSURANCE (0.0%)
500 Horace Mann Educators Corp., expiring
8/15/99 8
--------
METALS (0.0%)
5,000 Sheffield Steel Corp., expiring
11/01/01 30
--------
PACKAGING & CONTAINER (0.0%)
1,000 Crown Packaging Holdings, expiring
11/01/03 30
--------
REAL ESTATE (0.1%)
1,000 Petro PSC Properties L.P., expiring
6/01/97 33
--------
TELECOMMUNICATIONS (0.0%)
4,000 Dial Page, Inc., expiring 4/25/99 --
--------
TOTAL WARRANTS (Cost $221) 248
--------
<CAPTION>
NO. OF
UNITS
(000)
- --------
<C> <S> <C>
UNITS (9.7%)
GAMING & LODGING (8.2%)
1,750 Casino America, 11.50%, 11/15/01 1,702
2,208 Maritime Group, 13.50%, 2/15/97 1,082
500 Santa Fe Hotel, Inc., 11.00%, 12/15/00 491
2,564 Trump Taj Mahal Funding Inc., PIK,
11.35%, 11/15/99 1,942
--------
5,217
--------
METALS (1.5%)
1,000 Sheffield Steel Corp., 12.00%,
11/01/01 980
--------
TOTAL UNITS (Cost $7,884) 6,197
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------- --------
<C> <S> <C>
SHORT-TERM INVESTMENT (0.8%)
REPURCHASE AGREEMENT (0.8%)
$ 513 U.S. Trust, 6.00%, dated 3/31/95, due
4/03/95, to be repurchased at $513,
collateralized by $500 Government
National Mortgage Association, 9.00%
- 9.50%, due 12/15/04 - 6/15/05,
valued at $523 (Cost $513) $ 513
--------
TOTAL INVESTMENTS (97.3%) (Cost $67,443) 62,311
--------
OTHER ASSETS AND LIABILITIES (2.7%)
Other Assets 1,876
Liabilities (135)
--------
1,741
--------
NET ASSETS (100.0%) $64,052
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 6,511,994 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 9.84
--------
--------
<FN>
- -------------
PIK -- Payment-In-Kind. Income may be received in additional securities or cash
at the discretion of the issuer.
Floating Rate Securities. The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in effect
on March 31, 1995.
</TABLE>
5
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
SMALL CAP VALUE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Small Cap Value Portfolio invests in small companies that our research
indicates are undervalued, of high quality, and will reward the shareholder
through high current dividend income. The Portfolio's disciplined value approach
seeks to outperform the Russell 2500 Small Company Index in the longer term. We
believe our emphasis on high quality companies and high yielding securities will
help the Portfolio perform particularly well in difficult markets.
The Small Cap Value 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 total return of the Portfolio for the three month period ended March 31,
1995 was 4.47% as compared to 7.39% and 9.73% for the Russell 2500 Index and the
S&P 500 Index, respectively, for the same period. Total returns for the past
twelve months and the average annual return of the Portfolio for the period from
inception in December 1992 through March 31, 1995 were 6.65% and 8.67%,
respectively, compared to 8.66% and 11.30% for the Russell 2500 Index,
respectively, and, 15.54% and 9.36% for the S&P 500 Index, respectively, for the
same periods.
PERFORMANCE COMPARED TO THE RUSSELL 2500 AND S&P 500 INDICES(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO........... 4.47% 6.65% 8.67%
RUSSELL 2500........ 7.39 8.66 11.30
S&P 500............. 9.73 15.54 9.36
<FN>
- -------------
1. The Russell 2500 and the S&P 500 Indices 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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Portfolio had a strong start in January of the new year 1995 by
outperforming most small cap indices. We attribute the outperformance in January
to the continued very positive earnings progression of the Portfolio's
companies. As most upside surprises were the result of more streamlined
production processes and not solely sales related, we expect the positive
earnings trend to continue. However, as the quarter progressed the pendulum
swung ever more heavy towards the belief that an economic "soft landing" is
achievable. The ensuing enthusiasm lifted the stock market up sharply,
particularly highly visible, larger, growth-oriented companies. For the full
quarter the Russell 2000 Small Company Index trailed the S&P 500 Large Company
Index significantly.
Our outlook on the fundamental strength of the Portfolio's companies remains
very positive as reflected by strong fourth quarter earnings. In addition, the
Portfolio's industrial companies saw productivity increases twice as high as the
average domestic small company. This should bode particularly well for the
anticipated scenario of slower economic growth.
Although January's performance was driven by company specific earnings
announcements, performance later in the quarter was driven heavily by industry
effects. The best performing industries were clearly healthcare and technology.
Although the Portfolio's healthcare and technology companies averaged a 20% and
9% return respectively for the quarter, the Portfolio holds a below average
weighting in these industries as we could not find enough inexpensive, good
quality companies to invest in these areas. Other areas of strong returns for
the Portfolio were specific late cyclical companies such as paper (+8.9%) and
capital goods (+9.7%). Banks and insurance companies showed strong performance
(+11%, +7.2%) after reporting mostly excellent fourth quarter earnings. Laggards
during the quarter were utility companies(+1.7%), retail stocks (-4.6%), after
another disappointing Christmas season in apparel, and transportation (-5.8%)
anticipating weaker volume in a slowing economy.
During the quarter we purchased Jackpot Enterprises, a gaming route operator in
Nevada at a price close to its book value, a 4% dividend yield, and a superb
balance sheet showing a net cash position. Jackpot leases retail space in
Nevada's major chain stores where it operates gaming machines. We expect Jackpot
to take advantage of the fragmented
1
<PAGE>
yet growing market in gaming route operations. The Portfolio purchased Gerber
Scientific, Inc. at an inexpensive 130% of book value and a dividend yield of
2.5%. Gerber Scientific develops and markets computer-aided design and
manufacturing systems mainly for the garment industry. As a true global niche
operator in its segment, Gerber conducts about 50% of its sales outside the US.
We also added Manufactured Home Communities, Inc. to the Portfolio. The company
owns 67 manufactured housing communities in 20 states. We expect long term
growth to come from rental income on properties, the consolidation of a
fragmented industry, and the increase in retirement population in the company's
sun belt locations. We also took a position in Core Industries (140% of book
value, 3% dividend yield). The company operates in three niche areas including
the production of high end farm equipment.
The Portfolio added SkyWest Inc., one of the largest regional airlines located
in Utah. We purchased SkyWest at 1.3x book value with a strong balance sheet
supporting a 15% share buyback program. We believe SkyWest operates with a long
term high growth strategy. We believe the stock is temporary undervalued since
the company has suffered from recent heightened safety concerns for commuter
airlines. The most recent addition to the Portfolio is Augat Inc., the world's
largest manufacturer of connector products which we bought at a low 140% of book
value. Through its communication division Augat sells products such as cable TV
connectors. This provides the Portfolio exposure to the strongly growing
telecommunication industry without having to pay the high multiples typically
associated with these industries.
The purchase of six new positions during the first quarter of 1995 translates
into a 24% annual turnover ratio. This is in line with our targeted low turnover
rate of 20 - 30%.
Corresponding Portfolio sales took advantage of sharply increasing valuations in
the health care industry. We sold Diagnostic Products, Inc. based on valuation.
The company has been successful in bringing a critical amount of new diagnostic
tests and test equipment to the market. We purchased Diagnostic Products at a
price-to-book multiple of 1.8X in March 1994; the company currently sells at a
2.8X price-to-book multiple. Similarly, taking advantage of sharply increasing
prices in the healthcare industry, we sold Bergen Brunswig Corp, a California
distributor of ethical drugs. In January we sold Fourth Financial Corp., a
banking company located in midwestern Kansas based on valuation. We also sold
American Maize Co., a manufacturer of corn sweeteners and tobacco products. The
company received a purchase offer by Paris-based Eridania Beghin Say S.A. at
very favorable terms. We sold the stock since we regarded it as fully valued,
and due to the ownership structure of the company there was a risk the deal
would not be consummated. Although Beghin Say raised the offer and the stock
price rose even higher the buyout was finally stopped by the courts. American
Maize today trades at a level below our sales price. We feel this example
underlines the importance of our disciplined sell rule which requires a stock to
be traded when it is fairly valued and not to engage in takeover speculation.
STRATEGY
The Small Cap Value Equity Portfolio offers the consistent application of a
disciplined value driven investment process to its participants. As such, we
will pursue our search for smaller companies that our research shows are
undervalued, are of high quality and pay above average dividend yield. We
believe these companies will be well positioned to achieve superior total return
for the longer term.
