<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1995
[LOGO]
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active Country Allocation................. 3
Asian Equity.............................. 13
Emerging Markets.......................... 18
European Equity .......................... 26
Global Equity ............................ 30
Gold...................................... 34
International Equity ..................... 37
International Small Cap................... 46
Japanese Equity........................... 51
Latin American............................ 55
U.S. Equity Portfolios:
Aggressive Equity......................... 60
Emerging Growth........................... 64
Equity Growth............................. 68
Small Cap Value Equity.................... 72
U.S. Real Estate.......................... 77
Value Equity.............................. 81
Balanced Portfolio.......................... 85
Fixed Income Portfolios:
Emerging Markets Debt..................... 89
Fixed Income.............................. 94
Global Fixed Income....................... 99
High Yield................................ 104
Municipal Bond............................ 109
Money Market Portfolios:
Money Market.............................. 113
Municipal Money Market.................... 116
Statement of Operations..................... 122
Statement of Changes in Net Assets.......... 126
Financial Highlights ....................... 138
Notes to Financial Statements............... 150
Report of Independent Accountants........... 157
Federal Tax Information..................... 158
Officers and Directors ..................... 159
</TABLE>
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Fund, Inc. Prospectuses
describe in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectuses carefully before you invest
or send money.
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<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS:
We are very pleased to present to you the Fund's Annual Report for the year
ended December 31, 1995. After a difficult 1994 across nearly all major
financial asset classes, the domestic markets performed spectacularly in 1995,
while the international markets generally concluded the year on a positive note
after mixed sentiment at the start.
This letter briefly highlights the performance of certain of the Fund's
portfolios in 1995. The SEC-standardized performance of each of the portfolios
and commentaries from the portfolio managers discussing the results of each
portfolio are contained in this report. The performance of all of the portfolios
relative to their benchmarks is summarized in the performance table on page two
of this report.
On the domestic equity side, our Equity Growth Portfolio turned in a stellar
absolute and relative performance by returning 45.02% for the year,
outperforming its benchmark index by 748 basis points. The Portfolio also
performed well compared to its competition. Our Aggressive Equity Portfolio,
launched in March 1995, gained 41.25%, outperforming its benchmark index by 1545
basis points. Also performing creditably were the Value Equity and Emerging
Growth Portfolios, each of which had solid performance for the year.
The Fund's fixed income portfolios performed well in 1995. Our High Yield
Portfolio returned 23.35% for the year, compared with 17.38% for its benchmark
index. Lipper Analytical Services ranked the Portfolio second out of 119 funds
for the twelve months ended December 31, 1995 and fifth out of 69 high yield
funds for the three-year period ended December 31, 1995. The Fixed Income
Portfolio also performed well in absolute terms, returning 18.76%. In addition,
the Global Fixed Income Portfolio recorded an impressive 19.32% performance for
the year.
While the international equity markets did not achieve the domestic market's
level of performance in 1995, our International Equity Portfolio continued its
impressive absolute and relative performance returning 11.77%. The Portfolio has
generated an average annual return since its inception in August 1989 of 10.82%
compared to its benchmark index of 3.54%.
In the emerging markets, our Emerging Markets Debt Portfolio returned an
impressive 28.23% for 1995. However, 1995 was an extremely difficult year for
emerging markets equities which were still reeling from the effects of the
Mexican crisis among other negative developments. As we have stated before,
short-term volatility often is the price to pay for achieving higher long-term
returns in the emerging markets. At this writing, the emerging markets have
begun the year on a positive note. While the emerging markets endured a tough
1995, virtually all emerging nations moved forward with needed reforms, seeking
economic growth and efficiency. It is important to note that despite political
and economic uncertainties, we are investing in companies with strong earnings
prospects. By sticking with our investment strategies during the down markets,
our portfolios are well positioned to benefit from improving market conditions.
As important as annual performance is for each of our portfolios, we hope that
you also will note that each of our portfolios closely adhered to its respective
investment strategies and styles in 1995. Investment styles may go in and out of
favor in the marketplace but we are firmly of the view that superior long-term
results are best achieved by adhering to a rigorous, well thought out and
consistently applied investment strategy.
We hope you find the enclosed report informative. We very much appreciate your
support of the Fund and look forward to a successful 1996.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT
February 17, 1996
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1
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
AVERAGE AVERAGE RETURN
NET ONE YEAR ANNUAL FIVE ANNUAL SINCE
ASSET ONE TOTAL RETURN AVERAGE YEAR TOTAL TOTAL INCEPTION
VALUE YEAR FOR ANNUAL FIVE RETURN FOR RETURN FOR
INCEPTION PER TOTAL COMPARABLE YEAR TOTAL COMPARABLE SINCE COMPARABLE
DATES SHARE RETURN INDEXES RETURN INDEXES INCEPTION INDEXES
--------- ------- ------- ------------ ------------ ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 $11.63 10.57% 11.21%(2) -- -- 8.46% 10.05%(2)
Asian Equity 7/01/91 19.48 6.87 6.81(1) -- -- 21.85 18.73(1)
Emerging Markets 9/25/92 13.14 -12.77 -12.34(5) -- -- 13.16 14.15(5)
European Equity 4/02/93 13.92 11.85 21.62(4) -- -- 18.68 16.15(4)
Global Equity 7/15/92 14.31 18.66 20.72(3) -- -- 18.21 13.16(3)
Gold 2/01/94 8.55 13.21 11.14(14) -- -- 1.87 -6.27(14)
International Equity 8/04/89 15.15 11.77 11.21(2) 14.24% 9.37%(2) 10.82 3.54(2)
International Small Cap 12/15/92 14.94 2.60 11.21(2) -- -- 16.30 16.35(2)
Japanese Equity 4/25/94 9.27 -3.64 0.69(15) -- -- -3.17 1.83(15)
Latin American 1/18/95 9.06 -8.68* -8.04(17)* -- -- -- --
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 12.17 41.25* 25.80(18)* -- -- -- --
Emerging Growth 11/01/89 21.49 33.31 39.92(6) 14.48 22.99(6) 13.36 14.53(6)
Equity Growth 4/02/91 14.14 45.02 37.54(7) -- -- 14.33 14.20(7)
Small Cap Value Equity 12/17/92 11.91 20.63 31.70(8) -- -- 11.61 15.96(8)
U.S. Real Estate 2/24/95 11.42 21.07* 14.46(19)* -- -- -- --
Value Equity 1/31/90 13.94 33.69 37.54(7) 15.65 16.57(7) 11.86 14.54(7)
BALANCED PORTFOLIO 2/20/90 9.98 23.63 24.91(9) 11.45 12.43(9) 10.31 11.19(9)
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 8.59 28.23 27.54(16) -- -- 5.18 1.92(16)
Fixed Income 5/15/91 10.81 18.76 18.48(10) -- -- 9.18 9.35(10)
Global Fixed Income 5/01/91 11.22 19.32 19.31(11) -- -- 8.95 11.05(11)
High Yield 9/28/92 10.46 23.35 17.38(12) -- -- 12.28 10.98(12)
Municipal Bond 1/18/95 10.37 8.80* 12.03(20)* -- -- -- --
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 1.00 5.51 -- -- -- -- --
Municipal Money Market 2/10/89 1.00 3.44 -- -- -- -- --
<FN>
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INDEXES:
(1) MSCI Combined Far East Free ex-Japan
(2) MSCI EAFE (Europe, Australia, and Far East)
(3) MSCI World
(4) MSCI Europe
(5) IFC Global Total Return Composite
(6) NASDAQ Composite
(7) S&P 500
(8) Russell 2500
(9) Indata Balanced-Median
(10) Lehman Aggregate Bond
(11) J.P. Morgan Traded Global Bond
(12) CS First Boston High Yield
(13) Donaghue's Money Fund Report
(14) Philadelphia Gold and Silver
(15) MSCI Japan
(16) J.P. Morgan Emerging Markets Bond
(17) MSCI Emerging Markets Global Latin America
(18) Lipper Capital Appreciation
(19) NAREIT ex-healthcare
(20) Lehman 7 yr Municipal Bond
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 1995
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7 DAY 7 DAY 30 DAY 30 DAY
30 DAY CURRENT EFFECTIVE CURRENT COMPARABLE
CURRENT YIELD+++ YIELD++ YIELD++ YIELD+++ YIELD
----------------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Money Market
Portfolios: Portfolios:
Emerging Markets
Debt 15.67% Money Market 5.21% 5.34% 5.21% 5.14%(13)
Municipal Money
Fixed Income 6.39 Market 3.91 3.99 3.48 3.74 (13)
Global Fixed
Income 5.91
High Yield 10.65
Municipal Bond 4.17
<FN>
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++ The 7 day current yield and 7 day effective yield assume an annualization
of the current yield at December 31, 1995 with all dividends reinvested. As
with all money market portfolios, yields fluctuate as market conditions
change and the 7 day yields are not necessarily indicative of future
performance.
+++ The current 30 day yield reflects the net investment income generated by
the Portfolio over a specified 30-day period expressed as an annual
percentage. Expenses accrued for the 30-day period include any fees charged
to all shareholders. Yields will fluctuate as market conditions change and
are not necessarily indicative of future performance.
* Cumulative (unannualized) total return since inception of the Portfolio.
</TABLE>
Past performance should not be construed as a guarantee of future performance.
Investment return and principal value will fluctuate so that investor's shares,
when redeemed, may be worth more or less than their original cost. Investments
in the Money Market and Municipal Money Market Portfolios are neither insured
nor guaranteed by the U.S. Government. There is no assurance that the Money
Market and Municipal Money Market Portfolios will be able to maintain a stable
net asset value of $1.00 per share. Please read the Portfolio's prospectus
carefully before you invest or send money.
- --------------------------------------------------------------------------------
2
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.9%
Brazil 2.2%
Belgium 1.8%
France 3.5%
Germany 5.3%
Hong Kong 7.1%
Indonesia 2.2%
Italy 1.8%
Japan 41.9%
Malaysia 1.6%
Netherlands 3.1%
Singapore 2.8%
Spain 2.5%
Switzerland 3.3%
Thailand 2.6%
United Kingdom 8.1%
Other 8.3%
100.00%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACTIVE COUNTRY ALLOCATION
MSCI EAFE INDEX (1) PORTFOLIO
<S> <C> <C>
01/17/92* 500,000 500,000
10/31/92 452,945 468,500
12/31/92 459,595 479,500
12/31/93 609,250 626,820
12/31/94 656,600 623,550
12/31/95 730,205 689,459
*Commencement of Operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 10.57% 8.46%
INDEX............................ 11.21 10.05
<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 Active Country Allocation Portfolio invests in international equity markets,
with emphasis placed upon countries, rather that stock selection. This approach
reflects our belief that a diversified selection of securities representing
exposure to countries that we find attractive provides an effective way to
maximize the return and minimize the risk associated with global investing.
The total return of the Portfolio for the year ended December 31, 1995 was
10.57% as compared to 11.21% for the Morgan Stanley Capital International (MSCI)
EAFE Index for the same period. The average annual return for the period from
inception in January 1992 through December 31, 1995 for the Portfolio was 8.46%
compared to 10.05% for the Index for the same periods.
World equity markets concluded the year on a high note contrary to mixed
sentiment at the start. At the onset of 1995, consensus expectations for the
world's economy were for stronger growth, higher inflation and monetary
tightening. Expectations quickly changed as growth appeared sluggish,
inflationary pressures proved non-existent and monetary policies eased, which
combined to provide a supportive backdrop for lower interest rates and higher
stock prices around the world. While developed international equity markets
achieved positive returns in 1995, they failed to outpace the spectacular rise
of the U.S. market.
In U.S. dollar terms, as measured by the Morgan Stanley Capital International
(MSCI) indices, regional returns for the year were: U.S. 37.1%, Europe 21.6%,
Japan 0.7%, Pacific Ex-Japan 13.7% and the Emerging Markets -9.2%. In local
currency terms, twelve month regional returns were: Europe 15.1%, Japan 4.1%,
Pacific Ex-Japan 14.1%, and Emerging Markets -4.6%.
For the year, the Portfolio performed in line with the benchmark, having lagged
in the first half of 1995 and significantly outperformed in the second half.
Positive allocation decisions in the early part of the year to underweight Japan
and to overweight Europe and the Pacific Ex-Japan were overwhelmed by a decision
to hedge the Japanese yen (when the dollar was undervalued relative to most
measures). Since mid-year,
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
3
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
momentum has improved and the Portfolio has performed well. Our allocation
decision to re-emphasize Japan in late June/early July and to hedge our yen
exposure has been a primary contributor to outperformance. An underweight in
Europe and the hedging of our Deutsche mark bloc exposure has also added to
results.
Within the Portfolio, our most significant overweights are in Japan and Asia.
Over the past six months, the Japanese market backdrop has improved
substantially even though economic fundamentals have remained unchanged. The
improvement in sentiment has occurred as the market rise has led to an increase
in wealth and a general deleveraging in real terms. Internal and external
liquidity remains favorable as monetary and fiscal policy are stimulative and
the policy debate is beginning to tackle more substantial issues including
measures to deal with the non-performing loan problem. We expect the economy to
experience a moderate recovery in 1996, but anticipate that structural
impediments will continue to keep growth muted. Ongoing policy initiatives to
push the value of the yen down continue to favor our hedged strategy.
In Asia, we have increased exposure to the region and are currently overweight
in Hong Kong and Singapore. Favorable liquidity trends, a strong U.S. economy
and prospective recovery in Japan, and an easing of China's austerity program
are key drivers for improved trends in the Asian markets. While earnings
momentum is down from the peak of 1992/93, the Asian markets are cheap with
profits still increasing at high levels. Signs of recovery in the big developed
economies should lead to increased earnings estimates as 1996 progresses.
In Europe, the economic reports in early 1996 are likely to make depressing
reading as the lagged effects of the transport strike on production and sales in
France and reports of ongoing restructuring in Germany reinforce existing
perceptions of economic weakness. The current mix of tight budgets and high real
interest rates also can be expected to add to the gloomy prognostications. From
a positive perspective, inflation should be contained with unemployment rates
high and Gross Domestic Product gaps wide. In this environment there will be
tremendous pressure on European central banks, particularly on the French, to
cut interest rates. We expect that investors will not be disappointed. The
Bundesbank will continue to cut rates, perhaps even through the second quarter
if monetary growth and the economy remain lackluster. In sum, with the news from
Europe positive on the inflation front but negative on economic growth
prospects, we remain underweight in these markets and have fully hedged our
Deutsche mark bloc exposure.
After an extended correction, we believe that emerging market equities are
poised for recovery. The combination of high economic and earnings growth
prospects, attractive valuations and under-representation in institutional
portfolios bodes well for expected returns over the next twelve months. Within
the emerging markets, we believe Asia offers the most attractive opportunities
and have increased exposure to the region by initiating positions in Thailand,
Indonesia, Singapore and Malaysia.
Against a backdrop of positive liquidity, moderate growth and low inflation, we
remain optimistic about the outlook for international equities and believe that
the Portfolio is well positioned for the forecasted environment.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (89.5%)
AUSTRALIA (1.8%)
15,500 Amcor Ltd......................................... $ 109
8,800 Ampolex Ltd....................................... 19
14,600 Australian National Industries Ltd................ 11
24,900 Boral Ltd. (Bonus Shares Plan).................... 63
6,200 Brambles Industries Ltd........................... 69
46,670 Broken Hill Proprietary Co., Ltd.................. 659
16,100 Burns, Philip & Co., Ltd.......................... 36
7,981 Coca-Cola Amatil Ltd.............................. 64
32,918 Coles Myer Ltd.................................... 103
16,000 CRA Ltd........................................... 235
**+1,200 CRA Ltd. (Bonus Shares)........................... 17
25,100 CSR Ltd........................................... 82
47,400 Fosters Brewing Corp.............................. 78
+4,278 Goldfields Ltd.................................... 11
33,300 Goodman Fielder Ltd............................... 33
8,800 ICI Australia Ltd................................. 67
6,833 Lend Lease Corp., Ltd............................. 99
41,019 MIM Holdings Ltd.................................. 57
35,518 National Australia Bank Ltd....................... 319
8,200 Newcrest Mining Ltd............................... 34
47,600 News Corp., Ltd................................... 254
22,073 North Broken Hill Peko Ltd........................ 62
28,900 Pacific Dunlop Ltd................................ 68
24,200 Pioneer International Ltd......................... 62
7,700 Renison Goldfields Consolidated Ltd............... 38
15,400 Santos Ltd........................................ 45
18,400 Southcorp Holdings Ltd............................ 43
+11,900 TNT Ltd........................................... 16
26,000 Western Mining Corp. Holdings Ltd................. 167
43,900 Westpac Banking Corp.............................. 194
----------
3,114
----------
BELGIUM (1.8%)
120 Bekaert S.A....................................... 99
200 Cimenteries CBR................................... 81
2,800 Delhaize Freres et Cie, 'Le Lion' S.A............. 116
2,400 Electrabel S.A.................................... 571
500 Electrabel S.A. (New)............................. 119
1,700 Fortis AG......................................... 207
108 Fortis AG VVPR (New).............................. 13
785 Generale de Banque S.A............................ 278
1,375 Gevaert Photo-Producten S.A....................... 85
299 Glaverbel S.A..................................... 32
50 Glaverbel S.A. VVPR (New)......................... --
1,250 Groupe Bruxelles Lambert S.A...................... 173
700 Kredietbank S.A................................... 191
1,240 Petrofina S.A..................................... 380
675 Reunies Electrobel & Tractebel S.A................ 279
700 Royale Belge...................................... 140
450 Solvay et Cie S.A................................. 243
+1,350 Union Miniere S.A................................. 90
----------
3,097
----------
BRAZIL (0.5%)
935,000 Cia Paulista de Forca E Luz....................... 45
2,211,000 Cia Siderurgica Nacional.......................... 46
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
2,721,000 Eletrobras........................................ $ 736
425,000 Light Servicos de Eletricidade.................... 136
----------
963
----------
FRANCE (3.5%)
600 Accor S.A......................................... 78
2,800 Alcatel Alsthom................................... 241
3,100 AXA S.A........................................... 209
3,800 Banque Nationale de Paris......................... 171
400 BIC Corp.......................................... 41
600 Bouygues.......................................... 60
450 Canal Plus........................................ 84
500 Carrefour Supermarch S.A.......................... 303
1,700 Casino............................................ 49
150 Chargeurs S.A..................................... 30
550 Cie Bancaire S.A.................................. 62
1,750 Cie de Saint Gobain............................... 194
3,400 Cie de Suez S.A................................... 140
2,500 Cie Financiere de Paribas S.A., Class A........... 137
2,300 Cie Generale des Eaux............................. 230
***5,100 Elf Aquitaine..................................... 376
700 Eridania Beghin-Say S.A........................... 120
1,450 Groupe Danone..................................... 239
1,150 Havas S.A......................................... 91
2,265 Lafarge Coppee S.A................................ 146
1,300 L'Air Liquide..................................... 215
550 Legrand........................................... 85
1,300 L'Oreal........................................... 348
1,750 LVMH Moet Hennessy Louis Vuitton.................. 365
1,400 Lyonnaise des Eaux................................ 135
2,500 Michelin CGDE, Class B............................ 100
1,200 Pernod-Ricard..................................... 68
1,100 Peugeot S.A....................................... 145
400 Pinault-Printemps S.A............................. 80
350 Promodes.......................................... 82
6,000 Rhone-Poulenc S.A., Class A....................... 129
90 SAGEM............................................. 51
250 Saint Louis....................................... 66
***2,090 Sanofi............................................ 134
2,700 Schneider S.A..................................... 92
588 Simco S.A......................................... 56
62 Simco S.A. RFD.................................... 5
100 Societe Eurafrance S.A............................ 34
1,700 Societe Generale.................................. 210
2,900 Thomson CSF....................................... 65
4,200 Total S.A., Class B............................... 284
5,800 Union des Assurances de Paris..................... 151
+5,300 Usinor Sacilor.................................... 69
----------
5,970
----------
GERMANY (5.1%)
1,350 AGIV AG........................................... 29
550 Allianz AG........................................ 1,080
100 AMB Aachener & Muenchener Beteiligungs AG......... 72
100 Asko Deutsche Kaufhaus AG......................... 52
1,650 BASF AG........................................... 372
1,850 Bayer AG.......................................... 491
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
GERMANY (CONT.)
6,100 Bayerische Hypotheken und Wechsel Bank AG......... $ 154
6,250 Bayerische Vereinsbank AG......................... 187
100 Beiersdorf AG..................................... 69
100 Bilfinger & Berger AG............................. 38
150 Brau Und Brunnen AG............................... 23
+450 Bremer Vulkan Verbund AG.......................... 13
50 CKAG Colonia Konzern AG........................... 42
2,750 Continental AG.................................... 39
1,250 Daimler-Benz AG................................... 631
250 Degussa AG........................................ 84
12,300 Deutsche Bank AG.................................. 584
10,600 Dresdner Bank AG.................................. 284
150 Heidelberger Zement AG............................ 94
200 Hochtief AG....................................... 86
300 Karstadt AG....................................... 123
200 Kaufhof Holding AG................................ 61
+1,300 Kloeckner-Humboldt-Deutz AG....................... 8
250 Linde AG.......................................... 148
900 Lufthansa AG...................................... 125
250 MAN AG............................................ 69
1,000 Mannesmann AG..................................... 318
+4,300 Merck KGAA........................................ 175
+200 Muenchener Rueckver AG (Registered)............... 431
+9 Muenchener Rueckver AG RFD (New).................. 19
450 Preussag AG....................................... 127
850 RWE AG............................................ 309
1,550 SAP AG............................................ 240
1,800 Schering AG....................................... 120
1,450 Siemens AG........................................ 797
+850 Thyssen AG........................................ 155
12,450 Veba AG........................................... 533
550 Viag AG........................................... 227
700 Volkswagen AG..................................... 235
----------
8,644
----------
HONG KONG (7.1%)
+48,000 Applied International Holdings.................... 4
60,438 Bank of East Asia Ltd............................. 217
227,000 Cathay Pacific Airways Ltd........................ 346
170,000 Cheung Kong Holdings Ltd.......................... 1,036
153,000 China Light & Power Co., Ltd...................... 704
124,000 Chinese Estates Holdings.......................... 81
60,000 Dickson Concepts International Ltd................ 56
48,000 Giordano Holdings Ltd............................. 41
**96,000 Hang Lung Development Co.......................... 153
148,200 Hang Seng Bank Ltd................................ 1,327
14,800 Hong Kong Aircraft Engineering Co., Ltd........... 38
150,000 Hong Kong & China Gas Co., Ltd.................... 242
99,000 Hong Kong & Shanghai Hotel Ltd.................... 143
855,487 Hong Kong Telecommunications Ltd.................. 1,527
341,198 Hopewell Holdings Ltd............................. 196
278,000 Hutchison Whampoa Ltd............................. 1,693
80,000 Hysan Development Co., Ltd........................ 212
30,000 Johnson Electric Holdings Ltd..................... 54
45,000 Miramar Hotel & Investment Ltd.................... 95
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
114,656 New World Development Co., Ltd.................... $ 500
110,000 Oriental Press Group Ltd.......................... 33
30,500 Peregrine Investment Holdings Ltd................. 39
84,340 Shangri-La Asia Ltd............................... 103
126,000 Shun Tak Holdings Ltd............................. 89
144,000 South China Morning Post Holdings................. 88
80,000 Stelux Holdings Ltd............................... 20
177,000 Sun Hung Kai Properties Ltd....................... 1,448
124,000 Swire Pacific Ltd., Class A....................... 962
33,000 Television Broadcasts Ltd......................... 118
168,000 Wharf Holdings Ltd................................ 560
11,800 Wing Lung Bank Ltd................................ 66
27,000 Winsor Industrial Corp............................ 23
----------
12,214
----------
INDONESIA (2.2%)
**212,000 Bank Dagang Nasional (Foreign).................... 174
**761,000 Barito Pacific Timber (Foreign)................... 557
**372,000 Gadjah Tunggal (Foreign).......................... 207
**212,000 Hanajaya Mandala Sampoerna (Foreign).............. 2,207
**248,000 Jakarta International Hotel & Development
(Foreign)....................................... 304
**27,000 Matahari Putra Prima (Foreign).................... 48
+**17,000 Pan Brothers Tex (Foreign)........................ 4
**104,000 Sinar Mas Agro (Foreign).......................... 58
**95,000 United Tractors (Foreign)......................... 179
----------
3,738
----------
ITALY (1.8%)
22,770 Assicurazioni Generali S.p.A...................... 551
45,000 Banca Commerciale Italiana........................ 96
14,000 Banco Ambrosiano Ven.............................. 38
5,000 Benetton Group S.p.A.............................. 60
3,000 Cartiere Burgo.................................... 15
65,500 Credito Italiano.................................. 76
18,000 Edison S.p.A...................................... 78
+2,000 Falck............................................. 5
89,000 Fiat S.p.A........................................ 289
22,000 Fiat S.p.A. Di Risp (NCS)......................... 39
12,500 Fidis............................................. 24
+6,000 Impregilo S.p.A................................... 5
17,400 Instituto Mobiliare Italiano...................... 110
22,000 Istituto Bancario San Paolo....................... 130
113,700 Istituto Nazionale delle Assicurazioni............ 151
3,250 Italcementi....................................... 8
7,250 Italcementi Di Risp............................... 43
19,000 Italgas........................................... 58
10,900 Magneti Marelli S.p.A............................. 13
14,500 Mediobanca S.p.A.................................. 100
+150,000 Montedison S.p.A.................................. 101
+20,000 Montedison S.p.A. Di Risp (NCS)................... 12
+106,250 Olivetti S.p.A.................................... 85
35,600 Parmalat Finanziaria S.p.A........................ 31
+45,000 Pirelli S.p.A..................................... 58
7,150 R.A.S. S.p.A...................................... 81
3,100 R.A.S. S.p.A Di Risp (NCS)........................ 19
6,000 Rinascente........................................ 36
+2,000 Saffa S.p.A....................................... 5
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ITALY (CONT.)
3,500 SAI............................................... $ 36
12,500 Saipem............................................ 29
3,000 Sasib............................................. 13
7,000 Sirti S.p.A....................................... 39
+20,000 SNIA BPD S.p.A.................................... 17
+183,700 Telecom Italia Mobile S.p.A....................... 323
180,000 Telecom Italia S.p.A.............................. 280
45,000 Telecom Italia S.p.A. Di Risp (NCS)............... 55
----------
3,109
----------
JAPAN (41.9%)
4,000 Advantest Corp.................................... 205
44,000 Ajinomoto Co...................................... 490
22,000 Aoki Corp......................................... 92
3,000 Aoyama Trading Co................................. 96
89,000 Asahi Bank Ltd.................................... 1,121
22,000 Asahi Breweries Ltd............................... 260
66,000 Asahi Chemical Industry Co., Ltd.................. 505
66,000 Asahi Glass Co., Ltd.............................. 735
66,000 Bank of Tokyo..................................... 1,157
22,000 Bridgestone Co.................................... 350
62,000 Canon, Inc........................................ 1,123
34,000 Casio Computer Co................................. 333
36,000 Chiba Bank........................................ 324
9,000 Chiyoda Corp...................................... 89
22,000 Chugai Pharmaceuticals Co......................... 211
34,000 Citizen Watch Co., Ltd............................ 260
31,000 Daiei Inc......................................... 375
102,000 Dai-Ichi Kangyo Bank.............................. 2,006
22,000 Daikin Industries Ltd............................. 215
44,000 Dai Nippon Printing Co., Ltd...................... 746
+10,000 Daishowa Paper Manufacturing Co., Ltd............. 78
22,000 Daiwa House Industry.............................. 362
44,000 Daiwa Securities Co., Ltd......................... 673
15,000 Ebara Corp........................................ 220
10,300 Fanuc............................................. 446
100,000 Fuji Bank......................................... 2,208
32,000 Fuji Photo Film Ltd............................... 924
123,000 Fujitsu Ltd....................................... 1,370
36,000 Furukawa Electric Co.............................. 176
44,000 Hankyu Corp....................................... 241
22,000 Hazama Corp....................................... 94
175,000 Hitachi Ltd....................................... 1,763
57,000 Honda Motor Co.................................... 1,176
71,000 Industrial Bank of Japan.......................... 2,152
11,000 Ito-Yokado Co., Ltd............................... 678
+89,000 Japan Airlines Co................................. 591
56,000 Japan Energy Corp................................. 188
24,000 Joyo Bank......................................... 193
18,000 Jusco Co., Ltd.................................... 469
44,000 Kajima Corp....................................... 435
31,928 Kansai Electric Power Co.......................... 773
44,000 Kao Corp.......................................... 546
114,000 Kawasaki Steel Corp............................... 398
66,000 Kinki Nippon Railway.............................. 499
44,000 Kirin Brewery Co., Ltd............................ 520
+133,000 Kobe Steel Ltd.................................... 411
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
94,000 Komatsu Ltd....................................... $ 774
66,000 Kubota Corp....................................... 425
44,000 Kumagai Gumi Co................................... 177
7,000 Kyocera Ltd....................................... 520
22,000 Kyowa Hakko Kogyo................................. 208
12,000 Kyushu Matsushita Electric........................ 207
17,000 Makita Corp....................................... 272
66,000 Marubeni Corp..................................... 357
20,000 Marui Co., Ltd.................................... 416
90,000 Matsushita Electric Industries Ltd................ 1,464
66,000 Mitsubishi Chemical Corp.......................... 321
62,000 Mitsubishi Corp................................... 763
78,000 Mitsubishi Electric Corp.......................... 561
48,000 Mitsubishi Estate Co., Ltd........................ 600
121,000 Mitsubishi Heavy Industries Ltd................... 964
45,000 Mitsubishi Materials Corp......................... 233
43,000 Mitsubishi Trust & Banking Co..................... 716
66,000 Mitsui & Co....................................... 579
+44,000 Mitsui Engineering & Shipbuilding................. 122
37,000 Mitsui Fudosan Co................................. 455
25,000 Mitsukoshi Ltd.................................... 235
5,000 Mochida Pharmaceutical............................ 69
23,000 Murata Manufacturing Co., Ltd..................... 846
91,000 NEC Corp.......................................... 1,111
44,000 New Oji Paper Co., Ltd............................ 398
22,000 NGK Insulators.................................... 219
22,000 Nippon Denso Co., Ltd............................. 411
44,000 Nippon Express Co., Ltd........................... 424
22,000 Nippon Fire & Marine Insurance Co................. 149
22,000 Nippon Light Metal................................ 126
22,000 Nippon Meat Packers, Inc.......................... 320
66,000 Nippon Oil Co..................................... 414
167,000 Nippon Steel Co................................... 573
66,000 Nippon Yusen...................................... 383
84,000 Nissan Motor Co................................... 645
+129,000 NKK Corp.......................................... 347
66,000 Nomura Securities Co.............................. 1,438
44,000 Odakyu Electric Railway........................... 300
30,000 Olympus Optical Co., Ltd.......................... 291
133,000 Osaka Gas Co...................................... 460
22,000 Penta-Ocean Construction.......................... 170
18,000 Pioneer Electric Corp............................. 329
111,000 Sakura Bank....................................... 1,408
22,000 Sankyo Co., Ltd................................... 494
66,000 Sanyo Electric Co., Ltd........................... 380
5,000 Secom Co.......................................... 348
5,300 Sega Enterprises.................................. 293
22,000 Sekisui House Co., Ltd............................ 281
12,000 Seven-Eleven Japan................................ 846
73,000 Sharp Corp........................................ 1,167
6,000 Shimano, Inc...................................... 106
32,000 Shimizu Corp...................................... 325
10,000 Shin-Etsu Chemical Co............................. 207
10,000 Shiseido Co., Ltd................................. 119
27,000 Shizuoka Bank..................................... 340
+44,000 Showa Denko....................................... 138
17,000 Sony Corp......................................... 1,019
111,000 Sumitomo Bank..................................... 2,354
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
JAPAN (CONT.)
23,000 Sumitomo Cement................................... $ 107
89,000 Sumitomo Chemical Co.............................. 444
44,000 Sumitomo Corp..................................... 447
30,000 Sumitomo Electric................................. 360
9,000 Sumitomo Forestry Co., Ltd........................ 138
155,000 Sumitomo Metal Ind................................ 470
21,000 Sumitomo Metal & Mining........................... 189
44,000 Taisei Corp., Ltd................................. 294
44,000 Takeda Chemical................................... 724
7,000 TDK Corp.......................................... 357
44,000 Teijin Ltd........................................ 225
44,000 Tobu Railway Co................................... 275
21,925 Tohoku Electric Power............................. 529
69,000 Tokai Bank........................................ 962
66,000 Tokio Marine & Fire Insurance Co.................. 863
10,000 Tokyo Dome Corp................................... 171
43,952 Tokyo Electric Power Co........................... 1,175
8,000 Tokyo Electron Ltd................................ 310
117,000 Tokyo Gas Co...................................... 412
44,000 Tokyu Corp........................................ 311
31,000 Toppan Printing Co., Ltd.......................... 408
66,000 Toray Industries, Inc............................. 435
73,000 Toshiba Corp...................................... 572
22,000 Toto Ltd.......................................... 307
44,000 Toyoba Co......................................... 158
103,000 Toyota Motor Corp................................. 2,185
+44,000 Ube Industries Ltd................................ 166
44,000 Yamaichi Securities Co............................ 342
44,000 Yasuda Trust & Banking Co......................... 260
----------
71,490
----------
MALAYSIA (1.6%)
5,000 AMMB Holdings Bhd................................. 57
41,000 Amsteel Corp. Bhd................................. 30
5,000 Aokam Perdana Bhd................................. 8
6,000 Commerce Asset Holding Bhd........................ 30
20,000 DCB Holdings Bhd.................................. 58
6,000 Edaran Otomobil Nasional Bhd...................... 45
28,000 Golden Hope Plantations Bhd....................... 47
5,000 Golden Plus Holdings Bhd.......................... 9
10,000 Guinness Anchor Bhd............................... 19
19,000 Highlands & Lowlands Bhd.......................... 31
4,000 Hong Leong Industries Bhd......................... 21
24,000 Hong Leong Properties Bhd......................... 25
7,000 Hume Industries (Malaysia) Bhd.................... 34
+21,000 Idris Hydraulic (Malaysia) Bhd.................... 25
22,000 IGB Corp. Bhd..................................... 20
28,000 IOI Corp. Bhd..................................... 27
15,000 Kedah Cement Bhd.................................. 26
5,000 Kian Joo Can Factory Bhd.......................... 21
12,000 Land & General Bhd................................ 26
12,000 Leader Universal Holdings Bhd..................... 27
28,000 Magnum Corp. Bhd.................................. 53
28,000 Malayan Banking Bhd............................... 236
40,000 Malayan United Industries Bhd..................... 32
18,000 Malaysian Airline System Bhd...................... 58
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
25,000 Malaysian International Shipping Bhd (Foreign).... $ 65
15,000 Malaysian Mining Corp. Bhd........................ 22
3,000 Malaysian Oxygen Bhd.............................. 11
19,000 Malaysian Resources Corp. Bhd..................... 31
26,000 Metroplex Bhd..................................... 21
19,900 Mulpha International Bhd.......................... 20
20,000 Multi-Purpose Holdings Bhd........................ 29
4,000 Nestle (Malaysia) Bhd............................. 29
5,000 Oriental Holdings Bhd............................. 25
8,000 Perlis Plantations Bhd............................ 25
9,000 Petaling Garden Bhd............................... 10
15,000 Proton............................................ 53
25,000 Public Bank Bhd................................... 48
10,000 Rashid Hussain Bhd................................ 30
28,000 Resorts World Bhd................................. 150
9,000 R.J. Reynolds Bhd................................. 21
8,000 Rothmans of Pall Mall (Malaysia) Bhd.............. 66
11,000 Selangor Properties Bhd........................... 11
8,000 Shell Refining Co. (Malaysia) Bhd................. 23
53,000 Sime Darby Bhd.................................... 141
19,000 TA Enterprise Bhd................................. 23
22,000 Tan Chong Motor Holdings Bhd...................... 22
+18,000 Technology Resources Industries Bhd............... 53
51,000 Telekom Malaysia Bhd.............................. 398
79,700 Tenaga Nasional Bhd............................... 314
9,000 UMW Holdings Bhd.................................. 24
16,000 United Engineers Ltd. (Malaysia).................. 102
11,000 YTL Corp., Bhd.................................... 69
----------
2,801
----------
NETHERLANDS (3.1%)
7,469 ABN Amro Holdings N.V............................. 340
1,850 Akzo Nobel N.V.................................... 214
15,600 Elsevier N.V...................................... 208
950 Heineken N.V...................................... 169
6,638 Internationale Nederlanden Groep N.V.............. 444
2,082 KLM Royal Dutch Airlines N.V...................... 73
750 Koninklijke Hoogovens N.V......................... 25
3,074 Koninklijke Ahold N.V............................. 126
2,500 Koninklijke KNP BT N.V............................ 64
21,194 Koninklijke PTT Nederland N.V..................... 770
550 Nedlloyd Groep N.V................................ 12
7,900 Philips Electronics N.V........................... 286
12,700 Royal Dutch Petroleum Co.......................... 1,774
700 Stork N.V......................................... 17
3,800 Unilever N.V...................................... 534
1,650 Wolters Kluwer N.V................................ 156
----------
5,212
----------
SINGAPORE (2.8%)
23,000 Amcol Holdings Ltd................................ 63
62,000 City Developments Ltd............................. 451
18,000 Cycle & Carriage Ltd.............................. 179
65,000 DBS Land Ltd...................................... 220
32,000 Development Bank of Singapore Ltd. (Foreign)...... 398
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SINGAPORE (CONT.)
16,000 First Capital Corp. Ltd........................... $ 44
19,000 Fraser & Neave Ltd................................ 242
25,000 Hai Sun Hup Group Ltd............................. 17
33,000 Hotel Properties Ltd.............................. 51
15,000 Inchcape Bhd...................................... 48
9,000 Jurong Shipyard Ltd............................... 69
40,000 Keppel Corp., Ltd................................. 356
22,000 Natsteel Ltd...................................... 45
63,000 Neptune Orient Lines Ltd.......................... 71
47,000 Oversea-Chinese Banking Corp. (Foreign)........... 588
12,000 Overseas Union Enterprise Ltd..................... 61
25,000 Parkway Holdings Ltd.............................. 68
4,000 Robinson & Co. Ltd................................ 17
13,000 Shangri-La Hotel Ltd.............................. 51
59,000 Singapore Airlines Ltd. (Foreign)................. 551
16,800 Singapore Press Holdings (Foreign)................ 297
47,000 Straits Steamship Land Ltd........................ 159
31,000 Straits Trading Co., Ltd.......................... 73
125,000 United Industrial Corp. Ltd....................... 123
49,000 United Overseas Bank Ltd. (Foreign)............... 471
----------
4,713
----------
SPAIN (2.5%)
610 Acerinox S.A...................................... 62
5,800 Argentaria S.A.................................... 239
10,233 Autopistas (ACESA)................................ 116
10,900 Banco Bilbao Vizcaya S.A.......................... 393
7,300 Banco Central Hispano Americano S.A............... 148
5,500 Banco de Santander S.A............................ 276
1,000 Corporacion Financiera Alba....................... 62
1,300 Corporacion Mapfre................................ 73
3,300 Dragados y Construccion S.A....................... 43
2,700 Ebro Agricolas S.A................................ 28
1,000 ENCE S.A.......................................... 16
12,200 Endesa S.A........................................ 691
+4,900 Ercros S.A........................................ 3
1,100 FASA Renault S.A.................................. 18
700 Fomento Construction y Contractas S.A............. 54
1,750 Gas Natural SDG S.A............................... 273
42,100 Iberdrola S.A..................................... 385
200 MetroVacesa....................................... 7
500 Portland Valderrivas S.A.......................... 32
14,100 Repsol S.A........................................ 462
1,800 Tabacalera S.A., Class A.......................... 68
44,200 Telefonica de Espana S.A.......................... 612
14,700 Union Electrica Fenosa S.A........................ 88
1,950 Uralita S.A....................................... 18
2,100 Vallehermoso S.A.................................. 39
1,200 Viscofan Envolturas Celulosicas S.A............... 14
390 Zardoya Otis S.A.................................. 43
----------
4,263
----------
SWITZERLAND (3.3%)
+75 Adia S.A.(Bearer)................................. 12
50 Alusuisse-Lonza Holdings Ltd. (Bearer)............ 40
100 Alusuisse-Lonza Holdings Ltd. (Registered)........ 79
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
165 BBC Brown Boveri AG (Bearer)...................... $ 192
90 Ciba-Geigy AG (Bearer)............................ 79
450 Ciba-Geigy AG (Registered)........................ 396
2,275 CS Holding AG (Registered)........................ 233
10 Georg Fischer AG (Bearer)......................... 13
135 Holderbank AG (Bearer)............................ 104
100 Merkur Holding AG (Registered).................... 22
710 Nestle S.A. (Registered).......................... 785
30 Roche Holding AG (Bearer)......................... 420
130 Roche Holding AG (Registered)..................... 1,028
630 Sandoz AG (Registered)............................ 577
35 SGS Surveillance (Bearer)......................... 69
70 SMH AG (Bearer)................................... 42
300 SMH AG (Registered)............................... 39
70 Sulzer AG (Registered)............................ 40
+50 SwissAir (Registered)............................. 36
450 Swiss Bank Corp. (Bearer)......................... 184
700 Swiss Bank Corp. (Registered)..................... 143
300 Swiss Reinsurance (Registered).................... 349
390 Union Bank of Switzerland (Bearer)................ 423
430 Union Bank of Switzerland (Registered)............ 98
500 Zuerich Versicherung (Registered)................. 149
----------
5,552
----------
THAILAND (2.6%)
21,500 Advanced Information Services Co., Ltd.
(Foreign)....................................... 381
+32,400 Bangchak Petroleum Co., Ltd. (Foreign)............ 68
+107,300 Bangkok Metropolitan Bank Ltd..................... 102
11,900 Bank of Ayudhya Ltd. (Foreign).................... 67
11,800 CMIC Finance & Securities Co., Ltd................ 39
3,600 CP Feedmill Co., Ltd. (Foreign)................... 18
23,200 Dhana Siam Finance & Securities Co., Ltd.......... 133
27,400 General Finance & Securities Co., Ltd.
(Foreign)....................................... 126
22,900 Italian Thai Development Co., Ltd. (Foreign)...... 260
20,700 Jasmine International Co., Ltd. (Foreign)......... 127
127,500 Krung Thai Bank Ltd. (Foreign).................... 526
19,600 National Finance & Securities Co. Ltd.
(Foreign)....................................... 105
19,200 National Petrochemical............................ 49
+9,900 One Holding Co., Ltd. (Foreign)................... 25
16,900 Phatra Thanakit Co., Ltd. (Foreign)............... 145
+28,400 PTT Exploration & Production Co., Ltd (Foreign)... 298
+23,000 Quality House Public.............................. 100
+46,900 Sahaviriya Steel Industry (Foreign)............... 62
12,700 Shinawatra Computer Co., Ltd (Foreign)............ 313
+21,700 Shinawatra Satellite Co., Ltd. (Foreign).......... 35
3,600 Siam Cement Co., Ltd. (Foreign)................... 200
74,600 Siam City Bank Ltd. (Foreign)..................... 86
3,500 Siam City Cement Co., Ltd. (Foreign).............. 55
+204,100 TelecomAsia Corp., Ltd. (Foreign)................. 624
41,600 Thai Airways International Co., Ltd. (Foreign).... 78
26,500 Thai Military Bank Ltd. (Foreign)................. 107
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
THAILAND (CONT.)
21,500 United Communications Industry (Foreign).......... $ 275
----------
4,404
----------
UNITED KINGDOM (7.9%)
30,600 Abbey National plc................................ 302
22,900 Argyll Group plc.................................. 121
22,200 Arjo Wiggins Appleton plc......................... 57
15,600 Associated British Foods plc...................... 89
26,300 Barclays plc...................................... 302
16,600 Bass plc.......................................... 185
55,823 BAT Industries plc................................ 492
10,500 BICC plc.......................................... 45
19,400 Blue Circle Industries plc........................ 103
9,500 BOC Group plc..................................... 133
19,400 Boots Co. plc..................................... 176
13,100 BPB Industries plc................................ 61
7,800 British Aerospace plc............................. 97
18,100 British Airways plc............................... 131
81,900 British Gas plc................................... 323
93,400 British Petroleum Co. plc......................... 782
32,100 British Sky Broadcasting plc...................... 203
33,900 British Steel plc................................. 86
84,900 British Telecommunications plc.................... 467
65,700 BTR plc........................................... 336
4,484 Burmah Castrol plc................................ 65
39,403 Cable & Wireless plc.............................. 281
18,700 Cadbury Schweppes plc............................. 154
12,200 Caradon plc....................................... 37
13,300 Coats Viyella plc................................. 36
8,000 Commercial Union plc.............................. 78
7,800 Courtaulds plc.................................... 49
5,578 De La Rue Co. plc................................. 56
26,200 Forte plc......................................... 134
7,800 General Accident plc.............................. 79
59,400 General Electric plc.............................. 327
8,300 GKN plc........................................... 100
54,500 Glaxo Wellcome plc................................ 774
43,772 Grand Metropolitan plc............................ 315
18,900 Great Universal Stores plc........................ 201
25,869 Guardian Royal Exchange plc....................... 111
32,200 Guinness plc...................................... 237
93,700 Hanson plc........................................ 280
18,900 Harrisons & Crosfields plc........................ 47
36,600 HSBC Holdings plc................................. 558
13,300 Imperial Chemical Industries plc.................. 157
26,100 Ladbroke Group plc................................ 59
11,600 Land Securities plc............................... 111
16,600 Lasmo plc......................................... 45
58,947 Lloyds TSB Group plc.............................. 303
13,862 Lonrho plc........................................ 38
53,800 Marks and Spencer plc............................. 376
8,900 MEPC plc.......................................... 55
22,100 National Power plc................................ 154
10,000 North West Water Group plc........................ 96
16,100 Peninsular & Oriental Steam Navigation Co......... 119
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
22,200 Pilkington plc.................................... $ 70
39,100 Prudential Corp. plc.............................. 252
8,300 Rank Organization plc............................. 60
12,200 Redland plc....................................... 74
10,500 Reed International plc............................ 160
29,200 Reuters Holdings plc.............................. 267
8,900 Rexam plc......................................... 49
7,100 RMC Group plc..................................... 109
14,400 Royal Bank of Scotland Group plc.................. 131
13,100 Royal Insurance Holdings plc...................... 78
22,700 RTZ Corp. plc..................................... 330
22,560 Sainsbury (J) plc................................. 138
4,500 Schroders plc..................................... 96
14,000 Scottish Power plc................................ 80
28,800 Sears plc......................................... 47
9,000 Sedgwick Group plc................................ 17
6,700 Slough Estates plc................................ 23
22,600 SmithKline Beecham plc, Class A................... 249
5,600 Southern Electric plc............................. 79
20,600 Tarmac plc........................................ 33
11,100 Taylor Woodrow plc................................ 20
29,300 Tesco plc......................................... 135
10,500 Thames Water plc.................................. 92
9,400 THORN EMI plc..................................... 221
7,800 TI Group plc...................................... 56
+20,000 Trafalgar House plc............................... 9
11,900 Unilever plc...................................... 244
55,700 Vodafone Group plc................................ 199
13,500 Zeneca Group plc.................................. 261
----------
13,502
----------
TOTAL COMMON STOCKS (Cost $142,163)........................... 152,786
----------
PREFERRED STOCKS (2.0%)
AUSTRALIA (0.1%)
24,000 News Corp., Ltd................................... 112
----------
BRAZIL (NON-VOTING STOCKS) (1.7%)
31,666 Aracruz Celelose S.A., Class B.................... 49
19,080,443 Banco Bradesco.................................... 167
+4,252,000 Banco do Brasil................................... 48
+1,871,000 Banco do Estado Sao Paulo......................... 10
249,663 Brahma............................................ 103
1,191,000 Ceval Alimentos S.A............................... 14
1,786,000 Cia Brasileira de Petroleo Ipiranga............... 15
4,035,500 Cia Energetica de Minas Gerais.................... 89
+102,000 Cia Energetica de Sao Paulo....................... 3
3,570,000 Cia Siderurgica de Tubarao........................ 58
2,636,000 Eletrobras, Class B............................... 713
32,500 Industrias Klabin de Papel e Celulose S.A......... 29
111,000 Investimentos Itau S.A............................ 61
357,000 Itaubanco......................................... 100
3,742,000 Petrobras......................................... 320
27,000 Sadia Concordia................................... 20
12,416,000 Telebras.......................................... 598
638,000 Telecomunicacoes de Sao Paulo..................... 94
56,980,000 Usiminas.......................................... 46
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
BRAZIL (CONT.)
1,956,000 Vale Do Rio Doce.................................. $ 322
----------
2,859
----------
GERMANY (0.2%)
500 RWE AG............................................ 139
1,050 SAP AG............................................ 159
----------
298
----------
ITALY (0.0%)
27,000 Fiat S.p.A........................................ 49
----------
TOTAL PREFERRED STOCKS (Cost $3,082).......................... 3,318
----------
NO. OF
RIGHTS
- ----------
RIGHTS (0.0%)
BRAZIL (0.0%)
+**446,139 Banco Bradesco, expiring 2/96..................... 1
----------
SPAIN (0.0%)
+**4,900 Ercros, expiring 1/5/96........................... --
----------
UNITED KINGDOM (0.0%)
+7,425 Pilkington plc, expiring 1/8/96................... 23
----------
TOTAL RIGHTS (Cost $18)....................................... 24
----------
NO. OF
WARRANTS
- ----------
WARRANTS (0.0%)
BELGIUM (0.0%)
+347 Petrofina S.A., expiring 6/03/97.................. 5
----------
HONG KONG (0.0%)
+**4,400 Applied International Holdings, expiring
12/30/99........................................ --
----------
ITALY (0.0%)
+2,950 R.A.S. S.p.A, expiring 12/31/97................... 12
+1,550 R.A.S. S.p.A., Saving Shares, expiring 12/31/97... 3
----------
15
----------
MALAYSIA (0.0%)
**+2,400 Hong Leong Properties, expiring 10/00............. --
+***7,000 IOI Corp.......................................... 1
----------
THAILAND (0.0%)
+**3,050 CMIC Finance & Securities Co., Ltd., expiring
1999............................................ 1
+**6,400 National Finance & Securities Co. Ltd. expiring
11/15/99........................................ --
----------
1
----------
UNITED KINGDOM (0.0%)
+534 British Aerospace, expiring 11/15/00.............. 3
----------
TOTAL WARRANTS (Cost $1)...................................... 25
----------
NO. OF VALUE
UNITS (000)
- ------------------------------------------------------------
UNITS (0.2%)
AUSTRALIA (0.0%)
20,821 General Property Trust............................ $ 37
22,888 Westfield Trust................................... 41
1,762 Westfield Trust (New)............................. 3
----------
81
----------
UNITED KINGDOM (0.2%)
21,700 SmithKline Beecham plc............................ 237
----------
TOTAL UNITS (Cost $270)....................................... 318
----------
FACE
AMOUNT
(000)
- ----------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 60 Sanofi 4.00%, 1/1/00.............................. 45
----------
ITALY (0.0%)
ITL 3,150 Saffa S.p.A. 9.25%, 1/1/01........................ 2
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $40)....................... 47
----------
TOTAL FOREIGN SECURITIES (91.7%)
(Cost $145,574)............................................... 156,518
----------
SHORT-TERM INVESTMENT (2.2%)
UNITED STATES (2.2%)
REPURCHASE AGREEMENT (2.2%)
$ 3,746 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$3,748, collateralized by $3,045 United States
Treasury Bonds, 7.875%, due 2/15/21, valued at
$3,821 (Cost $3,746)............................ 3,746
----------
FOREIGN CURRENCY (0.2%)
AUD 14 Australian Dollar................................. 10
BEF 623 Belgian Franc..................................... 21
GBP 17 British Pound..................................... 26
DEM 17 Deutsche Mark..................................... 12
FRF 61 French Franc...................................... 12
HKD 383 Hong Kong Dollar.................................. 50
IDR 2,251 Indonesian Rupiah................................. 1
JPY 4,508 Japanese Yen...................................... 44
MYR 16 Malaysian Ringgit................................. 6
NLG 68 Netherlands Guilder............................... 43
PTE 20,102 Portuguese Escudo................................. 134
SGD 31 Singapore Dollar.................................. 22
ESP 195 Spanish Peseta.................................... 2
CHF 3 Swiss Franc....................................... 3
THB 162 Thai Baht......................................... 6
----------
TOTAL FOREIGN CURRENCY (Cost $391)............................ 392
----------
TOTAL INVESTMENTS (94.1%) (Cost $149,711)..................... 160,656
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
AMOUNT
(000)
- ----------------------------------------------------
OTHER ASSETS (6.0%)
Net Unrealized Gain on
Forward Foreign Currency
Exchange Contracts......... $ 9,417
Receivable for Portfolio
Shares Sold................ 524
Foreign Withholding Tax
Reclaim Receivable......... 167
Dividends Receivable........ 164
Interest Receivable......... 2
Other....................... 14 $ 10,288
----------
LIABILITIES (-0.1%)
Investment Advisory Fees
Payable.................... (77)
Custodian Fees Payable...... (71)
Payable for Portfolio Shares
Redeemed................... (43)
Administrative Fees
Payable.................... (26)
Payable for Investments
Purchased.................. (23)
Other Liabilties............ (41) (281)
---------- --------
NET ASSETS (100%)......................... $170,663
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 14,672,976 outstanding
$.001 par value shares (authorized
500,000,000 shares)..................... $11.63
--------
--------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT
INFORMATION:
Under the terms of forward foreign currency
exchange contracts open at December 31, 1995, the
Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as
indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- -------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
DEM 5,930 $ 4,136 1/04/96 U.S.$ 4,155 $ 4,155 $ 19
FRF 28,174 5,753 1/04/96 U.S.$ 5,670 5,670 (83)
CHF 6,170 5,382 2/28/96 U.S.$ 5,100 5,100 (282)
BEF 225,256 7,669 4/30/96 U.S.$ 8,000 8,000 331
DEM 6,458 4,525 4/30/96 U.S.$ 4,500 4,500 (25)
JPY4,591,639 45,210 4/30/96 U.S.$ 54,440 54,440 9,230
U.S.$ 4,790 4,790 4/30/96 BEF 141,479 4,817 27
U.S.$ 7,378 7,378 4/30/96 JPY 606,988 5,977 (1,401)
NLG 12,205 7,686 7/31/96 U.S.$ 8,000 8,000 314
U.S.$ 2,850 2,850 7/31/96 NLG 4,661 2,935 85
JPY 886,827 8,849 8/14/96 U.S.$ 9,630 9,630 781
JPY 310,447 3,104 8/30/96 U.S.$ 3,525 3,525 421
-------- -------- --------
$107,332 $116,749 $ 9,417
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
** -- Security is valued at fair
value -- See Note A-1
*** -- Security is valued at cost --
See Note A-1
NCS -- Non Convertible Shares
RFD -- Ranked for Dividends
ITL -- Italian Lira
- ------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------
Capital Equipment............. $ 21,419 12.6%
Consumer Goods................ 27,288 16.0
Energy........................ 16,779 9.8
Finance....................... 43,246 25.3
Gold Mines.................... 72 --
Materials..................... 18,501 10.8
Multi-Industry................ 7,106 4.2
Services...................... 22,107 13.0
---------- ---
$ 156,518 91.7%
---------- ---
---------- ---
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 1.2%
Hong Kong 26.7%
India 0.8%
Indonesia 5.3%
Korea 3.3%
Malaysia 19.3%
Philippines 5.6%
Singapore 13.1%
Taiwan 2.5%
Thailand 13.2%
Other 9.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI COMBINED FAR EAST FREE
ASIAN EQUITY
EX-JAPAN INDEX (1) PORTFOLIO
<S> <C> <C>
7/1/91* 500,000 500,000
10/31/91 493,080 483,500
10/31/92 676,180 684,130
12/31/92 630,045 658,030
12/31/93 1,252,425 1,353,595
12/31/94 1,014,350 1,139,550
12/31/95 1,083,427 1,217,837
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) COMBINED
FAR EAST FREE EX-JAPAN INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------- -----------------
<S> <C> <C>
PORTFOLIO........................ 6.87% 21.85%
INDEX............................ 6.81 18.73
<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, Singapore, 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.
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 year ended December 31, 1995 was 6.87%
as compared to 6.81% for the Morgan Stanley Capital International (MSCI)
Combined Far East Free ex-Japan Index for the same period. The average annual
return of the Portfolio for the period from inception in July 1991 through
December 31, 1995 was 21.85% compared to 18.73% for the MSCI Combined Far East
Free ex-Japan Index for the same period.
The Asian markets as represented by the MSCI Combined Far East Free ex-Japan
Index increased by a moderate 6.8% in 1995, which was largely an extension of
the correction and consolidation that took place since early 1994 when the
liquidity bubble was pricked. The performance, however, paled in comparison with
the developed markets, many of which achieved double-digit market appreciation
of between 15-35% in 1995. With the exception of Hong Kong which rose 18%, the
Asian markets generally did not benefit from a more benign external economic
environment which led to a surge in bond and equity prices in many parts of the
world. Portfolio investment flows into Asia in 1995 were down significantly from
the 1993/94 level, as funds were attracted to the developed markets led by the
U.S. where unexpectedly weak economies and low inflation resulted in significant
declines in interest rates. Investors had also largely avoided emerging markets
following the Mexico crisis which led to higher risk premiums being attached to
countries with weak economic fundamentals.
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
Hong Kong (+18.2%) emerged as the best performing market in Asia as a result of
its currency peg which benefitted directly from the U.S. monetary easing.
Singapore also performed strongly (+11.0%) because of its strong economic
fundamentals and relative valuation attractions. Concerns over overheating,
higher inflation and growing external deficits after several years of strong GDP
growth had put upward pressure on interest rates in some Asian markets such as
Thailand, Philippines and Malaysia. The subsequent downgrading of earnings
growth forecasts caused a sell-off in these markets and resulted in their
underperformance. The Taiwanese and Korean markets benefitted strongly from a
boom in sales of semiconductors, electronics and computer-related products.
However, these positive factors were overwhelmed by political concerns which
caused stock prices to plummet. Taiwan (-30.2%) was one of the worst performing
markets in the world last year as tensions between China and Taiwan escalated
following Taiwanese President Lee Teng Hui's high-profile visit to the U.S.
OUTLOOK FOR 1996
1996 has gotten off to an encouraging start, with many Asian markets recovering
strongly from their low levels seen in 1995. The rally was to a large extent
triggered by the return of foreign funds. According to Salomon Brothers, U.S.
mutual fund cash flows into Non-Japan Asia for the first 3 weeks of 1996 have
already exceeded the total inflow for the whole of 1995.
We expect the Asian markets to revert to their secular growth rate of between
15-20% in 1996 after two years of correction and below trend performance. While
a moderate slowdown in economic growth is expected in 1996 (from 7.5% to 7.1%),
the Asian economies are generally in a better shape than they were last year.
With cyclical pressure beginning to unwind in many Asian countries, inflation
should ease from an estimated 7% in 1995 to slightly below 6% in 1996. This
should give rise to less restrictive monetary policies and make interest rate
cuts possible. While lower U.S. interest rates will support liquidity flows into
Asia, attractive equity valuations should lend further credence to the Asian
story.
Politics is likely to be the major potential concern for 1996. Tensions between
China and Taiwan could build up again ahead of Taiwan's first ever presidential
election in March, although the prospect for a major military confrontation
seems remote. In South Korea, uncertainties ahead of the National Assembly
elections scheduled for April do not augur well for the stockmarket.
We expect Hong Kong, the largest and most liquid Asian market with modest equity
valuation, to continue to do well in 1996. The market is underpinned by a
favorable interest rate trend, the bottoming of the economic and real estate
cycle. The expected relaxation of China's austerity program should benefit Hong
Kong further. Singapore should continue to attract its fair share of
international fund flows given its robust economy and currency attraction. We
remain very selective in Malaysia, Thailand, Indonesia and Philippines where
economic and interest rate risks are relatively higher. Their overall market
risk reward profiles have deteriorated following their recent strong showings.
Their relative attraction should improve once their economic imbalance is
contained. Elsewhere, Taiwan and South Korea have borne the brunt of political
tensions last year. As these markets are trading near their respective
historical low multiples, we expect a significant rebound from the current low
levels once we get over the height of the political uncertainties.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (91.0%)
CHINA (1.2%)
979,440 China Merchants Shekou Port Services, Class B..... $ 355
+28,200 Jilin Chemical Co. Ltd. ADR....................... 606
5,505,000 Maanshan Iron & Steel Co., Class H................ 769
51,000 Shandong Huaneng Power Co., Ltd. ADR.............. 344
1,601,600 Shanghai Jinqiao, Class B......................... 599
+555,400 Shanghai Refrigerator Compressor, Class B......... 198
276,000 Shanghai Tyre & Rubber Co., Class B............... 57
4,265,000 Yizheng Chemical Fibre Co., Class H............... 960
----------
3,888
----------
HONG KONG (26.7%)
2,316,000 Cheung Kong Holdings Ltd.......................... 14,107
358,000 China Light & Power Co., Ltd...................... 1,648
1,209,500 Citic Pacific Ltd................................. 4,137
6,294,000 C.P. Pokphand Co., Ltd............................ 2,523
11,712,000 Guangdong Investments Ltd......................... 7,043
1,056,000 Harbin Power Equipment Co......................... 155
765,500 Hong Kong Electric Holdings Ltd................... 2,510
673,320 Hong Kong & Shanghai Bank Holdings plc............ 10,188
5,088,600 Hong Kong Telecommunications Ltd.................. 9,081
3,812,000 Hopewell Holdings Ltd............................. 2,194
1,827,000 Hutchison Whampoa Ltd............................. 11,129
+1,605,000 New World Development Co., Ltd.................... 6,995
3,008 New World Infrastructure Ltd...................... 6
+1,835,100 Shenzen North Jainshe Motorcycle Co., Ltd., Class
B............................................... 759
612,100 Sun Hung Kai Properties Ltd....................... 5,007
621,560 Swire Pacific Ltd., Class A....................... 4,823
906,000 Varitronix International Ltd...................... 1,681
----------
83,986
----------
INDIA (0.8%)
38,000 Grasim Industries Ltd. GDR........................ 779
#51,000 Hindalco Industries Ltd. GDR...................... 1,734
----------
2,513
----------
INDONESIA (5.3%)
**583,000 Asiana Imi Industries (Foreign)................... 306
**294,000 Bank Bali (Foreign)............................... 579
**859,000 Barito Pacific Timber (Foreign)................... 629
+**691,000 Bimantara Citra (Foreign)......................... 574
**621,826 Charoen Pokphand (Foreign)........................ 1,265
**141,100 Hanajaya Mandala Sampoerna (Foreign).............. 1,469
**302,000 Indocement Tunggal (Foreign)...................... 1,013
**730,000 Indosat (Foreign)................................. 2,650
**351,600 Kalbe Farma (Foreign)............................. 1,192
**210,000 Keramika Indonesia Assosiasi (Foreign)............ 101
**1,400,000 Ometraco (Foreign)................................ 689
+**177,000 Polysindo Eka Perkasa (Foreign)................... 101
**315,000 Semen Gresik (Foreign)............................ 882
**2,750,400 Sona Topas Tourism (Foreign)...................... 782
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
**277,333 Sorini Corp. (Foreign)............................ $ 1,345
**210,500 Suba Indah (Foreign).............................. 140
+**1,170,500 Telekomunikasi Indonesia (Foreign)................ 1,536
**590,000 Ultra Jaya Milk (Foreign)......................... 284
**644,800 United Tractors (Foreign)......................... 1,213
----------
16,750
----------
KOREA (3.3%)
**53,900 Korea Electric Power (Foreign).................... 2,311
**1,500 Korea Mobile Telecom (Foreign).................... 1,657
61,600 Pohang Iron & Steel Co., Ltd. ADR................. 1,348
+21,953 Samsung Electronics (Foreign)..................... 3,990
+185 Samsung Electronics (Foreign) (New)............... 34
+44 Samsung Electronics GDR........................... 3
+#152 Samsung Electronics GDS........................... 15
+#771 Samsung Electronics GDS (Voting Shares)........... 74
+811 Samsung Electronics RFD (New)..................... 145
**44,460 Shinhan Bank (Foreign)............................ 976
----------
10,553
----------
MALAYSIA (19.3%)
149,000 AMMB Holdings Bhd................................. 1,701
604,000 Bandar Raya Developments Bhd...................... 861
954,500 Genting Bhd....................................... 7,968
861,000 Land & General Holdings Bhd....................... 1,865
714,000 Magnum Corp. Bhd.................................. 1,349
1,191,500 Malayan Banking Bhd............................... 10,040
1,125,316 Malaysian International Shipping Bhd (Foreign).... 2,947
1,000 Malaysian Resources Corp. Bhd..................... 2
518,000 Petronas Gas Bhd.................................. 1,764
2,528,000 Renong Bhd........................................ 3,743
1,388,000 Resorts World Bhd................................. 7,433
650,000 Sime Darby Bhd.................................... 1,727
1,243,000 Tan & Tan Development Bhd......................... 1,062
+569,000 Technology Resources Industries Bhd............... 1,680
785,000 Telekom Malaysia Bhd.............................. 6,120
1,314,000 Tenaga Nasional Bhd............................... 5,173
264,000 Time Engineering Bhd.............................. 613
718,757 United Engineers Ltd. (Malaysia).................. 4,585
----------
60,633
----------
PHILIPPINES (5.6%)
1,379,300 Ayala Corp., Class B.............................. 1,683
1,175,625 Ayala Land, Inc., Class B......................... 1,434
+2,062,100 C&P Homes, Inc.................................... 1,513
+1,791,000 DMCI Holdings, Inc................................ 642
+597,700 Fil-Estate Land Inc............................... 450
6,958,000 JG Summit Holding, Class B........................ 1,910
362,050 Manila Electric Co., Class B...................... 2,954
5,149,900 Petron Corp....................................... 2,651
18,125 Phillipine Long Distance Telephone Co., ADR....... 981
15,430 Philippine Long Distance Telephone Co., Class B... 838
+29,440 Philippine National Bank, Class B................. 326
317,200 San Miguel Corp., Class B......................... 1,082
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (CONT.)
+4,508,000 SM Prime Holdings, Inc., Class B.................. $ 1,289
----------
17,753
----------
SINGAPORE (13.1%)
206,000 British-American Tobacco Co....................... 794
628,080 City Developments Ltd............................. 4,574
912,000 DBS Land Ltd...................................... 3,082
362,500 Development Bank of Singapore Ltd. (Foreign)...... 4,510
148,800 Fraser & Neave Ltd................................ 1,894
690,000 Keppel Corp., Ltd................................. 6,146
538,166 Oversea-Chinese Banking Corp. (Foreign)........... 6,734
263,000 Sembawang Corp.................................... 1,460
111,000 Singapore Airlines Ltd. (Foreign)................. 1,035
89,400 Singapore Press Holdings (Foreign)................ 1,580
1,472,000 Singapore Technologies Industrial Corp............ 3,330
507,000 Straits Steamship Land Ltd........................ 1,713
500,000 Straits Trading Co., Ltd.......................... 1,174
332,200 United Overseas Bank Ltd. (Foreign)............... 3,194
----------
41,220
----------
TAIWAN (2.5%)
806,000 Acer, Inc......................................... 1,861
412,000 Advanced Semiconductor Engineering, Inc........... 997
904,000 Taiwan Semiconductor Manufacturing Co............. 2,832
905,000 United Micro Electronics Corp., Ltd............... 2,272
----------
7,962
----------
THAILAND (13.2%)
84,000 Advanced Information Services Co., Ltd.
(Foreign)....................................... 1,487
583,200 Bangkok Bank Ltd. (Foreign)....................... 7,085
679,900 Finance One Co., Ltd. (Foreign)................... 4,723
36,000 Land & House Co., Ltd. (Foreign).................. 592
+202,800 National Finance & Securities Co., Ltd.
(Foreign)....................................... 1,087
266,600 Phatra Thanakit Co., Ltd. (Foreign)............... 2,286
84,100 Shinawatra Computer Co., Ltd (Foreign)............ 2,070
38,900 Siam Cement Co., Ltd. (Foreign)................... 2,157
344,100 Siam Commercial Bank (Foreign).................... 4,535
+1,450,500 TelecomAsia Corp. (Foreign)....................... 4,434
702,170 Thai Farmers Bank Ltd. (Foreign).................. 7,080
+320,000 Thai Telephone & Telecom (Foreign)................ 2,298
101,000 United Communications Industry (Foreign).......... 1,291
375,000 Wongpaitoon Footware Co., Ltd. (Foreign).......... 406
----------
41,531
----------
TOTAL COMMON STOCKS (Cost $243,859)............................. 286,789
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
</TABLE>
- ------------------------------------------------------------
<TABLE>
<C> <S> <C>
WARRANTS (0.0%)
INDONESIA (0.0%)
**+150,000 Ometraco, expiring 7/12/00 (Cost $0).............. $ --
----------
TOTAL FOREIGN SECURITIES (91.0%) (Cost $243,859)................ 286,789
----------
<CAPTION>
FACE AMOUNT
(000)
- ------------
SHORT-TERM INVESTMENT (8.3%)
UNITED STATES
REPURCHASE AGREEMENT (8.3%)
$ 26,154 The Chase Manhattan Bank, N.A. 5.35%, dated
12/29/95 due 1/02/96, to be repurchased at
$26,170, collateralized by $16,885 United States
Treasury Bonds, 12.00%, due 8/15/13, valued at
$26,678 (Cost $26,154).......................... 26,154
----------
FOREIGN CURRENCY (0.3%)
HKD 2,770 Hong Kong Dollar.................................. 358
IDR 810,970 Indonesian Rupiah................................. 355
MYR 1 Malaysian Ringgit................................. --
TWD 3,102 Taiwan Dollar..................................... 114
----------
TOTAL FOREIGN CURRENCY (Cost $827).............................. 827
----------
TOTAL INVESTMENTS (99.6%) (Cost $270,840)....................... 313,770
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Receivable for Investments Sold................. $ 2,182
Receivable for Portfolio Shares Sold............ 1,007
Dividends Receivable............................ 472
Foreign Withholding Tax Reclaim Receivable...... 23
Interest Receivable............................. 12
Other........................................... 23 3,719
----------
LIABILITIES (-0.8%)
Payable for Portfolio Shares Redeemed........... (1,025)
Bank Overdraft.................................. (541)
Payable for Investments Purchased............... (427)
Investment Advisory Fees Payable................ (411)
Custodian Fees Payable.......................... (112)
Administrative Fees Payable..................... (41)
Other Liabilities............................... (48) (2,605)
---------- ----------
NET ASSETS (100%)............................................. $ 314,884
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 16,166,258 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $19.48
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
** -- Securities (totaling $21,694 or 6.9% of net assets
at December 31, 1995) valued at fair value -- See
Note A-1
# -- 144A Security -- Certain conditions for public sale
may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
RFD -- Ranked for Dividends
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment.................... $ 27,807 8.8%
Consumer Goods....................... 18,705 5.9
Energy............................... 19,356 6.2
Finance.............................. 118,063 37.5
Materials............................ 12,063 3.8
Multi-Industry....................... 25,827 8.2
Services............................. 64,968 20.6
--------- -----
$ 286,789 91.0%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 1.0%
Brazil 16.3%
China 1.6%
Columbia 1.2%
Greece 2.9%
Hong Kong 9.9%
India 9.5%
Indonesia 6.3%
Israel 3.9%
Korea 2.2%
Malaysia 0.1%
Mexico 8.7%
Morocco 1.7%
Pakistan 2.6%
Phillippines 5.5%
Poland 0.8%
Portugal 0.2%
Russia 6.1%
South Africa 2.3%
Taiwan 4.5%
Thailand 5.0%
Turkey 5.4%
United Kingdom 0.3%
Zimbabwe 0.3%
Other 1.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IFC GLOBAL TOTAL RETURN EMERGING MARKETS
COMPOSITE INDEX (1) PORTFOLIO
<S> <C> <C>
9/25/92* 500,000 500,000
10/31/92 525,300 505,500
12/31/92 527,370 511,000
12/31/93 880,750 950,000
12/31/94 878,950 858,500
12/31/95 770,488 748,870
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL
RETURN COMPOSITE INDEX(1)
- ------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- -----------------
<S> <C> <C>
PORTFOLIO........................ -12.77% 13.16%
INDEX............................ -12.34 14.15
<FN>
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (assumes dividends 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 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 year ended December 31, 1995 was
- -12.77% compared to -12.34% for the IFC Global Total Return Composite Index for
the same period. The average annual total return for the period from inception
in September 1992 through December 31, 1995 was 13.16% compared to 14.15% for
the IFC Global Total Return Composite Index for the same period. For the fourth
quarter of 1995, the Portfolio's total return was -6.98% compared to -3.02% for
the Index.
In 1995, the Morgan Stanley Capital International (MSCI) Emerging Markets Free
(EMF) Index (excludes dividends) declined 6.9%. 1995 returns were especially
disappointing considering the spectacular year for U.S. equities and emerging
markets debt. Yet, the emerging markets have had only two other down years since
they began to be measured in 1985 as a separate asset class -- in 1990 and 1994
EMF fell 13.8% and 8.7%, respectively.
Only eight emerging markets included in the EMF Index showed positive returns in
dollar terms in 1995: Peru (22.1%), Israel (21.8%), South Africa (17.3%), Greece
(10.2%), Argentina (8.7%), Indonesia (7.5%), Jordan (5.4%) and Malaysia (4.0%).
The Portfolio underperformed relative to the Index due in part to an overweight
position in Latin America during the first quarter and to a large underweight
position in South Africa. Also dampening relative performance was the
Portfolio's 0.1% exposure to Malaysia -- 16.7% of the EMF Index -- which had an
above average return in 1995. Other negatives were Brazil, India and Turkey --
all overweight positions which produced disappointing performance. In dollar
terms Brazil was off 21.3%, India off 31.9%, and Turkey fell 5.9%. On a positive
note, however, the Hong Kong exposure added significantly to performance with a
rise of 18.2%. Russia, Israel and Greece were also positive contributors.
- ------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT
BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
Negative sentiment was fueled by worries about the Mexican peso devaluation,
interest rates, politics and an anticipated major slowdown of international
capital inflows. While the devaluation took center stage in Latin America, the
Asian markets were influenced by U.S. interest rates. Although interest rates
fell marginally in 1995, many anticipated that the U.S. Federal Reserve would
increase rates, as the economy was at or near the bottom of the economic cycle.
This tended to keep money at home in the U.S. In addition, there was some
speculation that the reversal of the strong yen\weak dollar would disadvantage
countries such as Korea whose exports have taken market share from the Japanese.
However, Korean labor costs are still only 1/4th of Japan's and we believe that
this will not have a marked impact on Korean profitability. Also, in Thailand
and Malaysia monetary conditions had to be tightened to cool these fast growing
economies with problematic trade deficits. Looking through into 1996 however,
some policy reversal may be possible in both countries assuming U.S. interest
rate rises are as moderate as we anticipate.
Politics across the emerging markets gave rise to investor concern in 1995. In
Korea, avarice charges were leveled against former president Roh Tae Woo.
Meanwhile, China applied pressure to Taiwan by testing missiles offshore in
response to the U.S. visit of President Lee and Taiwan's continued move toward
independence. Turkey's coalition government of Tansu Ciller collapsed and the
country remains in a political no-man's land after the failure of any party to
win an absolute majority in the December elections. This is not as bad as it
seems -- the equity market has since recovered, recognizing the value in stocks
and the improved economic stability from two years ago. The Russian election in
December produced no surprises but underlined the need for Boris Yeltsin
(assuming he stands again in the Presidential elections in June) to canvas the
communist vote by de-emphasizing reform in the next few months. On the bright
side, Russia has undergone an economic transformation towards positive economic
growth in 1996 coupled with continued progress on inflation, a positive current
account balance and more progress on the budget deficit.
India experienced economic growth in fiscal year 1996 of 6.0%, yet the
stockmarket suffered from a combination of local selling and international
avoidance. Politics influenced overseas investors away from the market in
anticipation of a change in government in the April 1996 elections. The slow
pace of reform of India's laborious settlement system and the cancellation
(recently reinstated) of the Enron power contract exacerbated the situation. In
the meantime, the 30% plus earnings growth makes India one of the cheapest
emerging markets in the world; we remain overweight.
Politics in Brazil have been the most settled for many years. Despite the major
success of the Real Plan in bringing inflation down from above 2,000% per annum
to around 22% by the end of 1995 and less than 20% predicted for 1996, the
stockmarket suffered from the spill over from the Mexican crisis and a degree of
impatience at the pace of the restructuring of local and state government
spending. However, with a strong currency, tight monetary policy, and low fiscal
and current account deficits, Brazil is setting itself up as a potential
economic success story for the remainder of the decade.
Despite doom and gloom forecasts, direct capital investment has continued in the
emerging markets. Direct investment by multinationals is the positive, long term
investment in infrastructure, factories etc. which will generate future economic
growth. Not surprisingly, in view of the strong U.S. market and the aftermath of
the Mexico crisis, portfolio flows were much lower in 1995. Portfolio flows to
the emerging markets showed signs of recovery in late 1995 and continue in 1996
to date. Compelling valuations will attract capital and the outlook is
excellent.
The emerging markets endured a tough 1995, both economically and politically.
Yet, virtually all emerging nations moved forward with needed reforms, seeking
to promote economic growth and efficiency. The basic market-oriented economic
model (with variations) not only endures in the emerging markets, it continues
to be reinforced as today's economic success story becomes a model for others.
It is important not to forget that despite politics and economic uncertainties,
at the end of the day we are investing in companies with strong earnings
prospects. The markets should eventually catch up to economic reality. It is
undoubtedly a roller coaster ride but the returns will repay persistent
investors who have a long-term horizon.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (84.1%)
ARGENTINA (1.0%)
+6 Acindar Industrial S.A., Class B................ $ --
#120,670 Capex S.A. ADR.................................. 1,765
67,858 Capex S.A., Class A............................. 495
431,533 Quilmes Industrial S.A.......................... 6,732
--------
8,992
--------
BRAZIL (5.6%)
302,170,000 Cia Acos Especiais Itabira...................... 1,430
+124,935 Cia Brasileira ADR.............................. 1,249
#696 Cia Energetica de Minas Gerais ADR.............. 15
84,361 Cia Energetica de Minas Gerais GDR.............. 1,867
#+116,352,140 Cia Energetica de Sao Paulo..................... 2,634
49,544,000 Cia Paulista de Forca E Luz..................... 2,401
17,175,000 Eletrobras...................................... 4,648
#180,024 Rhodia-Ster ADS................................. 1,620
7,175,000 Servicos de Eletricidade........................ 2,296
139,692,000 Telebras........................................ 5,404
#512,169 Telebras ADR.................................... 24,264
5,175,000 Telecomunicacoes de Sao Paulo................... 748
#50 Usiminas ADR.................................... 1
--------
48,577
--------
CHINA (1.6%)
750,000 Beiren Printing Machine, Class H................ 136
3,340,040 China Merchants Shekou Port Services, Class B... 1,209
3,720,000 Harbin Power Equipment Co. Ltd., Class H........ 548
+91,500 Jilin Chemical Co. Ltd. ADR..................... 1,967
2,658,500 Shanghai Diesel Engine Co., Ltd., Class B....... 984
+883,300 Shanghai Erfanji Co., Ltd., Class B............. 125
949,975 Shanghai Jin Jiang Tower Ltd., Class B.......... 268
3,673,680 Shanghai Jinqiao, Class B....................... 1,374
1,062,750 Shanghai Outer Gaoqiao Free Zone, Class B....... 389
903,800 Shanghai Phoenix Bicycle Ltd., Class B.......... 150
+1,114,130 Shanghai Refrigerator Compressor, Class B....... 397
986,000 Shanghai Tyre & Rubber Co., Class B............. 203
354,000 Shanghai Yaohua Pilkington Glass, Class B....... 312
3,126,400 Shenzhen Chiwan Wharf Holdings, Class B......... 1,177
+4,171,000 Shenzhen North Jianshe Motorcycle Co., Ltd.,
Class B....................................... 1,726
13,658,000 Yizheng Chemical Fibre Co., Class H............. 3,073
68,000 Zhuhai Lizhu Pharmaceutical Group, Inc., Class
B............................................. 22
--------
14,060
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COLOMBIA (0.7%)
17,130,000 Banco de Colombia............................... $ 6,207
--------
GREECE (2.8%)
413,369 Aegek........................................... 3,558
76,550 Alpha Credit Bank of Athens..................... 4,425
278,475 Delta Dairy..................................... 5,229
165,870 Ergo Bank....................................... 6,611
142,000 Hellenic Bottling Co............................ 4,644
--------
24,467
--------
HONG KONG (9.9%)
1,597,000 Cheung Kong Holdings Ltd........................ 9,728
2,628,000 Citic Pacific Ltd............................... 8,989
14,327,000 C.P. Pokphand Co., Ltd.......................... 5,744
4,500,00 Florens Group Ltd............................... 2,939
65,800 Great Wall Electric Ltd. ADR.................... 242
11,431,000 Guangdong Investments Ltd....................... 6,874
2,686,200 Hong Kong Telecommunications Ltd................ 4,794
5,397,000 Hopewell Holdings Ltd........................... 3,106
2,049,000 Hutchison Whampoa Ltd........................... 12,481
3,478,000 New World Development Co., Ltd.................. 15,158
+162,400 Shandong Huaneng Power Co., Ltd., ADR........... 1,096
617,000 Sun Hung Kai Properties Ltd..................... 5,047
618,000 Swire Pacific Ltd., Class A..................... 4,795
2,819,000 Varitronix International Ltd.................... 5,232
1,554,000 Wai Kee Holdings Ltd............................ 195
2,646,000 Zhenhai Refining & Chemical Co., Ltd., Class
H............................................. 496
--------
86,916
--------
INDIA (8.7%)
230,000 American Dry Fruits............................. 235
550 Andhra Valley Power Supply, Class B............. 2
100,000 AP Rayon, Class B............................... 215
10,000 Apollo Tyres Ltd................................ 39
77,650 Aruna Sugars & Enterprises, Class B............. 59
9,815 Associated Cement Companies Ltd................. 800
86,400 BPL Ltd......................................... 182
+891,500 Balaji Foods & Feeds............................ 298
8,500 Ballapur Industries Ltd., Class B............... 45
9,065 Baroda Rayon Corp............................... 80
92,284 Bharat Forge Co., Ltd., Class A................. 358
3,300,000 Bharat Heavy Electricals........................ 8,258
374,600 Bharat Pipes & Fittings Ltd., Class B........... 128
+125,000 Bharat Pipes & Fittings Ltd. (New).............. 34
191,642 Carrier Aircon Ltd., Class B.................... 937
90,000 Cosmo Films Ltd................................. 266
305,000 Crompton Greaves................................ 1,735
25,900 DCL Polyesters Ltd.............................. 15
77,000 DCM Shriram Industries Ltd...................... 149
38,800 Delta Industries Ltd............................ 80
185,000 Essab India Ltd................................. 300
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
INDIA (CONT.)