- ------------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------- ---------
<C> <S> <C>
COMMON STOCKS (96.7%)
AEROSPACE (3.3%)
33,500 AAR Corp. $ 406
18,000 Thiokol Corp. 511
85,300 United Industrial Corp. 458
---------
1,375
---------
BANKING (8.4%)
15,000 Deposit Guaranty Corp. 510
15,950 First Security Corp. (Delaware) 383
11,400 Mercantile Bancorp. 416
18,600 Onbancorp, Inc. 474
19,285 Southern National Corp. 383
16,000 Standard Federal Bank 430
25,110 Summit Bancorp., Inc. 471
12,400 Union Bank of San Francisco 428
---------
3,495
---------
BUILDING (3.1%)
11,500 Ameron, Inc. (Delaware) 391
29,800 Gilbert Associates, Inc., Class A 373
24,500 Pratt & Lambert, Inc. 514
---------
1,278
---------
CAPITAL GOODS (3.1%)
21,403 Binks Manufacturing Co. 471
30,200 Cascade Corp. 400
19,500 Starret (L.S.) Co., Class A 427
---------
1,298
---------
CHEMICALS (4.2%)
29,920 Aceto Corp. 456
21,400 Dexter Corp. 468
22,000 Learonal, Inc. 423
23,800 Quaker Chemical Corp. 405
---------
1,752
---------
COMMUNICATIONS (1.1%)
23,600 Comsat Corp. 440
---------
CONSUMER - DURABLES (2.9%)
19,200 Arvin Industries, Inc. 408
23,298 Knape & Vogt Manufacturing Co. 349
31,300 Oneida Ltd. 454
---------
1,211
---------
CONSUMER - RETAIL (5.6%)
28,800 CPI Corp. 457
41,900 Deb Shops, Inc. 168
23,800 Edison Brothers Stores, Inc. 354
21,700 Guilford Mills, Inc. 467
10,600 Springs Industries, Inc., Class A 397
38,600 Venture Stores, Inc. 478
---------
2,321
---------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------- ---------
<C> <S> <C>
CONSUMER - STAPLES (4.6%)
13,802 Block Drug Co., Inc., Class A $ 483
27,800 Coors (Adolph), Inc., Class B 455
25,900 International Multifoods Corp. 515
27,400 Nash Finch Co. 435
---------
1,888
---------
ENERGY (2.4%)
18,000 Diamond Shamrock, Inc. 475
19,300 Ultramar Corp. 502
---------
977
---------
FINANCIAL - DIVERSIFIED (3.1%)
13,900 Finova Group, Inc. 459
10,100 GATX Corp. 452
25,000 Manufactured Home Communities, Inc. 384
---------
1,295
---------
HEALTH CARE (4.8%)
15,500 Beckman Instruments, Inc. 459
31,500 Bindley Western Industries 508
53,200 Hooper Holmes, Inc. 538
63,700 Kinetic Concepts, Inc. 494
---------
1,999
---------
INDUSTRIAL (6.6%)
15,200 American Filtrona Corp. 414
11,400 Barnes Group, Inc. 502
33,700 GenCorp, Inc. 425
44,500 Kaman Corp., Class A 495
32,900 Zero Corp. (Delaware) 465
24,300 Zurn Industries, Inc. 446
---------
2,747
---------
INSURANCE (5.4%)
14,200 Argonaut Group, Inc. 426
25,000 Enhance Financial Services Group, Inc. 425
15,500 Provident Life & Accident Co. of
America, Class B 351
17,700 Selective Insurance Group, Inc. 509
13,300 USLife Corp. 507
---------
2,218
---------
METALS (2.1%)
7,700 Carpenter Technology Corp. 445
11,400 Cleveland-Cliffs Iron Co. 439
---------
884
---------
PAPER & PACKAGING (3.5%)
15,500 Ball Corp. 533
11,400 Potlatch Corp. 480
23,500 Sealright Co., Inc. 446
---------
1,459
---------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------- ---------
<C> <S> <C>
SERVICES (12.6%)
20,500 ABM Industries, Inc. $ 466
17,200 Angelica Corp. 473
24,000 Bowne & Co. 387
27,700 Cross (A.T.) Co., Class A 409
27,800 Gibson Greetings, Inc. 247
40,000 Handleman Co. 430
45,000 Jackpot Enterprises, Inc. 411
17,400 National Service Industries, Inc. 470
23,900 New England Business Services, Inc. 439
53,400 Piccadilly Cafeterias, Inc. 487
32,500 Russ Berrie & Co., Inc. 467
16,100 Wallace Computer Services, Inc. 517
---------
5,203
---------
TECHNOLOGY (8.8%)
28,000 Augat, Inc. 514
11,500 Avnet, Inc. 464
41,000 Core Industries, Inc. 497
21,800 Cubic Corp. 425
33,700 Gerber Scientific, Inc. 484
15,900 Joslyn Corp. 390
19,400 MTS Systems Corp. 466
23,500 National Computer Systems, Inc. 394
---------
3,634
---------
TRANSPORTATION (2.9%)
20,800 Overseas Shipholding Group, Inc. 426
29,600 SkyWest, Inc. 440
20,400 Yellow Corp. 327
---------
1,193
---------
UTILITIES (8.2%)
17,700 Central Hudson Gas & Electric 465
35,000 Central Maine Power Co. 385
9,300 Commonwealth Energy Systems Cos. 381
15,000 Eastern Enterprises 416
22,900 Oneok, Inc. 432
13,700 Orange & Rockland Utilities, Inc. 442
13,500 SJW Corp. 437
28,500 Washington Water Power Co. 428
---------
3,386
---------
TOTAL COMMON STOCKS (Cost $39,923) 40,053
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT (3.3%)
$1,351 U.S. Trust, 6.00%, dated 3/31/95, due
4/03/95, to be repurchased at
$1,352, collateralized by $1,305
Government National Mortgage
Association, 9.50%-10.00%, due
10/15/09 - 11/15/09, valued at
$1,401 (Cost $1,351) $1,351
---------
TOTAL INVESTMENTS (100.0%) (Cost $41,274) 41,404
---------
OTHER ASSETS AND LIABILITIES (0.0%)
Other Assets 117
Liabilities (113)
---------
4
---------
NET ASSETS (100%) $ 41,408
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 3,811,868 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 10.86
---------
---------
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
GOLD PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Morgan Stanley Institutional Fund's 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.
The total return of the Portfolio for the three month period ended March 31,
1995 was 3.97% as compared to 11.56% for the Philadelphia Gold and Silver Index
for the same period. The total return for the twelve months ended March 31, 1995
and the average annual return for the period from inception in February 1994
through March 31, 1995, were -3.99% and -4.21%, respectively, for the Portfolio,
compared to -8.77% and -10.10% for the Philadelphia Gold and Silver Index for
the same periods.
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS2
----------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ------------ --------------
<S> <C> <C> <C>
PORTFOLIO.............. 3.97% -3.99% -4.21%
INDEX.................. 11.56 -8.77 -10.10
</TABLE>
- -------------
1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of
nine 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.
Financial events during the first quarter of 1995 continued in an erratic
pattern. World currency volatility has escalated after destabilizing events in
Mexico. The U.S. dollar has suffered a precipitous plunge of 10% to 15% against
the safe-haven currencies of Japan, Germany, and Switzerland, resulting in
financial market dislocations.
Interestingly, U.S. stocks and bonds have rallied in the midst of the U.S.
dollar's demise. Although a cheaper dollar increases the risk of importing
inflation, the currencies of our North American trading partners have been even
weaker than the U.S. dollar. This effect has offset investors' inflationary
expectations and allowed U.S. financial assets to rally.
However, this rally has only partially offset big losses by Japanese, German,
and Swiss holders of dollar assets. Continuing currency losses have emphasized
the increasing attraction of precious metals. Instances of gold buying by
Japanese and Swiss investors have begun to surface, reportedly running three
times normal.
The Federal Reserve has kept monetary policy constant and seems disinclined to
support the dollar with higher interest rates. The Bundesbank, however,
surprised the currency markets with a late March interest rate cut which snapped
precious metals from their doldrums. Gold briefly touched $400 per ounce and
silver rallied 20 percent. Investors who had shunned gold for deutsche marks (as
a safe haven with yield) stampeded back to precious metals.
We continue to see positive developments on the supply side of gold. Producer
selling by mining companies seems to be slowing. Production can only be "sold
forward" once before the pace must slow. Recent reports of central bank sales
seem to have slowed also. Production from South Africa is slower than most
predictions, and outbreaks of labor unrest continue.
As gold investors, we continue to be encouraged. With destabilized currency
markets, financial markets at highs, and great supply versus demand
fundamentals, we believe that positive returns for precious metals are likely.
Gold can again be viewed as a safe haven and an exciting asset class.
- ----------
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.
1
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------ -------
<C> <S> <C>
COMMON STOCKS (95.8%)
AUSTRALIA (14.2%)
200,000 Acacia Resources Ltd. $ 355
500,000 Central Norseman Gold Corporation
Ltd. 322
418,000 Delta Gold N.L. 827
462,100 Gold Mines of Kalgoorlie Ltd. 369
390,000 Great Central Mines N.L. 629
25,000 Great Central Mines N.L. ADR 127
321,000 Newcrest Mining Ltd. 1,219
75,000 Poseidon Gold Ltd. 137
500,000 Wiluna Mines Ltd. 421
-------
4,406
-------
CANADA (41.1%)
230,400 Bema Gold Corp. 435
25,000 BGR Precious Metals, Inc., Class A 266
100,000 Bolivar Goldfields Ltd. 114
60,000 Cambior, Inc. 692
500,000 Campbell Resources, Inc. 350
105,800 Dakota Mining Corp. 172
102,500 Echo Bay Mines Ltd. 1,063
50,000 Euro-Nevada Mining Corp. 1,323
10,000 Franco-Nevada Mining Corp. Ltd. 497
126,700 Goldcorp Inc., Class A 918
131,300 Hemlo Gold Mines, Inc. 1,313
45,500 Kinross Gold Corp. 256
300,000 Miramar Mining 1,395
56,946 Placer Dome, Inc. 1,388
80,600 Prime Resource Group, Inc. 548
450,000 Royal Oak Mines, Inc. 1,491
75,000 TVX Gold, Inc. 489
-------
12,710
-------
UNITED STATES (40.5%)
163,800 Amax Gold, Inc. 962
98,047 Barrick Gold Corp. 2,451
3,828 Freeport McMoran Copper & Gold,
Inc., Class A 84
125,000 Freeport McMoran, Inc. 2,266
97,400 Gold Reserve Corp. 658
72,700 Homestake Mining Co. 1,345
63,800 Newmont Gold Co. 2,640
10,000 Newmont Mining Corp. 427
35,985 Pegasus Gold, Inc. 441
100,000 Santa Fe Pacific Gold Corp. 1,263
-------
12,537
-------
TOTAL COMMON STOCKS (Cost $30,999) 29,653
-------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- ------------ -------
<C> <S> <C>
WARRANTS (0.1%)
UNITED STATES (0.1%)
25,000 Gold Reserve Corp. (Cost $0) $ 29
-------
<CAPTION>
FACE
AMOUNT
(000)
- ------------
<C> <S> <C>
CONVERTIBLE BONDS (1.9%)
CANADA (1.4%)
$ 400 Bema Gold Corp. 7.50%, 9/28/99 418
-------
UNITED STATES (0.5%)
250 Canyon Resources 6.00%, 6/01/98 170
-------
TOTAL CONVERTIBLE BONDS (Cost $684) 588
-------
TOTAL FOREIGN AND US SECURITIES (97.8%)
(Cost $31,683) 30,270
-------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT (2.4%)
743 U.S. Trust, 6.00%, dated 3/31/95,
due 4/03/95, to be repurchased at
$743, collateralized by $725
Government National Mortgage
Association, 9.50%-10.00%, due
9/15/09-11/15/09, valued at $775
(Cost $743) 743
-------
TOTAL INVESTMENTS (100.2%) (Cost $32,426) 31,013
-------
OTHER ASSETS AND LIABILITIES (-0.2%)
Other Assets 51
Liabilities (100)
-------
(49)
-------
NET ASSETS (100%) $30,964
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 3,357,860 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 9.22
-------
-------
<FN>
- -------------
ADR -- American Depositary Receipt
</TABLE>
2
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
JAPANESE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities are defined as common and preferred stocks, debt
securities convertible into common stock and common stock purchase warrants.
The total return of the Portfolio for the three month period ended March 31,
1995, was -8.95% as compared to -2.13% for the Morgan Stanley Capital
International (MSCI) Japan Index during the same period. The total return for
the period from inception in April 1994 through March 31, 1995, was -10.50%,
compared to 0.21% for the MSCI Japan Index during the same period.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) JAPAN
INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------
SINCE
YTD INCEPTION
----------- -----------
<S> <C> <C>
PORTFOLIO...................... -8.95% -10.50%
INDEX.......................... -2.13 0.21
<FN>
- -------------
1. The MSCI Japan Index is an unmanaged index of common stocks (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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The year 1995 began trading with the first 4 trading days down, an unprecedented
occurrence over the last 50 years. In retrospect, this was an ominous sign of
events to come. Since then a series of nightmares became a reality for the
Japanese equity market. First it was the fall-out of the Mexican peso on world
markets and then the great Hanshin earthquake followed by the scandals related
to the Tokyo Kyodo Bank. The Japanese public outcry on the use of public funds
as a solution for non-performing loans began to grow when it was discovered that
the government announced Tokyo Kyodo was suspected of illicit dealings. For this
reason, negative sentiment for the proposed solution for Japanese Banks
portfolios appeared to be ventilated through further sales of securities by
investors of all classes. The massive rally in the yen beginning in March was
initially triggered by the Mexican crisis and followed by "flight to quality"
currencies such as the deutsche mark and yen. However, the relaxed attitude by
Japanese authorities to stem this rise further propelled the yen to all time
highs.
During the last quarter, the earthquake in Kobe temporarily lifted construction
related issues. The perceived positive effects of Sumitomo bank's write-off and
the Mitsubishi Bank/Bank of Tokyo announced merger also boosted banking stocks
for a few days. Unfortunately, as a result of the "nightmares" mentioned above
the market lacked energy for a sustainable rally and very quickly these sectors
joined the next down-leg of the overall market.
Foreign investors who actively purchased approximately $40 billion worth of
Japanese equities during 1994 on the assumption of an economic recovery in Japan
became less convinced of the magnitude of this anticipated recovery as the new
year progressed. As we went from one disaster to another, repatriation of funds
accelerated to home markets and the notion of country risk associated with Japan
began to be magnified. Furthermore, U.S. equity and bond markets staged a strong
rally during this period and global funds ear-marked for international
investments found their weightings increased in the U.S. Japanese institutional
investors, on the other hand, aggressively increased their structural selling of
equities to meet year end balance sheet requirements and to raise funds to
offset non-performing loans. The supply-demand situation was bleak for these
reasons and taken as a whole a significant negative for
1
<PAGE>
Japanese equities. Despite the catastrophic earthquake the Japanese economy
still showed signs of a recovery and the Tankan report released in March also
confirmed a firmer business climate. Although the positive results of an
improving economy began to emerge, spirits were severely dampened by multiple
domestic problems of the yen, Barings, and the earthquake, and a perceived risk
premium began to emerge in equity valuations as investors questioned Japan's
ability to overcome these problems.
During the 2nd quarter of 1995 we expect the equity market to test the bottom
and begin looking "forward" by discounting the economic recovery which we still
believe will occur. Clearly, the key will be the foreign exchange markets. With
the unprecedented and rapid rise in the yen, Japanese authorities will be forced
to examine and critically dissect the reasons for this dramatic increase.
Historically Japan has managed to cope with various crises and adversity. While
the current government seems "unorganized", there is a growing voice within
Japan, the Keidanren and MITI to name two, that are aggressively voicing their
dissatisfaction for the inactivity of the government. These groups are demanding
immediate action in the form of market opening measures, a discount rate cut,
tax cuts and additional stimulus packages. It is now becoming strongly evident
to the Japanese that domestic demand creation must occur for the yen to stem
it's rise. Perhaps a good example of the public dissatisfaction and the message
to the current government is the surprise victory by two "independents" who were
recently elected as governors in Tokyo and Osaka. These two are advocating no
public money intervention to rescue Tokyo Kyodo Bank and a more sensible and
responsible government which should address the needs of the Japanese public. In
our opinion this is a very strong sign of changes to occur. We feel as the
perception of change regarding Japan takes effect in the foreign exchange
markets the equity market will also be positively affected.
Japanese stocks fell during the first quarter under extremely disastrous events.
Equally, as pressure is eased on the currency, the market should also find
renewed buyers. The U.S. appears to be on course for a soft landing scenario and
we believe that rapid gains from the current levels to 18,500 are possible
during the 2nd quarter. Simply stated, this is because the market dropped
precipitously on unparalleled bad news which should be already factored into
prices. If the discount rate is lowered by 75 b.p., for example, the dividend
yield on equities will be about the same as the ODR and this should begin to
attract Japanese retail investors. Above 18,500, however, unless non-performing
loans are addressed, there will likely be further "structured selling" by banks
to raise cash to meet balance sheet requirements. In summary, as the Y$
(yen-dollar) rate stabilizes during the quarter we expect economic sensitive
sectors to benefit, where we still remain overweighted, and find increasingly
compelling valuations. Beyond this we believe 1995 will be remembered as a
significant year of change as Japan critically and meaningfully addresses both
trade and domestic structural problems.
- ----------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------- ---------
<C> <S> <C>
COMMON STOCKS (96.2%)
CAPITAL EQUIPMENT (23.1%)
70,000 Amada Co., Ltd. $ 742
40,000 Daifuku 534
60,000 Daikin Industries Ltd. 512
31,000 Fuji Machine Manufacturing Co. 867
70,000 Kyudenko Co., Ltd. 935
80,000 Matsui Construction 700
120,000 Mitsubishi Heavy Industries Ltd. 861
36,000 Nifco, Inc. 531
60,000 Ricoh Co., Ltd. 562
70,000 Taisei Corp., Ltd. 455
111,000 Teijin Seiki Co., Ltd. 528
100,000 Tsubakimoto Chain 548
---------
7,775
---------
CONSUMER GOODS (15.9%)
11,400 FamilyMart Co. 525
9,000 Ito-Yokado Co., Ltd. 445
70,000 Japan Vilene Co., Ltd. 484
17,000 Nintendo Corp., Ltd. 1,035
130,000 Nissan Motor Co. 991
16,500 Sankyo Co., Ltd. 380
100,000 Suzuki Motor Co., Ltd. 1,070
20,000 Yamanouchi Pharmaceutical Co. 438
---------
5,368
---------
ELECTRICAL & ELECTRONICS (24.7%)
30,000 CMK 456
115,000 Hitachi Ltd. 1,192
6,000 Kyocera Corp. 446
70,000 Matsushita Electric Industries
Ltd. 1,128
70,000 Mitsumi Electric Co., Ltd. 1,112
90,000 NEC Corp. 963
11,000 Sony Corp. 551
70,000 Stanley Electric Co. 476
20,000 TDK Corp. 933
160,000 Toshiba Corp. 1,085
---------
8,342
---------
FINANCE (11.3%)
40,000 Daiwa Securities Co., Ltd. 458
44,000 Keihanshin Real Estate 360
<CAPTION>
VALUE
SHARES (000)
- --------- ---------
<C> <S> <C>
60,000 Mitsubishi Estate Co., Ltd. $ 675
60,000 Nichido Fire & Marine Insurance 484
25,000 Nomura Securities Co. 466
46,000 Sumitomo Corp.'s Leasing Ltd. 334
50,000 Sumitomo Marine & Fire Insurance 425
95,000 Sumitomo Realty & Development 613
---------
3,815
---------
MATERIALS (9.2%)
50,000 Asahi Tec Corp. 440
90,000 Kaneka Corp. 601
95,000 Kansei Corp. 768
78,000 Okura Industrial Co., Ltd. 597
60,000 Sekisui Chemical Co. 712
---------
3,118
---------
SERVICES (12.0%)
20,000 Dai Nippon Printing Co., Ltd. 311
45,000 Inabata & Co. 326
85,000 Nippon Konpo Unyu Soko 794
32,000 Nishio Rent All Co. 884
21,000 Sangetsu Co., Ltd. 619
10,000 Secom Co., Ltd. 616
75,000 Tokyu Corp. 485
---------
4,035
---------
TOTAL COMMON STOCKS (Cost $34,345) 32,453
---------
<CAPTION>
AMOUNT
(000)
- ---------
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
Y 11 Japanese Yen (Cost $0) --
---------
TOTAL INVESTMENTS (96.2%) (Cost $34,345) 32,453
---------
OTHER ASSETS AND LIABILITIES (3.8%)
Other Assets 3,063
Liabilities (1,780)
---------
1,283
---------
NET ASSETS (100%) $ 33,736
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 3,767,611 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 8.95
---------
---------
</TABLE>
3
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
EMERGING MARKETS DEBT PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
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.
The total return of the Portfolio for the three month period ended March 31,
1995 was -14.35% as compared to -11.08% for the JP Morgan Emerging Markets Bond
Index for the same period. The total return for the twelve months ended March
31, 1995 and the average annual total return for the period from inception in
February 1994 through March 31, 1995 for the Portfolio was -8.38% and -23.26%,
respectively, as compared to -11.18% and -24.41% for the JP Morgan Emerging
Markets Bond Index for the same periods.
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ----------- --------------
<S> <C> <C> <C>
PORTFOLIO... -14.35% -8.38% -23.26%
INDEX....... -11.08 -11.18 -24.41
<FN>
- -------------
1. The J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Mexican peso devaluation of December 20 set the tone for emerging debt and
equity markets in the new year. The first quarter saw violent swings in Brady
bond prices in the developing countries.
The Mexican financial crisis was brought about by the combination of economic,
financial and political factors. An excessive reliance of short-term debt linked
to the U.S. dollar, current account deficits, an overvalued exchange rate, a
loose monetary policy, political and social tensions and a mismanaged
devaluation produced a financial crisis in Mexico, leading to withdrawals by
foreign investors and a run on the country's foreign exchange reserves. A lack
of refinancing alternatives in a hostile external environment drove fixed income
and equity prices down as Mexico sought funds from its partners in Nafta and the
multilateral agencies in order to avoid rescheduling its liabilities.
Domestic political dynamics determined the price behavior of assets for much of
the quarter. President Clinton's bold move to bypass Congress by tapping into
the Exchange Stabilization Fund to provide Mexico with a potential US$20 billion
in credits and/or guarantees was a turning point in the market's evaluation of
potential default risk. The market remained skeptical as the Mexican government
did not announce specific details about their revised economic targets and
measures to stabilize their economy in a post-devaluation environment. It was
not until March 9, 1995 that a comprehensive new economic program was unveiled.
March 9, 1995 also saw the low in the JP Morgan Emerging Markets Bond Index.
A high level of systemic risk in the market produced high volatility and
correlations across all emerging markets countries. The sell-off, at times
indiscriminate, created high correlations thereby reducing the benefits of
diversification in fund portfolios. Reactions to political and economic news and
events during periods of falling liquidity caused price volatilities to remain
at the high end of their ranges. Constant re-valuation of default risk
exacerbated by poor technical conditions (such as the need of broker/dealers to
hedge illiquid Eurobond and local currency debt with liquid Brady bonds and the
unwinding of structured notes, as prices hit stop-loss levels) caused asset
prices to decline precipitously. We also underestimated the herd instinct of
non-dedicated emerging markets funds to lighten up their positions in emerging
markets.
MEXICO
Fears of an unraveling of the economy and the financial system caused an exodus
of funds from Mexican assets. Local markets' assets, Eurobonds
1
<PAGE>
and Brady bonds were all hit. Some Mexican corporate valuations approached
liquidation levels. Price declines in the Brady bonds were about 30%. As the
Mexican authorities struggled to put together a comprehensive economic plan, the
Peso became the barometer of sentiment. After the Peso had devalued by about 70%
in nominal terms within a few weeks, we felt it was appropriate to add positions
in several types of Mexican assets: Brady bonds, sovereign Eurobonds, Tesebonos
at yields of 25 to 30% and short-term Peso-denominated paper (Cetes). These
additions brought our Mexican holdings at quarter end to almost 17% of the
Portfolio.
BRAZIL
Brazil, the best performing country in 1994, disappointed greatly in 1995.
Market expectations of rapid constitutional reform facilitating deregulation of
the economy, fiscal reform and faster privatization were dashed as the reform
process got bogged down in political gamesmanship and a perceived lack of
visible leadership in publicly shaping the agenda for reform. The Real Plan
succeeded in bringing down inflation but a lack of progress on fiscal reform
left the strong nominal exchange rate to bear too heavy a burden of adjustment.
Deterioration in the trade performance in the first quarter, on the back of a
booming economy forced the economic team to rethink their strong exchange rate
policy and a confused attempt at a controlled devaluation added to the
uncertainty in the market.
Revaluation of market expectations regarding the pace of reform and a market
adjustment to slightly higher inflation and weaker trade performance suggest
that asset prices will react positively to any incremental progress in the
reform process. Brazil retains the top weighting in our portfolio at 23%. Over
the coming quarters, we look for a reversal in Brazil's first quarter relative
underperformance.
ARGENTINA
Investors fearing a devaluation and/or sequestration of bank assets took capital
out of the banking system and the country on the heels of the Mexican debacle.