50,000 Essel Packaging................................. $ 264
12,000 Federal Bank Ltd................................ 60
2,370 Flex Industries Ltd., Class B................... 11
+16,566 Flex Industries Ltd. (New)...................... 67
10,000 Fuller.......................................... 48
+557,338 Garware Plastics & Polyester, Class A........... 2,995
+712,500 Godrej Soaps Ltd................................ 1,378
1,013,500 Great Eastern Shipping Co....................... 1,391
203,100 Gujarat Ambuja Cements, Ltd..................... 1,568
101,950 Hero Honda, Class B............................. 664
104,277 Housing Development Finance Corp................ 8,021
*@+78,000 India Magnum Fund, (The) Class A (acquired
11/25/92-3/01/94, Cost $3,782)................ 3,510
@+55,194 India Magnum Fund, (The) Class B................ 2,484
644,625 India Organic Chemical Ltd...................... 633
+396,200 Indian Petrochemicals Corp. Ltd................. 1,392
+40,000 Indian Seamless Steel & Alloys.................. 9
+571,197 Indo Rama Synthetic, Class B.................... 570
100,000 Infosys Technology Ltd.......................... 1,160
155,100 ITC Agrotech, Class B........................... 280
+113,500 ITC Ltd......................................... 808
225 ITW Signode Ltd. (New).......................... 1
608,700 Jai Parabolic Springs Ltd....................... 476
5,292 JCT Ltd. GDR.................................... 35
+353,231 JK Synthetics Ltd............................... 246
78,500 Kiloskar Oil Engine, Class B.................... 279
550 Lakme Ltd., Class B............................. 4
150,000 Lakshmi Precision............................... 252
+145,000 Laser Lamp...................................... 73
748,800 Mahanagar Telephone Nigam....................... 3,130
96,484 Mahavir Spinning Mills Ltd...................... 307
+425,700 Maikaal Fibres.................................. 127
159,700 Mardia Chemicals Ltd............................ 238
10,000 Modi Xerox Ltd.................................. 50
@+8,275,200 Morgan Stanley Growth Fund...................... 1,412
@+19,389 Morgan Stanley India Investment Fund, Inc....... 177
73,631 MRF Ltd., Class B............................... 3,767
350 Mukand Iron & Steel Works, Class A.............. 2
6 Nahar Spinning Mills Ltd., Class B.............. --
25,000 OM Sindoori Hotels Ltd.......................... 36
250,000 Patheja Forgings & Auto Parts, Class B.......... 540
+318,935 PCS Data Products Ltd., Class B................. 127
240,700 Philips India Ltd............................... 1,054
+135,500 Polar Latex..................................... 42
+232,700 Priyadarshini Cement Ltd., Class B.............. 142
8,200 Pudumjee........................................ 34
350,000 PVD Plastic Mouldings Inds. Ltd., Class B....... 181
850 Ranbaxy Laboratories Ltd., Class B.............. 16
152,250 Raymond Ltd..................................... 1,161
+200 Raymond Synthetics Ltd., Class B................ --
+3,770 Reliance Industries Ltd. GDS.................... 54
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
#73,581 Reliance Industries Ltd. GDS (New).............. $ 1,030
+25,350 Rossel Tea Ltd.................................. 144
+100,000 Saurashtra Cement & Chemicals, Class B.......... 176
29,500 SCICI Ltd....................................... 31
+50,000 Secals Ltd...................................... 84
+104,700 Sharp Industries Ltd............................ 41
397,500 Shipping Corp. of India......................... 350
25,000 Shree Vindhya Paper Mills....................... 57
125,636 Shree Vindhya Paper Mills (New)................. 288
125 S.K.F. Bearings Ltd............................. 9
+45,000 Sri Venkatesa Mills Ltd......................... 141
1,648,550 State Bank of India............................. 9,296
+400 Sundaram Finance, Class B....................... 2
725,950 Super Forgings & Steels......................... 537
272,280 Tata Engineering & Locomotive, Class A.......... 2,937
28,350 Tata Hydro Electric Power....................... 73
+2,180 Tata Power Co. Ltd.............................. 7
+320,000 Titagarh Steels Ltd............................. 312
600 T.P.I. India Ltd................................ 1
838 United Phosphorus Ltd. GDR...................... 17
165,500 Uniworth International Ltd., Class B............ 89
+1,566,000 Uttam Steels Ltd., Class A...................... 802
404 Videocon International Ltd., Class A............ 1
+149,100 Videsh Sanchar Nigam Ltd........................ 3,519
710,040 VXL Ltd......................................... 655
11,000 Vysya Bank...................................... 138
+5,000 Wartsila Diesel Ltd............................. 28
--------
76,256
--------
INDONESIA (6.3%)
**2,553,550 Bank Bali (Foreign)............................. 5,026
**1,703,500 Barito Pacific Timber (Foreign)................. 1,248
**+2,244,000 Bimantara Citra (Foreign)....................... 1,865
**3,359,598 Charoen Pokphand (Foreign)...................... 6,832
**168,000 Duta Pertiwi (Foreign).......................... 171
**425,500 Hanajaya Mandala Sampoerna (Foreign)............ 4,429
**1,147,000 Indocement Tunggal (Foreign).................... 3,850
**1,274,500 Indosat (Foreign)............................... 4,626
**808,100 Jembo Cable Co. (Foreign)....................... 521
**1,358,200 Kalbe Farma (Foreign)........................... 4,604
**481,000 Keramika Indonesia Assosiasi (Foreign).......... 231
**2,096,500 Polysindo Eka Perkasa (Foreign)................. 1,192
**1,058,500 Semen Gresik (Foreign).......................... 2,963
**4,336,200 Sona Topas Tourism (Foreign).................... 1,233
**1,220,000 Sorini Corp. (Foreign).......................... 5,923
**150,000 Suba Indah (Foreign)............................ 100
**+1,607,000 Telekomunikasi Indonesia (Foreign).............. 2,108
**1,467,600 Tempo Scan Pacific (Foreign).................... 3,979
**2,145,500 United Tractors (Foreign)....................... 4,035
--------
54,936
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ISRAEL (3.9%)
72,200 ELBIT........................................... $ 3,851
2,860 First International Bank of Israel, Class 1..... 335
25,122 First International Bank of Israel, Class 5..... 3,032
524,467 Israel Land Development......................... 1,517
80,819 Koor Industries................................. 8,023
543,520 Osem Investment................................. 3,250
+137,336 PEC Israel Economic Corp........................ 3,313
54,397 Scitex Ltd...................................... 741
164,365 Super Sol Ltd., Class B......................... 3,455
145,000 Teva Pharmaceutical Industries Ltd. ADR......... 6,724
--------
34,241
--------
KOREA (2.2%)
**7,890 Pohang Iron & Steel (Foreign)................... 557
71,480 Samsung Electronics (Foreign)................... 12,992
+814 Samsung Electronics (Foreign)(New).............. 148
+5,099 Samsung Electronics (New)....................... 920
**78,000 Shinhan Bank (Foreign).......................... 1,712
**30,436 Shinhan Bank RFD (Foreign)...................... 668
63,000 Yukong Ltd. (Foreign)........................... 2,176
--------
19,173
--------
MALAYSIA (0.1%)
735,000 Bandar Raya Developments Bhd.................... 1,048
--------
MEXICO (8.7%)
155,060 Alfa S.A. de C.V., Class A...................... 1,993
513,912 Apasco S.A., Class A............................ 2,111
4,877,920 Banacci, Class B................................ 8,190
763,554 Banacci, Class L................................ 1,137
+864,977 Cemex S.A. de C.V. CPO ADR...................... 5,703
#2,582,660 Cemex S.A., Class A............................. 8,525
+1,752,000 Cifra S.A. de C.V., Class C..................... 1,776
91,810 Coca-Cola Femsa S.A. ADR........................ 1,699
326,469 Empresas ICA S.A. ADR........................... 3,346
4,533,550 FEMSA, Class B.................................. 10,216
#+152,640 Grupo Carso S.A. ADR............................ 1,628
#1,476,655 Grupo Financiero Bancomer ADR................... 8,583
+7,541,700 Grupo Financiero Bancomer, Class B.............. 2,107
+257,551 Grupo Financiero Bancomer, Class L.............. 67
181,955 Grupo Televisa S.A. ADR......................... 4,094
#+107,663 Hylsamex S.A. ADR............................... 2,315
177,488 Panamerican Beverages, Inc., Class A............ 5,680
225,390 Telefonos de Mexico S.A. ADR, Class L........... 7,184
--------
76,354
--------
MOROCCO (1.7%)
20,000 BMCE............................................ 921
55,123 Groupe Ona...................................... 2,109
+188,100 SNI Maroc, series `V'........................... 9,218
58,221 Wafabank........................................ 2,509
--------
14,757
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PAKISTAN (2.6%)
33,480 Adamjee Insurance Co., Ltd...................... $ 101
+142,649 Cherat Cement Ltd............................... 184
+1,814 Crescent Investment Bank........................ 1
+6,459 Crescent Textile Mills Ltd...................... 4
+1,049,500 Dewan Salman Fibre.............................. 2,531
2,288,000 D.G. Khan Cement Ltd............................ 2,006
3,017,900 Fauji Fertilizer................................ 4,520
1,880,600 Karachi Electric Supply Corp.................... 1,457
+94,273 Muslim Commercial Bank.......................... 101
+1,256,519 Nishat Mills Ltd................................ 1,074
358,020 Pakistan State Oil Co........................... 2,773
+42,200 Pakistan Telecommunications..................... 3,793
+27,900 Pakistan Telecommunications GDS................. 2,427
+1,800,960 Sui Northern Gas................................ 1,566
+298,000 Zahur Textile Mills............................. 24
--------
22,562
--------
PERU (0.0%)
35 Cementos Lima S.A............................... --
--------
PHILIPPINES (5.5%)
4,235,962 Ayala Land, Inc., Class B....................... 5,168
+8,112,000 C&P Homes, Inc.................................. 5,953
+5,977,000 DMI Holdings, Inc............................... 2,142
16,698,330 JG Summit Holding, Class B...................... 4,584
818,588 Manila Electric Co., Class B.................... 6,679
12,893,816 Petron Corp..................................... 6,636
104,055 Philippine Long Distance Telephone Co., Class
B............................................. 5,653
2,031,420 San Miguel Corp., Class B....................... 6,931
+15,618,168 SM Prime Holdings, Inc., Class B................ 4,466
--------
48,212
--------
POLAND (0.8%)
20,000 Bre Bank........................................ 304
45,000 Debica.......................................... 679
***+33,400 Eastbridge...................................... 2,245
137,620 Elektrim........................................ 466
+2,085,038 International UNP Holdings...................... 703
+373,740 Mostostal Exports, S.A.......................... 735
11,125 Wedel S.A....................................... 368
15,735 Zywiec.......................................... 1,085
--------
6,585
--------
PORTUGAL (0.2%)
120,000 Filmes Lusomundo................................ 1,283
@+9,945 Portuguese Investment Fund Ltd. (The)........... 621
--------
1,904
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
RUSSIA (4.0%)
***+462,150 Alliance Cellulose Ltd.......................... $ 9,295
***+54,035 Alliance Cellulose Ltd., Class B................ 1,500
+130,000 Edinaya Enegertics.............................. 4
+503,500 Irkutskenergo................................... 2,492
+252,000 LUKoil Holding.................................. 1,153
+7,850,000 Moscow Energy................................... 2,080
+605,000 Rostelecom...................................... 2,829
***+317,851 Russian Telecom Development Corp................ 3,179
***+400,000 SFMT, Inc....................................... 4,000
***+990 Storyfirst Communications, Inc., Class C........ 660
***+2,640 Storyfirst Communications, Inc., Class D........ 1,980
***+3,250 Storyfirst Communications, Inc., Class E........ 3,250
+88,909,000 Unified Energy System........................... 2,703
--------
35,125
--------
SOUTH AFRICA (2.3%)
44,830 Anglo American Industrial Corp., Ltd............ 2,038
700,000 Bidvest......................................... 4,705
860,000 Gencor.......................................... 2,996
@224,490 Morgan Stanley Africa Investment Fund, Inc...... 2,890
972,084 Sasol Ltd....................................... 7,960
--------
20,589
--------
TAIWAN (4.5%)
+1,873,000 Acer, Inc....................................... 4,324
+909,000 Advanced Semiconductor Engineering, Inc.,....... 2,199
3,492,000 China Steel Corp................................ 2,790
100,000 Far East Textiles............................... 95
+1,117,986 Mosel Vitelic Ltd............................... 3,319
+2,027,999 Shinkong Synthetic Fiber........................ 1,754
+3,812,800 Taiwan Semiconductor Manufacturing Co........... 11,947
3,905,836 United Micro Electronics Corp., Ltd............. 9,805
+336,000 Walsin Lihwa Corp. GDR.......................... 3,368
--------
39,601
--------
THAILAND (5.0%)
298,550 Advanced Information Services Co., Ltd.
(Foreign)..................................... 5,286
785,400 Bangkok Bank Ltd. (Foreign)..................... 9,541
2,398,300 Finance One Co., Ltd. (Foreign)................. 16,661
144,600 Shinawatra Computer Co., Ltd. (Foreign)......... 3,559
257,400 Thai Farmers Bank Ltd........................... 1,757
727,100 Thai Farmers Bank Ltd. (Foreign)................ 7,332
--------
44,136
--------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
TURKEY (5.4%)
6,065,172 Aksa............................................ $ 1,867
2,868,000 Bagfas.......................................... 883
11,278,000 Borusan......................................... 2,269
+13,272,000 Bossa........................................... 948
+4,000,000 Demirbank TAS................................... 243
30,329,180 Ege Biracilik................................... 10,458
4,600,000 Ege Seramik..................................... 1,095
4,226,000 Erciyas Biracilik............................... 1,978
38,125,000 Eregli Demir.................................... 3,130
3,479,000 Guney Biracilik Ve Malt Sanayii................. 509
2,998,800 Migros.......................................... 2,290
85,761,000 Sabah........................................... 1,690
14,346,000 Sarkuysan....................................... 2,120
8,687,000 Tat Konserve Sanayli............................ 5,492
40,206,000 Tofas Turk Otomobil Fabrikasi................... 3,895
498,288 Tofas Turk Otomobil Fabrikasi GDR, Class E...... 249
28,340,000 Trakya Cam Sanayii.............................. 2,885
1,354,075 Turkas Petroculuk A.S........................... 239
#11,439,000 Turkiye Garanti Bankasi A.S..................... 958
220,482 Turkiye Garanti Bankasi ADR..................... 1,846
46,537,600 Yapi Ve Kredi Bankasi A.S....................... 1,911
--------
46,955
--------
UNITED KINGDOM (0.3%)
915,713 Lonrho plc...................................... 2,502
--------
ZIMBABWE (0.3%)
#+1,980,000 Trans Zambezi Industries Ltd.................... 2,871
+35,281 Trans Zambezi Industries Ltd., Class S.......... 51
--------
2,922
--------
TOTAL COMMON STOCKS (Cost $790,607).............................. 737,077
--------
PREFERRED STOCKS (10.8%)
BRAZIL (NON-VOTING STOCKS) (10.7%)
**1,754,000,000 Banco Bradesco S.A.............................. 15,339
+467,646,000 Banco do Brasil................................. 5,293
**295,998,880 Banco Nacional S.A.............................. 609
40,268,030 Brahma.......................................... 16,574
620,000 Brasmotor S.A................................... 123
73,517,103 Cia Energetica de Minas Gerais.................. 1,626
16,959,000 Cia Paulista de Forca E Luz..................... 454
84,212,850 Eletrobras, Class B............................. 22,788
32,803,800 Itaubanco....................................... 9,147
37,930,101 Lojas Americanas S.A............................ 890
105,758 Lojas Americanas S.A. (Bonus Shares Plan)....... 15
44,869,333 Petrobras....................................... 3,831
12,500 Sadia Concordia................................. 9
175,858,000 Telebras........................................ 8,468
32,080,815 Telecomunicacoes de Sao Paulo................... 4,720
526,000,000 Usiminas........................................ 428
21,118,000 Vale Do Rio Doce................................ 3,477
--------
93,791
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
GREECE (0.1%)
121,458 Aegek........................................... $ 666
--------
INDIA (0.0%)
2,700 Fabworth (India) Ltd............................ 2
--------
PORTUGAL (0.0%)
35,340 Filmes Lusomundo................................ 330
--------
TOTAL PREFERRED STOCKS (Cost $88,639)............................ 94,789
--------
<CAPTION>
NO. OF
RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
**43,545 Banco Bradesco.................................. 113
--------
INDIA (0.1%)
**+9,610 Baroda Rayon Corp............................... --
+6,000 Federal Bank Ltd................................ 5
+674 Flex Industries Ltd............................. --
**+155,100 ITC Agrotech.................................... --
**+2 Nahar Spinning.................................. --
+133,300 SCICI Ltd. (Bonus).............................. 139
+55,000 Vysya Bank...................................... 618
--------
762
--------
PAKISTAN (0.0%)
+686,400 D.G. Khan Cement................................ 241
+20,625 Dewan Salman.................................... --
--------
241
--------
TOTAL RIGHTS (Cost $579).........................................
1,116
--------
<CAPTION>
NO. OF
WARRANTS
- ---------------
<C> <S> <C>
WARRANTS (1.0%)
INDIA (0.1%)
**+33,571 Bharat Forge Co., Ltd. (New).................... 130
**+27,383 Flex Industries Ltd., expiring 11/23/97......... 103
**+44,702 Garware Plastics & Polyesters, expiring
4/04/98....................................... 346
--------
579
--------
INDONESIA (0.0%)
+274,600 Bank Bali, expiring 8/29/00..................... 120
--------
POLAND (0.0%)
**+1,014,000 International UNP Holdings...................... --
--------
RUSSIA (0.9%)
+9,640 LUKoil Holding.................................. 7,712
--------
THAILAND (0.0%)
**+10 Finance One Co., Ltd., expiring 3/15/99......... --
--------
TOTAL WARRANTS (Cost $10,050).................................... 8,411
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE DEBENTURES (0.6%)
COLOMBIA (0.5%)
U.S.$ #5,615 Banco de Colombia 5.20%, 2/01/99................ $ 4,267
--------
INDIA (0.1%)
INR **33,574 DCM Shriram Industries Ltd. 15.00%, 3/02/02..... 448
1,650 Indian Seamless Steel & Alloys 10.00%,
7/13/96....................................... 27
130 Tata Iron & Steel, 2.25%, 4/01/99............... 116
--------
591
--------
TOTAL CONVERTIBLE DEBENTURES (Cost $6,122)....................... 4,858
--------
NON-CONVERTIBLE DEBENTURES (0.5%)
INDIA (0.5%)
3,357 Bharat Forge Co., Ltd., 14.50%, 4/18/02......... 43
34,055 DCM Shriram Industries Ltd., 16.50%, 3/02/02.... 599
4,470 Garware Plastics & Polyester, 16.00%, 4/04/98... 127
1,467 Mahavir Spinning Mills Ltd., Series A, 15.40%,
3/22/00....................................... 40
50,000 Raymond Ltd., 16.00%, 1/05/02................... 1,422
70,000 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98...................................... 2,239
--------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $5,071)................... 4,470
--------
LOAN AGREEMENTS (1.2%)
POLAND (0.0%)
U.S.$ #54 Republic of Poland Interest Arrears PDI Bonds,
3.75%, 10/27/14............................... 35
--------
RUSSIA (1.2%)
CHF ++11,910 Bank for Foreign Economic Affairs (Floating
Rate)......................................... 3,485
U.S.$ ++21,003 Bank for Foreign Economic Affairs (Floating
Rate)......................................... 7,167
--------
10,652
--------
TOTAL LOAN AGREEMENTS (Cost $9,781).............................. 10,687
--------
TOTAL FOREIGN SECURITIES (98.3%) (Cost $910,849)................. 861,408
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (1.1%)
ARP 213 Argentine Peso.................................. $ 213
BRC 1,000 Brazilian Real.................................. 1,029
COP 512,134 Colombian Peso.................................. 517
HKD 2,753 Hong Kong Dollar................................ 356
HUF 59,707 Hungarian Forint................................ 437
INR 186,311 Indian Rupee.................................... 5,298
MXP 452 Mexican Peso.................................... 59
MAD 1,419 Morrocan Dirham................................. 168
PKR 12,099 Pakistani Rupee................................. 354
PSS 2,126 Peruvian New Sol................................ 920
PLZ 224 Polish Zloty.................................... 91
LKR 8,042 Sri Lankan Rupee................................ 150
TWD 5,118 Taiwan Dollar................................... 187
THB 3,262 Thai Baht....................................... 129
--------
TOTAL FOREIGN CURRENCY (Cost $10,194)............................ 9,908
--------
TOTAL INVESTMENTS (99.4%) (Cost $921,043)........................ 871,316
--------
</TABLE>
<TABLE>
<CAPTION>
OTHER ASSETS (2.9%)
<S> <C> <C>
Receivable for Investments Sold................. $ 21,080
Dividends Receivable............................ 1,908
Receivable for Portfolio Shares Sold............ 1,139
Interest Receivable............................. 403
Foreign Withholding Tax Reclaim Receivable...... 112
Other........................................... 367 25,009
-------------
LIABILITIES (-2.3%)
Payable for Investments Purchased............... (12,102)
Investment Advisory Fees Payable................ (3,005)
Payable for Portfolio Shares Redeemed........... (2,038)
Bank Overdraft.................................. (1,487)
Custodian Fees Payable.......................... (400)
Deferred India Taxes............................ (308)
Administrative Fees Payable..................... (119)
Payable for India Stamp Duty Tax................ (101)
Sub-Administrative Fees Payable................. (34)
Net Unrealized Loss on Forward Foreign Currency (10)
Exchange Contracts............................
Payable for India Taxes......................... (1)
Other Liabilities............................... (129) (19,734)
------------- --------
NET ASSETS (100%)................................................ $876,591
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 66,716,021 outstanding $.001 par value shares
(authorized 500,000,000 shares)................................ $13.14
--------
--------
</TABLE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ---------- --------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
HKD 2,722 $ 352 1/02/96 U.S.$352 $ 352 $ --
PSS 2,000 866 1/02/96 U.S.$856 856 (10)
--------- --------- ---
$ 1,218 $ 1,208 $ (10)
--------- --------- ---
--------- --------- ---
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------
+ -- Non-income producing security
++ -- Non-income producing security -- in
default
* -- Restricted as to public resale. Total
value of restricted securities at
December 31, 1995, was $3,510 or 0.4% of
net assets. (Total cost $3,782).
** -- Securities (totaling U.S.$74,961 or 8.6%
of net assets at December 31, 1995)
valued at fair value -- See Note A-1
*** -- Security is valued at cost -- See Note
A-1
# -- 144A Securities -- Certain conditions for
public sale may exist
@ -- The fund is advised by an affiliate
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
RFD -- Ranked For Dividend
CHF -- Swiss Franc
<CAPTION>
- ---------------------------------------------------------------
</TABLE>
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 86,196 9.8%
Consumer Goods........................ 125,580 14.3
Energy................................ 116,660 13.3
Finance............................... 207,434 23.7
Loan Agreements....................... 10,687 1.2
Materials............................. 138,556 15.9
Multi-Industry........................ 76,846 8.8
Services.............................. 99,449 11.3
--------- ---
$ 861,408 98.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Belgium 2.9%
Denmark 1.5%
Finland 3.1%
France 13.9%
Germany 14.9%
Italy 6.7%
Netherlands 11.7%
Norway 1.9%
Portugal 0.2%
Spain 8.4%
Sweden 3.0%
Switzerland 15.1%
United Kingdom 14.5%
Other 2.2%
100.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EUROPEAN EQUITY PORTFOLIO MSCI EUROPE INDEX (1)
<S> <C> <C>
04/02/93* 500,000 500,000
12/31/93 645,500 606,808
12/31/94 715,750 620,650
12/31/95 800,566 754,835
*Commencement of Operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 11.85% 18.68%
INDEX............................ 21.62 16.15
<FN>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (assumes
dividends are reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 stock equivalents such as securities
convertible into common stocks and securities having equity characteristics,
such as rights and warrants to purchase common stock.
The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.
The total return of the Portfolio for the year ended December 31, 1995 was
11.85% as compared to 21.62% for the Morgan Stanley Capital International (MSCI)
Europe Index for the same period. The average annual total return of the
Portfolio for the period from inception in April 1993 through December 31, 1995
was 18.68% compared to 16.15% for the MSCI Europe Index for the same period.
Following high expectations at the beginning of the year the levels of growth in
European economies has been disappointing for most countries in 1995. Growth in
Germany and Switzerland has been hindered by the strength of their currencies,
making exports less competitive. In both of these markets, however, we have seen
the authorities continuing to lower interest rates in an attempt to stimulate
economic activity. Of the countries that have had stronger currencies in 1995,
the Netherlands is the only one to keep its economic recovery on track. The
growth rate should match last year's 2.7% rise with the driving force in the
recovery being domestic spending with growth in
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
European Equity Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
both consumption and spending. Looking at some of the other European countries,
Italy has shown the best growth rate of the major economies with an increase of
3.5% expected for the full year. Exports have been strong due primarily to the
continual weakness in the Lira but there are now signs of growth spreading to
other parts of the economy. There has also been signs of improvement in Spain
while in both France and the U.K. improvement early in the year has been
followed more recently by disappointing economic results.
Unemployment remains a concern in nearly all European countries with the
situation deteriorating towards the end of the year following some improvement
in earlier months.
Following strong performance in both 1993 and 1994, the returns for the value
investor in Europe have not been good in 1995. Sectors that have performed well
during the year include technology, media and particularly pharmaceuticals. In
all of these industries, it is difficult to find good quality companies that
meet our value criteria. We are overweight the quality cyclicals and retail,
where both were largely disappointing, hindered by the lack of growth. The
Portfolio remains underweight in the U.K. relative to the Index while the
overweight positions are in the Netherlands, Switzerland, Spain and Italy.
Looking forward to 1996, the investment environment appears more beneficial to
the value investor. The valuation levels of many companies now look attractive,
particularly some of the smaller capitalization stocks. The performance of the
Portfolio will also benefit from weaker currencies, especially among the
deutschemark bloc, as we are overweight in the export sectors.
Recently we have added DSM in Holland, Courtaulds Textiles and Calor Gas in the
U.K.
DSM is the second largest chemical company in the Netherlands and the tenth
largest in Europe. It is an efficient producer of bulk petrochemicals and has a
well focused management. Since 1991, it has reduced headcount by 30% while
investing NLG 7 billion over the last 6 years, mostly to improve productivity.
The cyclicality of the group is offset by the energy division, which represented
34% of sales last year. The company has a strong balance sheet and is currently
trading on a price to cashflow multiple of 2.2x.
Courtaulds Textiles is an international textiles and clothing company which
operates in 17 different countries in Europe, North America, North Africa and
Southeast Asia. Particular attractions of Courtaulds Textiles are its position
as one of the leading textiles suppliers to the premium U.K. retailer Marks &
Spencer, and a very strong management team.
Calor's basic business is the sale of liquid petroleum gas, propane and butane
in both refillable cylinders and in bulk. Calor has a 60% share in its principal
U.K. market. Calor will use its highly cash generative U.K. core business to
fund growth in emerging markets in partnership with its majority shareholder
SHV.
- --------------------------------------------------------------------------------
European Equity Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (94.8%)
BELGIUM (2.9%)
+9,000 Arbed S.A......................................... $ 1,019
11,000 Delhaize Freres et Cie, 'Le Lion' S.A............. 456
12,000 G.I.B. Holdings Ltd............................... 527
55 G.I.B. Holdings Ltd. VVPR (New)................... 2
--------
2,004
--------
DENMARK (1.5%)
21,300 Unidanmark A/S, Class A (Registered).............. 1,054
--------
FINLAND (3.1%)
55,500 Amer-Yhtymae Oy, Class A.......................... 866
25,000 Huhtamaki Oy, Series 1............................ 604
+13,533 Merita, Ltd., Class A............................. 34
+10,500 Nokia AB Oy, Class A.............................. 413
20,000 Pohjola Insurance Co., Ltd., Class B.............. 257
--------
2,174
--------
FRANCE (13.9%)
23,500 Banque Nationale de Paris......................... 1,060
1,700 Bongrain S.A...................................... 958
7,000 Cie de Saint Gobain............................... 775
+10,000 Credit Lyonnaise CDI.............................. 480
15,000 Elf Aquitaine..................................... 1,105
8,000 Eridania Beghin-Say S.A........................... 1,372
+21,405 Legris Industries S.A............................. 697
4,100 Labinal S.A....................................... 455
7,000 Peugeot S.A....................................... 923
45,452 Thomson CSF....................................... 1,013
12,000 Total S.A., Class B............................... 810
--------
9,648
--------
GERMANY (11.9%)
6,000 BASF AG........................................... 1,352
5,000 Bayer AG.......................................... 1,328
+16,000 Bremer Vulkan Verbund AG.......................... 446
3,500 Commerzbank AG.................................... 831
2,200 Karstadt AG....................................... 902
2,500 Mannesmann AG..................................... 796
+3,700 Varta AG.......................................... 710
22,000 Veba AG........................................... 942
3,000 Volkswagen AG..................................... 1,006
--------
8,313
--------
ITALY (6.7%)
+518,000 Editoriale L'Expresso S.p.A....................... 897
+520,000 Impregilo S.p.A................................... 439
540,000 Olivetti S.p.A.................................... 433
200,700 Sogefi S.p.A...................................... 425
500,000 Stet Di Risp (NCS)................................ 1,020
205,500 Telecom Italia S.p.A.............................. 320
410,000 Telecom Italia S.p.A. Di Risp (NCS)............... 501
+242,200 Unicem Di Risp (NCS).............................. 614
--------
4,649
--------
NETHERLANDS (11.7%)
29,674 ABN Amro Holdings N.V............................. 1,352
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
9,500 Akzo Nobel N.V.................................... $ 1,099
950 DSM N.V........................................... 78
7,599 Hollandsche Beton Groep N.V....................... 1,160
13,084 Internationale Nederlanden Groep N.V.............. 874
13,000 Koninklijke Bijenkorf Beheer N.V.................. 859
30,468 Koninklijke PTT Nederland N.V..................... 1,107
25,000 Koninklijke Van Ommeren N.V....................... 779
23,500 Philips Electronics N.V........................... 849
--------
8,157
--------
NORWAY (1.9%)
200,000 Den Norske Bank A/S, Class A Free................. 524
5,113 Hafslund Nycomed, Class B......................... 130
53,000 Saga Petroleum A/S, Class B....................... 662
--------
1,316
--------
PORTUGAL (0.2%)
+@1,905 Portuguese Investment Fund........................ 119
--------
SPAIN (8.4%)
+100,000 Asturiana del Zinc S.A............................ 793
17,000 Banco de Santander S.A............................ 854
11,518 Bodegas y Bebidas S.A............................. 294
+107,870 Grupo Duro Felguera S.A........................... 381
110,000 Iberdrola S.A..................................... 1,007
106,000 Sevillana de Electricidad S.A..................... 823
125,000 Telefonica Nacional de Espana S.A................. 1,731
--------
5,883
--------
SWEDEN (3.0%)
1,700 Electrolux AB, Series B........................... 70
+50,000 Nordbanken AS..................................... 866
59,000 S.K.F. AB, Class B................................ 1,128
--------
2,064
--------
SWITZERLAND (15.1%)
+800 Ascom Holdings AG (Bearer)........................ 815
460 Bobst AG (Bearer)................................. 718
700 Ciba Geigy AG (Bearer)............................ 613
800 Ciba-Geigy AG (Registered)........................ 704
2,200 Forbo Holding AG (Registered)..................... 940
1,030 Hero Lenzburg AG (Bearer)......................... 509
1,400 Magazine Globus (Participating Certificates)...... 801
1,100 Nestle S.A. (Registered).......................... 1,217
+16,100 Oerlikon-Buehrle Holding AG (Registered).......... 1,312
1,000 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 1,014
1,800 Sulzer AG (Participating Certificates)............ 960
+1,200 SwissAir (Registered)............................. 874
--------
10,477
--------
UNITED KINGDOM (14.5%)
+145,500 Asprey plc........................................ 565
140,000 Associated British Foods plc...................... 802
20,000 Bass plc.......................................... 223
200,000 BET plc........................................... 394
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
European Equity Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (CONT.)
70,000 BSM Group plc..................................... $ 168
32,800 Calor Group plc................................... 130
350,000 Christian Salvesen plc............................ 1,437
38,900 Courtaulds Textiles plc........................... 215
188,491 John Mowlem & Co. plc............................. 174
114,000 Kwik Save Group plc............................... 892
24,895 McAlpine (Alfred) plc............................. 57
101,075 Reckitt & Colman plc.............................. 1,119
298,566 Rolls-Royce plc................................... 876
202,527 Royal Insurance Holdings plc...................... 1,201
46,000 Sketchley plc..................................... 90
50,000 Tate & Lyle plc................................... 366
30,000 Unilever plc...................................... 616
300,000 WPP Group plc..................................... 764
--------
10,089
--------
TOTAL COMMON STOCKS (Cost $63,242)............................ 65,947
--------
PREFERRED STOCKS (3.0%)
GERMANY (3.0%)
2,500 RWE AG............................................ 698
3,000 Spar Handels AG................................... 644
3,200 Volkswagen AG..................................... 776
--------
TOTAL PREFERRED STOCKS (Cost $2,010).......................... 2,118
--------
TOTAL FOREIGN SECURITIES (97.8%) (Cost $65,252)............... 68,065
--------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT (0.5%)
$ 336 The Chase Manhattan Bank N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$336, collateralized by $250 United States
Treasury Bonds 8.875%, due 8/15/17, valued at
$342 (Cost $336)................................ 336
--------
FOREIGN CURRENCY (3.2%)
GBP 227 British Pound..................................... 352
DEM 1,788 Deutsche Mark..................................... 1,248
FIM 949 Finnish Markka.................................... 218
ITL 751 Italian Lira...................................... --
NLG 121 Netherlands Guilder............................... 76
ESP 2 Spanish Peseta.................................... --
SEK 2,077 Swedish Krona..................................... 313
--------
TOTAL FOREIGN CURRENCY (Cost $2,199).......................... 2,207
--------
TOTAL INVESTMENTS (101.5%) (Cost $67,787)..................... 70,608
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
-----
OTHER ASSETS (0.4%)
Receivable for Investments Sold................. $ 140
Dividends Receivable............................ 79
<CAPTION>
AMOUNT
(000)
------------------------------------------------------------
<S> <C> <C>
Foreign Withholding Tax Reclaim Receivable...... $ 62
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 20
Receivable for Portfolio Shares Sold............ 10
Other........................................... 2 $ 313
-----
LIABILITIES (-1.9%)
Payable for Investments Purchased............... (710 )
Payable for Portfolio Shares Redeemed........... (457 )
Investment Advisory Fees Payable................ (112 )
Custodian Fees Payable.......................... (12 )
Administrative Fees Payable..................... (11 )
Other Liabilities............................... (36 ) (1,338 )
----- --------
NET ASSETS (100%).............................................
$69,583
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,999,857 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $13.92
--------
--------
------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars or foreign currency as indicated
below:
</TABLE>
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- --------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
NLG 121 $ 75 1/02/96 U.S.$ 75 $ 75 $ --
ESP 9,556 79 1/03/96 DEM 113 79 --
CHF 2,750 2,422 6/10/96 U.S.$2,420 2,420 (2)
DEM 3,000 2,107 6/10/96 U.S.$2,152 2,152 45
FRF 7,100 1,451 6/10/96 U.S.$1,422 1,422 (29)
DEM 400 282 8/09/96 U.S.$ 288 288 6
--------- --------- ---
$ 6,416 $ 6,436 $ 20
--------- --------- ---
--------- --------- ---
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
@ -- The fund is advised by an affiliate.
CDI -- Certificate of Investment
NCS -- Non Convertible Shares
CHF -- Swiss Franc
FRF -- French Franc
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C> <C>
VALUE PERCENT
INDUSTRY (000) OF NET ASSETS
<CAPTION>
- -----------------------------------------------------------------
<S> <C> <C>
Capital Equipment................... $ 11,080 15.9%
Consumer Goods...................... 14,873 21.4
Energy.............................. 5,170 7.4
Finance............................. 9,945 14.3
Materials........................... 11,835 17.0
Multi-Industry...................... 2,559 3.7
Services............................ 12,603 18.1
--------- ---
$ 68,065 97.8%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
European Equity Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.2%
Canada 0.4%
France 5.0%
Germany 7.4%
Ireland 2.9%
Italy 2.0%
Japan 9.7%
Netherlands 6.5%
Sigapore 0.7%
Spain 2.6%
Switzerland 6.2%
United Kingdom 5.9%
United States 32.1%
Other 17.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GLOBAL EQUITY
MSCI WORLD INDEX(1) PORTFOLIO
<S> <C> <C>
7/15/92* 500,000 500,000
10/31/92 481,390 467,500
12/31/92 493,625 487,500
12/31/93 604,750 703,145
12/31/94 635,450 752,000
12/31/95 767,115 892,323
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 18.66% 18.21%
INDEX............................ 20.72 13.16
<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 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 year ended December 31, 1995 was
18.66% as compared to 20.72% for the Morgan Stanley Capital International (MSCI)
World Index for the same period. The average annual total return of the
Portfolio for the period from inception in July 1992 through December 31, 1995
was 18.21% compared to 13.16% for the MSCI World Index for the same period.
The above average returns achieved on equities in the period under review
principally resulted from the liquidity boost of easier monetary policies
adopted by Central Banks in response to the slowdown in the global economy.
Particularly strong returns in U.S. markets reflected increased foreign
purchases of U.S. Treasuries and the Federal Reserve Board's shift to an easier
monetary policy stance in July, driving long bond yields down 175 points by year
end. A further significant factor was the net shrinkage of the equity base
brought about by sharply higher merger/acquisition and stock buy-back activity
which significantly outweighed new equity issuance.
The weakening yen/dollar recovery and rising Japanese stock market were the two
key features of the second half of the year. This was in stark contrast to the
first six months when a surging yen (Y/$ rate of 80) sent the Nikkei below
15,000 as Japanese policy makers were reluctant to address the financial
system's indebtedness and deflationary pressures within the economy. It was not
until concerted currency invervention on behalf of the Federal Reserve, the
Bundesbank and the Bank of Japan in addition to the Japanese Ministry of Finance
announcing yet another stimulatory fiscal package, that the yen weakened,
falling 25% over the summer and providing a much needed tonic to the equity
market. By year end, faint signs of economic recovery from what has been the
worst recession in Japanese post-war history had prompted a rise in the Nikkei
to the 20,000 level.
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Global Equity Portfolio
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
In Europe, the lower relative performance of the German and French markets was a
symptom of reduced competitiveness through overvalued currencies and labor
market rigidities. Switzerland, on the contrary, produced strong returns as the
currency was also seen as a safe haven given the prospect of EMU. The need to
improve productivity or relocate to lower cost countries is the key issue facing
European industrialists, while the increasing political desire for privatization
will place added pressures on already high levels of unemployment. From a value
standpoint however, continental Europe remains attractive.
Consensus forecasts remain slightly in favor of a "soft landing" rather than a
recession scenario, predicated on the outlook for low inflation, lower interest
rates, a balanced U.S. budget agreement and lower, but sustainable, growth. At
these valuation levels, and bearing in mind the low absolute levels of interest
rates, there is a risk that markets are already discounting these factors. In
the first half of 1996, sentiment may weaken in response to falling GDP, further
earnings disappointments and downgrades across many sectors, particularly in
technology. This implies a further two-tiering of equity markets and increasing
onus on individual stock selection. With corporate free cash flow in the U.S. at
record levels, companies will continue to pay down debt, buy-back stock and make
acquisitions.
The Portfolio remains about market weight in the U.S., overweight continental
Europe and underweight in Japan. Despite indications of a gradually improving
investment climate in Japan, our underweight stance is unlikely to change
significantly, given that we continue to search for companies that are cheap
globally in terms of either price/cash flow or price/book value. Furthermore,
Japan cannot forever continue to allow an easy monetary policy alongside a loose
fiscal policy when it's government deficit is running close to 8% of GNP.
The long term return from global equities is typically 6% per annum over and
above consumer price inflation. Given the scale of returns in 1995 and with
global inflation of between 2-3% likely for 1996, an increase of between 8-10%
in the MSCI World Index is considered reasonable.
- --------------------------------------------------------------------------------
Global Equity Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (81.7%)
AUSTRALIA (1.2%)
50,000 Brambles Industries Ltd........................... $ 557
120,000 Westpac Banking Corp.............................. 532
--------
1,089
--------
CANADA (0.4%)
22,900 Hudson's Bay Co................................... 329
--------
FRANCE (5.0%)
10,300 Banque Nationale de Paris......................... 465
1,870 Bongrain S.A...................................... 1,054
+12,000 Credit Lyonnaise CDI.............................. 576
19,266 Elf Aquitaine..................................... 1,419
4,900 Labinal S.A....................................... 543
11,965 Valeo S.A......................................... 554
--------
4,611
--------
GERMANY (6.6%)
5,200 BASF AG........................................... 1,171
3,822 Bayer AG.......................................... 1,015
3,600 Karstadt AG....................................... 1,476
3,000 Mannesmann AG..................................... 955
2,764 Sinn AG........................................... 520
+2,225 Varta AG.......................................... 427
10,100 Veba AG........................................... 433
260 Volkswagen AG..................................... 87
--------
6,084
--------
IRELAND (2.9%)
757,742 Anglo Irish Bank Corp. plc........................ 728
73,900 Arnotts plc....................................... 385
470,000 Avonmore Foods plc, Class A....................... 956
229,312 Green Property plc................................ 617
--------
2,686
--------
ITALY (2.0%)
500,000 Stet Di Risp (NCS)................................ 1,020
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 856
--------
1,876
--------
JAPAN (9.7%)
160 East Japan Railway Co............................. 778
65,000 Fuji Photo Film Ltd............................... 1,876
24,000 Hitachi Ltd....................................... 242
110,000 Kao Corp.......................................... 1,364
155,000 Nichido Fire & Marine Insurance Co................ 1,246
18,000 Sony Corp......................................... 1,079
100,000 Sumitomo Rubber Industries........................ 835
5,000 TDK Corp.......................................... 255
40,000 Toyo Seikan Kaisha Ltd............................ 1,197
--------
8,872
--------
NETHERLANDS (6.5%)
39,606 ABN Amro Holdings N.V............................. 1,804
2,101 Hollandsche Beton Groep N.V....................... 321
23,159 Internationale Nederlanden Groep N.V.............. 1,547
40,000 Koninklijke Van Ommeren N.V....................... 1,246
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
15,160 Nedlloyd Groep N.V................................ $ 344
20,000 Philips Electronics N.V........................... 723
--------
5,985
--------
SINGAPORE (0.7%)
220,000 Jardine Strategic Holdings, Inc................... 673
--------
SPAIN (2.6%)
89,500 Iberdrola S.A..................................... 819
112,300 Telefonica de Espana S.A.......................... 1,555
--------
2,374
--------
SWITZERLAND (6.2%)
+500 Ascom Holding AG (Bearer)......................... 509
800 Bobst AG (Bearer)................................. 1,248
1,800 Ciba-Geigy AG (Registered)........................ 1,584
1,400 Forbo Holding AG (Registered)..................... 599
1,400 Magazine Globus (Participating Certificates)...... 801
900 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 913
--------
5,654
--------
UNITED KINGDOM (5.8%)
28,500 Calor Group plc................................... 113
298,700 Christian Salvesen plc............................ 1,227
40,300 Forte plc......................................... 207
100,000 John Mowlem & Co. plc............................. 92
150,000 Kwik Save Group plc............................... 1,174
180,000 Matthews (Bernard) plc............................ 265
+**653,333 Pentos plc........................................ --
102,115 Pilkington plc.................................... 320
73,902 Rolls-Royce plc................................... 218
46,400 Unilever plc...................................... 953
279,000 WPP Group plc..................................... 710
--------
5,279
--------
UNITED STATES (32.1%)
+89,000 Addington Resources, Inc.......................... 1,302
18,000 Aluminum Company of America....................... 952
+15,400 AMR Corp.......................................... 1,143
32,100 Bank of New York Co., Inc......................... 1,565
+50,500 Beazer Homes USA, Inc............................. 1,042
+128,000 Cadiz Land Co., Inc............................... 736
+*22,000 Cadiz Land Co., Inc. (acquired 4/17/94, Cost
$88)............................................ 127
108,000 Comsat Corp....................................... 2,012
+40,000 Cray Research, Inc................................ 990
+80,000 Data General Corp................................. 1,100
+99,500 Egghead, Inc...................................... 640
50,000 Enhance Financial Services Group, Inc............. 1,331
45,000 Finova Group, Inc................................. 2,170
16,000 Gap, Inc.......................................... 671
2,000 General Motors Corp............................... 106
+134,200 GenRad, Inc....................................... 1,292
16,000 Georgia Pacific Corp.............................. 1,098
2,600 Houghton Mifflin Co............................... 112
+31,000 Kaiser Ventures, Inc.............................. 403
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Equity Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
24,300 Lukens, Inc....................................... $ 699
13,000 MBIA, Inc......................................... 975
61,400 MCI Communications Corp........................... 1,604
23,300 Mellon Bank Corp.................................. 1,252
+31,300 Nexthealth Inc.................................... 98
18,600 Philip Morris Cos., Inc........................... 1,683
12,000 Prime Retail, Inc................................. 143
25,000 Sun Co., Inc...................................... 684
13,100 Tecumseh Products Co., Class A.................... 678
27,000 UST Corp.......................................... 392
+70,000 Waban, Inc........................................ 1,313
+107,000 WorldCorp, Inc.................................... 1,070
--------
29,383
--------
TOTAL COMMON STOCKS (Cost $66,115)........................... 74,895
--------
PREFERRED STOCKS (0.8%)
GERMANY (0.8%)
3,000 Volkswagen AG (Cost $647)......................... 728
--------
CONVERTIBLE PREFERRED SECURITY (0.0%)
SINGAPORE (0.0%)
+21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97, (Cost $ 21)............................ 23
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
- -----------
<C> <S> <C>
RIGHTS (0.1%)
UNITED KINGDOM (0.1%)
+25,528 Pilkington plc (Cost $61)......................... 79
--------
TOTAL FOREIGN & U.S. SECURITIES (82.6%) (Cost $66,844)......... 75,725
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
$ 2,145 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95 due 1/02/96, to be repurchased at
$2,147, collateralized by $1,975 United States
Treasury Bonds, 7.50%, due 11/15/01, valued at
$2,190 (Cost $2,145)............................ 2,145
--------
FOREIGN CURRENCY (0.6%)
GBP 4 British Pound..................................... 6
JPY 1,014 Japanese Yen...................................... 10
NLG 812 Netherlands Guilder............................... 506
ESP 2 Spanish Peseta.................................... --
SEK 1 Swedish Krona..................................... --
--------
TOTAL FOREIGN CURRENCY (Cost $519)............................. 522
--------
TOTAL INVESTMENTS (85.5%) (Cost $69,508)....................... 78,392
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (14.9%)
Receivable for Portfolio Shares Sold............ $10,259
Receivable for Investments Sold................. 3,158
Dividends Receivable............................ 135
Foreign Withholding Tax Reclaim Receivable...... 55
Interest Receivable............................. 1
Other........................................... 6 $13,614
-----------
LIABILITIES (-0.4%)
Investment Advisory Fees Payable................ (141)
Unrealized Loss on Forward Foreign Currency
Exchange Contracts............................ (131)
Custodian Fees Payable.......................... (12)
Administrative Fees Payable..................... (12)
Payable for Investments Purchased............... (2)
Other Liabilities............................... (33) (331 )
----------- --------
NET ASSETS (100%).............................................. $91,675
--------
--------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 6,408,275 outstanding $.001 par value
shares (authorized 500,000,000 shares)....................... $14.31
--------
--------
</TABLE>
- ------------------------------------------------
<TABLE>
<C> <S> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ----------- --------- ----------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C>
JPY 9,167 $ 89 1/04/96 U.S.$ 89 $ 89 $ --
NLG 10,090 6,305 2/23/96 U.S.$6,174 6,174 (131)
--------- --------- -----
$ 6,394 $ 6,263 $ (131)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
* -- Restricted as to public resale. Total value of
restricted securities at December 31, 1995 was $127
or 0.1% of net assets. (Total cost $88)
** -- Security is valued at fair value -- See Note A-1
CDI -- Certificate of Investment
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -----------------------------------------------------------------
<S> <C> <C>
Capital Equipment...................... $ 16,075 17.5%
Consumer Goods......................... 11,364 12.4
Energy................................. 5,725 6.2
Finance................................ 16,017 17.5
Materials.............................. 7,645 8.3
Multi-Industry......................... 4,867 5.4
Services............................... 14,032 15.3
--------- ---
$ 75,725 82.6%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 35.8%
Canada 24.5%
South Africa 4.4%
United States 30.3%
Other 5.0%
100.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $250,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOLD PORTFOLIO PHILADELPHIA GOLD AND
SILVER INDEX (1)
<S> <C> <C>
2/01/94* 250,000 250,000
12/31/94 228,775 198,075
12/31/95 258,996 220,141
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ ---------------
<S> <C> <C>
PORTFOLIO........................ 13.21% 1.87%
INDEX............................ 11.14 -6.27
<FN>
1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of the
leading companies involved in the mining of gold and silver.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Gold Portfolio seeks to provide long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged in
gold-related activities. Companies involved in the exploration, mining,
fabrication, processing, distribution or trading of gold (or to a lesser degree
silver, platinum or other precious metals or minerals) qualify as portfolio
candidates.