Although Argentina avoided the price declines in January, the straight jacket of
the Convertibility Plan brought about a severe contraction in domestic credit
following the capital flight. High interest rates and the drying up of liquidity
forced many banks and financial institutions, in a overbanked country, to
liquidate portfolios of liquid securities. Some were even suspended from the
clearing system and put into receivership. Finance Minister Cavallo attempted to
tackle the problem by addressing the growing deficit in the fiscal accounts by
cutting expenditure and raising revenues.
Price deflation, improvements in the trade accounts, an eventual return of
capital into the system, the strengthening of the political position of
President Menem in his attempts to further reform the remaining static elements
in the Argentine system and a decisive election victory are long-term positives
for Argentina. Price recovery from default levels has been swift and Argentina
was the best performer in March.
We added to our Argentine position during the broad market collapse. At 16% of
the Portfolio, Argentina remains one of our top three weightings. We anticipate
a re-election of President Menem in May, and a continuation of the market-
oriented policies under the leadership of Finance Minister Cavallo.
VENEZUELA
Venezuelan bonds entered the quarter at already high yields. Its perceived
insularity from external shocks stemming from a high level of foreign reserves
and its cash flows from the oil sector attracted funds seeking refuge from the
"tequila effect." The domestic economy continues to suffer from high inflation
and low growth as the government has been unable to resolve the problem of
excessive liquidity which arose due to the bailout of the banking system.
Continued price and foreign exchange controls have limited investment and
growth. A lack of progress on the fiscal and monetary fronts could result in
further unraveling of the economy. The Venezuelan position has been reduced over
the quarter as funds have been added into Argentina and Mexico.
2
<PAGE>
OTHER
RUSSIAN Vnesheconombank loans have performed poorly for most of the quarter as
the market remains skeptical about Russia's intentions in moving forward on
re-negotiating its commercial bank debt. Additionally, President Yeltsin's
weakened commitment to reforms and the cost of the Chechnya conflict were
negative forces affecting market sentiment. On the positive side the IMF program
to stabilize the rouble and the domestic economy should introduce an element of
discipline into domestic economic policy formation and performance. Progress in
negotiations with official creditors and commercial banks should provide support
to prices in the next quarter.
MOROCCO Tranche A loans lost about 13% over the quarter. 1994 will prove to be a
hard act to follow in terms of economic performance. A drought in 1995 could
result in lower growth, higher inflation and worsened foreign trade performance.
However, continued progress in privatization and a relatively modest external
debt burden should permit the country to fund emergency food imports to
alleviate the supply shock. We had 9% of the Portfolio in Morocco at quarter's
end and look to gradually reduce the position on the asset's strength.
ECUADOR is the latest entrant into the Brady club, having issued Brady bonds on
February 28, 1995. Competent handling of the exchange rate and monetary policy
at the time of the border conflict with Peru improved the markets perception of
economic policy making in the country. Decisive actions to restore fiscal
equilibrium aided by buoyant oil prices and potential privatization revenues
should attract investment in their bonds. We expect PANAMA to be the next Brady
country, and anticipate bonds to be issued before the end of 1995. We continue
to hold 5% in Panamanian non-performing loans.
MARKET OUTLOOK
The first quarter crash has sobered both policy-makers and investors in emerging
markets. The central lesson learned from December 20, 1994 was that the market
will exact a severe penalty upon countries which stray from prudent, balanced
macroeconomic policies. We are impressed with the steps taken by other
countries, most notably Argentina, in immediate response to the Mexican crisis.
We believe the long-term fundamentals of emerging markets are intact, the past
three months have instilled discipline, and valuations are most compelling.
- ------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE IFC GLOBAL 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.
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
DEBT INSTRUMENTS (97.1%)
ALGERIA (1.1%)
LOAN AGREEMENTS (1.1%)
$ 5,788 Algeria Refinanced Loan
Agreements, Tranche A,
(Floating Rate), 8.313%,
3/04/00 $ 1,592
---------
ARGENTINA (16.2%)
BONDS (16.2%)
$ 3,000 Republic of Argentina Discount
Bonds, (Floating Rate), 7.125%,
3/31/23 1,590
4,500 Republic of Argentina Local
Markets Trust, 13.375%, 8/15/01 3,139
22,350 Republic of Argentina, Series L,
(Floating Rate), 7.313%,
3/31/05 12,124
16,050 Republic of Argentina Par Bonds,
Series L, (Floating Rate)
4.25%, 3/31/23 6,621
---------
23,474
---------
BRAZIL (22.8%)
BONDS (22.8%)
$ 1,600 Federative Republic of Brazil
Debt Conversion Bonds, Series
L, (Floating Rate), 6.75%,
4/15/12 704
10,750 Federative Republic of Brazil EI
Bonds, (Floating Rate), 6.688%,
4/15/06 5,456
7,200 Federative Republic of Brazil
New Money Bonds, Series L,
(Floating Rate), 6.75%, 4/15/09 3,258
19,000 Federative Republic of Brazil
Par Bonds, Series YL3,
(Floating Rate), 4.00%, 4/15/24 6,888
3,750 Federative Republic of Brazil
Par Bonds, Series YL4,
(Floating Rate), 4.00%, 4/15/24 1,359
41,295 Federative Republic of Brazil,
Series C, (Floating Rate),
4.00%, 4/15/14 15,382
---------
33,047
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
BULGARIA (3.0%)
BONDS (3.0%)
$ 1,700 Bulgaria Discount, Series A,
"Euro", (Floating Rate),
7.563%, 7/28/24 $ 727
2,291 Bulgaria Discount, Series A,
(Floating Rate), 6.0625%,
7/28/24 979
762 Bulgaria Discount, Series B,
(Floating Rate), 6.5625%,
7/28/24 325
6,483 Bulgaria Interest Arrears Bonds,
(Floating Rate), 6.0625%,
7/28/11 2,221
---------
4,252
---------
ECUADOR (5.9%)
BONDS (5.9%)
$ 14,681 Republic of Ecuador Discount
Bonds, (Floating Rate), 7.25%,
2/28/25 6,643
845 Republic of Ecuador IE Bonds,
(Floating Rate), 7.688%,
12/21/04 418
6,407 Republic of Ecuador PDI Bonds,
(Floating Rate), 7.25%, 2/27/15 1,474
---------
8,535
---------
MEXICO (16.6%)
LOAN AGREEMENTS (3.3%)
$ 8,664 United Mexican States Old New
Money Loans, (Floating Rate),
7.125% - 7.625%, 7/26/06 4,700
---------
BILLS (11.9%)
MEXICAN CETES
11,282 Zero Coupon, 5/25/95 1,484
11,202 Zero Coupon, 6/01/95 1,453
12,860 Zero Coupon, 6/15/95 1,625
5,872 Zero Coupon, 7/06/95 714
16,163 Zero Coupon, 8/17/95 1,822
13,125 Zero Coupon, 8/24/95 1,467
5,513 Zero Coupon, 8/31/95 609
6,426 Zero Coupon, 9/07/95 702
7,298 Zero Coupon, 2/22/96 628
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
MEXICO (CONTINUED)
$ 7,058 Mexican Tesobonos, Series E,
Zero Coupon, 5/04/95 $ 6,845
---------
BONDS (1.4%) 17,349
---------
4,000 Petro Mexicanos, 8.625%,
12/01/23 1,980
---------
24,029
---------
MOROCCO (8.9%)
LOAN AGREEMENTS (8.9%)
$ 22,000 Morocco Restructuring and
Consolidating Agreement,
Tranche A, (Floating Rate),
7.375%, 1/01/09 (Participation:
Chase Manhattan Bank, JP
Morgan, Lehman Brothers,
Goldman Sachs, Salomon
Brothers) 12,870
---------
NIGERIA (1.8%)
BONDS (1.8%)
$ 7,000 Central Bank of Nigeria Par
Bonds, (Floating Rate), 6.25%,
11/15/20 (Including 7,000
Warrants) 2,678
---------
PANAMA (4.8%)
LOAN AGREEMENTS (4.8%)
$ 9,929 Republic of Panama Refinanced
Loan Agreement, (Floating Rate) 3,922
7,800 Republic of Panama
Unrestructured Loans, (Floating
Rate) 3,081
---------
7,003
---------
POLAND (1.2%)
BONDS (1.2%)
$ 4,170 Republic of Poland Interest
Arrears PDI Bonds, 3.25%,
10/27/14 1,678
---------
RUSSIA (4.8%)
LOAN AGREEMENTS (4.8%)
$ 13,000 Bank for Foreign Economic
Affairs, (Floating Rate) 2,958
9,000 Bank for Foreign Economic
Affairs, Tranche A, (Floating
Rate) 2,048
3,293 Bank for Foreign Economic
Affairs, Tranche B, (Floating
Rate) 749
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
$ 2,964 Bank for Foreign Economic
Affairs, Tranche C, (Floating
Rate) $ 674
1,500 Bank for Foreign Economic
Affairs, Tranche D, (Floating
Rate) 341
443 Bank for Foreign Economic
Affairs, Tranche E, (Floating
Rate) 101
300 Bank for Foreign Economic
Affairs, Tranche F, (Floating
Rate) 68
---------
6,939
---------
VENEZUELA (10.0%)
BONDS (10.0%)
$ 29,000 Republic of Venezuela Debt
Conversion Bonds, Series DL,
(Floating Rate), 7.688%,
12/18/07 12,253
250 Republic of Venezuela Front
Loaded Interest Reduction
Bonds, Series A, (Floating
Rate), 7.3125%, 3/31/07 106
5,000 Republic of Venezuela Front
Loaded Interest Reduction
Bonds, Series B, (Floating
Rate), 7.3125%, 3/31/07 2,125
---------
14,484
---------
TOTAL DEBT INSTRUMENTS (Cost $162,314) 140,581
---------
SHORT-TERM INVESTMENTS (8.3%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (3.1%)
$ 4,600 Federal National Mortgage
Association, Discount Notes,
4/17/95 4,588
---------
REPURCHASE AGREEMENT (5.2%)
7,508 Goldman Sachs, 6.05%, dated
3/31/95, due 4/03/95, to be
repurchased at $7,512,
collateralized by $7,565 U.S.
Treasury Notes, 8.375%, due
8/15/00, valued at $7,706 7,508
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $12,096) 12,096
---------
FOREIGN CURRENCY (0.1%)
Y 5 Japanese Yen --
MXP 741 Mexican Peso 109
---------
TOTAL FOREIGN CURRENCY (Cost $99) 109
---------
TOTAL INVESTMENTS (105.5%) (Cost $174,509) 152,786
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
---------
OTHER ASSETS AND LIABILITIES (-5.5%)
<C> <S> <C>
Other Assets $ 23,002
Liabilities (30,965)
---------
(7,963)
---------
NET ASSETS (100%) $ 144,823
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 20,856,674 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 6.94
---------
---------
<FN>
---------------
Y -- Japanese Yen
MXP -- Mexican Peso
Floating Rate Securities. The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in
effect on March 31, 1995.
</TABLE>
6
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
MUNICIPAL BOND PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Municipal Bond Portfolio commenced operations on January 18, 1995. The
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.
The total return of the Portfolio for the period from inception on January 18,
1995 through March 31, 1995 was 2.20% as compared to 3.31% for the Lehman Seven-
Year Municipal Bond Index for the same period.
PERFORMANCE COMPARED TO THE LEHMAN 7YR MUNICIPAL BOND INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------
SINCE INCEPTION
-------------------
<S> <C>
PORTFOLIO.................................. 2.20%
INDEX...................................... 3.31%
<FN>
- -------------
1. The Lehman 7yr Municipal Bond Index consists of investment grade bonds with
maturities between 6-8 years, rated B, AA or better. All bonds have been
taken from deals done within the last 5 years, of $50 million or larger.