The total return of the Portfolio for the year ended December 31, 1995 was
13.21% as compared to 11.14% for the Philadelphia Gold and Silver Index for the
same period. The average annual total return for the Portfolio for the period
from inception in February 1994 through December 31, 1995 was 1.87% compared to
- -6.27% for the Philadelphia Gold and Silver (XAU) Index for the same period.
The Portfolio benefited from a geographic focus on North American and Australian
gold shares at the expense of South African shares. South African gold shares
were the worst performing gold share sector, declining 22% according to the
Financial Times Gold Mines Index. The wide variation in gold share performance
contrasts to gold bullion which concluded 1995 with an annual total return of
only 1%, closing the year at $378.10.
South African shares declined on the heels of significant drops in mine
production, attributable to lower productivity and higher operating costs.
Declines in South African production were unable to offset other worldwide
production gains, resulting in a worldwide production decline of 0.5%. Combined
with record fabrication demand, flat mine supply has increased the gap between
supply and demand, providing gold with strong fundamentals. In traditional
commodity markets, supply and demand imbalances are cleared by higher market
prices. In the gold market, two other market participants -- central banks and
mining companies -- can provide temporary sources of supply, effectively
preventing a higher gold price from clearing market imbalances.
Continuing the trend established in late 1993, producers have accelerated future
gold production to meet current demand through the use of forward sales
contracts. During 1995, producer selling reached
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Gold Portfolio
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO (CONT.)
record levels, aided by two large South African sales. As a result, severe
imbalances were recorded in the gold lease market. The gold lease rate measures
the cost of borrowing gold, an integral part of forward sales mechanics. Late in
the year, increased producer demands for borrowed gold caused the gold lease
rate to rise. Because a higher gold lease rate decreases the forward gold price
through forward pricing mathematics, the incentive to hedge is reduced. At this
juncture, unless substantial amounts of gold are added to the supply of loanable
gold in order to bring lease rates down, producers will reduce hedging
activities and permit the gold price to rise.
From an investment perspective, gold's performance in world currencies is
important to monitor. Although gold may benefit from a falling dollar -- a
driving factor behind the early 1995 price rise -- the most bullish backdrop
occurs when gold rises in a stable to strong dollar environment. This allows
gold to rise in terms of all major currencies. Under these circumstances,
worldwide investments flows are compounded and create a more dynamic gold
market. On an international basis, gold continues to hold lows in terms of
European currencies established in 1992. During March 1993, gold bottomed in
terms of the U.S. dollar. Most importantly, gold has likely established a
significant low in Japanese yen terms during April 1995. The yen-gold low was
linked to Japan's deflationary trend, established following the 1989 stock
market and real estate speculative bubble peaks. Continued success of Japan's
reflationary policies is important to maintain a rising yen-gold price.
The 1996 gold outlook remains positive. Gold's fundamentals remain firm. High
lease rates provide indications that producer hedging programs cannot
indefinitely fill chronic supply and demand imbalances. Many of these factors
were lost to financial markets which enjoyed one of the greatest years in recent
history. As we approach 1996, the gold market appears to be reaching the end of
a high level price consolidation. In search for a new equilibrium, we look for
gold prices to move higher in 1996.
- --------------------------------------------------------------------------------
Gold Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (92.1%)
AUSTRALIA (35.8%)
+55,000 Acacia Resources Ltd. ............................ $ 99
+50,000 Delta Gold N.L. .................................. 121
260,000 Gold Mines of Kalgoorlie Ltd. .................... 242
+200,000 Great Central Mines N.L. ......................... 386
90,000 Newcrest Mining Ltd. ............................. 379
135,000 Plutonic Resources, Ltd. ......................... 642
275,000 Poseidon Gold Ltd. ............................... 548
+225,000 Wiluna Mines Ltd. ................................ 232
--------
2,649
--------
CANADA (24.5%)
+169,600 Bema Gold Corp. .................................. 339
+91,100 Bolivar Goldfields Ltd. .......................... 50
+9,000 Bre-X Minerals, Ltd. ............................. 349
+97,000 Dakota Mining Corp. .............................. 146
20,000 Glamis Gold Ltd. ................................. 125
11,400 Placer Dome, Inc. ................................ 275
+100,000 Royal Oak Mines, Inc. ............................ 356
+25,000 TVX Gold, Inc. ................................... 176
--------
1,816
--------
SOUTH AFRICA (4.4%)
6,000 Driefontein Consolidated Ltd., ADR................ 74
14,000 Free State Consolidated Gold Mines Ltd. ADR....... 101
4,200 Kloof Gold Mining Co., Ltd. ADR................... 40
17,500 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 112
--------
327
--------
UNITED STATES (27.4%)
7,000 Freeport McMoRan Copper & Gold, Inc., Class B..... 197
+30,000 Gold Reserve Corp. ............................... 169
23,000 Homestake Mining Co. ............................. 359
6,000 Newmont Mining Corp. ............................. 272
+25,000 Pegasus Gold, Inc. ............................... 347
20,000 Santa Fe Pacific Gold Corp. ...................... 243
+23,000 Stillwater Mining Co. ............................ 442
--------
2,029
--------
TOTAL COMMON STOCKS (Cost $7,147).............................. 6,821
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.0%)
UNITED STATES (0.0%)
+25,000 Gold Reserve Corp., expiring 3/96 (Cost $0)....... 4
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
CONVERTIBLE BONDS (2.9%)
UNITED STATES (2.9%)
$ #250 Canyon Resources 6.00%, 6/01/98 (Cost $276)....... $ 212
--------
TOTAL FOREIGN & U.S. SECURITIES (95.0%) (Cost $7,423).......... 7,037
--------
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
287 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/2/96, to be repurchased at $287,
collateralized by $265 United States Treasury
Bonds, 7.50%, due 11/15/01, valued at $294 (Cost
$287)........................................... 287
--------
TOTAL INVESTMENTS (98.9%) (Cost $7,710)........................ 7,324
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Cash............................................ $ 1
Receivable for Investments Sold................. 106
Receivable from Investment Adviser.............. 16
Dividends Receivable............................ 2
Interest Receivable............................. 1 126
-----
LIABILITIES (-0.6%)
Investment Sub-Advisory Fees Payable............ (7)
Custodian Fees Payable.......................... (5)
Administrative Fees Payable..................... (2)
Other Liabilities............................... (27) (41)
----- --------
NET ASSETS (100%).............................................. $ 7,409
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 866,575 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $8.55
--------
--------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign
currency in exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER FOR GAIN (LOSS)
(000) VALUE (000) SETTLEMENT DATE (000) VALUE (000) (000)
- --------------- ----- ---------------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
AUD 56 $ 42 1/02/96 U.S.$42 $ 42 $ --
</TABLE>
- ------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
# -- 144A Security -- Certain conditions for public sale
may exist.
ADR -- American Depositary Receipt
</TABLE>
- ------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Gold Mines............................. $ 7,037 95.0%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Gold Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 4.6%
Belgium 1.1%
Denmark 1.8%
Finland 1.2%
France 7.2%
Germany 14.5%
Hong Kong 0.7%
Italy 2.2%
Japan 24.1%
Netherlands 9.3%
New Zealand 0.4%
Norway 1.4%
Singapore 2.1%
Spain 3.8%
Sweden 3.0%
Switzerland 5.9%
United Kingdom 9.0%
Other 7.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
MSCI EAFE INDEX (1) PORTFOLIO
<S> <C> <C>
8/04/89* 500,000 500,000
10/31/89 479,200 486,000
10/31/90 417,750 505,380
12/31/91 446,800 541,635
10/31/92 387,750 516,940
12/31/92 393,450 524,830
12/31/93 521,500 769,000
12/31/94 562,100 864,150
12/31/95 625,111 965,860
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
--------- ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO....... 11.77% 14.24% 10.82%
INDEX........... 11.21 9.37 3.54
<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 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.
The total return of the Portfolio for the year ended December 31, 1995 was
11.77% as compared to 11.21% for the Morgan Stanley Capital International (MSCI)
EAFE Index for the same period. The average annual return of the Portfolio for
the five years ended December 31, 1995 and for the period from inception in
August 1989 through December 31, 1995 were 14.24% and 10.82%, respectively, as
compared to 9.37% and 3.54% for the Index for the same periods.
Though the Portfolio kept ahead of its benchmark for the year it had a
disappointing final quarter. Part of this was attributable to its underweight
position in Japan but the dominant factor in its underperformance was poor
relative returns on a country basis led by Japan where the Portfolio's low
weighting in the financial and capital goods sector left its returns well short
of the Index. Disappointments were also observed in France, Germany, Switzerland
and the Netherlands. To an extent these poor returns were due to stock specific
problems like Nedlloyd and Philips in the Netherlands, but the Portfolio for
both the year and the final quarter suffered from its overweighting in cyclical
and what we call quality cyclical stocks. 1995 was a year for growth stocks and
those sectors most closely identified with strong bond prices, which means
financials and utilities. While we had sufficient weightings in bond surrogates
to lend some stability a more topdown approach than ours would certainly have
encouraged higher weightings in these areas. As for the stellar performance of
growth stocks, this is something a value investor has to watch with as much
equanimity as can be summoned. At the same time, the very poor showing from
cyclically sensitive companies should be seen in the context of very strong 1993
and 1994 absolute and relative returns.
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
International Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
More importantly, we believe that at current levels cyclicals and quality
cyclicals in Continental Europe discount a major slowing of this region's
economy. Though we do believe that a mid-cycle inventory correction will
continue through to the second quarter of 1996, German consumption should
recover and bring some support to economic activity as the year progresses.
Therefore, we think now is an opportune time to moderately increase positions in
this area of world markets. In contrast, the financial sectors discount a rosy
scenario for bonds which may not continue beyond the first quarter.
In the United States, either personal income must increase meaningfully or the
indebted consumer will threaten recession. We would bet on the former outcome
which is a negative for bonds. Meanwhile, in Japan the country's fiscal and
monetary policies are not consistent with 2.75% yields on ten-year bonds. This
could haunt the stock market later in the year.
Therefore, having suffered in 1995 from its sensitivity to levels of European
economic activity, the Portfolio will benefit in 1996 if Europe's midcycle
inventory slowdown proves to be no more than that. Having said that it would be
vulnerable to deflation which, as Japan has recently shown, is not an
economically or politically palatable development. Perhaps the old adage that
inflation is everyone's second worst enemy will come back into common usage
during the course of 1996. Meanwhile, it hardly bears repeating that the
Portfolio will not participate substantially in a domestically controlled bull
market in Japan driven by unsustainably low interest rates. The likelihood of
such a market developing depends on the Bank of Japan's monetary policy.
A final observation is that complacency in world equity markets is worryingly
high. The consensus that emerging markets will rally strongly in 1996 seems to
be based on the type of liquidity argument always prevalent when the occasional
fragility of equity markets is furthest from investors' minds.
We see 1996 as a year with similar opportunities to that of the previous year in
terms of total return but the risks of a break on the downside are higher,
simply because the starting point for bond yields is much lower.
As for the fourth quarter of 1995, turnover for the Portfolio was 5.3%.
Puchases in the final quarter were: Nokia (Finland), Hoechst (Germany), Hong
Kong Land (Hong Kong), Electrolux (Sweden), Nordbanken (Sweden) and Schindler
(Switzerland).
Portfolio sales during the final quarter were: Salomon (France), Amoy Properties
(Hong Kong), Alusuisse Lonza (Switzerland), Holderbank (Switzerland), Bass
(U.K.) and Tate & Lyle (U.K.).
GERMANY
The Morgan Stanley Capital International Germany Index increased by 2.0% in U.S.
dollar terms and by 2.6% in Deutschemark terms during the final quarter of 1995.
The latest economic indicators have turned out to be significantly weaker than
the market had anticipated. Unemployment is rising, industrial production and
orders have continued to fall, while the latest GDP figures from the third
quarter showed no increase on the second quarter. Analysis of these most recent
GDP numbers shows that the figures would have been worse were it not for a high
build up of inventories. Areas that were disappointing included net exports,
which were negative following a positive contribution in the first half, and
investment on machinery and equipment, down 3.4% quarter-on-quarter. The
continued strength of the Deutschemark is having an increasingly negative effect
on German competitiveness in international markets. For the whole of 1995 real
growth could be 2% or lower. The inflation rate continues to be low despite the
substantial pay rises recently awarded. Despite this difficult environment
Germany remains a market in which we continue to find cheap good quality
companies. Looking forward to 1996 the equity market should be helped by a pick
up in spending following lower taxes, while weakness in the Deutschemark will
help the exporters.
FRANCE
During the fourth quarter of 1995 the Morgan Stanley Capital International
France Index increased by 5.3% in U.S. dollar terms and by 4.9% in local
currency terms. Following two quarters when France was one of the poorest
performing equity markets in Europe, the final three months showed improving
returns. At the end of October President Chirac set new priorities for the
government by stating that cutting the budget and social insurance deficits
would take precedence over the fight against unemployment. This announcement
helped to give confidence not only to the equity market but also the bond market
and the franc. Referring specifically to Chirac's speech and the
- --------------------------------------------------------------------------------
International Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
strength of the franc, the Banque de France cut its lending rate on November
2nd. Another positive influence on the equity market has been the resolution of
the public sector strikes towards year-end. To resolve this unrest the
authorities have given up some ground on pensions but this will not adversely
affect budget cuts. Despite the positive political news the French economy
continues to struggle. Growth slowed further in the third quarter and could be
negative in the final three months with the strikes acting as a negative
influence. Unemployment has started to creep up while consumer confidence is at
its lowest since July 1993. The weakness in the French market enabled us to find
some attractive valuations and to increase our weighting.
SWITZERLAND
The Morgan Stanley Capital International Switzerland Index rose by 9.6% in U.S.
dollar terms and by 9.8% in Swiss franc terms in the final quarter of the year.
For the full year Switzerland returned 44.1% in U.S. dollar terms, the best
performing market of those covered by the Morgan Stanley Capital International
World Index. The pharmaceutical and insurance sectors have been particularly
strong and represent a significant proportion of the Index. While the strength
of the franc has improved the returns for non-Swiss investors, the Swiss
economic environment continues to disappoint. In the third quarter of 1995,
however, the economy failed to grow for the first quarter since early 1993.
Growth has been depressed by a tightening fiscal policy and poor export growth
hindered by the very strong currency. It was against this background that the
Swiss National Bank cut its discount rate to just 1.5% in December. Investment
has weakened in recent quarters, particularly in construction with machinery and
equipment starting to fall in the third quarter. Private consumption continues
to be weak, hurt by the introduction of VAT on goods and services and the poor
situation for wages and unemployment. We continue to find cheap and well managed
companies in Switzerland, of which many will benefit from a weaker Swiss franc.
NETHERLANDS
For the fourth quarter of 1995, the Morgan Stanley Capital International
Netherlands Index increased by 6.1% in U.S. dollar terms and by 6.7% in local
currency terms. Of the hard currency economies in Europe, the Netherlands is the
only country to keep their economic recovery on track. The economy should match
last year's 2.7% rate. The export market has been stronger than Germany and
Switzerland in recent months, despite the appreciation of the guilder. The
driving force in the recovery, however, has been domestic spending with growth
in both investment and consumption. Private consumption has been aided by higher
wages and an improved employment picture while real incomes have benefited from
the drop in inflation. At the start of the year inflation was around 2.5%, in
line with Germany. It has since fallen to 1.5% below the German level. The sharp
fall in inflation during the mid-year was due to lower food prices, however,
there could be some pick up in early 1996 due to the one-off effects of
selective VAT increases and from energy taxes. The level of imports has
increased gradually on the back of stronger demand and the strong guilder; if
the currency strength continues we will see further pressure on exports. The
Netherlands is a market in which we remain overweight as we continue to find
cheap, well managed businesses.
SPAIN
During the final quarter of 1995 the Morgan Stanley Capital International Spain
Index rose by 9.1% in U.S. dollar terms and by 7.5% in local currency terms. The
country continues to suffer from political and economic concerns and yet it had
one of the best performing markets in Europe in 1995, up nearly 30% in U.S.
dollar terms. Performance of individual stocks, however, has been mixed and two
of the best performing sectors have been banks and electrical utilities. The
political uncertainty continues in Spain with elections now expected in March.
The general consensus is that the Popular party will win, thereby replacing the
long-established socialist rule. This should help the equity markets by removing
uncertainty and will mean a budget is put in place for 1996. The economic
climate has shown some signs of improving over the last few months. Headline
inflation in 1995 has fallen from 5.2% in April to 4.4% in November due mainly
to wage moderation and lower domestic demand growth. The unemployment picture is
also improving, down from over 24% at the beginning of the year to below 23% in
the third quarter. Consumption remains weak, however, due primarily to low
income growth and high savings; selectively Spain remains a good market for the
value investor.
ITALY
The Morgan Stanley Capital International Italy Index fell by 1.5% in the final
quarter of the year and by 3.0% in Italian lira terms. It has been a volatile
time for the Index with a fall of more than 5% in
- --------------------------------------------------------------------------------
International Equity Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
November before a recovery of 9.5% in December. The recently released third
quarter GDP number was better than market expectations with quarter on quarter
growth of 1.9% which means an annualized rate of 3.5%, a faster growth rate
among the major economies. Growth continues to be driven by exports helped by
the collapse of the lira in recent years. There are signs now, however, that
growth is spreading to other parts of the economy. Investment spending has
picked up. While there has been an improvement in private consumption, this has
been held back by the tax increases over the last year. The downside of the
currency depreciation has been the high levels of inflation that continue to dog
the economy. The most recent numbers show inflation running at 8.5%. The
valuation levels available to investors in Italy continue to look attractive.
U.K.
In the last quarter of 1995, the Morgan Stanley Capital International U.K. Index
increased by 3.2% in U.S. dollar terms and by 5.2% in local currency. Overall,
for 1995, these figures were respectively 21.3% and 22.2%.
Quarterly economic data continued to show a slowing U.K. economy, with an
encouraging inflationary environment. Inflation remained flat at 2.9%
year-on-year in November, following its sharp fall from 3.1% year-on-year in
September to 2.9% year-on-year in October. Continued anticipated weakness in
economic activity should subdue the outlook for inflation in 1996. Manufacturing
output rose by a weak 1.1% year-on-year in October (0.2% month-on-month)
compared with 0.7% year-on-year in September. Continued weakness is likely in
coming months as production is cut to run down stocks. Retail sales of 1.0%
year-on-year in November compare favorably with 0.3% in October, reversing the
sharp decline in August 1995 of (-0.7)% month-on-month which was attributed to
hot weather.
The Budget of November 28, 1995 was received as fiscally responsible by the
market, given the challenging political backdrop, with L3.1billion of personal
income tax cuts (financed by spending cuts) towards the lower end of
expectations. Interest rates were cut from 6.75% to 6.50% on December 13, 1995.
Best performing stocks in the quarter included pharmaceuticals, retail banks on
a rosier interest rate scenario, integrated oils on the back of the increased
oil price, and building and construction, led principally on renewed hope for
housing.
The year as a whole has seen a divergence in market sector performance. The best
performers have been internationally-orientated larger stocks with good earnings
momentum and interest rate sensitives, both ideally with a takeover spin as
well. Best performing sectors on a total return basis have been pharmaceuticals,
banks and other financials, breweries and market-referential insurance, and life
insurance. The worst performers have in general been smaller capitalization
stocks as a group and those with a sluggish earnings outlook. Low dividend
growth high yielders have not been protected by a more favorable interest rate
environment. The worst performing sectors included gas distribution, paper and
printing, textiles, transport and building materials.
1995 leaves the market discounting further interest rate cuts and more takeover
activity. In a low inflation, low interest rate environment, it seems likely
that the market will continue to pay up for growth. Accordingly, value remains
scarce in the U.K. market entering 1996.
JAPAN
The Japanese stock market continued to recover from its June lows in the final
quarter, with the Morgan Stanley Capital International Japan Index appreciating
9.9% in yen terms but a mere 5.1% in U.S. dollar terms.
As long as Japan's banking crisis persists, it is clear that the Bank of Japan
will pursue an overtly easy monetary policy, a corollary of which is
extraordinarily low short-term interest rates, which makes equities attractive.
With Japanese savings accounts yielding a mere 0.5%, Japanese stocks must seem
attractive with a yield of 0.7%. Meanwhile, it appears that the country's fiscal
stimulus of prior years combined with continuous increases in public spending is
pulling the economy out of the doldrums while the yen's weakness is another
substantial positive for economic activity.
This is a remarkably positive combination of circumstances for the stock market
and the current state of high confidence in its prospects is readily
understandable. However, it is difficult to see how long these circumstances can
continue. The Bank of Japan has always been the most disciplined of central
banks in its conduct of monetary policy and one should expect it to curb
monetary growth as soon as economic activity accelerates and the banking system
stabilizes. It should also be noted that disappointing tax revenues, stimulatory
government spending programs and
- --------------------------------------------------------------------------------
International Equity Portfolio
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
tax cuts have done significant damage to Japan's government finances. Excluding
social security surpluses, the Japanese government deficit will total 8% of GNP
in the current fiscal year. It seems sensible to suppose that any moderate
economic recovery will lead to some fiscal tightening and it is no secret that
the Ministry of Finance wishes to raise VAT to offset corporate tax revenues
lost permanently since the heady days of the late eighties.
As to the internal dynamics of the stock market there will no doubt be
significant earnings recoveries reported for the financial years ending March
1996 and March 1997 but, in our view, these will not be sufficient to drive the
market higher if it is facing rising interest rates at both the long and short
end and the clear need for fiscal tightening. Though the Japanese stock market
still has a bit of its second honeymoon left, it is important to recognize that
prices never went as low as they would have without a government coordinated
rescue. Therefore, the fundamental scope for recovery is correspondingly lower.
Indeed, at the time of writing, the quality end of the market is at an all time
high and only those sectors that enjoyed most of the speculative excesses of the
late eighties are still languishing well below all-time highs. These sectors may
well enjoy a minor renaissance as long as external factors remain so
extraordinarily favorable, but they lack value characteristics on both a
relative and absolute basis.
The best of Japan's recovery has already happened for the value investor as the
best and cheapest companies have led the market towards testing a recovery high.
The impressive upward momentum of this market is likely to find its way into the
more ethereal sectors in the quarters ahead before it confronts the realities of
rising interest rates, the need for higher taxes and the end to currency
depreciation.
HONG KONG
In the final quarter of 1995 the Hong Kong stock market continued its impressive
recovery, the Morgan Stanley Capital International Hong Kong Index appreciating
5.8% in U.S. dollar terms and 3.8% in Hong Kong dollar terms.
Of all non-U.S. markets, Hong Kong is the most sensitive to movements in U.S.
interest rates due to the peg between the two currencies and the stock market's
extreme fundamental and psychological sensitivity to residential property
prices. As the quarter was characterized by falling U.S. interest rates, the
Hong Kong market reacted positively to a trend that has continued into the New
Year. We have been happy to admit that the fundamental resilience of the Hong
Kong property market has surprised us. However, we view current stock prices as
discounting a meaningful recovery of up to 15% in residential prices during
1996. With inflation continuing to fall and the psychological burden of 1997
becoming a more meaningful factor as time moves on, we think all good news is in
the market.
Furthermore, there are two factors to take into consideration when committing
funds to Hong Kong at its current elevated levels. First there is the question
of local ownership of the market in the context of June 1997; despite the huge
influence of foreigners in the Hong Kong market, it is still substantially owned
by a small number of local pension funds and, more importantly, Chinese
families. The temptation of these two important types of shareholder to at least
trim exposure to Hong Kong at current attractive prices must be considerable
given the less than diplomatic noises emanating from Peking on the Hong Kong and
Taiwan issues. The second factor to keep in mind is the persistent negative cash
flow generated by Hong Kong's corporate sector despite very high reported
profits. It is our belief that the blowout of net debt positions from net cash
among the principal non-bank companies in Hong Kong in recent years reflects the
capital intensity of their operations particularly in their need to rebuild land
banks. We conclude that non-cash charges like depreciation and amortization
against Hong Kong profit reports are lower than they should be and earnings are
consequently overstated.
Therefore, while we expect the market to benefit from any fall in U.S. interest
rates, it is currently fundamentally extended. Isolated value is still
discernible in the property investment sector.
AUSTRALIA
During the fourth quarter of 1995 the Australian stock market made steady
progress with the Morgan Stanley Capital International Australia Index
appreciating 3.0% in Australian dollar terms but a mere 1.6% in U.S. dollar
terms.
The mining sector which is dominated by international investors lost momentum as
the last quarter progressed, reflecting investor concern for the outlook for
metals prices given the perceived slowing in the economies of the United States
and Europe. Copper was particularly weak, and aluminium remained subdued. Though
we believe the outlook for the other
- --------------------------------------------------------------------------------
International Equity Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
metals is more promising, we believe that current share prices in Australia's
mining sector reflect the most favorable pricing development in the underlying
metals. In contrast, the industrials sector has hardly budged in the face of a
strong bond market in the second half of 1995. This reflects concern for the
prospects of the local economy given subdued consumption and a clear slowdown in
the housing sector. In stark contrast, the high yielding bank sector has
continued to exhibit absolute and relative strength, and we believe this area to
be fully valued. As 1996 progresses, the building material sector should rally
as the housing downturn bottoms and the prospects for non residential
construction improve. After three years of flat stock prices this is probably
the most attractive area in this market.
- --------------------------------------------------------------------------------
International Equity Portfolio
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (88.4%)
AUSTRALIA (4.6%)
3,535,000 Brambles Industries Ltd........................... $ 39,411
5,069,000 CSR Ltd........................................... 16,502
+402,000 McPherson's Ltd................................... 57
3,934,882 Westpac Banking Corp.............................. 17,430
----------
73,400
----------
BELGIUM (1.1%)
+52,500 Arbed S.A......................................... 5,940
254,000 G.I.B. Holdings Ltd............................... 11,151
2,156 G.I.B. Holdings Ltd. (New)........................ 92
----------
17,183
----------
DENMARK (1.8%)
88,000 Novo-Nordisk A/S, Class B......................... 12,036
350,000 Unidanmark A/S, Class A (Registered).............. 17,321
----------
29,357
----------
FINLAND (1.2%)
350,000 Huhtamaki Oy, Series 1............................ 8,449
+168,467 Merita, Ltd., Class A............................. 426
215,000 Nokia AB Oy, Series A............................. 8,453
125,200 Pohjola Insurance Co., Ltd., Class B.............. 1,612
----------
18,940
----------
FRANCE (7.2%)
249,500 Banque Nationale de Paris......................... 11,255
13,495 Bongrain S.A...................................... 7,606
133,000 Cie de Saint Gobain............................... 14,720
17,300 Cie Financiere de Paribas S.A., Class A........... 949
+153,050 Credit Lyonnaise CDI.............................. 7,345
246,975 Elf Aquitaine..................................... 18,197
119,100 Peugeot S.A....................................... 15,711
420,300 Thomson CSF S.A................................... 9,364
230,644 Total S.A., Class B............................... 15,565
324,045 Valeo S.A......................................... 15,008
----------
115,720
----------
GERMANY (10.8%)
110,000 BASF AG........................................... 24,779
105,000 Bayer AG.......................................... 27,885
50,000 Commerzbank AG.................................... 11,873
28,750 Hoechst AG........................................ 7,820
85,500 Karstadt AG....................................... 35,061
73,125 Mannesmann AG..................................... 23,280
+24,900 Varta AG.......................................... 4,775
+580,000 Veba AG........................................... 24,836
37,500 Volkswagen AG..................................... 12,579
----------
172,888
----------
HONG KONG (0.6%)
**90,600 China Light & Power Co., Ltd...................... 410
5,375,500 Hong Kong Land Holdings Ltd....................... 9,945
----------
10,355
----------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
ITALY (2.2%)
+3,120,000 Olivetti Di Risp.................................. $ 2,501
+2,560,500 Olivetti Di Risp (NCS)............................ 1,301
+1,297,317 SME Meridonale.................................... 2,651
9,000,000 Stet Di Risp (NCS)................................ 18,360
4,720,000 Telecom Italia S.p.A.............................. 7,340
2,655,000 Telecom Italia S.p.A. Di Risp (NCS)............... 3,246
----------
35,399
----------
JAPAN (24.1%)
1,050,000 Aisin Seiki Co., Ltd.............................. 13,831
1,000,000 Canon, Inc........................................ 18,111
115,000 Chudenko Corp..................................... 3,943
1,345,000 Daibiru Corp...................................... 15,241
1,465,000 Daicel Chemical Industry Ltd...................... 8,329
660,000 Daikin Industries Ltd............................. 6,456
1,037,000 Dainippon Ink & Chemical, Inc..................... 4,831
3,600 East Japan Railway Co............................. 17,503
2,150,000 Fuji Photo Film Ltd............................... 62,053
2,700,000 Hitachi Ltd....................................... 27,196
2,100,000 Kao Corp.......................................... 26,034
650,000 Kirin Brewery Co., Ltd............................ 7,680
1,700,000 Matsushita Electric Industries Ltd................ 27,661
81,000 Murata Manufacturing Co., Ltd..................... 2,981
2,400,000 Nichido Fire & Marine Insurance Co., Ltd.......... 19,293
1,836 Nippon Telegraph & Telephone Corp................. 14,848
221,000 Ryosan Co......................................... 6,079
350,000 Sony Corp......................................... 20,983
1,080,000 Stanley Electric Co............................... 6,485
1,450,000 Sumitomo Marine & Fire Insurance Co............... 11,909
3,000,000 Sumitomo Rubber Industries........................ 25,046
298,000 TDK Corp.......................................... 15,210
742,000 Toyo Seikan Kaisha Ltd............................ 22,206
37,150 Yurtec Corp....................................... 651
----------
384,560
----------
NETHERLANDS (9.3%)
705,168 ABN Amro Holdings N.V............................. 32,123
112,500 Akzo Nobel N.V.................................... 13,012
81,059 Hollandsche Beton Groep N.V....................... 12,376
575,744 Internationale Nederlanden Groep N.V.............. 38,462
247,500 Koninklijke Bijenkorf Beheer N.V.................. 16,349
153,050 Nedlloyd Groep N.V................................ 3,472
773,000 Philips Electronics N.V........................... 27,938
39,415 Unilever N.V. (Certificate)....................... 5,539
----------
149,271
----------
NEW ZEALAND (0.4%)
2,144,627 Fisher & Paykel Industries Ltd.................... 6,520
+**392,500 Smith City Group Ltd.............................. --
----------
6,520
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
NORWAY (1.4%)
3,180,000 Den Norske Bank A/S,.............................. $ 8,341
573,800 Hafslund Nycomed, Class B......................... 14,551
----------
22,892
----------
SINGAPORE (2.1%)
9,950,000 Jardine Strategic Holdings, Inc................... 30,447
3,265,000 Neptune Orient Lines Ltd. (Foreign)............... 3,670
----------
34,117
----------
SPAIN (3.8%)
+297,500 Grupo Duro Felguera S.A........................... 1,050
2,345,000 Iberdrola S.A..................................... 21,459
2,710,000 Telefonica Nacional de Espana S.A................. 37,533
----------
60,042
----------
SWEDEN (3.0%)
28,600 Electrolux AB, Series B........................... 1,174
+350,000 Nordbanken AB..................................... 6,062
2,400,000 Skandinaviska Enskilda Banken, Class A............ 19,881
660,600 S.K.F. AB, Class B................................ 12,636
511,300 Svenska Cellulosa AB, Class B..................... 7,931
----------
47,684
----------
SWITZERLAND (5.9%)
+2,605 Ascom Holdings AG (Bearer)........................ 2,654
25,008 Ciba-Geigy AG (Registered)........................ 22,005
16,000 Forbo Holding AG (Registered)..................... 6,838
33,000 Nestle S.A. (Registered).......................... 36,505
2,410 Schindler Holding AG (Participating
Certificates)................................... 2,496
15,550 Sulzer AG (Participating Certificates)............ 8,291
12,500 Sulzer AG (Registered)............................ 7,152
+10,815 SwissAir (Registered)............................. 7,876
----------
93,817
----------
UNITED KINGDOM (8.9%)
1,260,000 Associated British Foods plc...................... 7,218
1,360,104 Automated Security Holdings plc................... 570
4,905,000 Christian Salvesen plc............................ 20,142
1,487,721 Forte plc......................................... 7,634
2,524,100 Grand Metropolitan plc............................ 18,183
4,841,985 John Mowlem & Co. plc............................. 4,473
1,624,000 Kwik Save Group plc............................... 12,707
843,000 McAlpine (Alfred) plc............................. 1,937
+1,417,095 Pilkington plc.................................... 4,444
1,470,645 Reckitt & Colman plc.............................. 16,279
2,885,064 Rolls-Royce plc................................... 8,466
1,429,956 Royal Insurance Holdings plc...................... 8,480
755,000 Unilever plc...................................... 15,507
6,145,000 WPP Group plc..................................... 15,646
----------
141,686
----------
TOTAL COMMON STOCKS (Cost $1,152,875).......................... 1,413,831
----------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (3.7%)
GERMANY (3.7%)
+5,200 Fag Kugelficsher AG............................... $ 646
77,700 RWE AG............................................ 21,675
29,525 Spar Handels AG................................... 6,342
125,000 Volkswagen AG..................................... 30,319
----------
TOTAL PREFERRED STOCKS (Cost $46,959).......................... 58,982
----------
CONVERTIBLE PREFERRED SECURITIES (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc. IDR, 7.50%,
5/07/97......................................... 2,012
----------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............................. 6
2,196 International Nederlanden Groep N.V............... 12
----------
18
----------
TOTAL CONVERTIBLE PREFERRED SECURITIES (Cost $1,923)........... 2,030
----------
<CAPTION>
NO. OF
RIGHTS
- -----------
<C> <S> <C>
RIGHTS (0.1%)
UNITED KINGDOM (0.1%)
+354,273 Pilkington plc (Cost $843)........................ 1,100
----------
TOTAL FOREIGN SECURITIES (92.3%) (Cost $1,202,600)............. 1,475,943
----------
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
$ 62,548 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$62,585, collateralized by $40,380 United States
Treasury Bonds, 12.00%, due 8/15/13, valued at
$63,800 (Cost $62,548).......................... 62,548
----------
FOREIGN CURRENCY (3.4%)
AUD 3 Australian Dollar................................. 3
GBP 14,074 British Pound..................................... 21,850
DEM 14,857 Deutsche Mark..................................... 10,361
FIM 22,998 Finnish Markka.................................... 5,288
HKD 3 Hong Kong Dollar.................................. --
ITL 174 Italian Lira...................................... --
JPY 1,595,171 Japanese Yen...................................... 15,450
NLG 44 Netherlands Guilder............................... 27
ESP 19 Spanish Peseta.................................... --
SEK 2,753 Swedish Krona..................................... 415
----------
TOTAL FOREIGN CURRENCY (Cost $53,560).......................... 53,394
----------
TOTAL INVESTMENTS (99.6%) (Cost $1,318,708).................... 1,591,885
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Equity Portfolio
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
------------------------------------------------------------
OTHER ASSETS (1.9%)
Receivable for Portfolio Shares Sold............ $ 21,040
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................ 3,637
Receivable for Investments Sold................. 2,910
Dividends Receivable............................ 1,499
Foreign Withholding Tax Reclaim Receivable...... 1,136
Interest Receivable............................. 28
Other........................................... 103 $ 30,353
-----------
LIABILITIES (-1.5%)
Payable for Portfolio Shares Redeemed........... (10,574)
Payable for Investments Purchased............... (9,689)
Investment Advisory Fees Payable................ (2,986)
Administrative Fees Payable..................... (203)
Custodian Fees Payable.......................... (143)
Other Liabilities............................... (113) (23,708)
----------- ----------
NET ASSETS (100%).............................................. $1,598,530
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 105,547,323 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $15.15
----------
----------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars or foreign currency as
indicated below:
</TABLE>
<TABLE>
<CAPTION>
NET
IN UNREALIZED
CURRENCY EXCHANGE GAIN
TO DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------------ -------- ----------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
FIM 1,602 $ 368 1/02/96 DEM 526 $ 366 $ (2)
SGD 354 251 1/04/96 U.S.$ 251 251 --
U.S.$ 251 251 1/04/96 SGD 354 251 --
SGD 394 278 1/05/96 U.S.$ 278 278 --
DEM 95,500 66,730 3/01/96 U.S.$66,193 66,193 (537)
DEM 40,000 28,160 8/09/96 U.S.$28,751 28,751 591
FRF 153,000 31,289 10/11/96 U.S.$30,551 30,551 (738)
JPY 5,801,100 58,287 10/11/96 U.S.$61,000 61,000 2,713
NLG 118,000 74,654 11/14/96 U.S.$76,106 76,106 1,452
ESP 5,400,000 43,036 12/02/96 U.S.$42,584 42,584 (452)
JPY 3,100,000 31,341 12/24/96 U.S.$31,951 31,951 610
-------- -------- ---------
$334,645 $338,282 $ 3,637
-------- -------- ---------
-------- -------- ---------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
** -- Security is valued at fair value -- See Note A-1
CDI -- Certificate of Investment
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
FRF -- French Franc
SGD -- Singapore Dollar
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT
INDUSTRY (000) OF NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment................. $ 312,212 19.5%
Consumer Goods.................... 385,335 24.1
Energy............................ 80,467 5.0
Finance........................... 224,994 14.1
Materials......................... 195,044 12.2
Multi-Industry.................... 61,125 3.8
Services.......................... 216,766 13.6
--------- ---
$1,475,943 92.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 7.9%
Denmark 1.8%
Finland 2.7%
France 8.2%
Germany 9.1%
Hong Kong 1.9%
Ireland 2.0%
Italy 2.6%
Japan 12.7%
Netherlands 6.9%
New Zealand 2.0%
Norway 0.8%
Spain 5.2%
Switzerland 16.9%
United Kingdom 17.2%
Other 2.1%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP
MSCI EAFE INDEX (1) PORTFOLIO
<S> <C> <C>
12/15/92* $500,000 495,000
12/31/92 498,985 504,500
12/31/93 661,450 733,240
12/31/94 712,900 756,343
12/31/95 792,816 776,008
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 2.60% 16.30%
INDEX............................ 11.21 16.35
<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 International Small Cap Portfolio seeks long-term 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 U.S. $500 million is used as
our definition of "small."
The total return of the Portfolio for the year ended December 31, 1995 was 2.60%
as compared to 11.21% for the Morgan Stanley Capital International (MSCI) EAFE
Index for the same period. The average annual total return of the Portfolio for
the period from inception in December 1992 through December 31, 1995 was 16.30%
compared to 16.35% for the MSCI EAFE Index for the same period.
The disappointing relative performance of the Portfolio in 1995 reflects a
particularly difficult fourth quarter for small caps when measured against the
predominantly large cap EAFE Index. Uncertainty and caution among the investment
community increased as falling commodity prices amid evidence of high inventory
levels fed fears of economic weakness across Western Europe in particular.
Against this backdrop small caps fared badly experiencing significant
underperformance. In the U.K. and Switzerland, for example, small caps
underperformed large caps by over 5% and 10%, respectively (as measured by the
U.K. Hoare Govett Small Companies Index and Vontobel Swiss Small Companies
Index). The general sell off of cyclical stocks was particularly pronounced in
the small cap sector where they represent a far higher portion of the universe.
The Portfolio's underweighting in the strong Japanese market was also a clear
negative although yen weakness and good relative stock selection in Japan went
some way to offset this. Stock selection in Australia was also notably strong.
1995 has been a grim year for small caps. Unexciting economic growth, high real
interest rates, high levels of unemployment and a lack of clarity over the
direction and certainly the magnitude of economic growth left the investment
community playing it safe. Blue chips and, in particular, the financial,
utilities
- ------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND ARE FOR INFOMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS
A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT
PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
and pharmaceutical sectors benefited, all being poorly represented by small
caps. Having kept largely apace with the EAFE Index due to good relative stock
selection in the first three quarters of the year combined with the benefits of
being underweight the weak Japanese market in the first half, we were
disappointed to see these benefits evaporate in the final months of the year.
Looking forward we believe that economic growth will resume in 1996 and that the
current de-stocking process will prove to be a temporary adjustment post
excessive commodity price inflation earlier in the year. We do, however, remain
concerned about the high level of unemployment across Europe. Expectations that
German consumers will spend rather than save their new tax savings may prove to
be illusory.
In Japan, in contrast, an overly easy monetary policy together with the huge
fiscal stimulus of recent years is driving economic recovery aided by yen
weakness. Reported earnings for the March 1996 term will show strong gains,
albeit off a very depressed base. Ongoing deregulation and outward investment,
however, are unlikely to reduce the spectre of unemployment and we believe the
much touted consumer recovery in Japan will prove disappointing. Interest rates
are at unsustainably low levels given the fiscal and monetary policies at work.
Despite this somewhat cautious outlook, we believe the extremely low valuations
of small caps is unjustified. As economic growth resumes, the wide valuation gap
with large caps should attract increasing interest from both investors and
through corporate activity. Merger and acquisition activity in 1995 was mainly
concentrated in larger companies, but with four of the Portfolio's holdings bid
for last year, we believe that current valuations will attract more. The
Portfolio will continue to invest in cheaply valued high quality franchise
businesses with strong finances and good management. Critically, we will
endeavour to avoid those small companies too dependent on their domestic market
- -- inevitable losers as globalization continues -- and companies whose share
holding structures do not provide sufficient protection to minority
shareholders.
Looking forward we do not anticipate any major shift in the Portfolio's
geographic mix. This is purely a product of bottom-up stock selection and the
majority of new ideas coming through in our value screens are still in Europe
and Australia. Japanese small caps lagged last year but little quality value is
apparent. Too many Japanese small caps will be victims of the globalization
trend mentioned above. Their domestic niches will be eroded by a combination of
increasing competition as non-tariff barriers in Japan fall and by the
investment yen leaving Japan. The hollowing out of Japan's manufacturing heart
is a stark reality. Yet many of the companies in our value screens lack either
the critical size to develop new markets or the finances to follow their
Japanese customers overseas.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
COMMON STOCKS (93.9%)
AUSTRALIA (7.9%)
92,344 Arnotts Ltd....................................... $ 618
564,678 Auspine Ltd....................................... 1,645
+990,079 Bains Harding Ltd................................. 316
1,566,167 BRL Hardy Ltd..................................... 2,503
140,833 BRL Hardy Ltd. (New).............................. 225
1,100,000 Burswood Property Trust........................... 1,472
2,351,732 Country Road Ltd.................................. 3,059
2,186,801 E.R.G. Ltd........................................ 2,617
+467,800 McPherson's Ltd................................... 66
5,638,088 Parbury Ltd....................................... 2,179
1,721,500 Solution 6 Holdings Ltd........................... 1,024
----------
15,724
----------
DENMARK (1.8%)
+107,000 SYD-Sonderjylland Holdings........................ 3,466
----------
FINLAND (2.7%)
125,000 Amer-Yhtymae Oy, Class A.......................... 1,951
180,000 Hartwall Oy, Class A.............................. 3,352
----------
5,303
----------
FRANCE (8.2%)
72,000 Dauphin O.T.A..................................... 2,941
54,000 De Dietrich et Compagnie.......................... 2,371
31,150 Europeene de Propulsion S.A....................... 2,125
8,100 Galeries Layfayette............................... 1,975
+17,700 Legris Industries S.A............................. 576
24,500 Precision Mecaniques Labinal S.A.................. 2,717
91,756 Sediver S.A....................................... 3,560
----------
16,265
----------
GERMANY (5.3%)
13,000 Duerr Beteiligungs AG............................. 3,889
10,688 Sinn AG........................................... 2,013
+20,000 Varta AG.......................................... 3,836
2,210 Vossloh AG........................................ 729
----------
10,467
----------
HONG KONG (1.9%)
445,000 Jardine International Motor Holdings Ltd.......... 506
+5,200,000 Pico Far East Holdings Ltd........................ 666
780,000 Tungtex Holdings Co., Ltd......................... 80
5,862,000 Vitasoy International Holdings Ltd................ 2,502
----------
3,754
----------
IRELAND (2.0%)
1,070,000 Avonmore Foods plc, Class A....................... 2,176
692,472 Green Property plc................................ 1,863
----------
4,039
----------
ITALY (2.4%)
+1,172,800 Editoriale L'Expresso S.p.A....................... 2,031
+754,000 Unicem Di Risp (NCS).............................. 1,913
81,000 Vincenzo Zucchi S.p.A............................. 408
212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 468
----------
4,820
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
JAPAN (12.7%)
15,000 Exedy Corp........................................ $ 238
231,000 Foster Electric Co., Ltd.......................... 1,425
+175,000 Hankyu Realty..................................... 1,422
707,000 Japan Oil Transportation.......................... 4,451
213,000 Japan Vilene Co., Ltd............................. 1,343
134,000 Kansei Corp....................................... 1,085
243,000 Kirin Beverage Corp............................... 3,272
124,000 Nifco, Inc........................................ 1,621
335,000 Nissan Fire & Insurance Co........................ 2,349
549,000 Toc Co............................................ 5,477
+327,000 Tokai Senko K.K................................... 1,302
170,000 Toyoda Gosei Co................................... 1,177
----------
25,162
----------
NETHERLANDS (6.9%)
+62,600 Ahrend Groep N.V.................................. 2,060
26,800 Hollandsche Beton Groep N.V....................... 4,092
28,885 Industriemij Welna N.V............................ 837
141,000 Koninklijke Van Ommeren N.V....................... 4,393
36,000 Konin Nijverdal -- Ten Carte N.V.................. 1,519
8,802 Polynorm N.V...................................... 751
----------
13,652
----------
NEW ZEALAND (2.0%)
659,729 Fisher & Paykel Industries Ltd.................... 2,005
1,634,800 Whitcoulls Group Ltd.............................. 2,031
----------
4,036
----------
NORWAY (0.8%)
11,500 Adelsten, Class B................................. 1,136
+228,020 Oceanor........................................... 522
----------
1,658
----------
SPAIN (5.2%)
+346,000 Asturiana del Zinc S.A............................ 2,744
92,840 Bodegas y Bebidas S.A............................. 2,373
92,770 Gas y Electricidad S.A............................ 5,193
----------
10,310
----------
SWITZERLAND (16.9%)
3,715 Bobst AG (Bearer)................................. 5,797
4,965 Bucher Holdings AG (Bearer)....................... 2,841
9,800 Edipresse S.A. (Bearer)........................... 2,634
7,400 Elco Looser Holding AG (Registered)............... 3,015
3,400 Hero AG (Bearer).................................. 1,680
995 Kouni Reisen Holdings, Class B (Registered)....... 1,596
2,750 LEM Holdings AG................................... 970
7,035 Magazine Globus (Participating Certificates)...... 4,025
5,850 Porst Holding AG (Bearer)......................... 1,009
590 Schweizerische Industrie-Gesellschaft Holdings
(Bearer)........................................ 1,233
4,400 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 4,463
+4,250 Von Moos Holding AG (Bearer)...................... 350
+4,160 Zellweger Luwa AG (Bearer)........................ 4,057
----------
33,670
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (17.2%)
4,502,198 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... $ 4,438
+559,500 Asprey plc........................................ 2,172
31,700 Bespak plc........................................ 155
+895,000 Blagden Industries plc............................ 1,987
584,000 Bluebird Toys plc................................. 2,919
1,266,800 BSM Group plc..................................... 3,048
214,300 Church & Co. plc.................................. 1,211
+**2,540,850 Donelon Tyson plc................................. --
1,895,000 EFG plc........................................... 427
952,000 GEI International plc............................. 1,774
212,000 Hadleigh Industries Group plc..................... 599
2,340,000 Hobson plc........................................ 1,090
390,000 Hornby Group plc.................................. 951
223,000 International Business Communications (Holdings)
plc............................................. 990
877,294 John Mowlem & Co. plc............................. 810
35,365,100 Kendell plc....................................... 549
206,335 Mallett plc....................................... 266
2,662,000 Matthews (Bernard) plc............................ 3,926
157,500 Oriflame International S.A........................ 995
+**2,659,393 Pentos plc........................................ --
345,526 Perry Group plc................................... 783
1,600,000 Shandwick plc..................................... 907
72,000 Sketchley plc..................................... 141
800,000 The 600 Group plc................................. 1,950
275,000 Tibbett & Britten Group plc....................... 1,742
541,700 Waterman Partnership Holdings plc................. 336
----------
34,166
----------
TOTAL COMMON STOCKS (Cost $193,194)............................. 186,492
----------
PREFERRED STOCKS (3.8%)
GERMANY (3.8%)
59,900 Berentzen-Gruppe AG............................... 1,901
1,800 Jil Sander AG..................................... 1,324
7,745 Shaerf AG......................................... 1,053
10,550 Spar Handels AG................................... 2,266
5,410 Wuerttembergische Metallwarenfabrik AG............ 1,098
----------
TOTAL PREFERRED STOCKS (Cost $8,320)............................ 7,642
----------
<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...... 2
----------
SWITZERLAND (0.0%)
+4,600 Zellweger Luwa AG, expiring 5/21/97............... 44
----------
TOTAL WARRANTS (Cost $68)....................................... 46
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
------------------------------------------------------------
CONVERTIBLE DEBENTURE (0.2%)
ITALY (0.2%)
ITL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00
(Cost $329)..................................... $ 285
----------
TOTAL FOREIGN SECURITIES (97.9%) (Cost $201,911)................ 194,465
----------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 337 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$337, collateralized by $337 United States
Treasury Bonds, 8.875%, due 8/15/17, valued at
$348 (Cost $337)................................ 337
----------
FOREIGN CURRENCY (3.1%)
AUD 145 Australian Dollar................................. 108
GBP 1,147 British Pound..................................... 1,781
DEM 6,156 Deutsche Mark..................................... 4,293
HKD 359 Hong Kong Dollar.................................. 46
JPY 9 Japanese Yen...................................... --
NZD 63 New Zealand Dollar................................ 41
----------
TOTAL FOREIGN CURRENCY (Cost $6,246)............................ 6,269
----------
TOTAL INVESTMENTS (101.2%) (Cost $208,494)...................... 201,071
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.7%)
Receivable for Investments Sold................. $ 820
Receivable for Portfolio Shares Sold............ 225
Dividends Receivable............................ 209
Foreign Withholding Tax Reclaim Receivable...... 199
Interest Receivable............................. 16
Other........................................... 12 1,481
------------
LIABILITIES (-1.9%)
Payable for Investments Purchased............... (1,492)
Net Unrealized Loss on Forward Foreign Currency
Exchange Contracts............................ (933)
Payable for Portfolio Shares Redeemed........... (882)
Investment Advisory Fees Payable................ (440)
Custodian Fees Payable.......................... (31)
Bank Overdraft.................................. (29)
Administrative Fees Payable..................... (27)
Other Liabilities............................... (49) (3,883)
------------ ----------
NET ASSETS (100%)............................................... $ 198,669
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 13,299,989 outstanding $.001 par
value shares (authorized 1,000,000,000
shares)......................................... $14.94
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars or foreign currency as
indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- --------- ---------- ------------ --------- -------------
<C> <C> <C> <S> <C> <C>
AUD 388 $ 289 1/03/96 U.S.$ 289 $ 289 --
DEM 587 410 1/04/96 JPY 42,205 409 (1)
CHF 8,750 7,636 3/04/96 U.S.$ 7,204 7,204 (432)
DEM 10,300 7,198 3/04/96 U.S.$ 7,099 7,099 (99)
ESP 675,000 5,521 3/04/96 U.S.$ 5,107 5,107 (414)
JPY 798,840 8,026 10/11/96 U.S.$ 8,400 8,400 374
U.S.$ 8,400 8,400 10/11/96 JPY 800,100 8,039 (361)
--------- --------- -----
$ 37,480 $ 36,547 $ (933)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
** -- Security is valued at fair value -- See Note A-1
NCS -- Non Convertible Shares
CHF -- Swiss Franc
ESP -- Spanish Peseta
ITL -- Italian Lira
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 47,307 23.8%
Consumer Goods........................ 49,238 24.8
Energy................................ 7,937 4.0
Finance............................... 20,583 10.4
Materials............................. 20,257 10.2
Multi-Industry........................ 3,540 1.8
Services.............................. 45,603 22.9
--------- ---
$ 194,465 97.9%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Equipment 31.1%
Consumer Goods 14.9%
Electrical &
Electronics 18.4%
Finance 6.4%
Materials 7.4%
Multi-Industry 1.5%
Services 10.2%
Other 10.1%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO MSCI JAPAN INDEX (1)
<S> <C> <C>
4/25/94* $500,000 $500,000
12/31/94 $491,500 $512,000
12/31/95 $473,609 $515,533
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ ----------------
<S> <C> <C>
PORTFOLIO........................ -3.64% -3.17%
INDEX............................ 0.69 1.83
<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 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 year ended December 31, 1995 was
- -3.64% as compared to 0.69% for the Morgan Stanley Capital International (MSCI)
Japan Index for the same period. The average annual total return of the
Portfolio for the period from inception in April 1994 through December 31, 1995
was -3.17% as compared to 1.83% for the MSCI Japan Index for the same period.
During 1995 the Japanese equity market fluctuated greatly, beginning the first
six months with a rapid decline then recovering in the latter half of the year
with a remarkable rally to end the year almost flat. The first half was marked
by unexpected events such as the Mexican peso crisis, the Great Hanshin
Earthquake, bankruptcy of Barings Securities, Sarin subway gas attacks and the
unprecedented rise of the yen. Sentiment was greatly affected by the above
mentioned factors and equity market participants questioned Japan's anemic
economic recovery with the relentless strength of the yen.
Since the Clinton administration came to power, the rise of the yen continued
unabated as Japan's massive trade imbalance and structural reforms became
critical to the world outside Japan and currency pressure seemed a last resort
by the world to force Japan to address these issues. In fact, during March 1995
the yen reached a post World War II high of 79.80 yen to the dollar. The
systematic rise of the yen indeed made the authorities in Japan reflect on their
politics and policies and several important reforms took effect resulting in a
meaningful weakness for the yen during the second half of the year.
Supply and demand for equities were also greatly influenced by the foreign
exchange. Firstly, a strong yen is negative for corporate earnings and foreign
and
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
Japanese investors alike began liquidating equity portfolios during the first
two quarters. Furthermore, the spiraling effect of a weak economy resulted in
Japanese financial institutions and corporate investors increasing their
"structural selling" to help offset balance sheets with latent profits held in
equities, as well as life insurance companies and banks raising cash to meet
their solvency margins. With these multiple negative factors occurring
simultaneously the equity market declined by 26% during the first half of 1995.
The second half of 1995 saw a reversal of the currency, with the Japanese
authorities seriously addressing structural reforms, as well as a technical
rebound from extremely oversold conditions. The greatest impact on the market,
in our opinion, was the coordinated currency intervention which occurred from
May 31 by the 12 major countries. Moreover, we believe, at the Halifax G-7
Summit meeting, a consensus was formed that Japan's weak economy and spiraling
deflation was not only Japan's problem but that of the entire world. It appears
a "barter" occurred whereby the world would weaken the yen if Japan compromised
and addressed the need to open their markets and deregulate. Indeed, thereafter
Japan cut the Official Discount Rate to .05% (lowest on record and among G-7
nations) and an additional $140 billion stimulus package was announced in
September, while the Bank of Japan increased base money dramatically to 7.7% in
November. Additionally, the Ministry of Finance deregulated overseas investments
by Japanese life insurance companies. The result of the actions by Japan as well
as the massive currency intervention were reflected in the exchange rate move of
80 yen to 100 yen to the dollars by the end of September.
By December the Tankan report showed a marked increase in confidence by Japanese
corporations, and profits for major business in Japan began showing double digit
growth. The stock market, after hitting its lows in July, staged a powerful
rally, led by electronic companies and international blue-chip issues. Towards
the end of the year, the Daiwa Bank scandal and the Japan premium associated
with the banking sector caused the market to consolidate the rapid gains from
mid-summer. In December, some solutions to the "Junsen's" non-performing loans,
including the use of public funds, were put forth to the Diet, causing a year
end short-squeeze that depressed bank shares. Thus, in 1995 the stock market was
shaped like a classic "V" sign ending approximately at the same level as it
began.
The Portfolio's overweighting in high-tech shares such as Hitachi, Toshiba and
NEC were positive. Performance was negatively impacted by the first-half's
currency hedge, which in retrospect, was too early and dragged full year
performance slightly lower.
The key to 1996 is whether the current economic recovery is for real. We are
optimistic on Japan's prospects for the following reasons:
1) Further weaking of the yen, supported by G-7.
2) Prime Minister Hashimoto's stated purpose is economic recovery and addressing
non-performing loans held by banks.
3) Acceleration of structural changes in Japan.
4) Mr. Hashimoto's leadership abilities to implement policy in a effective
manner.
5) Restructuring by corporate Japan coming to fruition.
We believe that with the yen stable to weakening over the course of the year, it
will have material positive impact on corporate Japan and that private capital
expenditure will recover after being flat for the last 4 years. Private
consumption is already showing signs of improvement and we believe real GDP will
increase 2.5% or more in fiscal 1996, higher than most consensus estimates.
Moreover, corporate profits should accelerate quarter-over-quarter and the stock
market should also rise in anticipation of these earnings gains. Also,
allocation of foreign pension funds to Japanese equities will also likely
increase while individual investors in Japan will return to the equity market in
the current low interest rate environment.
Our strategy is to continue to have overweight positions in economic sensitive
names which comprise value and hold no bank shares which still do not represent
value in our opinion. The 1995 year-end rally in banking shares is viewed as a
temporary phenomenon, in our opinion, and investors should be critically focused
on individual stock selection. The Portfolio currently maintains an approximate
70% hedge on the yen, which we believe to be a critical strategic decision based
on our assumptions of a continuing weakening yen versus the U.S. dollar for the
foreseeable future.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (89.9%)
CAPITAL EQUIPMENT (31.1%)
240,000 Amada Co., Ltd.................................... $ 2,371
132,000 Dai Nippon Printing Co., Ltd...................... 2,237
136,000 Daifuku........................................... 1,923
146,000 Daikin Industries Ltd............................. 1,428
77,000 Fuji Machine Manufacturing Co..................... 2,759
80,000 Kurita Water Industries........................... 2,131
39,000 Kyocera Ltd....................................... 2,897
90,000 Kyudenko Co., Ltd................................. 1,185
60,000 Matsui Construction............................... 467
80,000 Matsushita Communication Industries............... 1,860
360,000 Mitsubishi Heavy Industries Ltd................... 2,870
67,000 Nifco, Inc........................................ 876
80,000 Nippon Pillar Packing............................. 1,023
294,000 Obayashi Corp..................................... 2,335
240,000 Ricoh Co., Ltd.................................... 2,626
300,000 Taisei Corp., Ltd................................. 2,001
260,000 Teijin Seiki Co., Ltd............................. 1,334
62,000 Tokyo Electron Ltd................................ 2,402
60,000 Toshiba Engineering & Construction................ 494
320,000 Tsubakimoto Chain................................. 1,925
----------
37,144
----------
CONSUMER GOODS (14.9%)
113,000 Canon, Inc........................................ 2,047
79,000 Fuji Photo Film Ltd............................... 2,280
131,000 Japan Vilene Co., Ltd............................. 826
37,000 Nintendo Corp., Ltd............................... 2,813
278,000 Nissan Motor Co................................... 2,135
71,000 Sankyo Co., Ltd................................... 1,595
37,000 Shimamura Co., Ltd................................ 1,430
230,000 Suzuki Motor Co., Ltd............................. 2,562
95,000 Yamanouchi Pharmaceutical Co...................... 2,042
----------
17,730
----------
ELECTRICAL & ELECTRONICS (18.4%)
70,000 CMK............................................... 997
344,000 Hitachi Ltd....................................... 3,465
187,000 Matsushita Electric Industries Ltd................ 3,043
85,000 Mitsumi Electric Co., Ltd......................... 2,050
294,000 NEC Corp.......................................... 3,588
28,000 Sony Corp......................................... 1,679
235,000 Stanley Electric Co............................... 1,411
40,000 TDK Corp.......................................... 2,042
464,000 Toshiba Corp...................................... 3,636
----------
21,911
----------
FINANCE (6.4%)
180,000 Daiwa Securities Co., Ltd......................... 2,754
77,000 Hitachi Credit Corp............................... 1,395
50,000 Nichido Fire & Marine Insurance Co., Ltd.......... 402
131,000 Nomura Securities Co.............................. 2,855
43,000 Sumitomo Corp. Leasing Ltd........................ 221
----------
7,627
----------
MATERIALS (7.4%)
171,000 Asahi Tec Corp.................................... 1,136
298,000 Daicel Chemical Industry Ltd...................... 1,694
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
226,000 Kaneka Corp....................................... $ 1,425
60,000 Kansei Corp....................................... 486
128,000 Okura Industrial Co., Ltd......................... 874
155,000 Sanwa Shutter..................................... 1,124
142,000 Sekisui Chemical Co............................... 2,091
----------
8,830
----------
MULTI-INDUSTRY (1.5%)
40,100 FamilyMart........................................ 1,810
----------
SERVICES (10.2%)
82,000 Daibiru Corp...................................... 930
190,000 Inabata & Co...................................... 1,343
117,000 Keihanshin Real Estate............................ 896
146,000 Mitsubishi Estate Co., Ltd........................ 1,824
100,000 Nippon Konpo Unyu Soko............................ 852
269 Nippon Telegraph & Telephone Corp................. 2,175
32,000 Nishio Rent All Co................................ 738
39,000 Sangetsu Co., Ltd................................. 982
35,000 Secom Co., Ltd.................................... 2,434
----------
12,174
----------
TOTAL COMMON STOCKS (Cost $105,078)........................... 107,226
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (7.2%)
REPURCHASE AGREEMENT (7.2%)
$ 8,601 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$8,606, collateralized by $5,665 United States
Treasury Bonds, 11.75%, due 11/15/14, valued at
$8,774 (Cost $8,601)............................ 8,601
----------
FOREIGN CURRENCY (0.0%)
JPY2,734 Japanese Yen (Cost $26)........................... 26
----------
TOTAL INVESTMENTS (97.1%) (Cost $113,705)..................... 115,853
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.1%)
Net Unrealized Gain on Forward Foreign Currency $ 3,571
Exchange Contracts.............................
Receivable for Portfolio Shares Sold............ 67
Dividends Receivable............................ 20
Interest Receivable............................. 4
Other........................................... 4 3,666
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable................ (165)
Administrative Fees Payable..................... (15)
Custodian Fees Payable.......................... (12)
Bank Overdraft.................................. (6)
Other Liabilities............................... (43) (241)
---------- ----------
NET ASSETS (100%)............................................. $ 119,278
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 12,868,920 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $9.27
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
JPY 1,649,900 $ 16,099 2/26/96 U.S.$17,500 $ 17,500 $ 1,401
JPY 2,064,876 20,162 2/29/96 U.S.$21,300 21,300 1,138
JPY 2,522,843 24,716 3/25/96 U.S.$25,500 25,500 784
JPY 1,350,000 13,332 5/22/96 U.S.$13,580 13,580 248
--------- --------- -----------
$ 74,309 $ 77,880 $ 3,571
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 10.3%
Brazil 52.9%
Colombia 2.6%
Mexico 31.9%
Venezuela 2.7%
Other -0.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LATIN AMERICAN
MSCI EMERGING MARKETS GLOBAL LATIN AMERICAN INDEX (1) PORTFOLIO
<S> <C> <C>
1/18/95* 500,000 500,000
12/31/95 459,800 456,600
*Commencement of operation
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL
RETURN(2)
------------
YTD
------------
<S> <C>
PORTFOLIO..................................... -8.68%
INDEX......................................... -8.04
<FN>
1. The MSCI Emerging Markets Global Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 December 31, 1995, the
total return of the Portfolio was -8.68% compared with -8.04% for the Morgan
Stanley Capital International ("MSCI") Emerging Markets Global Latin America
Index for the same period.
The negative performance of the Latin markets in the final quarter of 1995 was
attributable primarily to peso weakness in Mexico and political infighting that
stalled reforms in Brazil. The markets were also subject to tax-loss selling. By
the end of November, however, the markets stabilized and commenced a rally
driven by short-covering and bottom fishing in view of the region's improving
fundamentals.
The Portfolio's underperformance was a result of its overweighting of Brazil and
interest sensitive Mexican stocks and its underweighting of Chile and Argentina.
While 1995 was a disappointing year, the Portfolio's strategy is to invest in
Latin American equities based on secular driving forces which we believe will
produce absolute and relative outperformance over the medium term. To this end,
we believe that Brazil and Mexico will rebound more dramatically than the more
defensive markets such as Chile.
Over the fourth quarter, the MSCI Index for Brazil decreased 11% in U.S. dollars
resulting in a net decrease of 21% for 1995. The government was successful in
breaking the constitutional monopolies in the oil and telecom sectors. Year-end
foreign reserves reached a record level of U.S.$50 billion. The government
engineered a cooling of the economy, slowing GDP growth from 10.4% in Q1 to 4.5%
for the full year. 1995 saw a spectacular reduction in the inflation rate to 22%
for the year from 900% in 1994. All the while, Cardoso maintained approval
ratings of over 50%.
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Latin American Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
Nevertheless, the negative sentiment from the Mexico crisis and disappointment
in the pace of reform led to a decline in the Brazilian market for the year. The
market's underperformance has been driven by the tight monetary policy necessary
to control inflation. Real interest rates well over 20% slowed down the economy
and kept financial assets out of the equity market. In the final quarter of the
year a political scandal spooked investors regarding Cardoso's ability to
maintain the momentum for reform.
The key task in 1996 will be the implementation of tax, social security and
administrative changes necessary to reduce the growing fiscal imbalance.
Government expenses on personnel are too high. We believe that with Cardoso's
strong approval ratings, the pro-reform forces will make significant, albeit not
steady progress on these issues throughout 1996. With the fall in inflation and
the desire to reactivate the economy, monetary authorities will likely guide
short-term interest rates markedly lower over the course of the year, and we are
expecting the economy to pick up noticeably in the second half of 1996. Overall,
economic growth should be robust, led by consumption and domestic credit
expansion and, subsequently, investment spending. We are particularly excited by
a) the telecommunications sector, which should demonstrate explosive earnings
growth and is still quite inexpensively valued, b) the beer company Brahma,
which is implementing a huge capacity expansion to keep pace with booming demand
growth, and c) the banking sector, which should benefit by the decline in
interest rates as provisioning levels decline and loan volumes expand, and which
trades at the most attractive valuation levels in Latin America. Thus, the
Portfolio will continue to overweight Brazilian equities into 1996 with an
emphasis on telecom, banking and beverage stocks.
The Mexican stock market declined 4% in U.S. dollars for the fourth quarter,
resulting in a decrease of 23% for the year. The year's performance was driven
by an economic contraction necessary to stabilize the economy after Mexico's
poorly implemented devaluation at the end of 1994. The Zedillo administration's
stabilization program included tight monetary and fiscal policy that led to a
deep recession over the first three quarters of the year, but managed to prevent
the outbreak of uncontrolled inflation that had followed previous devaluations.
The result was a steep increase in unemployment, a plunge in domestic demand
and, consequently, a financial system crisis.
The shock therapy, while painful, has been effective in stabilizing the economy
in the short-term and restructuring it for a higher level of sustainable growth.
Mexico's trade accounts have turned from an U.S.$18.5 billion deficit in 1994 to
an estimated U.S.$7.3 billion surplus for 1995. The current account is likely to
be slightly positive for the year versus a negative U.S.$28 billion in 1994.
Foreign exchange reserves, which had reached a low of U.S.$3.5 billion in
January, grew to an estimated U.S.$16 billion by year-end, mostly as a result of
the U.S. and IMF support programs.
Fourth quarter performance was the result of increased currency volatility. The
peso's weakness resulted from the circular interplay of technical and
fundamental factors arising from Mexico's balance sheet. Weak peso demand from
investors led to a weakening outlook for recovery, which in turn further reduced
peso demand which further reduced the outlook for recovery, etc. The vicious
circle was broken by central bank intervention in the currency markets and
continued support by the government for the banking system.
For 1996, the Portfolio is positioned to take advantage of resumed economic
growth, decreasing interest rates and a stronger peso in real terms. Sentiment
has begun to improve and valuations are not demanding for an economy emerging
from a depression. While monetary policy is likely to remain tight to control
inflation it will be less restrictive than in 1995. Further, Mexico's debt
profile has improved significantly as debt amortizations for 1996 are projected
at U.S.$10 billion versus U.S.$41 billion in 1995. The banking system rescue
package is estimated to cost between 5-10% of GDP and, thus, will create a drag
on growth for several years, yet the system is likely to resume lending in 1996.
Fears of a generalized financial collapse have faded. The Portfolio is
overweight bank, cement and construction companies and underweight stocks
dependent on consumer spending. One exception is FEMSA, a very attractively
valued beer company (the Dos Equis brand).
The MSCI Index for Argentina increased 17% in U.S. dollars for the fourth
quarter and is up 9% for 1995. Argentina's performance is the result of its
demonstrated commitment to its currency convertibility system. In response to
capital outflows as a consequence of the Mexican crisis, the government bravely
chose fiscal austerity. Inflation for the year came in at 1.8%,
- --------------------------------------------------------------------------------
Latin American Portfolio
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
a lifetime low for most Argentines. The currency held firm against the dollar.
Due to the return of confidence and capital flows, economic growth should resume
in 1996 after falling 3% in 1995. While bullish about the macrofundamentals, the
Portfolio is neutral on the market in light of uninspiring earnings growth
forecasts for the listed companies.
The Chilean market decreased 2% in the fourth quarter for a twelve month decline
of 6%. The market was relatively insulated from the general sell-off due to the
country's restrictions on capital repatriation by foreigners and its very
positive macroeconomic fundamentals. However, in light of high relative
valuations and an unpromising outlook on interest rates, currency and earnings
growth, the Portfolio will continue its underweighting of the market.
Peru increased 3% for the quarter bringing its net full year appreciation to
22%. The country's strong GDP growth and rising global commodities prices helped
offset the selling pressure arising from the Mexico crisis. At this point, the
equities seem fully valued and prospective returns are likely to be weak.
Colombia declined 5% for the fourth quarter bringing its net performance to a
decrease of 28% for 1995. The market's performance was attributable to a
presidential election scandal involving illegal campaign contributions. While
Colombian equities are not expensive, the central bank is likely to maintain a
restrictive monetary policy to combat stubborn inflation.
Venezuela decreased 18% in the quarter leaving the market down 29% for the year.
Faced with dwindling foreign exchange reserves and mounting debt arrears,
Venezuela devalued its currency in response to IMF preconditions for financial
assistance. While the country's role as a major oil supplier provides long-term
support, the country is currently stagnating under a huge fiscal deficit. The
equity market also suffers from continued foreign exchange restrictions.
The performance of Latin American equity markets in 1995 was driven by the
fallout from the Mexican currency crisis. This crisis presented a clear
challenge and raised the question of whether Latin America would continue,
unlike in previous crises, along the path of political and economic
modernization. The answer was a clear "Yes", as orthodox economic policies
prevailed in all countries, save Venezuela, in managing the crisis.
1995 represented an extreme cyclical test of the Latin America story. The
long-term, secular trends driving equity appreciation and earnings growth of
Latin American companies remain intact: 1) sound economic policies continue to
enhance competitiveness, improve living standards and increase political
stability throughout most of the region; 2) accelerating global trade continues
to open new markets to Latin American producers; 3) professional management of
economic resources by the private sector continues to increase the efficiency of
companies in the region. In short, the fundamental outlook remains positive for
Latin American companies to continue to achieve high earnings growth and, thus,
for the stock markets' prospects for continuing to deliver superior, long-term
investment performance.
- --------------------------------------------------------------------------------
Latin American Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (62.9%)
ARGENTINA (10.3%)
4,030 Banco de Galicia Y Buenos Aires ADR............... $ 83
144,371 Banco del Suquia, Class B......................... 195
3,473 Banco Frances ADS................................. 93
#19,575 Capex S.A. ADR.................................... 286
8,659 Quilmes Industrial S.A............................ 135
3,950 Telecom Argentina S.A. ADR........................ 188
22,215 Telefonica de Argentina S.A. ADR.................. 606
-------
1,586
-------
BRAZIL (20.2%)
19,488,000 Cia Acos Especiais Itabira........................ 92
+#13,445 Cia Brasileira ADR................................ 134
#1,224 Cia Energetica de Minas Gerais ADR................ 27
#6,842 Cia Energetica de Minas Gerais GDR................ 151
2,295,000 Eletrobras........................................ 621
#27,650 Eletrobras ADR.................................... 375
1,400 Electrobras ADR, Class B.......................... 19
+#3,930 Lojas Americanas S.A. ADR......................... 33
7,240,000 Refrigeracao Parana S.A........................... 13
#6,845 Rhodia-Ster ADS................................... 62
515,000 Servicos de Eletricidade.......................... 165
3,590,000 Telebras.......................................... 139
#25,320 Telebras ADR...................................... 1,200
538,500 Telecomunicacoes de Sao Paulo..................... 78
-------
3,109
-------
COLOMBIA (0.5%)
#15,330 Banco de Colombia GDR............................. 80
-------
MEXICO (31.9%)
79,160 Apasco S.A., Class A.............................. 325
213,980 Banacci, Class B.................................. 359
52,329 Banacci, Class L.................................. 78
+23,950 Cemex CPO ADR..................................... 158
149,248 Cemex S.A., Class A............................... 493
+143,000 Cifra S.A. de C.V., Class B....................... 149
24,160 Empresas ICA S.A. ADR............................. 248
299,100 FEMSA, Class B.................................... 674
+#7,210 Grupo Carso S.A. ADR.............................. 77
#118,585 Grupo Financiero Bancomer ADR..................... 689
13,270 Alfa S.A. de C.V., Class A........................ 171
15,070 Grupo Televisa S.A. ADR........................... 339
11,870 Kimberly Clark de Mexico S.A. de C.V., Class A.... 180
8,185 Panamerican Beverages, Inc., Class A.............. 262
21,945 Telefonos de Mexico S.A. ADR, Class L............. 699
-------
4,901
-------
TOTAL COMMON STOCKS (Cost $9,082).................................... 9,676
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
PREFERRED (NON-VOTING STOCKS) (32.7%)
BRAZIL (32.7%)
65,136,249 Banco Bradesco S.A................................ $ 570
+19,913,000 Banco do Brasil................................... 225
**11,847,000 Banco Nacional S.A................................ 25
1,892,173 Brahma............................................ 779
+148,500 Centrais Eletricas de Santa Catarina, Class B..... 72
+4,811,000 Cia Energetica de Minas Gerais.................... 107
7,899,000 Cia Paulista de Forca E Luz....................... 211
3,566,000 Continental 2001.................................. 44
479,000 Coteminas......................................... 160
+189,211 Dixie Toga S.A.................................... 165
1,664,000 Eletrobras, Class B............................... 450
1,126,400 Itaubanco......................................... 314
151,000 Itausa Investimentos Itau S.A..................... 82
8,180,000 Lojas Renner...................................... 219
63,000 Multibras S.A..................................... 47
3,280,000 Petrobras......................................... 280
38,295,000 Refrigeracao Parana S.A........................... 76
15,109,000 Telebras.......................................... 728
551,000 Telecomunicacoes de Sao Paulo..................... 81
1,518,000 Vale Do Rio Doce.................................. 250
329,000 WEG S.A........................................... 135
-------
TOTAL PREFERRED (NON-VOTING STOCKS) (Cost $5,375).................... 5,020
-------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------
<C> <S> <C>
FIXED INCOME SECURITIES (4.8%)
BONDS (2.1%)
COLOMBIA (2.1%)
$ #430 Banco de Colombia 5.20%, 2/01/99
(Cost $380)..................................... 327
-------
CONVERTIBLE DEBENTURES (2.7%)
VENEZUELA (2.7%)
750 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.563%, 12/18/07
(Cost $394)..................................... 413
-------
TOTAL FIXED INCOME SECURITIES (Cost $774)............................ 740
-------
<CAPTION>
NO. OF
RIGHTS
- ----------------
<C> <S> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
+**2,058,932 Banco Bradesco, expiring 1/31/96
(Cost $0)....................................... 3
-------
TOTAL FOREIGN SECURITIES (100.4%) (Cost $15,231)..................... 15,439
-------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Latin American Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
FOREIGN CURRENCY (0.2%)
ARP 7 Argentine Peso.................................... $ 7
BRC 4 Brazilian Real.................................... 4
MXP 155 Mexican Peso...................................... 20
PSS 2 Peruvian New Sol.................................. 1
-------
TOTAL FOREIGN CURRENCY (Cost $32).................................... 32
-------
TOTAL INVESTMENTS (100.6%) (Cost $15,263)............................ 15,471
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.1%)
Receivable for Investments Sold........ $ 581
Dividends Receivable................... 42
Interest Receivable.................... 11
Other.................................. 1 635
---------
LIABILITIES (-4.7%)
Bank Overdraft......................... (415)
Payable for Portfolio Shares
Redeemed.............................. (237)
Custodian Fees Payable................. (29)
Investment Advisory Fees Payable....... (7)
Sub-Administrative Fees Payable........ (5)
Administrative Fees Payable............ (4)
Other Liabilities...................... (33) (730)
--------- ---------
NET ASSETS (100%)................................... $ 15,376
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,697,153 outstanding $.001 par
value shares (authorized 500,000,000 shares)...... $9.06
---------
---------
</TABLE>
- ------------------------------------------------
+ -- Non-income producing security
** -- Security is valued at fair value -- See Note A-1
# -- 144A Security -- Certain conditions for public sale may exist.
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
GDR -- Global Depositary Receipt
CPO -- Certificate of Participation.
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on December 31,
1995.
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 344 2.3%
Consumer Goods......................... 2,512 16.3
Energy................................. 2,881 18.7
Finance................................ 3,124 20.3
Government............................. 413 2.7
Materials.............................. 1,719 11.2
Multi-Industry......................... 389 2.5
Services............................... 4,057 26.4
--------- -----
$ 15,439 100.4%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Latin American Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 16.0%
Consumer Cyclical 14.4%
Consumer Staples 30.8%
Diversified 4.1%
Finance 26.0%
Services 1.4%
Technology 8.5%
Other -1.2%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY LIPPER CAPITAL APPRECIATION INDEX
PORTFOLIO (1)
<S> <C> <C>
03/08/89* 500,000 500,000
12/31/95 706,250 629,000
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
----------------
YTD
----------------
<S> <C>
PORTFOLIO.................................... 41.25%
LIPPER CAPITAL APPRECIATION INDEX............ 25.80
S&P 500 INDEX................................ 30.17
<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 Aggressive Equity 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, although this strategy was not being
utilized at December 31, 1995. It is anticipated that the Portfolio will hold
thirty names or less, although it may hold more from time to time. At December
31, 1995, there were 36 positions in the Portfolio.
From inception on March 8, 1995 through December 31, 1995, the total return for
the Portfolio was 41.25%, as compared to 25.80% for the Lipper Capital
Appreciation Index and 30.17% for the S&P 500 Index for the same period.
For the quarter ended December 31, 1995, total return for the Portfolio was
6.53%, compared to a 1.72% for the Lipper Capital Appreciation Index and 6.02%
for the S&P 500 Index for the same period.
The largest holding in the Portfolio at December 31, 1995, was tobacco and food
company Philip Morris which represented approximately 19% of net assets. Philip
Morris has been the Portfolio's largest holding throughout the year and has
risen approximately 43% since we first initiated a position in March. Philip
Morris currently trades at 11.8 times 1996 earnings estimates and 10 times 1997;
is growing earnings at 15%+; will likely raise the dividend 15-20% in August;
and is buying back about 4% of the company's market capitalization each year. In
the present low interest rate environment, the company's high debt leverage,
high dividend yield, and substantial free cash flow are a powerful and
compelling combination. We believe the stock should have another strong year in
1996.
The Portfolio's second largest position at year end was Wells Fargo,
representing approximately 9% of net assets. A combination of factors makes
Wells Fargo particularly attractive now: 1) if the company wins the battle for
First Interstate the likely synergies and cost savings are extensive; 2) even
without First Interstate, Wells Fargo should continue to show good earnings
growth; top and bottom-line results reported for the September quarter were
surprisingly strong which caused analysts to raise estimates; 3) the company has
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
been successfully restructuring its business, reducing its dependence on low
return lending and share buybacks and focusing on new growth opportunities and
fee income while reducing the cost of branch banking; 4) the stock trades at 9.5
times 1996 estimated earnings and 8.5 times 1997 and will generate 12-20%
earnings growth for the next several years; 5) although the company cannot buy
back stock due to the battle for First Interstate, if their bid is unsuccessful
management has committed to make up for lost time when they are free to resume
their buyback (they have been buying back 2% of their stock per quarter); 6) the
California economy should grow faster than the country as a whole; and 7) Warren
Buffet owns 14% of the company and the management, in general, is very
shareholder-oriented. In short, in Wells Fargo we have a stock with a low
price/earnings ratio, solid growth outlook and the potential for events that
could cause the stock to rise significantly.
The Portfolio's third largest holding at December 31 was HFS, formerly known as
Hospitality Franchise Systems. We rarely take large positions in high p/e, high
beta growth stocks preferring instead to take a basket approach to minimize the
event risk inherent in these types of issues. We have owned HFS since management
announced the acquisition of Century 21, making the company the biggest player
in the U.S. hotel and residential broker businesses. With their market clout,
the company is charging fees for preferred access to its customer base and is
providing unique benefits to its consumers. We think this is a brilliant
marketing strategy which will pay big dividends in the future. In the meantime
the stock has risen from $29 when the deal was announced to $74 currently with
earnings estimates rising almost weekly. Current expectations call for earnings
of $1.46 in 1995 rising to $2.25 this year for a 54% gain. We expect the stock
to have another banner year.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (101.2%)
CAPITAL GOODS/CONSTRUCTION (16.0%)
AEROSPACE & DEFENSE (9.2%)
8,900 General Dynamics Corp............................. $ 526
10,200 McDonnell Douglas Corp............................ 938
12,300 United Technologies Corp.......................... 1,167
----------
2,631
----------
BUILDING & CONSTRUCTION (2.8%)
18,400 American Standard Co.............................. 515
19,900 AMRE, Inc......................................... 291
----------
806
----------
MACHINERY (4.0%)
16,300 Sundstrand Corp................................... 1,147
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 4,584
----------
CONSUMER CYCLICAL (14.4%)
ENTERTAINMENT & LEISURE (2.4%)
4,700 Eastman Kodak Co.................................. 315
6,400 Walt Disney Co.................................... 378
----------
693
----------
FOOD SERVICE & LODGING (5.0%)
+17,300 HFS, Inc.......................................... 1,414
----------
PUBLISHING (1.8%)
42,300 K-III Communications, Corp........................ 513
----------
RETAIL-GENERAL (5.2%)
+20,700 AutoZone, Inc..................................... 598
+25,200 General Nutrition Cos., Inc....................... 580
6,700 Home Depot, Inc................................... 321
----------
1,499
----------
TOTAL CONSUMER CYCLICAL..................................... 4,119
----------
CONSUMER STAPLES (30.8%)
BEVERAGES & TOBACCO (2.9%)
15,000 Coca Cola Enterprises, Inc........................ 401
13,800 RJR Nabisco Holdings Corp......................... 426
----------
827
----------
CIGARETTES (19.8%)
59,400 Philip Morris Cos., Inc........................... 5,376
8,400 UST, Inc.......................................... 280
----------
5,656
----------
DRUGS (5.0%)
16,200 Pharmacia & Upjohn, Inc........................... 628
14,600 Schering-Plough Corp.............................. 799
----------
1,427
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FOOD (3.1%)
12,000 Ralston Purina Group.............................. $ 749
2,700 Wrigley (William) Jr. Co.......................... 142
----------
891
----------
TOTAL CONSUMER STAPLES...................................... 8,801
----------
DIVERSIFIED (4.1%)
14,900 Loews Corp........................................ 1,168
----------
FINANCE (26.0%)
BANKING (15.0%)
6,700 Chase Manhattan Corp.............................. 406
9,300 First Interstate Bancorp.......................... 1,269
12,100 Wells Fargo & Co.................................. 2,614
----------
4,289
----------
FINANCIAL SERVICES (11.0%)
31,800 American Express Co............................... 1,316
6,000 Dean Witter Discover & Co......................... 282
8,600 Federal National Mortgage Association............. 1,067
7,000 Student Loan Marketing Association................ 461
----------
3,126
----------
TOTAL FINANCE............................................... 7,415
----------
SERVICES (1.4%)
TRANSPORTATION (1.4%)
+26,600 Canadian National Railway......................... 399
----------
TECHNOLOGY (8.5%)
COMPUTERS (0.8%)
+3,000 Intuit, Inc....................................... 234
----------
ELECTRONICS (3.7%)
+9,600 Applied Materials, Inc............................ 378
4,500 Intel Corp........................................ 255
9,300 Watkins-Johnson Co................................ 407
----------
1,040
----------
OFFICE EQUIPMENT (4.0%)
+5,500 Digital Equipment Corp............................ 352
8,500 International Business Machines Corp.............. 780
----------
1,132
----------
TOTAL TECHNOLOGY............................................ 2,406
----------
TOTAL COMMON STOCKS (Cost $27,097)............................ 28,892
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (5.6%)
U.S. GOVERNMENT AGENCY OBLIGATION (5.6%)
$ 1,600 Federal National Mortgage Association Discount
Note 5.50%, 1/22/96
(Cost $1,595)................................... 1,595
----------
TOTAL INVESTMENTS (106.8%) (Cost $28,692)..................... 30,487
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (12.0%)
Receivable for Securities Sold Short............ $ 2,707
Receivable for Investments Sold................. 448
Receivable for Portfolio Shares Sold............ 210
Dividends Receivable............................ 62
Other........................................... 1 $ 3,428
----------
LIABILITIES (-18.8%)
Securities Sold Short, at Value (Proceeds
$2,707)........................................ (2,642)
Bank Overdraft.................................. (1,797)
Payable for Investments Purchased............... (873)
Investment Advisory Fees Payable................ (22)
Administrative Fees Payable..................... (4)
Custodian Fees Payable.......................... (3)
Other Liabilities............................... (26) (5,367 )
---------- ----------
NET ASSETS (100%)............................................. $ 28,548
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,345,287 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $12.17
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
</TABLE>
Interest rate disclosed for U.S. Government Agency discount note
represents effective yields at December 31, 1995.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
<C> <S> <C>
26,600 Canadian National Railway.................. $ 399
5,500 Digital Equipment Corp..................... 352
3,000 Intuit, Inc................................ 234
16,200 Pharmacia & Upjohn, Inc.................... 628
12,000 Ralston Purina Group....................... 749
8,400 UST, Inc................................... 280
---------
(Total Proceeds $2,707).................... $ 2,642
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer Cyclical 19.4%
Consumer Staples 29.5%
Finance 3.3%
Materials 2.9%
Services 14.7%
Technology 27.5%
Other 2.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $250,000**
INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NASDAQ COMPOSITE INDEX (1) EMERGING GROWTH PORTFOLIO
<S> <C> <C>
11/1/89* $250,000 $250,000
10/31/90 $180,980 $226,818
10/31/91 $297,928 $407,900
10/31/92 $332,050 $377,398
12/31/92 $371,438 $408,910
12/31/93 $426,225 $408,910
12/31/94 $412,600 $406,375
12/31/95 $577,310 $541,739
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO....... 33.31% 14.48% 13.36%
INDEX........... 39.92 22.99 14.53
<FN>
1. The NASDAQ Composite Index is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended December 31, 1995 was
33.31%, as compared to 39.92% for the NASDAQ Composite Index for the same
period. The average annual total return of the Portfolio for the five-year
period ended December 31, 1995 and for the period from inception in November
1989 through December 31, 1995 were 14.48%, and 13.36%, respectively, compared
to 22.99%, and 14.53% for the NASDAQ Composite Index for the same periods.