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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The U.S. fixed income markets staged a strong rally during the first quarter of
1995, rebounding significantly from the lows seen during the 4th quarter of
1994. While a combination of factors contributed to this strong performance,
three were probably most important. These were indications of a slower rate of
growth in the economy, changing perceptions among market participants about the
prospects for future Federal Reserve tightenings of monetary policy, and the
need for investors to put to work large cash positions that had accumulated in
the portfolios. Against this backdrop of very strong domestic bond market
performance was the behavior of the U.S. dollar, which set new lows against the
German mark and Japanese yen over the quarter.
Entering 1995, market expectations were generally for a continuation of strong
economic growth, further tightening by the Federal Reserve, and rising interest
rates, as had occurred in 1994. While the Fed did indeed tighten at the end of
January, increasing both the Federal Funds Rate and the Discount Rate by 50
basis points, subsequent economic releases suggested that higher rates had begun
to have an effect in slowing the economy. More important, perhaps, comments made
by Federal Reserve Chairman Greenspan in February, as well as by other Fed
members, led many market participants to conclude that the Fed itself believed
it had successfully engineered a "soft landing" for the economy. As a result,
many concluded that the Fed was near the end of its tightenings for this
interest rate cycle.
In the municipal bond market, this significant change in investor psychology led
to strong demand from individuals in the 1-5 year range and from property and
casualty insurance companies in the 10-15 year range. Tax-exempt mutual funds
saw cash positions start to build up from January 1 coupon payments, calls and
maturities, and redemption activity, which was heavy during the 4th quarter of
1994, subsided, and subscriptions started to reappear. This demand was met with
a limited amount of new issue supply; new issue supply during the first quarter
totaled $27.6 billion, a 46% decrease from 1994's first quarter. We expect new
issuance levels to remain low as long as reducing taxes and curtailing spending
are the prevalent themes in statehouses across the country.
The Portfolio is invested in very high credit quality bonds, with an
overweighting in premium coupon pre-refunded bonds ("Pre-re's") with short to
intermediate maturities. Pre-re's are AAA rated securities that have been
escrowed in U.S. Treasuries and generally have maturities in the 1-7 year range.
As the outstanding supply of Pre-re's continues to shrink and new refundings
remain virtually non-existent, the relative value of outstanding Pre-re's should
continue to appreciate. The majority of the Portfolio's other holdings include
state general obligation and state agency bonds. With many high-tax states
looking to cut personal income tax rates, we expect most states to keep
borrowings to a minimal level to control annual debt service payments. The high
ratings and state income tax advantage for individuals should keep demand up for
this type of bond. The Portfolio is defensively positioned with an average
maturity of 5 1/2 years and a weighted average duration of 4 years.
Municipal bonds are currently trading at historically expensive levels as a
percentage of U.S. Treasury yields.
1
<PAGE>
Most of this "richness" can be attributed to the low level of new municipal bond
issuance. Various factors in the future could have an impact on these
Municipal/Treasury yield ratios. These include: a more balanced supply/demand
scenario in the municipal market, the outcome of current proposals for
overhauling the U.S. income tax system (including the flat tax proposal), and a
sharp decline in the prices of U.S. Treasury securities which would have a
larger impact on the municipal market. We feel municipal are very expensive and
the expectation for further tightening is limited. We expect the ratios to
remain at current levels or more likely cheapen up as market participants focus
on the extremely tight levels and take some profits.
While economic growth may be moderating and the pace of Fed tightening may be
slowing, we do not anticipate extending portfolio duration in the near-term.
Current interest rate levels appear already to discount a slowdown in the
economy, and absent Fed easing, which we do not expect any time soon, we do not
see much room for rates to rally. To the extent the market does not receive
continued confirmation of the slowdown scenario, it is vulnerable to a setback.
We will continue our focus on the high quality sector of the municipal bond
market and will eventually look to extend the duration of the Portfolio.
- ------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATION 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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (100.8%)
DAILY VARIABLE RATE BONDS (16.1%)
$ 1,000 Birmingham, Alabama, Medical Clinic
Board Revenue, University of Alabama
Hospital Services Fund, 4.50%,
12/01/26 $ 1,000
1,000 Hapeville, Georgia, Industrial
Development Authority, Series 85,
4.60%, 11/01/15 1,000
1,500 Hurley, New Mexico, Pollution Control
Revenue Bonds, 4.55%, 12/01/15 1,500
400 Louisiana Public Facilities Authority,
Industrial Development, Kenner Hotel
Series, 4.60%, 12/01/15 400
100 Maricopa County, Arizona, Pollution
Control Revenue, Series B, 4.55%,
5/01/29 100
1,000 New York City, New York, Water Finance
Authority, Water and Sewer System
Revenue, Series 94C, 4.60%, 6/15/22 1,000
1,000 Pennsylvania State Higher Educational
Facilities Authority, Colleges &
Universities Revenue Bonds, 4.45%,
10/01/09 1,000
1,300 Valdez, Alaska, Marine Terminal
Authority, Exxon, Series 85, 4.55%,
10/01/25 1,300
---------
TOTAL DAILY VARIABLE RATE BONDS 7,300
---------
FIXED RATE INSTRUMENTS (84.7%)
2,000 Connecticut State Special Obligation,
Tax Revenue Bonds,
Transportation 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102 2,153
1,000 De Kalb County, Georgia General
Obligation Bonds, 7.30%, 1/01/00,
Prerefunded 1/01/97 at 102 1,062
1,000 De Kalb County, Georgia, Water & Sewer
Revenue Bonds 7.00%, 10/01/06 1,067
1,120 Fairfax County, Virginia, Water
Authority, Water Revenue Bonds,
6.13%, 1/01/29,
Prerefunded 1/01/00 at 100 1,174
1,000 Georgia State, General Obligation
Bonds, Series E, 6.75%, 12/01/02 1,110
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
$ 500 Hawaii State, General Obligation
Bonds, Series BS, 6.70%, 9/01/97 $ 522
1,000 Hawaii State, General Obligation
Bonds, Series CJ, 6.20%, 1/01/12 1,022
1,000 Howard County, Maryland, Consolidated
Public Improvement General Obligation
Bonds, Series A, 7.20%, 8/01/03,
Prerefunded 8/01/96 at 102 1,054
1,500 Intermountain Power Agency, Utah,
Power Supply Revenue Bonds, Series D,
8.38%, 7/01/12 1,637
1,000 Kentucky State Housing Corp. Revenue
Bonds, Series A, 6.00%, 7/01/10 1,007
1,155 Maryland State Department of
Transportation, Construction Revenue
Bonds, Second Issue, 6.80%, 11/01/05,
Prerefunded 11/01/99 at 102 1,262
1,000 Massachusetts State Consolidated Loan,
Series A, 7.50%, 3/01/03 1,110
1,500 Massachusetts State Consolidated Loan,
Series A, 7.63%, 6/01/08,
Prerefunded 6/01/01 at 102 1,719
1,625 Michigan State Housing Development
Authority Revenue Bonds, Series A,
6.75%, 12/01/14 1,676
1,500 Minnesota State General Obligation
Bonds, 7.00%, 8/01/99,
Prerefunded 8/01/96 at 100 1,550
1,400 Mississippi State General Obligation
Bonds, 6.00%, 2/01/09 1,433
1,475 Montana State General Obligation
Bonds, Long Range Building Program,
Series C, 6.00%, 8/01/13 1,502
1,500 Municipal Assistance Corp. for City of
New York, New York, Refunding Revenue
Bonds, Series 56, 7.90%, 7/01/98,
Prerefunded 7/01/96 at 102 1,593
1,050 Northern California Power Agency,
Public Power Refunding Revenue Bonds,
Hydro Electric Project 8.00%,
7/01/13,
Prerefunded 7/01/96 at 102 1,114
1,500 North Little Rock, Arkansas, Electric
Revenue Refunding Bonds, Murray Lock
& Dam Hydro, 7.40%, 7/01/15,
Prerefunded 7/01/96 at 102 1,582
500 Ohio State General Obligation Bonds,
6.20%, 8/01/12 520
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------- ---------
<C> <S> <C>
FIXED RATE INSTRUMENTS (CONTINUED)
$ 1,000 Ohio State Housing Finance Agency,
Residential Mortgage Revenue Bonds,
Series A-1, 6.20%, 9/01/14 $ 1,009
1,400 Rhode Island Depositors Economic
Protection Corp., Special Obligation
Revenue Bonds, Series A, 7.25%,
8/01/21,
Prerefunded 8/01/96 at 102 1,475
1,000 Sacramento, California, Municipal
Utility District, Electric Revenue
Bonds, Series Q, 7.50%, 5/01/16,
Prerefunded 5/01/96 at 102 1,052
1,350 San Antonio, Texas General Obligation
Bonds, 6.50%, 8/01/14 1,405
1,000 Santa Clara Valley, California Water
District, Water Revenue Bonds, 5.75%,
6/01/04,
Prerefunded 6/01/96 at 100 1,016
1,000 Virginia Beach, Virginia General
Obligation Bonds, 6.00%, 9/01/10 1,022
500 Virginia State Housing Development
Authority, Commonwealth Mortgage
Revenue Bonds, Series B, 6.60%,
1/01/12 513
1,000 Virginia State Housing Development
Authority, Commonwealth Mortgage
Revenue Bonds, Series B, 6.65%,
1/01/13 1,025
1,500 Washington State General Obligation
Bonds, Series 86-D, 8.00%, 9/01/09,
Prerefunded 9/01/96 at 100 1,571
1,350 Wisconsin State General Obligation
Bonds, 6.00%, 5/01/02 1,414
---------
TOTAL FIXED RATE INSTRUMENTS 38,371
---------
TOTAL TAX-EXEMPT INSTRUMENTS (100.8%)
(Cost $45,067) 45,671
---------
TOTAL INVESTMENTS (100.8%) (Cost $45,067) 45,671
---------
<CAPTION>
VALUE
(000)
---------
<C> <S> <C>
OTHER ASSETS AND LIABILITIES (-0.8%)
Other Assets $ 684
Liabilities (1,063)
---------
(379)
---------
NET ASSETS (100%) $ 45,292
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,448,146 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 10.18
---------
---------
<FN>
- -------------
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the U.S. Treasury escrow.
</TABLE>
4
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
LATIN AMERICAN PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
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 period from inception on January 18, 1995 through March 31, 1995, the
total return of the Portfolio was -27.40% versus -23.20% for the Morgan Stanley
Capital International Latin America Global Index (MSCI Index). The MSCI Index is
a broad-based market cap weighted composite index covering at least 60% of
markets in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela.
The selling panic that began in the last two weeks of 1994 in response to the
Mexican currency crisis continued during the quarter as investors feared that
other countries in the region, despite significant fundamental differences, were
vulnerable to a Mexico-style crisis. Although the Portfolio was underweight
Mexico for the period, Brazil and Argentina, two of the Portfolio's largest
overweights, were hit hard both by domestic factors and the Mexico ripple
effect. At the same time the Portfolio was hurt by its underweight position in
Chile which, despite its high valuations, declined the least in the region due
to the stability of its economy and the insulating effect of the country's
restrictions on foreign investment.
Over the first quarter, the MSCI Index for Brazil decreased 31.3 % in U.S.
dollars. The decline was driven by concern about political delays in the
constitutional reform process and by reversal of the country's trade balance
from a surplus to a deficit.
Although Cardoso's Plan Real has successfully stabilized the Brazilian economy
and brought about inflation control, there is significant opposition to the pace
and manner in which structural reforms are being introduced by the
administration. During the quarter, Congress handed Cardoso procedural defeats
on social security reform. While this is a secondary issue, Congress wanted to
send the message that the major reforms will need to be negotiated. In response,
the administration has shifted to a strategy implementing the least
controversial amendments, while negotiating privatization and fiscal
restructuring, the most significant reforms, behind the scenes. We expect
progress on privatization and fiscal reform to proceed steadily, albeit slowly
and with a low degree of visibility. As a result, we expect the market to
continue to be highly sensitive to political developments.
On the economic front, the success of the Plan Real produced a
post-stabilization increase in domestic demand which has led to concerns that
inflation could re-ignite. This possibility of resurgent inflation remains the
major risk in the market. With the decline in inflation, the purchasing power of
the poorest segments of society increased dramatically leading to a consumption
boom despite high interest rates and consumer credit restrictions. Due to the
high real rates, capital inflows and Cardoso's monetary policy, the real,
Brazil's currency, appreciated against the dollar, further increasing consumer
purchasing power. As a result, imports surged, exports declined and Brazil's
trade surplus turned to a deficit. This shift in the balance of payments was
exacerbated as investors grew concerned over the current account deficit in
light of the Mexican experience. The government has taken steps to alleviate
these pressures. Nevertheless, we view Brazil's finances as inherently more
stable due to the country's high foreign exchange reserves, low level of debt
and low level of foreign investors in the market.
1
<PAGE>
We expect outperformance of the stock market as Cardoso makes progress on the
political front and as global investors distinguish between Brazil's financial
position and that of Mexico prior to its crisis. Thus, the Portfolio expects to
continue overweighting Brazilian equities throughout 1995.
The Mexican market's first quarter plunge of 42.8% in U.S. dollars (comprising a
22% decline in the Bolsa and a 20% drop in the value of the peso) was driven by
a general crisis of confidence regarding economic and political concerns. A
currency crisis, sparked by the devaluation of the peso at the close of 1994,
developed into a liquidity squeeze as investors refused to roll-over maturing
debt of both sovereign and private sector borrowers. Due to excessively high
levels of short-term debt at both the country and company level, the market
sold-off indiscriminately on concerns that the liquidity problems could produce
a systemic solvency crisis as in the early 1980's.
Although the Zedillo administration handled the devaluation poorly, the policy
action is a positive development from a fundamental, long-term perspective. The
weaker peso makes Mexico more competitive globally and will hasten the country's
transition to an export-driven economy. The key issue is how long the adjustment
period will be. In the near-term we expect a deep recession as the stabilization
program, based on orthodox fiscal and monetary policy, imposes strict austerity
on the country. Zedillo's democratic reforms have led to increased participation
in government of the PAN, the dominant opposition party, which holds orthodox
economic views similar to those of the President. Thus, as the two major parties
in Mexico are behind the program, we expect disciplined adherence in spite of
potential political turbulence.
By the end of the first quarter, a small, but promising trade surplus indicated
a positive outlook for the program. By the close of the quarter, the market
began to recover as: 1) a U.S.-led international support effort provided funding
for maturing sovereign debt; 2) political developments increased Mexican and
international confidence in President Zedillo's ability to govern and commitment
to political reform; 3) the Mexican government's economic program showed early
progress towards correcting the trade imbalances which had led to the
devaluation; 4) buyers were attracted to equities selling at distress level
valuations.
Mexico is not yet out of the woods either politically or economically; however,
the fundamentals are improving, valuations are low and sentiment is still
negative. Thus, we are increasing positions in selected companies on the basis
of attractive valuations.
The MSCI Index for Argentina decreased 10.4% in U.S. dollars for the first
quarter. Unlike Brazil, Argentina's fundamentals have been affected by the
capital outflows from Latin America due to its currency peg to the dollar. The
central bank has responded to the crisis by raising interest rates at the cost
of slowing the economy. In addition, the economy withstood a run on the banking
system as depositors grew concerned over the risk of systemic failures. The key
event for the second quarter will be the presidential election in May. We expect
reelection of President Menem and continuity of the Argentine economic program.
While we expect a period of slow GDP growth and, perhaps a recession, the
Portfolio will add selected stocks as valuations reach attractive levels.
The Chilean market fell 6.2% in the first quarter. The market was insulated from
the Latin America sell-off due to both the country's strong fundamentals and its
restrictions on capital repatriation by foreigners. Despite Chile's solid
fundamentals, due to its investment restrictions and high valuations, the
Portfolio will likely continue its underweighting of the market throughout 1995.
2
<PAGE>
Colombia declined 6.5% in the first quarter. While Colombia, like Chile, has
solid fundamentals and is relatively insulated from external events due to a low
level of participation by foreign investors, the country has a structural
inflation problem which the central bank has been combating through high
interest rates. Due to strong growth from increasing oil revenues, interest
rates are likely to remain high throughout 1995. The Portfolio will participate
only in selected companies.
Peru decreased 21.4% for the quarter as a minor, but highly visible, border
conflict with Ecuador spooked investors. Peru is currently negotiating a
settlement with Ecuador and investors have now focused on the overwhelming
victory by President Fujimori and continuation of his economic program. The
Portfolio increased its exposure to Peru during the quarter and we believe
Peru's strong fundamentals will drive good market performance.
Despite its closed economy and markets, Venezuela decreased 16.1% during the
quarter as local investors grew disillusioned with the progress of President
Caldera's economic measures. The Portfolio is likely to continue its nearly 0%
allocation due to the currency controls and populist economic policies of the
Caldera administration.
Despite the volatility of this quarter, the Latin American story remains intact.
By the end of the quarter, the markets began to recover as investors commenced
bottom-fishing. Over the last three weeks of March, Brazil rose 37%, Argentina
44% and Mexico 32%. Yet, valuations are still low, fundamentals are improving,
and sentiment is still negative. While we expect continued volatility in the
near-term, the confluence of these three factors is what leads to superior
investment performance over the long-term. Thus, we are increasing positions in
selected companies on the basis of attractive valuations.
- ----------
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.
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
COMMON STOCKS (60.1%)
ARGENTINA (16.0%)
7,360 BAESA ADR $ 192
18,787 Banco de Galicia y Buenos Aires
ADR 286
25,400 Banco del Sud Argentina, Class B 163
110,000 Banco del Suquia, Class B 148
34,100 Capex S.A. ADR 375
25,000 CIADEA (Renault) S.A. 129
18,100 Corporation Cementera Argentina,
Class B 85
20,414 Quilmes Industrial S.A. 337
631 Telecom Argentina S.A. ADR 27
2,200 Telefonica de Argentina S.A. ADR 53
---------
1,795
---------
BRAZIL (22.0%)
17,500 Cia Energetica de Minas Gerais ADR 350
3,100,000 Cia Energetica de Sao Paulo 105
7,500 Cia Energetica de Sao Paulo ADR 88
4,950,000 Cia Paulista de Forca E Luz 218
8,900,000 Cia Siderurgica Nacional 208
1,467,000 Eletrobras 289
30,700 Eletrobras ADR 307
27,300 Rhodia-Ster ADS 334
375,000 Servicos de Eletricdad 111
11,400 Telecomunicacoes Brasileiras ADR 305
14,100 Usinas Siderurgicas de Minas
Gerais ADR 162
---------
2,477
---------
CHILE (2.0%)
4,550 Banco Osorno y La Union ADR 58
2,100 Embotelladora Andina ADR 55
6,350 Maderas Y Sinteticos S.A. ADR 108
---------
221
---------
MEXICO (18.0%)
62,000 Apasco S.A. 169
32,200 Cemex CPO ADR 136
14,000 Desc Sociedad de Fomento
Industrial S.A. ADR 115
78,000 FEMSA, Class B 131
9,000 Grupo Carso S.A. ADR 79
86,300 Grupo Financiero Banamex Accival,
Class C 99
80,900 Grupo Financiero Bancomer ADR 293
29,000 Grupo Mexicano Desarrollo ADR,
Class B 72
95,000 Grupo Sidek S.A., Class B 58
<CAPTION>
VALUE
SHARES (000)
- -------- ---------
<C> <S> <C>
2,500 Grupo Televisa S.A. ADR $ 42
10,150 Grupo Tribasa S.A. ADR 58
14,700 Hylsamex S.A. ADR 136
7,600 Panamerican Beverages, Inc., Class
A 199
8,630 Telefonos de Mexico S.A. ADR,
Class L 246
84,400 Tolmex S.A., Class B2 192
---------
2,025
---------
PERU (2.1%)
65,000 Banco de Credito del Peru 106
113,500 Telefonica del Peru S.A., Class B 132
---------
238
---------
TOTAL COMMON STOCKS (Cost $8,548) 6,756
---------
PREFERRED STOCKS (31.5%)
BRAZIL (31.5%)
49,800,000 Banco Bradesco 335
19,940,000 Banco do Brasil 206
7,300,000 Banco do Estado Sao Paulo 43
3,200,000 Banco Nacional S.A. 53
330,000 Brahma 79
390,000 Centrais Eletricas de Santa
Catarina, Class B 228
1,300,000 Cia Energetica de Sao Paulo 52
5,760,000 Cia Paulista de Forca E Luz 218
550,000 Coteminas 144
267,000 Dixie Laleka S.A. 181
1,490,000 Eletrobras 285
250,000 Iochpe Maxion S.A. 121
1,120,000 Itaubanco 267
4,600,000 Lojas Renner 81
151,000 Multibras S.A. 138
3,470,000 Petrobras 241
30,000,000 Refrigeracao Parana 58
11,800,000 Telecomunicacoes Brasileiras 318
2,390,000 Telecomunicacoes de Sao Paulo 247
460,000 Vale Do Rio Doce 62
320,000 WEG S.A. 185
---------
TOTAL PREFERRED STOCKS (Cost $4,346) 3,542
---------
<CAPTION>
FACE
AMOUNT
(000)
- --------
<C> <S> <C>
CONVERTIBLE DEBENTURES (2.7%)
COLOMBIA (2.7%)
$ 430 Banco de Colombia 5.20%, 2/01/99
(Cost $386) 299
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NO. OF VALUE
UNITS (000)
- -------- ---------
UNITS (0.6%)
<C> <S> <C>
MEXICO (0.6%)
52,000 Interceramica (Cost $124) $ 69
---------
<CAPTION>
SHARES
- --------
<C> <S> <C>
PURCHASED OPTIONS (0.1%)
BRAZIL (0.1%)
700,000 Eletrobras call, expiring 6/19/95,
strike price BRL 30.58 (Cost $46) 7
---------
<CAPTION>
FACE
AMOUNT
(000)
- --------
<C> <S> <C>
SHORT-TERM INVESTMENT (9.8%)
REPURCHASE AGREEMENT (9.8%)
$ 1,106 U.S. Trust, 6.00%, dated 3/31/95,
due 4/03/95, to be repurchased at
$1,107, collateralized by $1,070
Government National Mortgage
Association 8.50% - 10.00%, due
11/15/09 - 12/15/09, valued at
$1,147 (Cost $1,106) 1,106
---------
<CAPTION>
AMOUNT VALUE
(000) (000)
- -------- ---------
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
BLR 3 Brazilian Real (Cost $4) $ 4
---------
TOTAL INVESTMENTS (104.8%) (Cost $14,560) 11,783
---------
OTHER ASSETS AND LIABILITIES (-4.8%)
Other Assets 494
Liabilities (1,037)
---------
(543)
---------
NET ASSETS (100%) $ 11,240
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 1,547,450 outstanding $.001
par value shares (authorized 500,000,000
shares) $ 7.26
---------
---------
<FN>
- -------------
ADR -- American Depositary Receipt
ADS -- American Depositary Share
</TABLE>
5
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
U.S. REAL ESTATE PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The U.S. Real Estate Portfolio commenced operations on February 24, 1995. The
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.