The fourth quarter and full year 1995 performance results were very positive for
the Portfolio. During the three months ended December 31, 1995, the total return
of the Portfolio was 2.77%. The total return for the year was the best annual
gain since 1991. On a relative basis, the Portfolio outperformed most small
capitalization benchmarks as well as the Lipper Small Company Growth Mutual Fund
Index which gained 1.2% and 31.4% for the fourth quarter and 1995, respectively.
The performance pattern of the U.S. equity market in 1995 was large
capitalization stocks outperforming small caps, and growth stocks providing much
higher returns than value-oriented equity strategies. The Portfolio benefited
from its focus on growth stocks and, despite its concentration on
small-to-medium size companies, it nearly kept pace with the very strong large
capitalization indices. The background of moderate economic growth, continued
low inflation, and a downward trend in interest rates provided an ideal
environment for growth stocks to outperform last year.
The main investment story in 1995 was electronic technology stocks. Technology
was the best performing sector for the year, but reached a peak in the third
quarter and suffered a fairly sharp decline in the final three months of the
year. In our two previous quarterly letters, we commented that there were
clearly some excesses developing in technology stocks.
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
Valuations were high, initial public offerings of technology stocks were
overheating (e.g. Netscape), and many portfolios were becoming dangerously
overweighted with technology shares. While we continue to believe that the
long-term growth opportunities in technology are outstanding, the short-term
excesses call for a more cautious stance toward the technology sector over the
near-term. During the second half of 1995, we reduced the technology weighting
in the Portfolio from 32% of net assets on June 30, 1995 to 28% on December 31,
1995. This reduced technology weighting helped the Portfolio outperform in the
fourth quarter despite the decline in technology share prices. The performance
of the health care (20% of net assets) and business/financial services (31% of
net assets) sectors of the Portfolio were relatively strong in the final three
months of the year and more than offset the weakness in the technology stocks.
The consumer area (20% of net assets) was about in line with the market during
the fourth quarter.
As of December 31, 1995, the Portfolio held positions in 56 stocks with the
largest holding (Healthsource) at 3.5% of total net assets. The top 10 holdings
in the Portfolio comprised 31.3% of assets.
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
COMPANY NET ASSETS
- ------------------------------------------------ -------------
<S> <C>
Healthsource.................................... 3.5%
Informix........................................ 3.4
First Data...................................... 3.3
CUC International............................... 3.3
HealthSouth Rehabilitation...................... 3.2
HFS............................................. 3.1
Linear Technology............................... 2.9
Viking Office Products.......................... 2.9
SunGard Data Systems............................ 2.9
Cintas.......................................... 2.8
---
Total........................................... 31.3%
</TABLE>
If the favorable economic background is sustained in the year ahead, emerging
growth stocks have the potential to increase further in 1996-1997. We believe
the current upcycle for small growth stocks that began in 1990 is not yet
complete. The accompanying table depicting the fundamental characteristics of
the companies held in the Portfolio, compared with the S&P 500, shows that while
the emerging growth stocks are, on average, 2.1 times better than the S&P 500
companies, the price/earnings ratio is only 1.5 times as high. The relative P/E
of 1.5 is in the middle of the 1.0 to 2.0 historic range. At the end of previous
emerging growth upcycles, the relative P/E has reached the 2.0-2.2 range -- a
level at which the superior fundamentals characteristics of emerging growth
stocks are then fully reflected in share prices.
PORTFOLIO CHARACTERISTICS
<TABLE>
<CAPTION>
PORTFOLIO S&P 500 RATIO
------------ ------------- -----
<S> <C> <C> <C>
Five Year Estimated Earnings Growth... 21.7% 7.0% 3.1x
Operating Margin...................... 20.6% 20.1% 1.0x
Return on Average Invested Capital.... 16.7% 10.1% 1.7x
Long Term Debt as a % of Total
Capital............................. 15.1% 40.0% 2.4x
--
Average............................... 2.1x
Price/Earnings Ratio
1996 estimated P/E.................. 22.7x 15.4x 1.5x
</TABLE>
Of course, nothing moves in a straight line (except the S&P 500 in 1995). The
Portfolio has risen for six consecutive quarters and the net asset value has
appreciated 51% since June 30, 1994. A correction is likely to occur at some
point and the current Federal budget impasse in Washington could well be the
catalyst. We believe the Portfolio is well positioned to weather a short-term
correction and participate in what we see as a longer term and still unfinished
upcycle.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
COMMON STOCKS (97.3%)
CONSUMER-CYCLICAL (19.4%)
FOOD SERVICE & LODGING (6.8%)
+37,700 Cheesecake Factory, Inc........................... $ 801
+45,000 HFS, Inc.......................................... 3,679
70,000 Promus Hotel Corp................................. 1,558
+111,600 Sonic Corp........................................ 2,064
----------
8,102
----------
PRINTING & PUBLISHING (3.3%)
80,000 Lee Enterprises, Inc.............................. 1,840
+27,000 Scholastic Corp................................... 2,099
----------
3,939
----------
RETAIL-GENERAL (9.3%)
+70,000 Bed, Bath & Beyond, Inc........................... 2,704
+35,000 Central Tractor Farm & Country, Inc............... 359
+120,000 General Nutrition Cos., Inc....................... 2,760
+30,000 Kohl's Corp....................................... 1,575
+75,000 OfficeMax, Inc.................................... 1,678
+88,000 Sunglass Hut International, Inc................... 2,068
----------
11,144
----------
TOTAL CONSUMER-CYCLICAL..................................... 23,185
----------
CONSUMER-STAPLES (29.5%)
DRUGS (6.1%)
+60,000 Forest Laboratories, Inc.......................... 2,715
28,000 Genzyme Corp. -- General Division................. 1,736
+9,800 Immucor, Inc...................................... 91
+55,000 Scherer (R.P.) Corp............................... 2,702
----------
7,244
----------
HEALTH CARE SUPPLIES & SERVICES (19.5%)
47,000 Arrow International, Inc.......................... 1,868
55,000 Ballard Medical Products.......................... 983
+120,000 Biomet, Inc....................................... 2,130
+50,000 Haemonetics Corp.................................. 887
+85,000 Health Management Systems, Inc.................... 3,273
+115,000 Healthsource, Inc................................. 4,140
+130,000 HEALTHSOUTH Rehabilitation Corp................... 3,786
+6,400 Mariner Health Group, Inc......................... 107
+75,000 Research Medical, Inc............................. 2,025
+40,000 Vencor, Inc....................................... 1,300
+112,500 Vivra, Inc........................................ 2,827
----------
23,326
----------
HOSPITAL MANAGEMENT (1.5%)
36,000 American Oncology Resources, Inc.................. 1,750
----------
MISCELLANEOUS (2.4%)
+60,000 IDEXX Laboratories, Inc........................... 2,820
----------
TOTAL CONSUMER-STAPLES...................................... 35,140
----------
FINANCE (3.3%)
INSURANCE (3.3%)
50,000 Mutual Risk Management Ltd........................ 2,288
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
45,000 NAC Re Corp....................................... $ 1,620
----------
TOTAL FINANCE............................................... 3,908
----------
MATERIALS (2.9%)
MISCELLANEOUS (2.9%)
+75,000 Viking Office Products, Inc....................... 3,487
----------
SERVICES (14.7%)
BUSINESS SERVICES (3.4%)
60,000 First Data Corp................................... 4,012
3,000 Sitel Corp........................................ 92
----------
4,104
----------
PROFESSIONAL SERVICES (11.2%)
+19,900 American Business Information, Inc................ 386
+44,900 American Medical Response, Inc.................... 1,459
75,000 Cintas Corp....................................... 3,338
60,000 CRA Managed Care, Inc............................. 1,313
+115,000 CUC International, Inc............................ 3,924
115,000 G & K Services, Inc., Class A..................... 2,932
----------
13,352
----------
TRANSPORTATION (0.1%)
4,500 Midwest Express Holdings, Inc..................... 125
----------
TOTAL SERVICES.............................................. 17,581
----------
TECHNOLOGY (27.5%)
ELECTRONICS (13.7%)
+60,000 Electroglas, Inc.................................. 1,470
+39,900 Fusion Systems Corp............................... 1,117
+50,100 Level One Communications, Inc..................... 902
90,000 Linear Technology, Inc............................ 3,532
+70,000 Maxim Integrated Products, Inc.................... 2,678
+35,000 Microchip Technology, Inc......................... 1,278
70,000 Molex, Inc., Class A.............................. 2,144
+110,000 Xilinx, Inc....................................... 3,327
----------
16,448
----------
OFFICE EQUIPMENT (12.9%)
8,600 Adobe Systems, Inc................................ 533
+75,000 BISYS Group, Inc.................................. 2,306
+75,000 Concord EFS Corp.................................. 3,094
+134,850 Informix Corp..................................... 4,045
+52,600 Progress Software Corp............................ 1,946
+125,000 SunGard Data Systems, Inc......................... 3,469
----------
15,393
----------
TELECOMMUNICATIONS (0.9%)
+50,000 Mobile Telecommunications Technologies Corp....... 1,063
----------
TOTAL TECHNOLOGY............................................ 32,904
----------
TOTAL COMMON STOCKS (Cost $63,267)............................ 116,205
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.6%)
REPURCHASE AGREEMENT (2.6%)
$ 3,053 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$3,055, collateralized by $2,570 United States
Treasury Bonds, 7.625%, due 11/15/22, valued at
$3,113 (Cost $3,053)............................ $ 3,053
----------
TOTAL INVESTMENTS (99.9%) (Cost $66,320)...................... 119,258
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Cash............................................ $ 1
Receivable for Portfolio Shares Sold............ 318
Receivable for Investments Sold................. 190
Dividends Receivable............................ 27
Interest Receivable............................. 1
Other........................................... 10 547
-----
LIABILITIES (-0.4%)
Investment Advisory Fees Payable................ (332)
Payable for Portfolio Shares Redeemed........... (47)
Administrative Fees Payable..................... (16)
Custodian Fees Payable.......................... (4)
Other Liabilities............................... (28) (427)
----- ----------
NET ASSETS (100%)............................................. $ 119,378
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 5,554,674 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $21.49
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing security
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 8.5%
Consumer Cyclical 19.0%
Consumer Staples 20.9%
Diversified 3.4%
Finance 23.1%
Materials 2.9%
Services 3.0%
Technology 13.4%
Other 5.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P STOCK INDEX (1) EQUITY GROWTH PORTFOLIO
<S> <C> <C>
4/2/91* $500,000 $500,000
10/31/91 $533,090 $533,000
10/31/92 $585,450 $582,330
12/31/92 $612,760 $604,725
12/31/93 $674,400 $630,900
12/31/94 $683,250 $651,465
12/31/95 $939,742 $944,733
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 45.02% 14.33%
S&P 500.......................... 37.54 14.20
<FN>
1. The S&P 500 Index is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended December 31, 1995 was
45.02% compared to 37.54% for the S&P 500 Index for the same period. The average
annual total return of the Portfolio for the period since inception in April
1991 through December 31, 1995 was 14.33% compared to 14.20% for the S&P 500
Index for the same period.
It was a good year for the Equity Growth Portfolio. The Portfolio's total annual
return of 45.02% compares to returns (including reinvested dividends) of 37.54%,
32.09% and 36.99% for the S&P 500 Index, the Lipper Growth Fund Index and the
Russell Growth Index, respectively. Compared to domestic equity funds in general
the performance was also favorable. According to Lipper Analytical Services
domestic stock funds on average earned 31.11% in 1995.
For most of the year the market rally was led by three sectors: growth stocks,
including the large cap consumer staple names; technology; and finance.
Throughout 1995, we were roughly market weighted in consumer staples but we
concentrated our bet on Philip Morris, which was our largest holding in the
group (and the Portfolio) for most of the period. The barrage of negative
publicity about tobacco in 1994 and 1995 diverted investors' attention from the
underlying positive fundamentals at the company (earnings and cash flow expected
to grow 15% over the next five years; dividend yield significantly above the
market) but the stock returned approximately 57% in 1995 powered by strong
earnings and aggressive share repurchase. Our weighting in Philip Morris at year
end was 9.2% of net assets and we continue to like the stock very much, given
its prospects for mid-teens earnings growth through the end of the decade, a
dividend yield of 4.4% versus 2.3% for the S&P 500,
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
and strong free cash flow -- 1996 cash flow after dividend payments and capital
expenditures will approximate $2.8 billion which will support the company's
large and ongoing share buyback program.
The technology sector was a driver for the market most of the year before giving
up some ground in the fourth quarter. We started the year about market weighted
in this sector (and therefore underweight most growth managers). When the stocks
began to pull back late in the year we selectively increased our holdings,
taking advantage of the weakness. We ended the year with approximately 13% in
the group.
Finance was a third very important sector for the market in 1995. Buoyed by
falling interest rates and good earnings growth many of our favorite financial
stocks rose considerably. The Portfolio's largest financial holding at year-end
was Wells Fargo which climbed about 49% in 1995; other financial holdings which
did well included Citicorp, up 62%; Federal Home Loan, up 65%; and Federal
National Mortgage, up 70%.
In the last three weeks of December, while the broad market averages held up,
many of the sectors which had led the equity market higher in 1995 did poorly.
For example, utilities, energy and consumer staples did well while technology,
finance and growth stocks retreated. We took advantage of this weakness to add
to our favorite stocks, particularly in the finance area. Throughout 1995 our
exposure to finance ranged between 15% and 25% and in December we took our
position back to peak levels. Financial stocks, for the most part, peaked in
October and proceeded to correct 5-10% but earnings estimates during this period
were flat to up for our favorite names; i.e. p/e multiples had contracted but
earnings growth fundamentals were intact. The stocks were driven down largely on
fears of rising consumer debt delinquencies which will not impact all financial
stocks to the same degree. We also feel that the group is in a win/win situation
regarding interest rates. The decline in rates has benefited the companies and
the stocks; obviously if rates stay flat or continue to drop the stocks should
do well. If, on the other hand, interest rates rise, the entire market will
stumble and financials, with their lower valuations, should prove defensive. Our
favorites in the group continue to be Wells Fargo, First Interstate, American
Express, Citicorp and Federal National Mortgage.
As we begin 1996, in addition to our emphasis on tobacco and finance, we
continue to favor select high growth stocks. One such issue is HFS. Formerly
known as Hospitality Franchise Systems, this rapidly growing franchisor of
lodging brands (Ramada, Howard Johnson and Days Inns) recently purchased real
estate broker Century 21 in the belief that HFS, with its expertise in managing
franchise businesses, could dramatically improve the results at Century. The
early signs are very encouraging as evidenced by the company's moves to cut
costs and to improve Century 21's competitive advantage by negotiating preferred
vendor contracts that offer the buyer of a Century 21-listed residence discounts
on everything from new cars to telephone service. Earnings fundamentals look
solid with the company likely to report $1.46 for 1995 and $2.25 in 1996 for a
54% gain in earnings.
Our outlook for the overall equity market is neutral to positive. While some
market prognosticators expect a cut in the capital gains tax to precipitate a
market correction we are less certain that such a pull-back would occur. If it
should, however, we would view it as a buying opportunity. We continue to find
companies generating good earnings growth selling at reasonable valuations and
believe the biggest risk to the market is a much stronger economy or
significantly higher rates, neither of which we expect at this juncture.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (94.2%)
CAPITAL GOODS/CONSTRUCTION (8.5%)
AEROSPACE & DEFENSE (6.6%)
17,500 Boeing Co......................................... $ 1,371
15,100 General Dynamics Corp............................. 893
+6,500 Litton Industries, Inc............................ 289
10,900 Lockheed Martin Corp.............................. 861
35,500 McDonnell Douglas Corp............................ 3,266
38,700 United Technologies Corp.......................... 3,672
----------
10,352
----------
MACHINERY (1.9%)
43,000 Sundstrand Corp................................... 3,026
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 13,378
----------
CONSUMER-CYCLICAL (19.0%)
AUTOMOTIVE (1.0%)
34,300 Goodyear Tire & Rubber Co......................... 1,556
----------
BROADCAST-RADIO & TELEVISION (2.3%)
+40,000 Infinity Broadcasting, Class A.................... 1,490
+52,400 New World Communications Group, Inc............... 917
+26,797 Viacom, Inc., Class B............................. 1,269
----------
3,676
----------
ENTERTAINMENT & LEISURE (1.3%)
+24,300 AMC Entertainment, Inc............................ 568
26,000 Walt Disney Co.................................... 1,534
----------
2,102
----------
FOOD SERVICE & LODGING (3.0%)
+28,000 Boston Chicken, Inc............................... 899
+34,300 HFS, Inc.......................................... 2,804
39,200 La Quinta Inns, Inc............................... 1,073
----------
4,776
----------
GAMING & LODGING (0.1%)
+10,100 Trump Hotels & Casino Resort...................... 217
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (2.0%)
+78,700 American Standard Co.............................. 2,203
59,700 AMRE, Inc......................................... 873
----------
3,076
----------
LEISURE RELATED (1.3%)
22,400 Eastman Kodak Co.................................. 1,501
+23,500 Toy Biz, Inc...................................... 511
----------
2,012
----------
PUBLISHING (3.1%)
29,800 Gannett Co., Inc.................................. 1,829
+175,900 K-III Communications, Corp........................ 2,133
31,300 New York Times Co., Class A....................... 927
----------
4,889
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
RETAIL-GENERAL (4.9%)
+60,700 AutoZone, Inc..................................... $ 1,753
+84,200 General Nutrition Cos., Inc....................... 1,937
32,000 Harcourt General, Inc............................. 1,340
31,300 Home Depot, Inc................................... 1,498
+17,600 PetSmart, Inc..................................... 546
14,100 Tandy Corp........................................ 585
----------
7,659
----------
TOTAL CONSUMER-CYCLICAL..................................... 29,963
----------
CONSUMER-STAPLES (20.9%)
APPAREL & TEXTILES (0.5%)
7,400 NIKE, Inc., Class B............................... 515
11,200 Reebok International Ltd.......................... 316
----------
831
----------
BEVERAGES & TOBACCO (11.7%)
68,600 Coca Cola Enterprises, Inc........................ 1,835
161,500 Philip Morris Cos., Inc........................... 14,616
66,600 RJR Nabisco Holdings Corp......................... 2,056
----------
18,507
----------
DRUGS (3.3%)
15,500 American Home Products Corp....................... 1,504
28,900 Pfizer, Inc....................................... 1,821
35,700 Schering-Plough Corp.............................. 1,955
----------
5,280
----------
FOOD (2.2%)
23,800 Interstate Bakeries Corp.......................... 532
12,600 Kellogg Co........................................ 973
9,100 Ralston Purina Group.............................. 568
25,400 Wrigley (William) Jr. Co.......................... 1,334
----------
3,407
----------
HEALTH CARE SUPPLIES & SERVICES (3.2%)
17,800 Aetna Life & Casualty Co.......................... 1,232
33,000 Columbia/HCA Healthcare Corp...................... 1,675
13,600 United Healthcare Corp............................ 891
26,700 US Healthcare, Inc................................ 1,242
----------
5,040
----------
TOTAL CONSUMER-STAPLES...................................... 33,065
----------
DIVERSIFIED (3.4%)
48,900 Loews Corp........................................ 3,833
23,400 Textron, Inc...................................... 1,580
----------
TOTAL DIVERSIFIED........................................... 5,413
----------
FINANCE (23.1%)
BANKING (10.1%)
22,100 Chase Manhattan Corp.............................. 1,340
32,000 Citicorp.......................................... 2,152
28,300 First Interstate Bancorp.......................... 3,863
23,800 Morgan (J.P.) & Co., Inc.......................... 1,910
31,200 Wells Fargo & Co.................................. 6,739
----------
16,004
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Equity Growth Portfolio
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (10.6%)
110,600 American Express Co............................... $ 4,576
12,400 CIGNA Corp........................................ 1,280
40,000 Dean Witter Discover & Co......................... 1,880
22,800 Federal Home Loan Mortgage Corp................... 1,904
19,400 Federal National Mortgage Association............. 2,408
26,000 Franklin Resources, Inc........................... 1,310
29,900 Household International, Inc...................... 1,768
24,000 Student Loan Marketing Association................ 1,581
----------
16,707
----------
INSURANCE (2.4%)
31,300 Ace Ltd........................................... 1,244
38,900 Exel Ltd.......................................... 2,373
+9,500 GCR Holdings, Ltd................................. 211
----------
3,828
----------
TOTAL FINANCE............................................... 36,539
----------
MATERIALS (2.9%)
CHEMICALS (2.9%)
26,400 Hercules, Inc..................................... 1,488
18,800 IMC Global, Inc................................... 769
9,100 Monsanto Co....................................... 1,115
15,600 Olin Corp......................................... 1,158
----------
TOTAL MATERIALS............................................. 4,530
----------
SERVICES (3.0%)
BUSINESS SERVICES (1.0%)
22,600 First Data Corp................................... 1,511
----------
PROFESSIONAL SERVICES (1.1%)
+15,200 Bell & Howell Holding Co.......................... 426
+38,750 CUC International, Inc............................ 1,322
----------
1,748
----------
TRANSPORTATION (0.9%)
+10,800 AMR Corp.......................................... 802
+51,300 USAir Group, Inc.................................. 680
----------
1,482
----------
TOTAL SERVICES.............................................. 4,741
----------
TECHNOLOGY (13.4%)
COMPUTERS (3.8%)
+12,800 Cisco Systems, Inc................................ 955
18,900 Hewlett Packard Co................................ 1,583
26,700 International Business Machines Corp.............. 2,450
+23,200 Seagate Technology, Inc........................... 1,102
----------
6,090
----------
ELECTRONICS (4.6%)
+40,600 Applied Materials, Inc............................ 1,599
19,800 Intel Corp........................................ 1,124
+28,100 LSI Logic Corp.................................... 920
19,300 Motorola, Inc..................................... 1,100
15,400 Texas Instruments, Inc............................ 797
40,900 Watkins-Johnson Co................................ 1,789
----------
7,329
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
OFFICE EQUIPMENT (0.6%)
26,100 Reynolds & Reynolds, Class A...................... $ 1,015
----------
SOFTWARE SERVICES (2.0%)
+18,900 Microsoft Corp.................................... 1,658
+33,900 Oracle System Corp................................ 1,437
----------
3,095
----------
TELECOMMUNICATIONS (2.4%)
+26,400 AirTouch Communications, Inc...................... 746
23,700 American Telephone & Telegraph Corp............... 1,535
56,400 MCI Communications Corp........................... 1,473
----------
3,754
----------
TOTAL TECHNOLOGY............................................ 21,283
----------
TOTAL COMMON STOCKS (Cost $132,472)........................... 148,912
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 9,800 Goldman Sachs & Co., 5.83%, dated 12/29/95, due
1/02/96, to be repurchased at $9,806,
collateralized by $6,105 United States Treasury
Bonds, 13.875%, due 5/15/11, valued at $10,006
(Cost $9,800)................................... 9,800
----------
TOTAL INVESTMENTS (100.4%) (Cost $142,272).................... 158,712
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.3%)
Receivable for Investments Sold................. $ 3,215
Dividends Receivable............................ 353
Receivable for Portfolio Shares Sold............ 65
Interest Receivable............................. 5
Other........................................... 9 3,647
----------
LIABILITIES (-2.7%)
Payable for Investments Purchased............... (2,782)
Payable for Portfolio Shares Redeemed........... (1,176)
Investment Advisory Fees Payable................ (224)
Administrative Fees Payable..................... (22)
Custodian Fees Payable.......................... (7)
Other Liabilities............................... (36) (4,247)
---------- ----------
NET ASSETS (100%)............................................. $ 158,112
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 11,182,044 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $14.14
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Equity Growth Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 2.2%
Banking 9.5%
Building 1.9%
Capital Goods 4.2%
Chemicals 4.8%
Communications 1.1%
Consumer - Durables 3.9%
Consumer - Retail 4.1%
Consumer - Staples 4.3%
Energy 3.3%
Financial -
Diversified 4.6%
Health Care 6.7%
Industrial 5.8%
Insurance 5.8%
Metals 2.1%
Paper & Packaging 2.8%
Services 11.0%
Technology 7.7%
Transportation 2.5%
Utilities 7.4%
Other 4.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY
RUSSIA 2500 INDEX (1) PORTFOLIO
<S> <C> <C>
12/17/92* $500,000 500000
12/31/92 515665 507000
12/31/93 601000 564420
12/31/94 595350 578700
12/31/95 784076 698086
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE RUSSELL 2500
AND S&P 500 INDICES(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 20.63% 11.61%
RUSSELL 2500..................... 31.70 15.96
S&P 500.......................... 37.53 15.22
<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 Small Cap Value Equity Portfolio invests in small companies that our
research indicates are undervalued, of high quality, and will reward the
shareholder through high current dividend income. The Portfolio's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies will help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
The total return of the Portfolio for the year ended December 31, 1995 was
20.63% as compared to 31.70% and 37.53% for the Russell 2500 Index and the S&P
500 Index, respectively, for the same period. The average annual total return of
the Portfolio for the period from inception in December 1992 through December
31, 1995 was 11.61% compared to 15.96% for the Russell 2500 Index and 15.22% for
the S&P 500 Index for the same periods.
PERFORMANCE REVIEW
One investment theme dominated the direction of U.S. equity market returns
during 1995: the considerable slowdown of the strong economic growth experienced
in 1994. During the summer the slowdown was severe enough as to awaken talks of
a recession pending. By year-end, however, the consensus focused on a successful
`soft landing' and moderate growth expectations for 1996. The slowdown in
economic growth led to a sharp drop in long term interest rates during 1995.
Equity markets in the United States responded with enthusiasm. The bellwether
S&P 500 Index rose 37.5% for the full year 1995. Since the rally in equities was
interest rate driven, interest rate sensitive "growth" companies rose most
sharply. The most dramatic example of this could be seen in the areas of
technology and health care. By mid-year 1995 the average small cap technology
company was trading at a price-to-earnings multiple of 30.2 times, more than
twice as expensive as the average stock in the Portfolio. Periods of such market
ebullience are
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
expected to produce high absolute returns for a small cap portfolio. They are,
however, the most difficult time for the small cap value style to better the
small cap averages since the market's normal desire for dividend income and deep
bargain values is superseded by its willingness to count on extraordinarily high
future earnings growth. Going forward, we expect increasing market valuation,
absolutely low interest rates, and a steady economy to set the stage for a
positive environment for the Portfolio's out-of-the-limelight companies.
The best performing industries in the Portfolio were banking companies,
insurance companies, aerospace, electric utilities, healthcare, and technology
companies. The Portfolio's banking stocks returned 51.8% for the year. Since
banks began the year as truly undervalued securities with good growth prospects,
the Portfolio benefited from an overweighting in that industry. While falling
interest rates provided for healthy fundamental earnings growth, the sharp rally
in banking stocks was fueled by announced mergers and acquisitions affecting
highly visible money center banks, midsize regional banks, as well as small
community banks. The Portfolio's insurance companies returned 41% during 1995.
We believe the success in the industry was the result of falling interest rates
which led to strongly improved earnings for the Portfolio's companies. The
Portfolio's aerospace companies averaged a return of 39% for 1995. Good
performance in that industry was mainly driven by the resurgence of the U.S.
commercial airline industry which strongly improved the business conditions for
the portfolio's airline service companies. Another bright spot during 1995
proved to be companies in the electric utility industry. At the beginning of the
year confidence in U.S. utilities was badly shaken by the specter of loss of
their monopoly status which led to extremely attractive valuations in that
industry. However, as utilities prepared for increased wholesale and retail
competition by dramatically improving their cost structure, they managed to show
positive earnings surprises as the year progressed. The Portfolio's technology
companies returned above average results for the year. The overall return impact
of the Portfolio's technology issues was somewhat muted, since the Portfolio --
true to its mission of seeking `value' companies -- has been underweight in this
highflying industry.
The weakest areas in the Portfolio turned out to be companies in cyclical
industries. The slowdown in economic growth and the mid-year fear of slipping
into a recession penalized companies in its deep cyclical industries. The
slowdown in U.S. automobile sales and production had a ripple effect on the
Portfolio's auto part suppliers. Weakening steel prices, falling prices for
paper products and chemicals were interpreted as harbingers of a looming
recession and not simply as the result of a mid cycle inventory correction.
Another area of mixed performance proved to be the retail sector. As it became
evident mid-year that the expected strengthening of consumer retail spending
would not materialize we decided to significantly upgrade the quality of the
portfolio holdings. We sold Venture Stores, the midwest discount retail chain,
and Edison Brothers, a chain of high fashion men's stores, and purchased Ross
Stores. Ross Stores, an off-price retailer based in California, displays a clean
balance sheet and was managed in a cautious and most conservative manner. Unlike
its competitors in the apparel retail business, Ross Stores managed to increase
same store sales for the remainder of the year and the stock price nearly
doubled since purchase.
As we look for inexpensive companies with rich dividend yields in specialty
niche markets we added Tecumseh Products, a Michigan company, to the Portfolio.
Tecumseh is one of the leading domestic companies in the manufacturing of
compressors for refrigerators and air conditioners. We were able to purchase the
company at an inexpensive 130% of book value and 8.4x earnings. We believe this
low price ignores the company's extensive operations overseas that show high
growth potential. The Portfolio also purchased Airborne Freight Corp., an air
courier company based in Seattle. We purchased Airborne Freight at a price close
to its bookvalue. The company has shown 20% growth in total delivery volume
during the previous six months. However, since a large percentage of the
increased volume came from less profitable deferred deliveries (two-day instead
of next-day) the company's earnings are currently lower than last year. We
believe Airborne's earnings are only temporarily lower since the company has had
a successful record of restoring profit margins by increasing operating
efficiencies. Hence, Airborne's current stock price constitutes a bargain
purchase for the Portfolio. During the fourth quarter we took advantage of
attractive valuations of deep cyclical companies and added Smith (A.O.) Corp., a
manufacturer of automobile structural components, to the Portfolio. We purchased
Smith (A.O.) at seven times trailing earnings. The company has improved its
earning every year since 1991 and is estimated to grow its earnings by 15% in
1996.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
In September we increased our holdings in Real Estate Investment Trusts (REITs).
At the time of purchase, REITs were valued at the largest discount relative to
the yield on U.S. Treasury bonds since 1990. Unlike in 1990, fundamentals in the
real estate sector appear very promising: interest rates are low, internal
growth is solid, and there are few new equity offerings in the making. The
Portfolio has taken positions in two financially conservatively managed
apartment REITs (Wellsford Residential Property Trust and Southwestern Property
Trust) that also trade at significant price-to-cash flow discounts relative to
their peers.
Four of the Portfolio's companies were involved in takeover activities during
the year and subsequently sold out of the Portfolio: Joslyn Corp., a Chicago
maker of electric components, Wallace Computer Services Inc., a printer of
business forms, Summit Bancorp in New Jersey, and most recently Pratt & Lambert,
United Co. The latter was acquired by Sherwin Williams Co., which paid a 70%
premium to market value to obtain Pratt & Lambert's franchise in architectural
finishes (paint). While we do not aim to construct a portfolio of takeover
candidates, these companies shared in common an undervalued stock price and a
franchise that made them special to their acquisitors.
Our outlook on the fundamental strength of the Portfolio's companies remains
positive as reflected by recent earnings reports. In addition, many U.S.
industrial small cap companies see strongly rising demand from overseas. Thanks
to past efficiency gains and a favorable U.S. currency, small industrial
companies have emerged as worldwide low cost producers of goods.
The Portfolio offers the consistent application of a disciplined value driven
investment process to its shareholders. 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.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.7%)
AEROSPACE (2.2%)
27,000 AAR Corp.......................................... $ 594
16,000 Thiokol Corp...................................... 542
300 United Industrial Corp............................ 2
----------
1,138
----------
BANKING (9.5%)
17,450 First Security Corp. (Delaware)................... 672
24,000 Greenpoint Financial Corp......................... 642
15,600 Onbancorp, Inc.................................... 521
25,000 Peoples Heritage Financial Group, Inc............. 569
16,000 Standard Federal Bank............................. 630
29,000 Trustmark Corp.................................... 660
20,000 Union Planters Corp............................... 638
21,000 Washington Mutual, Inc............................ 606
----------
4,938
----------
BUILDING (1.9%)
13,300 Ameron, Inc. (Delaware)........................... 500
38,800 Gilbert Associates, Inc., Class A................. 485
----------
985
----------
CAPITAL GOODS (4.2%)
21,403 Binks Manufacturing Co............................ 503
33,200 Cascade Corp...................................... 465
21,600 Starrett (L.S.) Co., Class A...................... 559
12,200 Tecumseh Products Co., Class A.................... 631
----------
2,158
----------
CHEMICALS (4.8%)
33,792 Aceto Corp........................................ 541
23,400 Dexter Corp....................................... 553
19,400 Learonal, Inc..................................... 446
29,800 Quaker Chemical Corp.............................. 402
18,000 Witco Corp........................................ 527
----------
2,469
----------
COMMUNICATIONS (1.1%)
30,200 Comsat Corp....................................... 562
----------
CONSUMER-DURABLES (3.9%)
26,200 Arvin Industries, Inc............................. 432
30,298 Knape & Vogt Manufacturing Co..................... 526
31,300 Oneida Ltd........................................ 552
25,100 Smith (A.O.) Corp., Class B....................... 521
----------
2,031
----------
CONSUMER-RETAIL (4.1%)
31,800 CPI Corp.......................................... 509
25,500 Deb Shops, Inc.................................... 88
25,700 Guilford Mills, Inc............................... 523
23,000 Ross Stores, Inc. 440
14,100 Springs Industries, Inc., Class A................. 583
----------
2,143
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (4.3%)
15,246 Block Drug Co., Inc., Class A..................... $ 530
30,400 Coors (Adolph), Inc., Class B..................... 673
27,900 International Multifoods Corp..................... 561
26,400 Nash Finch Co..................................... 482
----------
2,246
----------
ENERGY (3.3%)
24,600 Ashland Coal, Inc................................. 526
21,000 Diamond Shamrock, Inc............................. 543
25,500 Ultramar Corp..................................... 657
----------
1,726
----------
FINANCIAL-DIVERSIFIED (4.6%)
11,900 Finova Group, Inc................................. 574
10,100 GATX Corp......................................... 491
35,000 Manufactured Home Communities, Inc. REIT.......... 613
28,000 South West Property Trust REIT.................... 378
14,000 Wellsford Residential Property Trust REIT......... 322
----------
2,378
----------
HEALTH CARE (6.7%)
30,000 Analogic Corp..................................... 555
14,500 Beckman Instruments, Inc.......................... 513
26,400 Bergen Brunswig Corp., Class A.................... 657
35,500 Bindley Western Industries........................ 604
49,700 Kinetic Concepts, Inc............................. 596
26,000 United Wisconsin Services, Inc.................... 572
----------
3,497
----------
INDUSTRIAL (5.8%)
17,200 American Filtrona Corp............................ 576
13,400 Barnes Group, Inc................................. 482
50,700 GenCorp, Inc...................................... 621
44,500 Kaman Corp., Class A.............................. 495
34,900 Zero Corp. (Delaware)............................. 620
10,300 Zurn Industries, Inc.............................. 220
----------
3,014
----------
INSURANCE (5.8%)
16,200 Argonaut Group, Inc............................... 526
25,000 Enhance Financial Services Group, Inc............. 666
19,500 Provident Companies, Inc.......................... 661
15,900 Selective Insurance Group, Inc.................... 564
19,950 USLife Corp....................................... 596
----------
3,013
----------
METALS (2.1%)
35,700 Birmingham Steel Corp............................. 531
14,100 Cleveland-Cliffs Iron Co.......................... 578
----------
1,109
----------
PAPER & PACKAGING (2.8%)
21,500 Ball Corp......................................... 591
13,900 Potlatch Corp..................................... 556
25,500 Sealright Co., Inc................................ 284
----------
1,431
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SERVICES (11.0%)
23,200 ABM Industries, Inc............................... $ 644
21,200 Angelica Corp..................................... 435
27,000 Bowne & Co........................................ 540
30,700 Cross (A.T.) Co., Class A......................... 464
38,000 Jackpot Enterprises, Inc.......................... 442
18,400 National Service Industries, Inc.................. 596
20,900 New England Business Services, Inc................ 455
24,400 Ogden Corp........................................ 521
55,400 Piccadilly Cafeterias, Inc........................ 526
41,500 Russ Berrie & Co., Inc............................ 524
25,000 Sbarro, Inc....................................... 537
----------
5,684
----------
TECHNOLOGY (7.7%)
36,000 Augat, Inc........................................ 616
48,000 Core Industries, Inc.............................. 618
21,800 Cubic Corp........................................ 621
33,700 Gerber Scientific, Inc............................ 548
15,900 MTS Systems Corp.................................. 525
30,500 National Computer Systems, Inc.................... 576
36,000 Scitex Ltd........................................ 490
----------
3,994
----------
TRANSPORTATION (2.5%)
22,000 Airborne Freight Corp............................. 586
19,800 Overseas Shipholding Group, Inc................... 376
28,000 SkyWest, Inc...................................... 360
----------
1,322
----------
UTILITIES (7.4%)
19,700 Central Hudson Gas & Electric..................... 608
13,300 Commonwealth Energy Systems Cos................... 595
15,000 Eastern Enterprises............................... 529
25,900 Oneok, Inc........................................ 592
13,700 Orange & Rockland Utilities, Inc.................. 490
13,700 SJW Corp.......................................... 517
28,500 Washington Water Power Co......................... 499
----------
3,830
----------
TOTAL COMMON STOCKS (Cost $44,714)............................ 49,668
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (4.1%)
REPURCHASE AGREEMENT (4.1%)
$ 2,127 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$2,128, collateralized by $1,800 United States
Treasury Bonds, 7.50%, due 11/15/24, valued at
$2,171 (Cost $2,127)............................ $ 2,127
----------
TOTAL INVESTMENTS (99.8%) (Cost $46,841)...................... 51,795
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Dividends Receivable............................ $ 126
Receivable for Investments Sold................. 121
Interest Receivable............................. 1
Other........................................... 4 252
----------
LIABILITIES (-0.3%)
Investment Advisory Fees Payable................ (91)
Administrative Fees Payable..................... (7)
Custodian Fees Payable.......................... (3)
Payable for Portfolio Shares Redeemed........... (1)
Other Liabilities............................... (26) (128)
---------- ----------
NET ASSETS (100%)............................................. $ 51,919
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,357,807 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $11.91
----------
----------
</TABLE>
- ------------------------------------------------------------
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 18.6%
Land 2.5%
Lodging/Leisure 17.8%
Manufactured Home 6.1%
Office and
Industrial 25.9%
Self Storage 4.7%
Shopping Center 20.4%
Other 4.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. REAL ESTATE
NAREIT INDEX (1) PORTFOLIO
<S> <C> <C>
02/24/95* $500,000 $500,000
12/31/95 $572,300 $605,350
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION
OF REAL ESTATE INVESTMENT TRUSTS (NAREIT) INDEX(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
-----------------
YTD
-----------------
<S> <C>
PORTFOLIO................................... 21.07%
INDEX....................................... 14.46
<FN>
1. The NAREIT Index is an unmanaged market weighted index of tax qualified REITs
(excluding healthcare REITs) listed on the New York Stock Exchange, American
Stock Exchange and the NASDAQ National Market System, including dividends.
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. 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 December 31, 1995 was 21.07% compared to 14.46% for the National
Association of Real Estate Investment Trusts (NAREIT) Equity Index (excluding
Healthcare).
Although the return for the Index clearly lagged the broader equity and debt
markets by a substantial margin it is consistent with return expectations for
real estate during the recovery stage of the property cycle, with approximately
7.3% of the return in dividends and the other half in appreciation. From an
investment perspective, the REIT market in 1995 can be characterized as one in
which sector allocation, as opposed to stock selection, was the key determinant
of performance. Specifically, the office and industrial, hotel and self-storage
sectors provided the best returns (each in excess of 25%). These sectors, which
are comprised of a relatively small number of companies, represent only 20% of
the total Index. By contrast, the retail and multifamily sectors, representing
over 60% of the Index, generated total returns of only 5.1% and 12.3%
respectively.
In 1995, equity issuance was dominated by follow-on offerings from existing
REITs as opposed to IPOs. In total, there were 77 equity deals which raised
approximately $7 billion, including only 5 IPOs which raised approximately $830
million. By comparison, $10 billion was raised in 1994 with two-thirds of the
equity raised for IPOs. In 1995 REITs raised an additional $1.5 billion in
preferred stock and almost $2.4 billion from the placement of unsecured notes.
We anticipate that equity issuance in 1996 will be similar to last year in terms
of the ratio of follow-on to initial equity offerings and that the IPOs will,
once again, primarily be in the office and industrial and hotel sectors. Finally
we anticipate an increase in the amount of equity raised in the form of private
placements.
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
There were a number of significant events that occurred in the fourth quarter of
1995 that are worth noting. On a positive note, Carr Realty, a 2.4% position in
the Portfolio at year end, received a significant equity commitment from a
private investor at a premium to the then current share price; this served to
underpin investor perceptions of asset value and the stock rapidly rose to
parity with estimated Net Asset Value. In contrast, there were a number of
events on the retail front that caused some concern in the REIT market.
Generally the retail environment continued to show signs of weakness with
bankruptcy filings (e.g., Charming Shoppes and Edison Brothers Stores) as well
as a number of significant threatened and rumored bankruptcies, most notably
Kmart Corporation. This caused weakness throughout the retail REIT sector. The
Portfolio remains underweighted in each segment of the retail sector. Finally,
while we foresee continued consolidation in the REIT market through mergers of
public REITs with private real estate companies, there was one failed merger in
which Factory Stores of America was unable to complete its scheduled merger with
a private outlet center developer Charter Oak. We believe this is a greater
reflection on uncertainty in retailing, particularly the outlet center business,
as opposed to a significant signal that private mergers will slow.
The Portfolio continues to overweight those property sectors which are viewed to
hold above average total return potential by virtue of their stage in the
ongoing real estate recovery cycle. These sectors generally are characterized by
the greatest relative overbuilding during the 1980s, the greatest discount of
current values relative to replacement cost and the most attractive relative
operating leverage. This shareholder letter will provide a brief description of
our weighting in each of the sectors and some of our larger positions. We will
continue to provide updates of changes in sector allocation and stock ownership
in the coming quarters.
The office and industrial sector continues to be an overweighted position in the
Portfolio. At December 31, the Portfolio was 26% weighted in the sector (versus
13% in the Index). For the full-year 1995 this sector provided a total return of
25.6% in the Index. We anticipate companies in this sector to have improved
valuations both through cash flow growth as well as improving valuations of
these properties in the private market. Given the limited number of companies in
the sector our increase in overweighting in the fourth quarter was primarily due
to adding to existing positions. Larger positions held in the Portfolio include
companies that only own office properties such as Beacon Properties
(predominantly Boston) and Carr Realty (Washington D.C.), companies that only
own industrial buildings such as First Industrial (midwestern focus) and those
that own both office and industrial properties, including Spieker Properties
(Pacific Northwest and California), Highwoods Properties (North Carolina) and
Duke Realty (Midwest). Given the lack of significant new supply and the rental
rates required to justify new construction, we anticipate that the Portfolio
will continue to be overweighted in the office and industrial sector throughout
the year.