The total return of the Portfolio for the period from inception on February 24,
1995 through March 31, 1995 was 0.70% compared to -0.44% for the NAREIT Index
(excluding Healthcare) for the same period.
PERFORMANCE COMPARED TO NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS
(NAREIT) INDEX(1)
<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
---------------
<S> <C>
PORTFOLIO.............................. 0.70%
INDEX.................................. -0.44
<FN>
- -------------
1. The NAREIT Index is a 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.
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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
We believe that the current valuation in the REIT market is depressed relative
to underlying property fundamentals and may be poised for an upward correction.
Our conviction is based upon several key factors:
- Underlying property performance in the majority of real estate markets
continues to improve. This is evidenced by gains in occupancies and rental
rates and decreases in leasing concessions to tenants.
- The majority of REITs have continued on the path of continued growth in
Funds from Operations as a result of improvements in the performance of
their underlying assets and growth through acquisition and new development.
- REIT valuations have in many instances fallen to levels below the private
market value of their real estate. Although discounts may be appropriate in
selected instances for weaker REITs, we believe that in most instances
asset value provides a floor for the valuation of REITs.
It is noteworthy that studies undertaken by a number of securities analysts with
regard to the historical performance of equity REITs also suggest that the
sector is becoming undervalued relative to other fixed income instruments
(Treasuries and utility stocks). While we concur with the conclusions, we tend
to ascribe less value to historical studies of the REIT market primarily because
it has changed markedly since 1991 and the emergence of more than eighty new
REITs.
Despite these positive fundamentals, two factors continue to act as an overhang
on the REIT market:
- Since mid-1994 the REIT market has suffered from downward pressure as a
result of a number of institutional investors exiting in whole or in part
from REIT shares. We see this trend slowing as a number of the "momentum
players" who entered the market during the IPO wave have already exited
and, more importantly, public pension funds and foreign investors have
begun to participate in a more meaningful manner as buyers of shares.
- The market continues to witness disappointing announcements from certain
REITs at a fairly consistent, albeit slowing, pace. They have ranged from
announcements that development schedules are behind pace to announcements
by companies that are unable to meet their earnings projections from their
initial public offerings (most often due to increases in floating rate debt
costs). In general, these announcements are delivered by companies that
have failed to make the necessary
1
<PAGE>
transition from real estate promoters to public companies (and have not
learned that overpromising is a dangerous exercise).
Since this is our first letter to shareholders, it is appropriate to provide an
overview of our strategy. While our goal is to provide a diverse exposure to
each property type and region, our objective is not simply to replicate the
existing market basket of public real estate securities through a passive index
approach. Rather, we bring to the market a view towards portfolio weightings
based upon our analysis of relative opportunity within each property type and
geographic region. Within the property sectors (e.g., multi-family, office,
retail), the primary drivers affecting portfolio weighting are perceived demand
for space and actual and future competitive supply from new construction. With
respect to regional allocations, the most important factors include demand
drivers such as population growth, income and employment and supply-side drivers
such as existing vacancy, zoning restrictions on new development, and the
availability of new construction financing. The focus of these property type
considerations and regional factors is an asset allocation matrix that provides
us with an overall view as to the Portfolio's optimal allocation across property
sectors and regions.
Within this asset allocation framework, we then attempt to select individual
securities with the best risk-adjusted total return potential. The primary
driver for security selection is value. We screen each security for value using
a variety of measurements, including implied value per square foot, implied
property cap rate, comparison of cash flow multiples across comparable companies
and, lastly, discounted cash flow analysis, which captures the growth component
of both the existing property portfolio as well as projected additions to the
portfolio. While value, and specifically underlying property asset value, is the
principal consideration in the selection of individual securities, we also apply
an overlay of structural and qualitative factors such as REIT structure,
management tenure and depth, and capital structure.
At March 31, the Portfolio had over 20% of its assets invested in companies
focused in the office and industrial sectors of the market. This is a
significant overweighting relative to the NAREIT Index and reflects our current
conviction that there will be strong recoveries in the office and industrial
markets. These markets have generally been characterized by a lack of new supply
since the early 1990's, while demand has continued to recover with the growth of
the economy. As a result, occupancy rates have increased and net effective rents
have recently begun to improve. From an external growth perspective, it is
important to note that this is one sector in which positive spread investing
continues to exist, and rental rates have improved in some areas to justify new
development, particularly in the industrial sector. This allows companies to
provide both internal growth from gains in their existing portfolio as well as
external growth.
Two examples of our positions in this sector are Spieker Properties ("SPK") and
Carr Realty ("CRE"). Spieker represents an excellent opportunity to participate
in the emerging recovery of the office and industrial property markets in the
Pacific Northwest and Northern California. In addition, Spieker, a company deep
in management talent, has demonstrated its capabilities for innovative growth
through value-added acquisitions. The company has a strong pipeline of
acquisitions and has demonstrated its access to the capital markets. Carr
represents an interesting value play in the office sector. The company's stock
has been penalized for a perceived lack of strong growth and exposure to the
possible downsizing of Washington D.C. office usage. We believe that at current
prices the shares represent a significant discount to private market value for a
portfolio of Class "A" office properties in one the nation's strongest office
markets.
Another large position both at quarter-end and currently is Equity Residential
Properties Trust ("EQR"). We consider Equity Residential to be an excellent play
on the continuing growth in the multifamily market. The company possesses one of
the deepest management teams in the entire REIT market and has the capability to
expand or contract in multiple markets given their national
2
<PAGE>
approach. For example, we applaud their decision to sell selected assets in San
Antonio and redeploy these funds to stronger markets. Despite the reduced
opportunities in positive spread acquisitions, Equity Residential has the
capability to grow cash flow significantly from internal growth. We have
increased our stake in the company since quarter-end from 4.7% to a weighting in
excess of 5%, due to softening in the stock price, which we believe is
unwarranted and represents a good buying opportunities in the REIT market.
At quarter-end, we were market-weighted in the multi-family market with 26.9% of
assets in this sector. Although we are encouraged by growth in rents and
occupancies and see only moderate additions to supply, we continue to study the
market carefully for signs of weakness, particularly in southwestern cities with
most new construction. As a result, we are somewhat defensive in our posture for
this market and as a result, have targeted REITs that are dominant in their
markets and face the least competition from new supply.
The Portfolio also includes a significant overweighting in the manufactured home
community business. We consider this to be a very attractive sector of the real
estate market with fairly little downside risk as evidenced by a proven ability
to maintain high occupancies and rental growth in excess of inflation with
little exposure in terms of capital expenditures. Our largest position is Sun
Communities ("SUI") which expects to grow cash flow primarily from rental
increases and will provide additional growth from increased occupancies and
selected expansions of existing communities. Continued strong performance by
this company should narrow its valuation discount versus its peer group.
Overall, the Portfolio is underweighted in the retail sector as a result of a
persistent over-supply of retail square footage per capita as well as continued
weakness in retail sales. We are particularly underweighted in the "strip" or
"open-air" shopping center sub-sector. We believe that the neighborhood centers
that are the mainstay for many of the REITs in this sub-sector will have greater
difficulties competing with power centers and other retail forms. We do,
however, have confidence in Developers Diversified Realty ("DDR"), a
multi-dimensional company with capabilities in development, redevelopment and
opportunistic acquisitions. We believe that this company is trading at an
undeserved discount to its peers due primarily to a shorter track record as a
public company.
We are approximately market-weighted in the regional mall sector primarily
because valuations have reached levels that are attractive compared to private
market values. DeBartolo Realty ("EJD") is an excellent example of a company
that provides an opportunity to invest in a solid portfolio of regional malls
currently trading at a discount. This is accentuated by the built-in growth from
rental increases at lease roll-overs, increased occupancies at several recently
developed centers as well as growth from expansion within the existing
portfolio.
In addition, we are overweighted in the factory outlet sector. This is
predominantly because we believe that this sector has been oversold due to
investor concerns about its long-term viability. At a significant discount to
the REIT market in terms of cash flow multiples, selected outlet stocks can be
attractive.
It is worth noting that we continue to see opportunities for the Portfolio to
profit from the very problems that have hurt the performance of the sector. Due
to relative illiquidity and an investor universe in which certain players do not
have great conviction in their REIT positions, both negative announcements and
trading pressure have made stock prices volatile. Often this price movement
permits us to increase our position in core holdings at attractive levels or to
create a short-term trading opportunity in shares that are not in our model
portfolio.
Finally, it is worthwhile to discuss performance measures. We are using the
NAREIT Index for Equity REITs excluding Healthcare as our primary benchmark,
although we believe that it has some imperfections. One key shortcoming of the
measure is that it only includes REITs and does not include any real estate
operating companies. For example, we believe that Host Marriott
3
<PAGE>
("HMT") provides an excellent play in the ownership of full service middle
market hotels, while the Rouse Company ("ROUS"), a non-REIT, is a peer of the
other large regional mall REITs included in the Index. Another shortcoming of
the Index is that it is composed of all REITs, including those with market
capitalizations below $100 million, which are generally illiquid. In addition to
the NAREIT Index, we will also monitor the Portfolio performance versus other
benchmarks including the Wilshire Real Estate Index and the Morgan Stanley REIT
Index, which is expected to become effective in the near term.
- ----------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATION 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.