In the fourth quarter we increased our overweighting to the hotel sector to 18%
(versus 2% for the Index). The hotel sector provided a total return of 31% in
the Index in 1995. Our addition to the overweighting was primarily the result of
the opportunity to purchase a number of new names at very attractive valuation
levels. In the case of two companies, John Q. Hammons Hotels and ShoLodge Inc.,
the shareholder base of the companies changed materially during several days of
trading in which we believe a number of growth-oriented investors exited and
were replaced by more value-oriented investors. The Portfolio focus for this
sector remains in the full-service segment, which was enhanced in the fourth
quarter with the addition of Felcor Suite Hotels (the largest independent owner
of Embassy Suite Hotels) and Red Lion Hotels (a Western U.S. focused
full-service hotel company). Similar to the office and industrial sector, the
full service segment of the hotel sector has significant constraints to new
supply which cause us to anticipate that the Portfolio will remain overweighted
in the hotel sector.
We remain approximately market weighted in the apartment sector, as we continue
to see a resumption in new construction which appears well-balanced by steady
demand and anticipate that many markets will return to rental growth which is
closer to the level of inflation. The Portfolio holdings in this sector can be
divided into several themes which include companies that have significant market
share of new construction in markets with significant development barriers
(e.g., Avalon Properties in the Northeast); companies that are in markets which
are poised for superior growth (e.g., Essex Property, with large holding in the
San Francisco Bay area) and companies that offer attractive valuations versus
their underlying assets (e.g.,
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
Wellsford Residential in the Southwest and Northwest). Since we believe that the
multifamily sector has reached more of an equilibrium level, we anticipate
remaining approximately market-weighted.
In the fourth quarter, the Portfolio reduced an already underweighted position
versus the Index in the retail sector. As discussed in previous letters, new
construction in the retail sector continued to outpace lackluster growth in
retail sales. This past Christmas season provided further evidence of the
difficulties that retailers are facing with weak same store sales combined with
significant discounting programs. In this sector, the Portfolio focus is upon a
small number of companies that trade at a significant discount to their
underlying asset value and provide a strong current dividend return. Significant
positions include DeBartolo Realty (owner of regional malls nationwide), Crown
American Realty (owner of dominant regional malls in smaller Mid-Atlantic
markets) and Alexander Haagen Properties (owner of malls and shopping centers in
Southern California). Given our concerns with the retail sector, we anticipate
remaining significantly underweighted in this sector.
The final three other sectors combined account for approximately 13% of the
Portfolio. They include the manufactured home sector (6% of the Portfolio) which
is an overweighted position versus the Index due to the predictability of
cashflow growth and minimal capital expenditures; the self storage sector (5% of
the Portfolio) which is market-weighted versus the Index based on relatively
full valuation levels in a sector which is approaching a supply-demand
equilibrium; and finally the land sector (2% of the Portfolio) which is an
overweight postion and is likely to remain overweight in the Portfolio as a
select group of companies with holdings in attractive markets continue to trade
at a significant discount to net asset value.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (96.0%)
APARTMENT (18.6%)
47,300 Associated Estates Realty Corp. REIT.............. $ 1,017
123,800 Avalon Properties, Inc. REIT...................... 2,662
31,100 Camden Property Trust REIT........................ 742
125,900 Essex Property Trust, Inc. REIT................... 2,424
61,100 Evans Withycombe Residential, Inc. REIT........... 1,314
50,300 Paragon Group, Inc. REIT.......................... 874
9,700 South West Property Trust REIT.................... 131
135,000 Walden Residential Properties, Inc. REIT.......... 2,818
40,700 Wellsford Residential Property Trust REIT......... 936
----------
12,918
----------
LAND (2.5%)
+196,200 Atlantic Gulf Communities Corp.................... 1,324
+69,800 Catellus Development Corp......................... 419
----------
1,743
----------
LODGING/LEISURE (17.8%)
40,000 Felcor Suite Hotels, Inc. REIT.................... 1,110
+220,500 Host Marriot Corp................................. 2,922
+207,500 John Q Hammons Hotels, Inc........................ 1,919
+246,600 Prime Hospitality Corp............................ 2,466
54,200 Red Lion Hotels, Inc.............................. 949
+117,600 Servico, Inc...................................... 1,235
+187,400 ShoLodge, Inc..................................... 1,780
----------
12,381
----------
MANUFACTURED HOME (6.1%)
90,800 Manufactured Home Communities, Inc. REIT.......... 1,589
109,650 ROC Communities, Inc. REIT........................ 2,632
----------
4,221
----------
OFFICE AND INDUSTRIAL (25.9%)
INDUSTRIAL (1.7%)
53,700 First Industrial Realty Trust, Inc. REIT.......... 1,208
----------
OFFICE (7.4%)
101,500 Beacon Properties Corp. REIT...................... 2,335
67,500 Carr Realty Corp. REIT............................ 1,645
6,900 Crescent Real Estate Equities, Inc. REIT.......... 235
106,100 Crocker Realty Trust, Inc. REIT................... 942
----------
5,157
----------
OFFICE AND INDUSTRIAL (16.8%)
257,400 Bedford Property Investors, Inc. REIT............. 1,866
54,600 Duke Realty Investments, Inc. REIT................ 1,713
49,100 Highwoods Properties, Inc. REIT................... 1,387
160,700 Liberty Property Trust REIT....................... 3,335
60,600 Reckson Associates Realty Corp. REIT.............. 1,780
64,000 Spieker Properties, Inc. REIT..................... 1,608
----------
11,689
----------
TOTAL OFFICE AND INDUSTRIAL................................. 18,054
----------
SELF STORAGE (4.7%)
173,000 Public Storage, Inc. REIT......................... 3,287
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SHOPPING CENTER (20.4%)
FACTORY OUTLET CENTER (1.9%)
58,100 HGI Realty, Inc. REIT............................. $ 1,329
----------
REGIONAL MALL (14.3%)
343,100 Crown American Realty Trust REIT.................. 2,702
235,000 DeBartolo Realty Corp. REIT....................... 3,055
222,900 Glimcher Realty Trust REIT........................ 3,845
13,600 Rouse Co.......................................... 277
3,700 Taubman Centers, Inc. REIT........................ 37
----------
9,916
----------
SHOPPING CENTER (4.2%)
185,500 Alexander Haagen Properties, Inc. REIT............ 2,272
55,700 Burnham Pacific Property Trust REIT............... 536
6,800 Kranzco Realty Trust REIT......................... 100
----------
2,908
----------
TOTAL SHOPPING CENTER....................................... 14,153
----------
TOTAL COMMON STOCKS (Cost $62,861)............................ 66,757
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT (3.3%)
$ 2,315 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$2,316, collateralized by $1,510 United States
Treasury Bonds, 10.625%, due 8/15/15, valued at
$2,363 (Cost $2,315)............................ 2,315
----------
TOTAL INVESTMENTS (99.3%) (Cost $65,176)...................... 69,072
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.7%)
Cash............................................ $ 1
Receivable for Investments Sold................. 2,649
Dividends Receivable............................ 588
Receivable for Portfolio Shares Sold............ 35
Interest Receivable............................. 1
Other........................................... 2 3,276
----------
LIABILITIES (-4.0%)
Payable for Investments Purchased............... (2,706)
Investment Advisory Fees Payable................ (78)
Administrative Fees Payable..................... (9)
Custodian Fees Payable.......................... (6)
Payable for Portfolio Shares Redeemed........... (3)
Other Liabilities............................... (37) (2,839)
---------- ----------
NET ASSETS (100%)............................................. $ 69,509
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 6,086,542 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $11.42
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
80
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 2.1%
Banking 12.5%
Capital Goods 2.1%
Chemicals 4.0%
Communications 6.6%
Consumer-Durables 4.9%
Consumer-Retail 6.8%
Consumer-Service & Growth 3.5%
Consumer-Staples 5.4%
Energy 9.3%
Financial-Diversified 1.9%
Health Care 3.9%
Industrial 3.6%
Insurance 6.6%
Metals 2.0%
Paper & Packaging 5.9%
Technology 3.4%
Transportation 3.7%
Utilities 9.9%
Other 1.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ----------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE EQUITY
S&P 500 STOCK INDEX (1) PORTFOLIO
<S> <C> <C>
1/31/90* $500,000 500000
10/31/90 474,650 444750
10/31/91 633500 557460
10/31/92 695700 604880
12/31/92 728150 638765
12/31/93 801400 735485
12/31/94 811900 726000
12/31/95 1116687 970589
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE S&P 500 INDEX
AND THE INDATA EQUITY-MEDIAN INDICES(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
ONE YEAR YEARS INCEPTION
---------- ----------- ------------
<S> <C> <C> <C>
PORTFOLIO........................... 33.69% 15.65% 11.86%
S&P 500............................. 37.54 16.57 14.54
INDATA EQUITY-MEDIAN................ 32.77 16.03 13.84
<FN>
1. The Indata Equity-Median Index and the S&P 500 Stock Index are unmanaged
indices of common stocks. The Indata Equity-Median Index includes an average
asset allocation of 5% cash and 95% equity based on $30.6 billion in assets
among 562 portfolios for the twelve month period ended December 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.
Our value investment philosophy for the Value Equity Portfolio is based on the
premise that a diversified portfolio of undervalued securities will outperform
the market over the long-term, and can be expected to preserve principal in a
difficult market environment.
Key aspects of our philosophy are as follows:
Reversion to mean valuation levels (return to the long term average) is the
most consistent and powerful force in investing.
We buy companies selling at less than our research measures to be their true
worth.
Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.
We limit our universe of investments to larger, liquid stocks. This is a
list similar to the S&P 500.
Investment decisions are based on research undertaken by the Morgan Stanley
Asset Management/Chicago investment team.
The total return of the Portfolio for the year ended December 31, 1995 was
33.69% as compared to 37.54% for the S&P 500 Index and 32.77% for the Indata
Equity-Median Index for the same period. The average annual total return of the
Portfolio for the five years ended December 31, 1995 and for the period from
inception in January 1990 through December 31, 1995 were 15.65% and 11.86%,
respectively, compared to 16.57% and 14.54% for the S&P 500 Index, and 16.03%
and 13.84% for the Indata Equity-Median Index for the same periods. In 1995 the
median U.S. mutual fund returned 32.3% and the median value type fund
(equity-income) returned 30.7%.
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
P/E P/B
--------- ---------
<S> <C> <C>
Value Equity Portfolio 14.0x 2.2x
S&P 500 17.7x 3.7x
</TABLE>
The U.S. market had a strong year in 1995. Declining interest rates, a low
inflation environment, and strong growth in corporate earnings within a
moderating economy helped propel the market to the sixth
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Value Equity Portfolio
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
highest total return since 1926. Continuing flows of money into U.S. equity
mutual funds, in excess of $100 billion in 1995, also played a significant
factor. Large-capitalization stocks performed particularly well, driven in part
by the strong flows of money into index funds tied to the S&P 500 Stock Index.
In addition, the relatively weak dollar has provided currency gains for large
multinationals. The effect of non-dollar earnings can have a significant impact
on multinationals. We estimate that approximately 30% of S&P 500 earnings are
non-dollar.
Market capitalization size was an important factor in 1995, with substantial
differences in returns between large and small capitalization stocks. The S&P
500, which is capitalization weighted, was up 37.5%, while the same S&P 500
stocks were up 32.2% when equally weighted. This size factor had the biggest
negative impact on the Portfolio as it is equally weighted (as are most actively
managed portfolios). The impact on smaller capitalization stocks was greater.
The Russell 2000 Index, consisting of small capitalization stocks, rose 28.4%
for the year while the Russell 1000 Index, consisting of larger capitalization
stocks, rose 37.8%.
Investment style had a lesser negative impact on performance. During 1995, the
growth style of investing outperformed value investing. The S&P/Barra Growth
Index returned 38.1% compared to the S&P/ Barra Value Index return of 37.0%.
However, the difference was more pronounced for mutual funds. The median Growth
& Income mutual fund returned 32.8%, outperforming the median Equity-Income
mutual fund by 170 basis points.
During the year, the Portfolio reduced the exposure to health care from 12% to
4%. The change reflected the revaluation of the sector from a price-earnings
ratio of 15 to the current level of 20 to 25. Health care stocks that were sold
include Merck, Becton Dickinson, Bristol Myers Squibb, and Pharmacia-Upjohn. The
Portfolio also reduced the exposure to consumer staples, from 10% to 5%, with
the sale of CPC International and Anheuser Busch, and the partial sale of H.J.
Heinz as these stocks reverted to fair valuation.
These sales were replaced with attractively-valued stocks in the cyclical, oil
and retail sectors. In the cyclical and oil sectors, new holdings include
Willamette Industries, Weyerhaeuser, Louisiana-Pacific, Chrysler, Exxon and
Arco. The U.S. retailing market is finishing its third year of difficult sales,
resulting in compelling valuations. Mid-year, the portfolio increased retail
exposure, adding TJX Companies and JCPenney.
For the year, the best performing sectors were transportation, returning 65%,
capital goods, returning 64%, financial services, returning 56%, and health
care, returning 56%. The Portfolio was overweighted in all of these sectors.
Underperforming sectors included retail, returning 2%, and consumer durables,
returning 18%. Both sectors were overweighted in the Portfolio due to the
attractive valuations within the sector.
The top performing stock in the Portfolio was the Student Loan Marketing
Association (Sallie Mae), up 105%. The Portfolio added the stock when the market
expected President Clinton's direct student loan program to significantly impair
Sallie Mae's business. Since then, Sallie Mae has benefited from the changes
implemented by the U.S. Congress and has gained new clients due to superior
servicing capability.
- --------------------------------------------------------------------------------
Value Equity Portfolio
82
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (98.1%)
AEROSPACE (2.1%)
33,300 United Technologies Corp.......................... $ 3,159
----------
BANKING (12.5%)
43,750 BankAmerica Corp.................................. 2,833
44,000 Bankers Trust (New York) Corp..................... 2,926
53,700 Chemical Banking Corp............................. 3,155
74,000 First of America Bank Corp........................ 3,283
58,550 Mellon Bank Corp.................................. 3,147
95,000 PNC Bank Corp..................................... 3,064
----------
18,408
----------
CAPITAL GOODS (2.1%)
86,700 Deere & Co........................................ 3,056
----------
CHEMICALS (4.0%)
41,275 Eastman Chemical Co............................... 2,585
27,100 Monsanto Co....................................... 3,320
----------
5,905
----------
COMMUNICATIONS (6.6%)
60,200 NYNEX Corp........................................ 3,251
54,800 SBC Communications, Inc........................... 3,151
84,100 Sprint Corp....................................... 3,353
----------
9,755
----------
CONSUMER-DURABLES (4.9%)
35,000 Chrysler Corp..................................... 1,938
86,800 Ford Motor Co..................................... 2,517
50,900 General Motors Corp............................... 2,692
----------
7,147
----------
CONSUMER-RETAIL (6.8%)
61,800 J.C. Penney Co., Inc.............................. 2,943
194,700 Kmart Corp........................................ 1,411
167,800 TJX Companies, Inc................................ 3,167
189,500 Woolworth Corp.................................... 2,464
----------
9,985
----------
CONSUMER-SERVICE & GROWTH (3.5%)
32,600 Eastman Kodak Co.................................. 2,184
138,900 Ogden Corp........................................ 2,969
----------
5,153
----------
CONSUMER-STAPLES (5.4%)
68,100 American Brands, Inc.............................. 3,039
154,900 Fleming Cos., Inc................................. 3,195
51,500 Heinz (H.J.) Co................................... 1,706
----------
7,940
----------
ENERGY (9.3%)
86,500 Ashland, Inc...................................... 3,038
33,000 Atlantic Richfield, Co............................ 3,655
21,600 Exxon Corp........................................ 1,731
16,050 Royal Dutch Petroleum Co.......................... 2,265
38,350 Texaco, Inc....................................... 3,011
----------
13,700
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
FINANCIAL-DIVERSIFIED (1.9%)
43,250 Student Loan Marketing Association................ $ 2,849
----------
HEALTH CARE (3.9%)
81,900 Bausch & Lomb, Inc................................ 3,245
59,800 Baxter International, Inc......................... 2,504
----------
5,749
----------
INDUSTRIAL (3.6%)
147,300 Hanson plc ADR.................................... 2,246
57,100 Rockwell International Corp....................... 3,019
----------
5,265
----------
INSURANCE (6.6%)
90,900 American General Corp............................. 3,170
70,000 Lincoln National Corp............................. 3,763
51,000 St. Paul Cos., Inc................................ 2,837
----------
9,770
----------
METALS (2.0%)
48,400 Phelps Dodge Corp................................. 3,013
----------
PAPER & PACKAGING (5.9%)
121,600 Louisiana-Pacific Corp............................ 2,949
66,000 Weyerhauser Co.................................... 2,855
50,400 Willamette Industries, Inc........................ 2,835
----------
8,639
----------
TECHNOLOGY (3.4%)
68,000 Apple Computer, Inc............................... 2,168
51,200 Harris Corp....................................... 2,796
----------
4,964
----------
TRANSPORTATION (3.7%)
+32,000 AMR Corp.......................................... 2,376
128,000 Ryder System, Inc................................. 3,168
----------
5,544
----------
UTILITIES (9.9%)
106,700 General Public Utilities Corp..................... 3,628
92,500 NIPSCO Industries, Inc............................ 3,538
137,400 Pinnacle West Capital Corp........................ 3,950
85,800 Texas Utilities Co................................ 3,529
----------
14,645
----------
TOTAL COMMON STOCKS (Cost $129,825)........................... 144,646
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.6%)
REPURCHASE AGREEMENT (1.6%)
$ 2,342 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$2,343, collateralized by $1,905 United States
Treasury Bonds, 7.875%, due 2/15/21, valued at
$2,391 (Cost $2,342)............................ 2,342
----------
TOTAL INVESTMENTS (99.7%) (Cost $132,167)..................... 146,988
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Value Equity Portfolio
83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (0.5%)
Receivable for Investments Sold................. $ 326
Dividends Receivable............................ 324
Interest Receivable............................. 1
Other........................................... 8 $ 659
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable................ (168)
Payable for Portfolio Shares Redeemed........... (50)
Administrative Fees Payable..................... (20)
Custodian Fees Payable.......................... (5)
Other Liabilities............................... (39) (282)
---------- ----------
NET ASSETS (100%)............................................. $ 147,365
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 10,568,118 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $13.94
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Value Equity Portfolio
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.0%
Banking 6.5%
Capital Goods 1.1%
Chemicals 2.1%
Communications 3.8%
Consumer-Durables 2.4%
Consumer-Retail 3.6%
Consumer-Service & Growth 1.6%
Consumer-Staples 3.1%
Energy 4.5%
Financial-Diversified 0.9%
Health Care 2.0%
Industrial 1.9%
Insurance 3.0%
Metals 0.9%
Paper & Packaging 3.0%
Technology 1.8%
Transportation 1.7%
Utilities 5.3%
U.S. Treasury Notes 44.5%
Other 5.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INDATA BALANCED MEDIAN INDEX(1) BALANCED PORTFOLIO
<S> <C> <C>
2/20/90* $500,000 500000
10/31/90 488035 496840
10/31/91 601750 582845
10/31/92 659000 638635
12/31/92 680250 656635
12/31/93 747350 736015
12/31/94 743800 718950
12/31/95 929081 888838
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX(1)
- -----------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO....... 23.63% 11.45% 10.31%
INDEX........... 24.91 12.43 11.19
<FN>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 7% cash, 39% bonds and 54% equity based on $37.8 billion in
assets among 538 portfolios for the year ended December 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.
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 our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.
The total return of the Portfolio for the year ended December 31, 1995 was
23.63%, compared to 24.91% for the Indata Balanced-Median Index for the same
period. The average annual total return of the Portfolio for the five years
ended December 31, 1995 and for the period from inception in February 1990
through December 31, 1995 were 11.45%, and 10.31% respectively, as compared to
12.43% and 11.19% for the Index for the same periods.
Our asset allocation, based on market value percentage of net assets at December
31, 1995 is as follows:
<TABLE>
<S> <C>
Equities................................ 50.2%
Fixed Income............................ 44.5
Cash and other net assets............... 5.3
-----
100.0%
-----
-----
</TABLE>
With the strong growth in corporate earnings, the market, as measured by the S&P
500 Stock Index (S&P 500), is within its historical range for fair valuation
(14-16x P/E). The current level of equity exposure is 51%, up slightly from the
December 31, 1994 level of 50%. The slight increase in equity exposure reflects
the recent strong performance of the U.S. equity market.
EQUITIES
For 1995, the equity component of the Portfolio had a gross return of 35.40%
compared to the S&P 500 return of 37.57%. The median equity return within
balanced portfolios for 1995, as measured by Indata, was 35%.
The U.S. market had a strong year in 1995. Declining interest rates, a low
inflation environment, and strong
- ------------------------------------------------
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.
- --------------------------------------------------------------------------------
Balanced Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
growth in corporate earnings within a moderating economy helped propel the
market to the sixth highest total return since 1926. Continuing flows of money
into U.S. equity mutual funds, in excess of $100 billion in 1995, also played a
significant factor. Large-capitalization stocks performed particularly well,
driven in part by the strong flows of money into index funds tied to the S&P 500
Stock Index. In addition, the relatively weak dollar has provided currency gains
for large multinationals. The effect of non-dollar earnings can have a
significant impact on multinationals. We estimate that approximately 30% of S&P
500 earnings are non-dollar.
Market capitalization size was an important factor in 1995, with substantial
differences in returns between large and small capitalization stocks. The S&P
500, which is capitalization weighted, was up 37.5%, while the same S&P 500
stocks were up 32.2% when equally weighted. This size factor had the biggest
negative impact on the equity portion of the Portfolio as it is equally weighted
(as are most actively managed portfolios). The impact on smaller capitalization
stocks was greater. The Russell 2000 Index, consisting of small capitalization
stocks, rose 28.4% for the year while the Russell 1000 Index, consisting of
larger capitalization stocks, rose 37.8%.
Investment style had a lesser negative impact on performance. During 1995, the
growth style of investing outperformed value investing. The S&P/Barra Growth
Index returned 38.1% compared to the S&P/ Barra Value Index return of 37.0%.
However, the difference was more pronounced for mutual funds. The median Growth
& Income mutual fund returned 32.8%, outperforming the median Equity-Income
mutual fund by 170 basis points.
The equity component of the Portfolio holds the same undervalued companies that
are held in the Value Equity Portfolio. The equity portion of the Portfolio has
a wide valuation gap as compared to the characteristics of the S&P 500.
<TABLE>
<CAPTION>
P/E P/B YIELD
--------- --------- ---------
<S> <C> <C> <C>
Portfolio-equity portion............ 14.0x 2.2x 3.4%
S&P 500............................. 17.7x 3.7x 2.3%
</TABLE>
During the year, the Portfolio reduced the exposure to health care from 6% to
2%. The change reflected the revaluation of the sector from a price-earnings
ratio of 15 to the current level of 20 to 25. Health care stocks that were sold
include Merck, Becton Dickinson, Bristol-Myers Squibb, and Pharmacia-Upjohn. The
Portfolio also reduced the exposure to consumer staples, from 5% to 3%, with the
sale of CPC International and Anheuser Busch, and the partial sale of H.J. Heinz
as these stocks reverted to fair valuation.
These sales were replaced with attractively-valued stocks in the cyclical, oil
and retail sectors. In the cyclical and oil sectors, new holdings include
Willamette Industries, Weyerhaeuser, Louisiana-Pacific, Chrysler, Exxon and
Arco. The U.S. retailing market is finishing its third year of difficult sales,
resulting in compelling valuations. Mid-year, the portfolio increased retail
exposure, adding TJX Companies and J.C. Penney.
For the year, the best performing sectors were transportation, returning 65%,
capital goods, returning 64%, financial services, returning 56%, and health
care, returning 56%. The Portfolio was overweighted in all of these sectors.
Underperforming sectors included retail, returning 2%, and consumer durables,
returning 18%. Both sectors were overweighted in the Portfolio due to the
attractive valuations within the sector.
The top performing stock in the Portfolio was the Student Loan Marketing
Association (Sallie Mae), up 105%. The Portfolio added the stock when the market
expected President Clinton's direct student loan program to significantly impair
Sallie Mae's business. Since then, Sallie Mae has benefited from the changes
implemented by the U.S. Congress and has gained new clients due to superior
servicing capability.
FIXED INCOME
The fixed income component of the Portfolio continues to maintain 100% exposure
to intermediate-term U.S. Government securities. For 1995, the fixed income
portion of the Portfolio had a total return of 16.18% compared to a return of
15.30% for the Lehman Intermediate-Government/Corporate Index (MSAM/Chicago's
fixed-income benchmark). The median fixed income return within balanced
portfolios for 1995, as measured by Indata, which includes longer-duration
benchmarks, was 16.5%.
The Portfolio began the year at approximately an index neutral weighted average
maturity of 4.4 years. During the year, interest rates fell across all maturity
spectrums, with the largest decline occurring in the intermediate maturities.
The Portfolio benefited from the reshaping of the yield curve as it holds U.S.
Treasuries in maturities of 3 and 5 years. With inflation at approximately the
3% level, and intermediate yields (5 year maturity) at the 5% level, we are
comfortable with our current position.
- --------------------------------------------------------------------------------
Balanced Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (50.2%)
AEROSPACE (1.0%)
2,300 United Technologies Corp.......................... $ 218
----------
BANKING (6.5%)
3,700 BankAmerica Corp.................................. 240
3,400 Bankers Trust (New York) Corp..................... 226
4,300 Chemical Banking Corp............................. 252
6,100 First of America Bank Corp........................ 271
4,700 Mellon Bank Corp.................................. 252
7,400 PNC Bank Corp..................................... 239
----------
1,480
----------
CAPITAL GOODS (1.1%)
6,900 Deere & Co........................................ 243
----------
CHEMICALS (2.1%)
3,425 Eastman Chemical Co............................... 214
2,100 Monsanto Co....................................... 258
----------
472
----------
COMMUNICATIONS (3.8%)
5,500 NYNEX Corp........................................ 297
5,000 SBC Communications, Inc........................... 288
7,200 Sprint Corp....................................... 287
----------
872
----------
CONSUMER-DURABLES (2.4%)
2,100 Chrysler Corp..................................... 116
7,300 Ford Motor Co..................................... 212
4,300 General Motors Corp............................... 227
----------
555
----------
CONSUMER-RETAIL (3.6%)
4,800 J.C. Penney Co., Inc.............................. 229
17,100 Kmart Corp........................................ 124
14,100 TJX Companies, Inc................................ 266
15,300 Woolworth Corp.................................... 199
----------
818
----------
CONSUMER-SERVICE & GROWTH (1.6%)
2,400 Eastman Kodak Co.................................. 161
9,600 Ogden Corp........................................ 205
----------
366
----------
CONSUMER-STAPLES (3.1%)
5,500 American Brands, Inc.............................. 245
13,700 Fleming Cos., Inc................................. 283
5,100 Heinz (H.J.) Co................................... 169
----------
697
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ENERGY (4.5%)
6,600 Ashland, Inc...................................... $ 232
2,500 Atlantic Richfield Co............................. 277
1,400 Exxon Corp........................................ 112
1,250 Royal Dutch Petroleum Co.......................... 176
3,000 Texaco, Inc....................................... 236
----------
1,033
----------
FINANCIAL-DIVERSIFIED (0.9%)
3,000 Student Loan Marketing Association................ 198
----------
HEALTH CARE (2.0%)
6,500 Bausch & Lomb, Inc................................ 258
4,600 Baxter International, Inc......................... 192
----------
450
----------
INDUSTRIAL (1.9%)
12,400 Hanson plc ADR.................................... 189
4,400 Rockwell International Corp....................... 233
----------
422
----------
INSURANCE (3.0%)
5,900 American General Corp............................. 206
4,700 Lincoln National Corp............................. 252
3,800 St. Paul Cos., Inc................................ 211
----------
669
----------
METALS (0.9%)
3,100 Phelps Dodge Corp................................. 193
----------
PAPER & PACKAGING (3.0%)
9,500 Louisiana-Pacific Corp............................ 230
5,000 Weyerhauser Co.................................... 216
4,100 Willamette Industries, Inc........................ 231
----------
677
----------
TECHNOLOGY (1.8%)
5,500 Apple Computer, Inc............................... 175
4,200 Harris Corp....................................... 230
----------
405
----------
TRANSPORTATION (1.7%)
+2,200 AMR Corp.......................................... 163
9,200 Ryder System, Inc................................. 228
----------
391
----------
UTILITIES (5.3%)
9,100 General Public Utilities Corp..................... 309
7,500 NIPSCO Industries, Inc............................ 287
11,100 Pinnacle West Capital Corp........................ 319
7,050 Texas Utilities Co................................ 290
----------
1,205
----------
TOTAL COMMON STOCKS (Cost $9,704)............................. 11,364
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Balanced Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
FIXED INCOME SECURITIES (44.5%)
U.S. TREASURY NOTES (44.5%)
$ 4,875 8.25%, 7/15/98.................................... $ 5,218
4,803 5.50%, 4/15/00.................................... 4,843
----------
TOTAL FIXED INCOME SECURITIES (Cost $9,804)................... 10,061
----------
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
1,006 The Chase Manhattan Bank, N.A., 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$1,007, collateralized by $765 United States
Treasury Bonds, 10.75%, due 2/15/03, valued at
$1,025 (Cost $1,006)............................ 1,006
----------
TOTAL INVESTMENTS (99.1%) (Cost $20,514)...................... 22,431
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.2%)
Interest Receivable............................. $ 243
Dividends Receivable............................ 24
Other........................................... 1 268
-----
LIABILITIES (-0.3%)
Investment Advisory Fees Payable................ (15)
Payable for Portfolio Shares Redeemed........... (13)
Administrative Fees Payable..................... (4)
Custodian Fees Payable.......................... (2)
Other Liabilities............................... (23) (57)
----- ----------
NET ASSETS (100%)............................................. $ 22,642
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,268,132 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $9.98
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Balanced Portfolio
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Algeria 3.4%
Argentina 25.9%
Brazil 13.5%
Bulgaria 0.8%
Ecuador 3.3%
Mexico 16.5%
Morocco 7.8%
Nigeria 1.5%
Panama 5.9%
Poland 1.8%
Russia 15.4%
Venezuela 3.5%
Other 0.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
JP Morgan Emerging Markets Bond Index (1) Emerging Markets Debt Portfolio
2/1/94* $500,000 $500,000
12/31/94 $406,550 $429,500
12/31/95 $518,514 $550,748
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE JP MORGAN EMERGING MARKETS BOND INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 28.23% 5.18%
INDEX............................ 27.54 1.92
<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 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 year ended December 31, 1995 was
28.23% as compared to 27.54% for the J.P. Morgan Emerging Markets Bond Index for
the same period. The average annual total return of the Portfolio for the period
from inception in February 1994 through December 31, 1995 was 5.18% as compared
to 1.92% for the J.P. Morgan Emerging Markets Bond Index for the same period. As
of December 31, 1995 the Portfolio had an SEC 30-day yield of 15.67%.
For the three months ended December 31, 1995, the total return of the Portfolio
was 7.12% compared with 10.20% for the J.P. Morgan Emerging Markets Bond Index.
Following a bout of profit taking early in the fourth quarter, the market
resumed its upward climb. Profit taking was triggered by broker/dealers who were
reducing positions due to fiscal year end considerations. An improvement in the
markets sentiment toward Argentina prompted all market participants to increase
capital committed to this asset class. Hopes of a balanced budget agreement in
the U.S. provided a favorable backdrop to the currency and fixed income markets
in general over this period.
The fourth quarter was characterized by a high degree of dispersion in the
individual country performances, as investors re-positioned their portfolios.
Panama, Argentina and Venezuela were the outperformers and Poland, Philippines,
South Africa, Mexico and Russia were the underperformers for the quarter.
The markets perception of Argentina's credit risk changed dramatically as the
political infighting between rival contenders for power came to an end, as
President Menem seized the political initiative. Aggressive moves to tackle the
federal budget, remedial measures to tackle the fiscal problems in the provinces
and the privatization of the remaining state assets pulled Argentina out of the
vicious circle of declining
- ------------------------------------------------
THE 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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
confidence and poor economic performance following the tequila crisis of the
first quarter. Price movements were exaggerated by the fact that most investors,
foreign and local, were underweight in Argentina. The return of liquidity and
improving sentiment should result in the resumption of economic growth in 1996.
Entering the quarter with a relative underweight in Argentina, we started
increasing our positions during the first half of November and ended the year
close to our target levels. We intend to retain a relative overweight allocation
until such time when the market prices in all the good economic news that we can
expect in the first half of 1996.
Part of the increase in Argentina was financed by a modest reduction in our
exposure to Brazil. Brazil underperformed in the fourth quarter as the market
was disappointed with the progress of the reform agenda. Further, a plethora of
bad news such as an increase in the fiscal deficit, interventions in private
banks and politicians jockeying for influence adversely affected market
perceptions. Issues such as the lack of fiscal controls at the federal, state
and local levels and the burgeoning in the levels of internal debt questioned
the long term sustainability of the Real plan. Brazilian assets recovered quite
strongly during the last weeks of the quarter as President Cardoso re-
established the political momentum for the reform program. The fiscal condition
of the federal government will continue to be strained as the current
constitution does not provide the government with sufficient degrees of freedom.
Any long term corrective measures will have to wait until such time when reforms
(including the administrative, tax and social security reform measures currently
being discussed) are passed and implemented in the future. We remain optimistic
that the political process will deliver reforms eventually. Meanwhile the
competent economic managers of the country will work hard to maintain the Real
plan. Declining inflation and real interest rates, a manageable external account
situation and reasonable economic growth should make their work that much
easier.
We entered the quarter with an overweight position in Venezuela. Its high
yields, we thought, compensated us for the deterioration in the country's
economic fundamentals. High inflation, negative real interest rates and
spiraling fiscal deficits were counteracted by its oil revenues and reasonable
level of foreign exchange reserves. The political leadership was making
half-hearted measures to gradually move away from its non-orthodox economic
policies. The resignation of the last remaining committed reformer
prompted us to reduce the allocation to Venezuela. With hindsight such a move
proved to be pre-mature as we underestimated the President's commitment to
reform and his willingness to engage the IMF and the World Bank in discussions
to obtain external finance and expertise in managing the transition to a more
free market oriented economic policy stance. The impact of stabilization
measures on the real non-oil economy will be severe and managing the political
fallout of the IMF program will be one of the key challenges for the government.
There does seem to have developed a political consensus in favor of a
stabilization program and this should reduce the probability of civil unrest
following the adoption of policies which will result in higher inflation, fiscal
contraction and positive real interest rates. We will increase our allocation to
Venezuela as the opportunity presents itself during the early part of 1996. We
continue to believe that implementing the IMF program will require an upgrade in
the technical skills of the administrative machinery.
Mexico once again proved to be a difficult credit to understand. Concerns over
the state of the banking system and the lack of a pick-up in domestic growth
caused nervousness in the foreign exchange markets in the fourth quarter. The
markets believed that the government lacked the political will and economic
policy alternatives to meeting year-end demand for dollars. Fears about another
peso crisis and the lack of a clear and timely strategic response on the part of
the policy makers to combat the speculative demand for dollars produced the
second peso crisis within the space of less than twelve months. Our holdings in
peso denominated local treasury bills were affected as interest rates eventually
increased and the peso weakened dramatically. We continued to hold our positions
as we believed that this time around the pressures on the currency were seasonal
and temporary and a drastic tightening of monetary policy would reverse the
slide in the currency. Our outlook for 1996 is one of cautious optimism. The
return of growth is imperative from a social and political standpoint. Growth in
private consumption is unlikely to surprise on the upside as the system needs to
de-leverage and payoff the debts accumulated in the last four years. The economy
remains vulnerable to any internal and external shocks that would delay the
economic recovery. Local treasury bills continue to offer the best way to play
the Mexican debt markets as Mexican Brady bonds trade unjustifiably tight to
other credits in the region.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
Russia, one of our relatively large bets against the index finally reached an
agreement with its external creditors. Prices of the loans did appreciate in
value soon after, but profit taking and a reduction in positions in front of the
Duma elections causing prices to come down from their highs. The Duma elections
did result in the Communists winning the largest share of the seats, however,
the opposition still lacks a two-thirds majority to reverse the stance of
economic policy. The political aspirations of the incumbent President will
however result in changes in the tone of public pronouncements of the
administration and the President will take policy actions to increase his
approval ratings within the ranks of the center and right of the political
spectrum. There could be a slow-down and some dilution of the economic reform
program as economic policy takes a back seat to Presidential politics. The
potential for a policy vacuum or a near term reversal in course will limit the
enthusiasm for Russian assets in the market. The non-performing loans, based on
the parameters of the announced restructuring, trade at spreads close to 2,000
bps above U.S. Treasuries, 700 bps wider than the assets of Ecuador, Bulgaria
and Venezuela. We believe that given the current state of the economy (declining
inflation, trade surpluses, a low external debt burden and a resumption in
growth) and the willingness of any future administration to service their
external debts, the market is mis-pricing Russian risk. The prices of the asset
should increase on the announcement of an IMF Extended Fund Facility and
continued compliance by the government under the terms of the restructuring
agreement. We do not envisage any changes in our exposure to Russia at this
point.
Morocco has been maintained at a steady 7% level for most of the quarter. At
current prices Morocco is attractive. The drought of 1995 is over and the
resumption of rainfall during this season will make all the difference to the
fortunes of this country. A better harvest will lead to higher growth, lower
inflation, improvement in the external payments position and give the policy
makers an opportunity to initiate long delayed structural reforms. The country
has outlined the course of economic policy to be followed in the next fiscal
year. Financial de-regulation, privatization, increasing exports and reforming
government expenditures are in the cards. Implementation of the proposed
strategy should result in a substantial tightening of Moroccan spreads in 1996.
In the high yield sector we remain sanguine about the prospects of Ecuador and
Bulgaria. We reduced our exposure to Nigeria following the delay in the
transition to civilian rule and the execution of leaders campaigning for civil
rights. The prospects for further political uncertainty and strife make Nigerian
assets risky.
Panama, a pre-Brady country turned in a strong performance for the quarter.
Investors sought to increase their allocations in the when-as and if issued
markets. The commitment of the new government to reform encouraged investors.
The enactment of labor reform and the possible privatization of state assets,
including the properties along the Panama canal should improve the economic
fortunes of the country in the future. We retain our relative overweight
exposure to Panama.
Our outlook for emerging markets debt remains positive. A slowdown in growth in
the U.S. and Europe and signs of inflation should result in a decline in market
rates. Credit stories unfolding in Latin America and Eastern Europe show
dramatic improvements over 1995. Policy makers commitment to reform has only
been strengthened in the post tequila days. The perfect line up of interest
rates, spreads and fund flows should result in price appreciation. We will
remain vigilant however for the first signs of a turnaround in market sentiment
or fundamentals.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
DEBT INSTRUMENTS (90.6%)
ALGERIA (3.4%)
LOAN AGREEMENTS (3.4%)
$ p###9,788 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 6.875%, 12/31/00............... $ 5,090
~p###2,000 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 12/31/00 (Participation:
Salomon Brothers)............................... 1,040
--------------
6,130
--------------
ARGENTINA (25.9%)
BONDS (25.9%)
$ 3,000 Banco de Galicia 9.00%, 11/01/03.................. 2,629
7,000 Republic of Argentina BOCON, Series 1 DL,
(Floating Rate), 3.188%, 4/01/01................ 6,072
5,200 Republic of Argentina Discount Bonds, (Floating
Rate), 6.563%, 3/31/23.......................... 3,412
/ /26,450 Republic of Argentina Par Bonds, Series L, 5.00%,
3/31/23......................................... 15,110
++28,000 Republic of Argentina, Series L, "Euro", (Floating
Rate), 6.813%, 3/31/05.......................... 19,950
--------------
47,173
--------------
BRAZIL (13.5%)
BONDS (13.5%)
$ / /17,250 Federative Republic of Brazil Par Bond, Series
Z-L, 4.25%, 4/15/24............................. 9,186
/\26,753 Federative Republic of Brazil, Series C, "Euro",
(Floating Rate), PIK, 8.00%, 4/15/14............ 15,349
--------------
24,535
--------------
BULGARIA (0.8%)
BONDS (0.8%)
$ 250 Bulgaria Front Loaded Interest Reduction Bond,
Series A, (Floating Rate), 2.00%, 7/28/12....... 75
#2,983 Bulgaria Interest Arrears Bonds, (Floating Rate),
6.75%, 7/28/11.................................. 1,387
--------------
1,462
--------------
ECUADOR (3.3%)
BONDS (3.3%)
$ 5,000 Republic of Ecuador Discount Bonds, "Euro",
(Floating Rate), 6.813%, 2/28/25................ 2,534
#181 Republic of Ecuador Discount Bonds, (Floating
Rate), 6.813%, 2/28/25.......................... 92
1,900 Republic of Ecuador IE Bonds, (Floating Rate),
6.50%, 12/21/04................................. 1,159
/ /4,000 Republic of Ecuador Par Bond, "Euro", 3.00%,
3/01/25......................................... 1,460
2,043 Republic of Ecuador PDI Bonds, "Euro", (Floating
Rate), PIK, 6.813%, 3/01/15..................... 684
--------------
5,929
--------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
MEXICO (7.8%)
BONDS (7.8%)
MXP 19,092 Banamex Pagare Discount Bond 4/03/97.............. $ 1,568
32,143 Banamex Pagare Discount Bond 10/09/97............. 2,293
$ 5,000 Mexican Discount Bond, Series A, (Floating Rate),
6.766%, 12/31/19, (Value Recovery Rights
Attached)....................................... 3,613
5,000 Mexican Discount Bond, Series B, (Floating Rate),
6.766%, 12/31/19, (Value Recovery Rights
Attached)....................................... 3,613
#4,200 Petroleos Mexicanos, 8.625%, 12/01/23............. 3,150
--------------
14,237
--------------
MOROCCO (7.8%)
LOAN AGREEMENTS (7.8%)
$ ~21,000 Kingdom of Morocco Restructuring and Consolidating
Agreement, Tranche A, (Floating Rate), 1/01/09
(Participation: Goldman Sachs, Lehman Brothers,
Paribas, Salomon Brothers)...................... 14,254
--------------
NIGERIA (1.5%)
BONDS (1.5%)
$ 5,500 Nigeria Par Bonds, 6.25%, 11/15/20 (Warrants
Attached)....................................... 2,709
--------------
PANAMA (5.9%)
LOAN AGREEMENTS (5.9%)
$ p###14,313 Republic of Panama Loans.......................... 10,735
--------------
POLAND (1.8%)
NOTE (1.8%)
$ ##3,121 Republic of Poland Note, Zero Coupon, 2/28/96..... 3,211
--------------
RUSSIA (15.4%)
LOAN AGREEMENTS (15.4%)
$ ++15,000 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 5,119
DEM++86,500 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 22,923
--------------
28,042
--------------
VENEZUELA (3.5%)
BONDS (3.5%)
$ 11,500 Republic of Venezuela Debt Conversion Bonds,
Series DL, (Floating Rate), 6.563%, 12/18/07.... 6,339
--------------
TOTAL DEBT INSTRUMENTS (Cost $152,483)............................. 164,756
--------------
SHORT TERM INVESTMENTS (8.7%)
MEXICO (8.7%)
BILLS (8.7%)
MXP 20,000 Mexican Cetes, Zero Coupon, 1/18/96............... 2,535
21,716 Mexican Cetes, Zero Coupon, 2/08/96............... 2,683
7,298 Mexican Cetes, Zero Coupon, 2/22/96............... 887
19,994 Mexican Cetes, Zero Coupon, 7/18/96............... 2,079
41,820 Mexican Cetes, Zero Coupon, 8/08/96............... 4,260
35,000 Mexican Cetes, Zero Coupon, 9/26/96............... 3,404
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $20,430)........................ 15,848
--------------
TOTAL INVESTMENTS (99.3%) (Cost $172,913).......................... 180,604
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
- ------------------------------------------------------------ (000)
OTHER ASSETS (35.7%)
<S> <C> <C>
Interest Receivable............................. $ 2,819
Receivable for Investments Sold................. 37,950
Collateral on Deposit with Broker............... 24,039
Receivable due from Broker...................... 5,000
Receivable for Portfolio Shares Sold............ 63
Other........................................... 12 $ 69,883
-----------
LIABILITIES (-35.0%)
Securities Sold Short, at Value (Proceeds $ (26,242)
$24,470).......................................