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ------------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
COMMON STOCKS (96.2%)
APARTMENT (26.9%)
42,200 Associated Estates Realty Corp. $ 791
29,700 Avalon Properties, Inc. 583
25,800 Bay Apartment Communities, Inc. 474
13,200 Camden Properties Trust 282
18,900 Columbus Realty Trust 354
37,500 Equity Residential Properties Trust 975
42,000 Home Properties of New York, Inc. 772
31,400 Irvine Apartment Communities, Inc. 491
41,700 Wellsford Residential Property Trust 870
---------
5,592
---------
LODGING/LEISURE (3.4%)
48,100 Host Marriott Corp. 571
7,400 National Golf Properties, Inc. 146
---------
717
---------
MANUFACTURED HOME (8.3%)
29,900 Chateau Properties, Inc. 594
24,400 Manufactured Home Communities, Inc. 375
33,300 Sun Communities, Inc. 749
---------
1,718
---------
OFFICE (8.2%)
26,500 Beacon Properties Corp. 527
22,400 Cali Realty Corp. 389
45,200 Carr Realty Corp. 785
---------
1,701
---------
OFFICE AND INDUSTRIAL (12.3%)
35,100 Duke Realty Investments, Inc. 930
32,400 Liberty Property Trust 628
51,100 Spieker Properties, Inc. 1,016
---------
2,574
---------
SELF STORAGE (1.4%)
5,300 Shurgard Storage Centers, Inc.,
Series A 126
10,000 Storage Equities, Inc. 170
---------
296
---------
SHOPPING CENTER (35.7%)
FACTORY OUTLET CENTER (8.9%)
15,800 Chelsea GCA Realty, Inc. 409
35,300 Factory Stores of America, Inc. 724
16,900 Horizon Outlet Centers, Inc. 376
14,300 Tanger Factory Outlet Centers, Inc. 340
---------
1,849
---------
<CAPTION>
VALUE
SHARES (000)
- ---------- ---------
<C> <S> <C>
REGIONAL MALL (17.5%)
57,700 Crown American Realty Trust $ 750
58,400 DeBartolo Realty Corp. 825
49,700 Glimcher Realty Trust 994
27,500 Macerich Co. 560
54,600 Taubman Centers, Inc. 526
---------
3,655
---------
STRIP CENTER (9.3%)
26,300 Developers Diversified Realty Corp. 743
14,800 Federal Realty Investment Trust 314
14,000 JP Realty, Inc. 284
6,200 Kimco Realty Corp. 238
12,300 Price REIT, Inc., Series B 352
---------
1,931
---------
TOTAL SHOPPING CENTER 7,435
---------
TOTAL COMMON STOCKS (Cost $20,129) 20,033
---------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.5%)
REPURCHASE AGREEMENT (5.5%)
$ 1,152 U.S. Trust, 6.00%, dated 3/31/95, due
4/03/95, to be repurchased at
$1,153, collateralized by $1,135
Government National Mortgage
Association 8.50% - 10.00%, due
10/15/09 - 12/15/09 valued at $1,198
(Cost $1,152) 1,152
---------
TOTAL INVESTMENTS (101.7%) (Cost $21,281) 21,185
---------
OTHER ASSETS AND LIABILITIES (-1.7%)
Other Assets 802
Liabilities (1,166)
---------
(364)
---------
NET ASSETS (100%) $ 20,821
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 2,066,858 outstanding $.001
par value shares (authorized 500,000,000 shares) $ 10.07
---------
---------
</TABLE>
5
<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Frederick B. Whittemore James W. Grisham
CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John P. Britton Valerie Y. Lewis
DIRECTOR SECRETARY
George R. Bunn, Jr. Karl Hartmann
DIRECTOR ASSISTANT SECRETARY
A. MacDonald Caputo Hilary D. Toole
DIRECTOR ASSISTANT SECRETARY
Peter E. de Svastich James R. Rooney
DIRECTOR TREASURER
Gerard E. Jones Timothy F. Osborne
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------
CUSTODIANS
The United States Trust Company of New York
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.
AGGRESSIVE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1995
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Aggressive Equity Portfolio commenced operations on March 8, 1995. The
Portfolio seeks long-term capital appreciation through a concentrated,
non-diversified portfolio of U.S. stocks. Short sales and options can be used to
enhance performance. It is anticipated that the Portfolio will hold 30 names or
less, although it may hold more from time to time.
From inception on March 8, 1995 through March 31, 1995, the Portfolio's return
was 3.90%. This compares to a total return of 3.80% for the S&P 500 and 2.91%
for the Lipper Capital Appreciation Index for the same period.
PERFORMANCE COMPARED TO THE LIPPER CAPITAL APPRECIATION INDEX AND THE S&P 500
INDEX(1)
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------
YTD
-----------------
<S> <C>
PORTFOLIO.............................. 3.90%
LIPPER CAPITAL APPRECIATION INDEX...... 2.91%
S&P 500 INDEX.......................... 3.80%
<FN>
- -------------
1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 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.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The largest holding in the Portfolio at March 31, by a wide margin, was Philip
Morris, representing 18.4%. We believe Philip Morris stock has tremendous upside
potential over the next 1 - 2 years. If we are wrong, though, the dividend yield
is 5% currently; and this should rise to about 6% in August. If the stock merely
goes back to where it peaked in 1992, the return, excluding dividends, would be
30%. In 1992, Philip Morris earned $5.45 and the dividend was $2.60. This year,
the company should earn $6.50 and next year $7.60, and by August 1996 we expect
the dividend to be $4.50. As always, political and legal issues exist, but we
believe they are widely discounted. Business is very strong, street earnings
estimates have been moving up consistently over the past few quarters, and the
stock's peer group -- other consumer staples -- has exploded over the past year
and is now pushing toward the high end of historical P/E ranges. If Philip
Morris traded at its 10-year high P/E on next year's earnings a year from now,
the stock would return 85%, plus dividends. We doubt this will occur, but
investors who missed the move in consumer staple stocks, and look at the P/Es of
stocks like Coca Cola (24x) and Pfizer (18x), should find Philip Morris' 10 P/E
and recession-resistant 15% growth rate compelling.
And investors, in our view, are underestimating the positive shift in management
strategy. During the 1980s, Philip Morris stock rose sixfold despite increasing
political, legal and social pressures on the cigarette industry. The sixfold
increase in value is also remarkable in light of the two enormously dilutive
acquisitions made during the decade -- General Foods in 1985 and Kraft in 1988
- -- totalling nearly $19 billion. These acquisitions were supposed to raise the
stock's P/E multiple, making up for the dilution in earnings. That never
happened. Food and beer now represent 40% of profits, but the stock still
languishes at a tobacco multiple. Had the company used the $19 billion to buy
back stock, EPS would be sharply higher today. New management is committed to
making only fill-in acquisitions, and is actually divesting low-return food
assets. The dividend payout ratio has been moved up over 50% and stock
repurchases are running at a 3-4% annual rate, the most aggressive return of
cash to shareholders ever.
Our position in Philip Morris is part of a big overweight in consumer staples.
Other significant holdings in this area at March 31 include UST (since sold),
Kellogg, Ralston Purina, Coca Cola,
1
<PAGE>
Duracell and Pfizer. Our total consumer staple weighting was 33% at March 31,
versus an S&P 500 weighting of 22%.
Our other meaningful sector bets are financial services (7%), retail (14%),
defense and defense-based conglomerates (9%) and technology (11%).
Fannie Mae, our largest financial stock holding, is still attractive despite its
more than 10% move since we acquired it. The stock is still below its level of a
year ago by nearly 10%, and the P/E on projected 1995 earnings is only about 10
times. In 1994, interest rates soared and, while earnings growth slowed, it
remained in double digit territory. Now, with the yield curve flattening and
interest rates stabilizing, the company's growth fundamentals are likely to
reaccelerate. Our other financial stocks include Citicorp, Wells Fargo, Exel,
PartnerRe and American Express.
Retailers really stand out as having missed the growth stock rally of the past
year. Some of the best growth retailers are trading at levels of one or two or
even three years ago despite rapid underlying earnings growth. Investors are
currently looking at the glass as being half empty in this sector, focusing on
issues like rising labor costs, a soft consumer spending environment, slowing
same-store sales. We are excited about the opportunity to own such high-quality
growth companies at their lowest P/Es in years. Our major holdings in this area
include Home Depot, Lowe's, Autozone, General Nutrition and Cracker Barrel.
Restructuring in the defense industry is leading to impressive bottom-line
growth and shareholder-oriented actions. McDonnell Douglas (3.2% of the
Portfolio), for example, is in the midst of a 15% buyback program. Litton, a
3.3% holding, is looking for accretive acquisitions while working on raising
operating margins. Lockheed Martin, purchased since the end of the quarter, has
tremendous cost-cutting opportunities due to the synergies from the recent
merger of two large defense contractors. In all three cases, P/Es are low, EPS
growth should be double digit, and there are events that could cause consensus
earnings estimates to rise.
It is difficult to not own technology stocks in light of the extremely strong
fundamentals in this sector. Yet, our exposure here is modest compared to many
growth-oriented investors due to the fact that event risk is high. Our major
holdings here are IBM, Intel, Cabletron, Watkins Johnson and Applied Materials.
- ----------
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.
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------- -------
<C> <S> <C>
COMMON STOCKS (83.5%)
CAPITAL GOODS/CONSTRUCTION (7.6%)
AEROSPACE (6.6%)
1,200 Boeing Co. $ 65
4,300 McDonnell Douglas Corp. 240
2,700 United Technologies Corp. 186
-------
491
-------
MACHINERY (1.0%)
1,400 Caterpillar, Inc. 78
-------
TOTAL CAPITAL GOODS/CONSTRUCTION 569
-------
CONSUMER CYCLICAL (18.7%)
FOOD SERVICE & LODGING (2.6%)
5,800 Boston Chicken, Inc. 94
4,400 Cracker Barrel Old Country Store,
Inc. 99
-------
193
-------
HOUSEHOLD FURNISHINGS & APPLIANCES (1.3%)
2,100 Duracell International, Inc. 94
-------
PUBLISHING (0.8%)
1,200 Gannett Co., Inc. 64
-------
RETAIL - GENERAL (14.0%)
12,100 Autozone, Inc. 301
9,300 General Nutrition Cos., Inc. 258
2,900 Harcourt General, Inc. 113
6,100 Home Depot, Inc. 270
3,100 Lowe's Cos., Inc. 107
-------
1,049
-------
TOTAL CONSUMER CYCLICAL 1,400
-------
CONSUMER STAPLES (32.5%)
BEVERAGES & TOBACCO (24.1%)
3,400 Coca-Cola Co. 192
21,100 Philip Morris Cos., Inc. 1,377
7,300 UST, Inc. 232
-------
1,801
-------
DRUGS (1.6%)
1,400 Pfizer, Inc. 120
-------
FOOD (5.1%)
4,700 Kellogg Co. 274
2,300 Ralston Purina Group 110
-------
384
-------
HEALTH CARE SUPPLIES & SERVICES (1.7%)
1,500 Columbia/HCA Healthcare Corp. 64
1,300 United Healthcare Corp. 61
-------
125
-------
TOTAL CONSUMER STAPLES 2,430
-------
FINANCE (12.1%)
BANKING (2.8%)
2,700 Citicorp 115
600 Wells Fargo & Co. 94
-------
209
-------
<CAPTION>
VALUE
SHARES (000)
- --------- -------
<C> <S> <C>
FINANCIAL SERVICES (7.0%)
1,900 American Express Co. $ 66
4,700 Federal National Mortgage
Association 382
1,800 First USA, Inc. 76
-------
524
-------
INSURANCE (2.3%)
1,300 Exel Ltd. 57
5,500 PartnerRe Holdings Ltd. 117
-------
174
-------
TOTAL FINANCE 907
-------
MATERIALS (2.0%)
CHEMICALS (2.0%)
3,200 Hercules, Inc. 149
-------
TECHNOLOGY (10.6%)
COMPUTERS (2.5%)
1,500 Cabletron Systems, Inc. 67
1,400 International Business Machines
Corp. 115
-------
182
-------
ELECTRONICS (8.1%)
2,300 Applied Material, Inc. 127
1,400 Intel Corp. 119
6,800 Litton Industries, Inc. 244
3,100 Watkins-Johnson Co. 118
-------
608
-------
TOTAL TECHNOLOGY 790
-------
TOTAL COMMON STOCKS (Cost $6,054) 6,245
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------
<C> <S> <C>
SHORT-TERM INVESTMENT (13.4%)
US GOVERNMENT AND AGENCY OBLIGATION (13.4%)
$ 1,000 Federal Home Loan Mortgage Corp.
Discount Note, 4/3/95 (Cost
$1,000) 1,000
-------
TOTAL INVESTMENTS (96.9%) (Cost $7,054) 7,245
-------
OTHER ASSETS AND LIABILITIES (3.1%)
Other Assets 840
Liabilities (605)
-------
235
-------
NET ASSETS (100%) $ 7,480
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
Applicable to 719,607 outstanding $.001 par
value shares (authorized 500,000,000 shares) $ 10.39
-------
-------
</TABLE>
3