Payable for Investments Purchased............... (26,106)
Payable for Reverse Repurchase Agreement........ (12,225)
Bank Overdraft.................................. (2,755)
Interest Payable on Securities Sold Short....... (692)
Investment Advisory Fees Payable................ (443)
Custodian Fees Payable.......................... (50)
Administrative Fees Payable..................... (25)
Payable for Portfolio Shares Redeemed........... (2)
Other Liabilities............................... (69) (68,609)
----------- -----------
NET ASSETS (100%).............................................. $ 181,878
-----------
-----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 21,172,632 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $8.59
-----------
-----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
) -- Security is expected to be received in connection
with the restructuring of the Panama loan owned by
the Portfolio.
++ -- Non-income producing security - in default
++ -- Denotes all or a portion of securities subject to
repurchase under Reverse Repurchase Agreements as of
December 31, 1995 -- See Note A-4 to Financial
Statements.
# -- 144A security -- certain conditions for public sale
may exist.
## -- Securities redemption value is linked to the
Republic of Poland Treasury Bill maturing 2/28/96
and to the value of the Polish Zloty and Deutsche
Mark at maturity.
### -- Under restructuring at December 31, 1995 -- see Note
A-8 to Financial Statements.
*** -- Security is valued at cost. See Note A-1.
/ / -- Step Bond -- coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 1995.
Maturity date disclosed is the ultimate maturity.
~ -- Participation interests were acquired through the
financial institutions indicated parenthetically.
/\ -- 4.00% of 8.00% represents amount paid in cash. The
remainder is payment-in-kind. Cash payment rate
increases in increments to maturity.
p -- Issuer is making partial interest payments.
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
DEM -- Deutsche Mark
MXP -- Mexican Peso
Floating Rate -- Interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at
December 31, 1995.
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
MEXICO
BONDS
$ 20,000 United Mexican States Aztec Bonds (Floating Rate)
7.609%, 3/31/08 (Proceeds $16,900).............. $ 18,000
5,000 United Mexican States Discount Bond, Series D,
(Floating Rate), 6.547%, 12/31/19 (Value
Recovery Rights Attached) (Proceeds $3,500)..... 3,613
----------
21,613
----------
PANAMA
BONDS
#) 2,000 Republic of Panama Interest Reduction Bond,
12/29/49 (Proceeds $820)........................ 905
----------
VENEZUELA
BONDS
6,500 Republic of Venezuela, Par Bond, Series A,
(Floating Rate), 6.75%, 3/31/20 (Oil Warrants
Attached) (Proceeds $3,250)..................... 3,724
----------
(Total Proceeds $24,470).......................... $ 26,242
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Government & Agency Obligations 37.8%
Foreign Government & Agency Obligations 14.9%
Corporate Bonds & Notes 24.9%
Asset Backed Securities 5.7%
Other 16.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LEHMAN AGGREGATE BOND INDEX (1) BALANCED PORTFOLIO
<S> <C> <C>
5/15/91* 500000 500000
10/31/91 537100 535590
10/31/92 589900 592415
12/31/92 599400 598440
12/31/93 657800 652710
12/31/94 638650 632500
12/31/95 756673 751157
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE LEHMAN AGGREGATE
BOND INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 18.76% 9.18%
INDEX............................ 18.48 9.35
<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.
The Fixed Income Portfolio invests primarily in a diversified portfolio of U.S.
Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.
For the year ended December 31, 1995, the Portfolio had a total return of 18.76%
as compared with 18.48% for the Lehman Aggregate Bond Index. The average annual
total return of the Portfolio for the period from inception in May 1991 through
December 31, 1995 was 9.18% as compared to 9.35% for the Lehman Aggregate Bond
Index for the same period. As of December 31, 1995, the Portfolio had an SEC
30-day yield of 6.39%.
After a dismal performance in 1994, the fixed income markets rebounded in 1995
to provide their best total return performance in ten years. The 18.48% return
on the Lehman Aggregate Bond Index represents the third highest return since its
inception in the mid-1970s.
Key to this strong market performance was an ongoing change in investor
perceptions about the outlook for Federal Reserve policy, with these perceptions
changing from an anticipation of aggressive Fed tightening at the start of the
year to an anticipation of aggressive Fed easing as the year progressed. These
changes helped drive rate declines of almost 200 basis points in 30-year bond
yields and over 250 basis points in 2-year bond yields.
Following rapid economic growth in the latter part of 1994, consensus
expectations entering 1995 were for continued strong growth accompanied by a
pickup in inflation. As a result, bond yields at the start of the year reflected
a view that the Fed would continue tightening aggressively. While the Fed did
tighten once at the end of January, this proved to be its last tightening.
Instead, economic growth moderated substantially and inflation remained subdued.
From a nearly 5% growth rate in the last quarter of 1994, growth averaged barely
2% in the first half of 1995. As the year
- ------------------------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
progressed, signs of economic weakness became increasingly evident, with areas
such as manufacturing activity, employment growth and retail sales showing a
number of particularly weak reports. In response, the bond market rallied
sharply. Not only did it remove expectations of further Fed tightenings, but the
market began to anticipate aggressive Fed easing. By the time the Fed actually
eased 25 basis points in July, 10-year Treasury yields had already fallen more
than 160 basis points.
Besides the changing economic environment, two other factors helped support the
rally in Treasuries over the first half of the year. Ironically, the first of
these was a sharp decline in the value of the dollar versus the Japanese yen and
German mark. As the dollar fell by more than 10% against the DM and almost 20%
against the yen early in the year, central banks purchased large volumes of
Treasury securities. The second factor was convexity-related buying of
Treasuries. As rates fell, holders of mortgage-backed securities sought to
offset the shortening in duration of their mortgage holdings by adding to and
extending the duration of their Treasury holdings. The more rates fell, the
stronger this trend became.
Following the Fed's ease in July, the market had a brief correction as economic
growth temporarily reaccelerated and the market reassessed prospects for further
Fed easing. The backup was brief and was followed by a strong rally into
year-end. This time, the rally was supported by favorable political
considerations, specifically expectations for an agreement on balancing the
Federal budget. The prospects for a long-term tightening of fiscal policy could
reduce the risk premium assigned to U.S. Treasuries. As the fourth quarter
progressed, expectations for a budget deal grew stronger. Two shutdowns of the
Federal government and threats of default by the government were largely viewed
as noise by the marketplace that would not derail the momentum towards a
balanced budget. The Fed then eased another 25 basis points in December and
while this merely brought the Fed funds rate back to its level at the start of
the year, the market's outlook was dramatically different. The year closed with
the entire yield curve inside of seven years trading below Fed funds, suggesting
strong expectations that the Fed would continue to ease and do so more
aggressively than it had done to date.
The major non-Treasury sectors of the marketplace turned in contrasting
performances over the year. As might be expected given the magnitude of the rate
drop, the mortgage market underperformed comparable duration Treasuries. While
the market feared an acceleration of prepayments to the elevated levels seen in
1993, the actual level of prepayments turned out to be much more moderate.
Market sponsorship was weak, however, as investors focused on the convexity of
the sector. This was particularly true for the insurance industry, as Standard
and Poor's changed its rating methodology to specifically account for the
negative convexity of the sector. The Federal agencies themselves (FNMA and
FHLMC) became the primary sponsors of the mortgage market, issuing callable debt
and investing in the cheaper MBS market. Structured mortgage product was
particularly out of favor as reflected in new issuance of agency CMOs, which
declined to just $12 billion of issuance from more than $300 billion in 1993.
Mortgage-related markets with better convexity characteristics enjoyed better
sponsorship, for example commercial mortgage backed securities and seasoned
mortgages. The asset-backed market also witnessed substantial issuance growth
and increased sponsorship over the year.
The corporate bond market, in contrast, performed quite well in 1995. Strong
fundamentals, including a favorable environment for corporate profitability and
upgrades of some of the larger issuers within the corporate market, combined
with strong technicals in terms of large groups of investors allocating
additional assets to the corporate sector at the expense of the mortgage sector
to tighten corporate spreads. Even the re-emergence of event risk in response to
increased merger and acquisition activity could not derail the corporate market.
In contrast to the 1980s, much (although certainly not all) of this activity was
strategic in nature with minimal and in some cases positive impacts on credit
quality.
Foreign bond markets provided a number of opportunities for U.S. investors over
the course of 1995. Spreads on German government bonds, for example, fluctuated
widely versus U.S. bonds. Not only could U.S. investors buy German bonds at
higher yields than comparable maturity U.S. Treasuries at several times during
the year, but favorable hedging costs allowed U.S. investors to add over 150
basis points more yield by hedging their currency exposure.
FOURTH QUARTER STRATEGY REVIEW
Through much of the fourth quarter, our Portfolio was slightly long in duration
against the benchmark. We adjusted this position to a slightly short one late in
the quarter in anticipation of a possible correction in the market. We also
reduced our more barbelled yield curve exposure early in the quarter to a
neutral
- --------------------------------------------------------------------------------
Fixed Income Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
to slightly more bulleted position against our benchmark. We added
opportunistically to our exposure to spread product over the quarter, taking
advantage of spread volatility both in mortgages and corporates. We continued to
aggressively monitor the durations of our mortgage holdings. Finally, we
increased exposure to foreign bond markets, specifically German bonds on a
currency hedged basis.
OUTLOOK FOR 1996
While repeating the return performance of 1995 is not a very likely event
(10-year Treasury yields would have to fall to well below 4%), the outlook for
the fixed income markets still looks favorable going into 1996. Although we
enter 1996 slightly short in duration, we view this as a temporary position
reflective of a market discounting too much good news and therefore vulnerable
to a trading setback. With the Fed in all likelihood still easing, we anticipate
extending duration at higher rate levels. We are overweighted in spread product
currently and will adjust these positions as market values dictate. We view
currency-hedged non-U.S. bonds, particularly German government bonds, as the
best opportunity to enhance returns at the start of 1996.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (83.3%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (37.8%)
U.S. Treasury Notes (12.1%)
$ 7,000 8.25%, 7/15/98.................................... $ 7,492
10,000 6.25%, 5/31/00.................................... 10,336
2,000 7.25%, 8/15/04.................................... 2,224
----------
20,052
----------
Federal Home Loan Mortgage Corporation (4.4%)
14 13.00%, 9/01/10................................... 16
6,868 9.00%, 1/01/25.................................... 7,227
----------
7,243
----------
Government National Mortgage Association (21.3%)
9 11.00%, 12/15/15.................................. 10
16 10.00%, 5/15/19................................... 17
7,976 6.00%, 2/15/24.................................... 7,757
7,159 8.00%, 3/15/24.................................... 7,459
19,745 7.00%, 5/15/24.................................... 19,980
----------
35,223
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................ 62,518
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (14.9%)
5,000 Republic of Italy 6.875%, 9/27/23................. 4,883
5,000 Treuhandanstalt 6.50%, 4/23/03.................... 3,635
22,100 Treuhandanstalt 6.75%, 5/13/04.................... 16,171
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS............. 24,689
----------
CORPORATE BONDS AND NOTES (24.9%)
FINANCE (24.9%)
7,500 CCP Insurance 10.50%, 12/15/04.................... 8,171
#7,500 Farmers Insurance 8.625%, 5/01/24................. 7,781
5,000 Ford Motor Credit Co. 6.25%, 11/08/00............. 5,068
5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,284
5,000 Goldman Sachs Group 7.80%, 7/15/02................ 5,343
3,000 John Hancock 7.375%, 2/15/24...................... 3,002
3,000 Metropolitan Life Insurance 7.80%, 11/01/25....... 3,125
3,000 USX Corp. 9.125%, 1/15/13......................... 3,449
----------
TOTAL CORPORATE BONDS AND NOTES............................. 41,223
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES (5.7%)
$ 4 Case Equipment Loan Trust, 92-A 5.40%, 6/15/98.... $ 4
26 Federal Home Loan Mortgage Corp., REMIC 16-B
10.00%, 10/15/19................................ 26
19 Federal National Mortgage Association, REMIC
92-59F, (Floating Rate), 6.243%, 8/25/06........ 19
100 Ford Credit Auto Loan Master Trust, 92-1A 6.875%,
1/15/99......................................... 101
7 General Motors Acceptance Corp. Trust, 92-DA
5.55%, 5/15/97.................................. 7
4,001 Resolution Trust Corp., Series 1991-M5, Class A,
9.00%, 3/25/17.................................. 4,171
5,000 Standard Credit Card Trust 6.75%, 6/07/00......... 5,136
----------
TOTAL ASSET BACKED SECURITIES............................... 9,464
----------
TOTAL FIXED INCOME SECURITIES (Cost $129,833)................. 137,894
----------
SHORT-TERM INVESTMENT (15.2%)
REPURCHASE AGREEMENT (15.2%)
25,181 Goldman Sachs & Co., 5.83%, dated 12/29/95, due
1/02/96, to be repurchased at $25,197,
collateralized by $18,310 United States Treasury
Bonds, 9.25%, due 2/15/16, valued at $25,707
(Cost $25,181).................................. 25,181
----------
TOTAL INVESTMENTS (98.5%) (Cost $155,014)..................... 163,075
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.6%)
Cash............................................ $ 1
Interest Receivable............................. 2,314
Net Unrealized Gain on Forward Foreign Currency 233
Exchange Contracts.............................
Receivable for Portfolio Shares Sold............ 39
Other........................................... 14 2,601
----------
LIABILITIES (-0.1%)
Investment Advisory Fees Payable................ (94)
Administrative Fees Payable..................... (23)
Custodian Fees Payable.......................... (4)
Payable for Portfolio Shares Redeemed........... (1)
Other Liabilities............................... (27) (149)
---------- ----------
NET ASSETS (100%)............................................. $ 165,527
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 15,306,696 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $10.81
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Fixed Income Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1995, the Portfolio is obligated to deliver or is to receive
foreign currency in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ---------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
DEM 23,100 $ 16,110 1/19/96 U.S.$ 16,360 $ 16,360 $ 250
U.S.$ 16,131 16,131 1/19/96 DEM 23,100 16,110 (21)
DEM 28,500 20,011 6/07/96 U.S.$ 20,015 20,015 4
--------- --------- -----
$ 52,252 $ 52,485 $ 233
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
# -- 144A Security. -- Certain conditions for public
sale may exist.
REMIC -- Real Estate Mortgage Investment Conduit
DEM -- Deutsche Mark
Floating Rate -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect on December 31, 1995.
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Fixed Income Portfolio
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 1.0%
British Pound 5.7%
Canadian Dollar 5.0%
Danish Krone 5.8%
Deutsche Mark 15.6%
French Franc 6.8%
Irish Pound 1.6%
Italian Lira 4.0%
Japanese Yen 8.0%
Netherlands Guilder 2.0%
New Zealand Dollar 1.6%
Spanish Peseta 5.1%
Swedish Krona 2.8%
United States Dollar 30.7%
Other 4.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
J.P. MORGAN TRADED GLOBAL BOND INDEX GLOBAL FIXED INCOME
(1) PORTFOLIO
<S> <C> <C>
5/1/91* 500,000 500,000
10/31/91 538,720 530,500
10/31/92 606,455 585,090
12/31/92 601,365 577,395
12/31/93 675,100 665,985
12/31/94 683,750 625,500
12/31/95 815,782 746,347
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED
GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 19.32% 8.95%
INDEX............................ 19.31 11.05
<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.
The Global Fixed Income Portfolio aims to produce an attractive rate of return
by investing in fixed income securities issued by governments, agencies,
supranational entities and corporations with varying maturities in various
currencies.
The total return of the Portfolio for the year ended December 31, 1995 was
19.32% as compared to 19.31% for the J.P. Morgan Traded Global Bond Index for
the same period. The average annual total return of the Portfolio for the period
from inception in May 1991 through December 31, 1995 was 8.95% compared to
11.05% for the J.P. Morgan Traded Global Bond Index for the same period. As of
December 31, 1995, the Portfolio had an SEC 30-day yield of 5.91%.
Global fixed income markets registered strong gains in 1995 with local currency
returns ranging from 14% in Japan to over 20% in Sweden. The dominant factor
fueling the rally was a continued drop in short rate expectations in response to
weaker than anticipated economic data and subdued inflationary pressures.
U.S. Treasury bonds steadily rallied during the year and by year end the 30 year
long bond was trading around a 6.0% yield level, the lowest since October 1993.
The average return was 17.3% and the highest returns came from longer duration
securities, despite a slight steepening of the yield curve. The yield spreads on
mortgage bonds typically widened over Treasuries as they lagged the rally and
prepayment risk increased. However, corporate spreads remained tight. The market
continued to expect a relaxation of monetary policy by the Federal Reserve as
various indicators confirmed that economic activity was declining from the rapid
pace experienced in late 1994. This easing initially occurred in July when the
Fed Funds rate was lowered by 0.25% to 5.75%, with another 0.25% reduction
occurring in December. The authorities cited the continued benign inflation
outlook in justifying their moves. The market shrugged off the continued impasse
over the budget deficit negotiations, believing an eventual agreement involving
a reduced deficit would be a positive factor for the market. Expectations of the
Fed moving to a slightly
- ------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
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Global Fixed Income Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
less restrictive stance remained in place as evidenced by ten year yields
finishing the year no higher than cash rates. The fund maintained a neutral to
slightly longer than benchmark duration throughout the year, with tactical
shifts into the mortgage sector. An underweight allocation was maintained in
preference to European bonds.
Canadian bonds outperformed their U.S. counterparts across the maturity spectrum
and the market offered an average return of 19.3%. The narrow defeat of the
Quebec separatist movement in the September referendum removed some risk
premium, allowing an immediate rally in the market and an easing of interest
rates by the Bank of Canada. Subdued inflation, credible fiscal tightening, high
real interest rates and the scope for further rate cuts also aided performance.
The fund increased exposure to overweight after the referendum. An overweight
position was held in the Australian and New Zealand markets. The former returned
an overall 19.9%. Economic activity continued to moderate over the year but the
Reserve Bank resisted the pressure to lower rates as underlying inflation broke
above their target ranges. New Zealand bonds returned 14.0%. The yield curve
remained inverse as the Reserve Bank remained hawkish on inflation and increased
rates in December.
The Japanese market performed strongly in the first half of the year with
benchmark yields falling to all time lows of 2.5% by July. The strength of the
yen continued to threaten any economic recovery prospects whilst the banking
system remained fragile and deflation pressures mounted. The Official Discount
rate had fallen to a record low of 0.5% by September. In the second half of the
year returns were flat as the yen weakened, the stock market recovered and the
authorities finally became more willing to acknowledge the need to reliquify and
stimulate the economy. The yield curve moved to an historically steep position
as shorter dated yields fell relative to longs. The impact of fiscal stimulus, a
deteriorating budget deficit and the weaker yen will probably put further upward
pressure on yields although they are likely to be capped by the prospect of only
moderate economic recovery with continued disinflation. The fund maintained a
low allocation to the market but tactically increased duration slightly in
anticipation of yield curve flattening.
European bonds performed well, particularly in the latter part of the year, as
short rate expectations fell in response to increasingly disappointing economic
data. The German market produced a return of 16.8% as deteriorating business
surveys and industrial production data together with declining inflation
encouraged the Bundesbank to allow their money market repo rates to fall below
4.0%. The discount rate was reduced in August and then December when it fell to
3.0%, the lowest level since 1987. The German yield curve steepened to a
historic extreme, but longer dated bonds produced the highest returns. After
underperforming in the first part of the year, most other European markets
recovered strongly and narrowed their yield spread over German bonds. Improving
fundamentals and the general bond friendly environment gave investors confidence
to diversify into higher yielding assets. The best performer was Sweden, boosted
by the prospects of a lower budget deficit, lower short rates and a positive
inflation outlook. The prospects for Monetary Union cast uncertainty over
European markets, although most countries reaffirmed their commitment to the
concept at a November summit meeting. The fund remained overweight Europe
throughout the year, with a long overall duration reflecting attractive
valuations and steep yield curves. Holdings were actively switched between
markets and the overweight total position in the higher yielders was a positive
for performance.
On the foreign exchanges the dollar ended a volatile year 8-9.0% weaker against
most European currencies but 3.2% higher against the yen. During the period it
traded within a range of DM1.35 to DM1.56 against the deutschemark and Y80 to
Y104.5 against the yen. the dollar fell to new lows in the first quarter as
declining interest rate and growth expectations added to the negative influences
of the current account and budget deficits. It then recovered sharply,
particularly against the yen, following aggressive central bank intervention.
This generated speculation of a G7 agreement to bring the dollar more into line
with fundamentals and an acknowledgement of the dangers of an implosion of the
Japanese economy. The fund maintained an overweight exposure to the dollar by
hedging some European currency exposure. This also earned a hedging premium due
to interest rate differentials. The yen was underweighted throughout the year.
The fund also hedged some of its Canadian dollar exposure because of an erosion
of rate differentials with the U.S. and the Bank of Canada's overt desire to
stimulate the economy through looser monetary policy and a trade
competitiveness. On the European cross rates, the general trend was for higher
yielding currencies to suffer in the first half of the year, then appreciated in
line with their bond markets in the second half. Sterling was the weakest
European currency, falling to new all time lows on a trade weighted basis,
undermined by weaker economic data,
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
poor trade figures and political worries. Monetary Union uncertainties continued
to give the Swiss franc a strong bid, despite official protestations of the
resultant damage to the Swiss economy.
1995 has proved to be an exceptionally good year for bond investors who have
enjoyed double digit returns across all markets. The current environment of
structurally subdued inflation, stable or slightly lower interest rates, below
potential economic growth and restrained fiscal policies would suggest there is
little on the horizon to threaten a significant reversal of recent gains in the
near future. Parallels are naturally being drawn with the situation at the end
of 1993, but a repeat of 1994's simultaneous growth surge and bond market
carnage seems unlikely this time around. Market valuations are less stretched
than in late 1993 with real yields higher, the overhang of leverage less of a
risk and the global environment of slow nominal growth more firmly entrenched
than two years ago. The policy priorities of major nations are also different
from late 1993 with greater emphasis on the need for medium term fiscal
responsibility in the U.S. and Europe and a stronger commitment in Japan to
fighting deflation.
Despite this benign background it is clear that 1995's fall in yields is most
unlikely to be repeated this year. Any pick up in economic prospects later in
the year is likely to result in a move to higher yields. In relative terms
European markets appear to offer better protection than the U.S. and Japan.
Starting from reasonably cheap valuation levels, prospects for the dollar seem
quite encouraging for 1996. There appears an international desire to push the
dollar higher to ease the strain on growth in European economies and Japan.
Although the current U.S. budget negotiations are unlikely to offer a quick
solution to U.S. fiscal problems, the deficit as a percentage of GDP is the
lowest for fifteen years and better than most other nations. A falling current
account deficit with Japan should further aid the USD/JPY rate. Arguably the
value of the dollar has yet to fully reflect the competitive advances of the
U.S. corporate sector and the recent strength of U.S. financial markets.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (95.7%)
AUSTRALIAN DOLLAR (1.0%)
GOVERNMENT BONDS (1.0%)
AUD 1,300 Government of Australia 9.50%, 8/15/03............ $ 1,044
--------
BRITISH POUND (5.7%)
GOVERNMENT BONDS (5.7%)
GBP 3,800 United Kingdom Treasury 7.00%, 11/06/01........... 5,907
--------
CANADIAN DOLLAR (5.0%)
EUROBONDS (2.6%)
CAD 1,500 British Columbia Province 7.75%, 6/16/03.......... 1,131
2,100 Export-Import Bank of Japan 7.75%, 10/08/02....... 1,588
--------
2,719
--------
GOVERNMENT BONDS (2.4%)
500 Government of Canada 7.50%, 9/01/00............... 380
2,700 Government of Canada 7.50%, 12/01/03.............. 2,039
--------
2,419
--------
5,138
--------
DANISH KRONE (5.8%)
GOVERNMENT BONDS (5.8%)
DKK 15,000 Kingdom of Denmark 8.00%, 11/15/01................ 2,890
9,500 Kingdom of Denmark 7.00%, 12/15/04................ 1,703
7,000 Kingdom of Denmark 8.00%,
3/15/06......................................... 1,328
--------
5,921
--------
DEUTSCHE MARK (15.6%)
GOVERNMENT BONDS (15.6%)
DEM 5,200 German Unity Bond 8.00%, 1/21/02.................. 4,087
7,750 Treuhandanstalt 6.875%, 6/11/03................... 5,746
8,500 Treuhandanstalt 6.75%, 5/13/04.................... 6,219
--------
16,052
--------
FRENCH FRANC (6.8%)
GOVERNMENT BONDS (6.8%)
FRF 24,500 French Treasury Bill 7.75%, 4/12/00............... 5,363
3,500 French Treasury Bill 7.00%, 10/12/00.............. 748
4,250 Republic of France 7.00%, 10/12/00................ 908
--------
7,019
--------
IRISH POUND (1.6%)
GOVERNMENT BONDS (1.6%)
IEP 950 Irish Government 9.25%, 7/11/03................... 1,696
--------
ITALIAN LIRA (4.0%)
GOVERNMENT BONDS (4.0%)
ITL 6,400,000 Republic of Italy Treasury Bond 10.50%,
11/01/00........................................ 4,062
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
JAPANESE YEN (8.0%)
EUROBONDS (4.6%)
JPY 425,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04..................... $ 4,703
--------
GOVERNMENT BONDS (3.4%)
300,000 Japan Development Bank 6.50%, 9/20/01............. 3,546
--------
8,249
--------
NETHERLANDS GUILDER (2.0%)
GOVERNMENT BONDS (2.0%)
NLG 3,000 Netherlands Government 7.75%, 1/15/00............. 2,061
--------
NEW ZEALAND DOLLAR (1.6%)
GOVERNMENT BONDS (1.6%)
NZD 1,800 New Zealand Government 8.00%, 7/15/98............. 1,184
750 New Zealand Government 6.50%, 2/15/00............. 475
--------
1,659
--------
SPANISH PESETA (5.1%)
GOVERNMENT BONDS (5.1%)
ESP 612,000 Spanish Government 10.30%, 6/15/02................ 5,216
--------
SWEDISH KRONA (2.8%)
GOVERNMENT BONDS (2.8%)
SEK 17,500 Swedish Government 10.25%, 5/05/00................ 2,829
--------
UNITED STATES DOLLAR (30.7%)
CORPORATE BONDS AND NOTES (6.2%)
U.S.$ ++998 Asset Securitization Corp. 7.10%, 8/13/29......... 1,044
500 Goldman Sachs 6.20%, 2/15/01...................... 498
700 John Hancock 7.375%, 2/15/24...................... 701
898 LB Commercial Conduit Mortgage Trust 7.144%,
8/25/04......................................... 937
#600 Metropolitan Life Insurance 7.45%, 11/01/23....... 588
600 Prudential Insurance Co. 8.30%, 7/01/25........... 644
2,000 UCFC CMO, Series 1995-C1, Class A3, 6.775%,
11/10/17........................................ 2,018
--------
6,430
--------
EUROBONDS (0.5%)
500 Statens Bostads 8.50%, 5/30/97.................... 519
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (24.0%)
U.S. TREASURY BONDS
++545 10.75%, 8/15/05................................... 750
++1,280 8.125%, 8/15/19................................... 1,610
U.S. TREASURY NOTES
++650 5.00%, 1/31/99.................................... 645
++2,030 7.75%, 11/30/99................................... 2,199
++890 6.25%, 2/15/03.................................... 929
++675 7.25%, 5/15/04.................................... 751
++2,800 7.50%, 2/15/05.................................... 3,178
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
U.S. TREASURY STRIPS
U.S.$ ++/\1,600 2/15/98, Principal Only........................... $ 1,434
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
++249 ARM Pool #179778 8.00%, 5/15/02................... 259
+++2,500 7.00%, 1/15/26.................................... 2,525
+++8,250 8.50%, 1/15/26.................................... 8,663
+++1,700 6.00%, 1/20/26.................................... 1,717
--------
24,660
--------
31,609
--------
TOTAL FIXED INCOME SECURITIES (Cost $95,076)......................... 98,462
--------
SHORT-TERM INVESTMENT (13.7%)
REPURCHASE AGREEMENT (13.7%)
14,105 The Chase Manhattan Bank, N.A. 5.35%, dated
12/29/95, due 1/02/96, to be repurchased at
$14,113 collateralized by $10,890 United States
Treasury Bonds, 10.75%, due 5/15/03 valued at
$14,388 (Cost $14,105).......................... 14,105
--------
FOREIGN CURRENCY (0.1%)
JPY 10,094 Japanese Yen (Cost $99)........................... 99
--------
TOTAL INVESTMENTS (109.5%) (Cost $109,280)........................... 112,666
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.5%)
Cash............................................ $ 531
Interest Receivable............................. 2,496
Receivable for Portfolio Shares Sold............ 411
Net Unrealized Gain on Forward Foreign Currency
Exchange Contracts............................. 132
Foreign Withholding Tax Reclaim Receivable...... 9
Other........................................... 9 3,588
--------
LIABILITIES (-13.0%)
Payable for Investments Purchased............... (12,882)
Bank Overdraft.................................. (411)
Investment Advisory Fees Payable................ (53)
Administrative Fees Payable..................... (14)
Custodian Fees Payable.......................... (12)
Other Liabilities............................... (30) (13,402)
-------- --------
NET ASSETS (100%)................................................... $ 102,852
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 9,164,317 outstanding $.001 par value shares
(authorized 500,000,000 shares).................................... $11.22
----------------
----------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December 31,
1995, the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
JPY 10,094 $ 98 1/04/96 U.S.$ 98 $ 98 $ --
NLG 5,600 3,497 2/13/96 U.S.$ 3,530 3,530 33
U.S.$ 1,559 1,559 2/13/96 NLG 2,500 1,562 3
CAD 2,500 1,832 2/14/96 U.S.$ 1,845 1,845 13
JPY 160,000 1,559 2/14/96 U.S.$ 1,620 1,620 61
U.S.$ 794 794 2/14/96 JPY 80,000 780 (14)
DEM 5,000 3,491 2/20/96 U.S.$ 3,571 3,571 80
DEM 5,000 3,494 3/06/96 U.S.$ 3,498 3,498 4
FRF 14,000 2,860 3/07/96 U.S.$ 2,812 2,812 (48)
--------- --------- -----
$ 19,184 $ 19,316 $ 132
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+++ -- Security is subject to delayed delivery -- see Note
A-7.
# -- 144A Security -- Certain conditions for public sale
may exist.
/\ -- Stripped securities represent the splitting of cash
flows into several classes which vary by the
proportion of principal and interest paid. Holders
are entitled to the portion of the payments on the
certificate representing interest only or principal
only.
++ -- Security was pledged as collateral for delayed
delivery securities.
CMO -- Collateralized Mortgage Obligation
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------
<S> <C> <C>
Finance................................... $ 13,240 12.8%
Foreign Government and Agency
Obligations............................... 60,562 58.9
U.S. Government and Agency Obligations.... 24,660 24.0
--------- ---
$ 98,462 95.7%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Broadcast - Radio & Television 22.7%
Building Materials & Components 0.6%
Chemicals 3.4%
Coal, Gas & Oil 0.5%
Electrical Equipment 0.4%
Entertainment & Leisure 4.4%
Environmental Controls 1.9%
Financial Services 6.9%
Food 1.7%
Food Services & Lodging 3.0%
Gaming & Lodging 4.0%
Health Care Supplies & Services 2.6%
Materials 3.4%
Metals 3.6%
Multi-Industry 0.4%
Packaging & Container 5.1%
Publishing 1.8%
Real Estate 0.9%
Retail - General 6.3%
Telecommunications 9.3%
Textiles & Apparel 4.1%
Transportation 2.4%
Utilities 6.4%
Foreign Government & Agency Obligations 3.8%
Other 0.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
J.P. MORGAN TRADED GLOBAL BOND INDEX CS FIRST BOSTON HIGH YIELD
(1) INDEX
<S> <C> <C>
9/28/92* 500,000 500,000
10/31/92 490,500 494,800
12/31/92 503,435 507,897
12/31/93 593,400 603,940
12/31/94 598,050 591,250
12/31/95 729,122 701,991
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON
HIGH YIELD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO........................ 23.35% 12.28%
INDEX............................ 17.38 10.98
<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 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 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 year ended December 31, 1995 was
23.35% as compared to 17.38% for the CS First Boston High Yield Index for the
same period. The average annual total return of the Portfolio for the period
from inception in September 1992 through December 31, 1995 was 12.28% compared
to 10.98% for the Index for the same period. As of December 31, 1995, the
Portfolio had an SEC 30-day yield of 10.65%. Having just past our three-year
anniversary, Lipper ranked the Portfolio #6 out of 67 high yield mutual funds
for the three-year period ended December 31, 1995, and #6 out of 108 mutual
funds for the twelve months ended December 31, 1995.
As 1995 closed, the high yield market wrapped up one of its finest years. The
outstanding results were in concert with all the domestic markets. Bonds rallied
strongly as the ten-year Treasury yields declined 225 basis points to 5.57%.
Equities reached all-time highs as the Dow industrial average climbed over
5,000.
While market returns were excellent, there were several undercurrents that one
had to be aware of to stay ahead of the competition. While the market rallied,
spreads to Treasuries widened. More importantly, intra-market quality spreads
widened as well. Market participants were concerned that the economy was
entering an economic downturn. This view was supported by an extremely weak
retail environment. Several major retailers filed for bankruptcy during the
year. Also auto sales seemed to be softening and steel and paper prices were
reported to be declining after strong run-ups in late 1994 and early 1995.
The Portfolio's results were very strong for the year. Several factors
contributed to our performance. As we stated at the end of last year, we felt
the casino bonds were oversold and that the baby had been thrown out with the
bathwater in some cases. As a result we maintained, and in some cases added to,
our exposure in the casino sector. We were handsomely rewarded as the sector was
one of the best performers in the
- ------------------------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- --------------------------------------------------------------------------------
High Yield Portfolio
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
market. Other sectors where we were overweighted that performed well were
communications, and cable television. Both of these industries were able to
improve credit quality over the year. Many of the bonds in these industries also
tend to have a long duration and thus benefited from the decline in interest
rates. Finally, these industries are not cyclical. As investors perceived the
economy was weakening in the second half of 1995, they shed cyclical holdings
and put money into more stable companies. We were also overweighted in
chemicals, particularly fertilizers. The fertilizer industry had explosive
earnings in 1995 and the prospects are bright in 1996. Several of the companies
in the industry went public in 1995 so the combination of strong earnings and a
strengthened balance sheet helped the bonds perform well.
Winning ideas are important, but so is avoiding trouble situations. Two of the
weakest industries in 1995 were retailers and restaurants. We avoided these
sectors virtually entirely. The retail sector was bombarded with bad news nearly
the entire year. In the first half of the year, major northeast retailers
Bradlees and Caldor filed for bankruptcy protection. In the second half of the
year, concerns for a weak Christmas season spooked the market. A large discount
chain hit the headlines as being on the verge of bankruptcy also. Like the
retailers, the restaurant sector seems over-stored also. Price competition is
stiff and it is difficult to attract incremental traffic. Most of the companies
in the sector are overburdened with debt and it is difficult to see at this
point how they will reduce leverage.
It is difficult to formulate a strategy for 1996. Other than retailers, which
have had a horrible history in the high yield market, it is hard to find a
clearly undervalued industry. Steels and auto related companies have widened to
the rest of the market but it is a question of timing the market to catch a
rebound in their bond prices and earnings momentum. Treasury rates have dropped
precipitously and therefore cushion bonds have some appeal. Long term interest
rates are near the lows achieved at the end of 1993, however the shape of the
yield curve is very different. Short term rates are much higher than at the end
of 1993 and it does not appear that a tightening is likely in the near future.
We are also faced with the uncertainty of an election year. We expect to play it
fairly close to the vest in 1996. We will be searching for bonds that generate
good current income but do not represent undue credit risk.
- --------------------------------------------------------------------------------
High Yield Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES (89.6%)
BROADCAST-RADIO & TELEVISION (21.5%)
$ 2,250 Ackerley Communications, Inc., Series A, 10.75%,
10/01/03........................................ $ 2,408
750 ACT III Broadcasting, Inc., 10.25%, 12/15/05...... 769
1,000 Cablevision Systems Corp., 10.75%, 4/01/04........ 1,058
1,250 Continental Cablevision, Inc., 9.50%, 8/01/13..... 1,328
250 Fundy Cable Ltd., 11.00%, 11/15/05................ 261
/ /1,600 Helicon Group, Series B, 9.00%, 11/01/03.......... 1,544
400 Heritage Media, 11.00%, 10/01/02.................. 421
500 Katz Corp., 12.75%, 11/15/02...................... 525
/ /2,400 Marcus Cable Co., 0.00%, 12/15/05................. 1,632
1,350 New World Communications Group Holding Corp., Zero
Coupon, Series B, 6/15/99....................... 935
900 Rogers Cablesystems Ltd., 11.00%, 12/01/15........ 968
1,500 Viacom, Inc., 8.00%, 7/07/06...................... 1,526
--------
13,375
--------
CHEMICALS (3.4%)
750 Harris Chemical, 10.75%, 10/15/03................. 683
1,000 Plastic Specialties & Technologies, Inc., 11.25%,
12/01/03........................................ 920
500 Sherritt, Inc., 10.50%, 3/31/14................... 533
--------
2,136
--------
COAL, GAS & OIL (0.4%)
33 Columbia Gas Systems, Inc., Series A, 6.39%,
11/28/00........................................ 33
33 Columbia Gas Systems, Inc., Series B, 6.61%,
11/28/02........................................ 33
33 Columbia Gas Systems, Inc., Series C, 6.80%,
11/28/05........................................ 33
33 Columbia Gas Systems, Inc., Series D, 7.05%,
11/28/07........................................ 33
33 Columbia Gas Systems, Inc., Series E, 7.32%,
11/28/10........................................ 33
33 Columbia Gas Systems, Inc., Series F, 7.42%,
11/28/15........................................ 33
33 Columbia Gas Systems, Inc., Series G, 7.62%,
11/28/25........................................ 33
--------
231
--------
ENTERTAINMENT & LEISURE (4.4%)
886 Kloster Cruise Ltd., 13.00%, 5/01/03.............. 673
#/ /2,000 Six Flags Theme Park, Inc., 0.00%, 6/15/05........ 1,560
500 Stena AB, 10.50%, 12/15/05........................ 510
--------
2,743
--------
ENVIRONMENTAL CONTROLS (1.9%)
#1,200 Norcal Waste Systems, 12.50%, 11/15/05............ 1,209
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (6.9%)
#$1,191 GPA Equipment Trust, 9.125%, 12/02/96............. $ 1,179
550 GPA Investments, 6.40%, 11/19/98.................. 451
/ /500 PM Holdings Corp., 0.00%, 9/01/05................. 257
500 Rapp International Finance, 13.25%, 12/15/05...... 491
1,000 Terra Nova Holdings, 10.75%, 7/01/05.............. 1,091
1,189 Tiphook Finance Corp., 8.00%, 3/15/00............. 826
--------
4,295
--------
FOOD (1.7%)
1,150 Pilgrim's Pride Corp., 10.875%, 8/01/03........... 1,044
--------
FOOD SERVICE & LODGING (2.8%)
2,250 Family Restaurant Inc., 9.75%, 2/01/02............ 1,238
500 United Meridian Corp., 10.375%, 10/15/05.......... 526
--------
1,764
--------
GAMING & LODGING (2.0%)
500 Casino America, 11.50%, 11/15/01.................. 462
250 Grand Casinos Inc., 10.125%, 12/01/03............. 261
575 Louisiana Casino Cruises, 11.50%, 12/01/98........ 552
--------
1,275
--------
HEALTH CARE SUPPLIES & SERVICES (2.6%)
1,000 Quorum Health Group, Inc., 8.75%, 11/01/05........ 1,035
500 Tenet Healthcare Corp., 10.125%, 3/01/05.......... 554
--------
1,589
--------
MATERIALS (3.4%)
500 IMC Fertilizer, 9.25%, 10/01/00................... 526
1,500 IMC Fertilizer, 9.45%, 12/15/11................... 1,599
--------
2,125
--------
METALS (2.0%)
750 Algoma Steel Inc., (Yankee Bond), 12.375%,
7/15/05......................................... 675
650 Sheffield Steel Corp., 12.00%, 11/01/01........... 566
--------
1,241
--------
MULTI-INDUSTRY (0.4%)
#250 Howmet Corp., 10.00%, 12/01/03.................... 260
--------
PACKAGING & CONTAINER (5.1%)
500 Owens-Illinois, Inc., 10.50%, 6/15/02............. 531
1,500 Owens-Illinois, Inc., 9.95%, 10/15/04............. 1,594
1,000 Stone Container Corp., 10.75%, 10/01/02........... 1,033
--------
3,158
--------
PUBLISHING (1.8%)
750 Marvel III Holdings Inc., Series B, 9.125%,
2/15/98......................................... 734
500 Marvel Parent Holdings, Zero Coupon, 4/15/98...... 360
--------
1,094
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
High Yield Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
REAL ESTATE (0.8%)
$#500 HMC Acquisition Properties, 9.00%, 12/15/07....... $ 505
--------
RETAIL-GENERAL (6.3%)
750 Grand Union Co., 12.00%, 9/01/04.................. 645
#800 Host Marriot Travel Plaza, Series B, 9.50%,
5/15/05......................................... 790
3,000 Southland Corp., 5.00%, 12/15/03.................. 2,498
--------
3,933
--------
TELECOMMUNICATIONS (9.3%)
/ /3,000 Dial Call Communications, 0.00%, 4/15/04.......... 1,710
/ /450 Horizon Cellular Telephone, 0.00%, 10/01/00....... 374
/ /2,250 Nextel Communications, 0.00%, 8/15/04............. 1,221
400 Paging Network, 10.125%, 8/01/07.................. 434
500 Rogers Communications, Inc., 10.875%, 4/15/04..... 522
1,500 Telefonica de Argentina, (Yankee Bond), 11.875%,
11/01/04........................................ 1,571
--------
5,832
--------
TEXTILES & APPAREL (4.1%)
1,000 Polysindo Eka Perkasa, (Yankee Bond), 13.00%,
6/15/01......................................... 1,035
500 Synthetic Industries, 12.75%, 12/01/02............ 494
1,000 Westpoint Stevens, Inc., 9.375%, 12/15/05......... 992
--------
2,521
--------
TRANSPORTATION (2.4%)
*243 America West Airlines, 6.00%, 3/31/97 (acquired
1/17/94 Cost $232).............................. 228
1,500 Venture Holdings, 9.75%, 4/01/04.................. 1,253
--------
1,481
--------
UTILITIES (6.4%)
1,478 Beaver Valley Funding Corp., (Lease Obligation
Bond), 9.00%, 6/01/17........................... 1,247
1,250 California Energy Co., Inc., 9.875%, 6/30/03...... 1,303
1,400 First PV Funding Corp., (Lease Obligation Bond),
Series 1986B, 10.15%, 1/15/16................... 1,428
--------
3,978
--------
TOTAL CORPORATE BONDS AND NOTES (Cost $54,542)................ 55,789
--------
FOREIGN GOVERNMENT BONDS (3.8%)
BONDS (3.8%)
/ /2,500 Federative Republic of Brazil, Par Bond, Series
Z-L, 4.25%, 4/15/24............................. 1,313
1,500 Republic of Argentina, Series L, "Euro" (Floating
Rate), 6.813%, 3/31/05.......................... 1,068
--------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $2,018).................. 2,381
--------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (0.8%)
BUILDING MATERIALS & COMPONENTS (0.6%)
+30,331 Walter Industries, Inc............................ $ 398
--------
FINANCIAL SERVICES (0.0%)
+1,268 WestFed Holdings, Inc., Class B................... --
--------
FOOD SERVICE & LODGING (0.2%)
+1,300 Motels of America, Inc............................ 98
--------
GAMING & LODGING (0.0%)
+500 Trump Taj Mahal, Class A.......................... 10
--------
TOTAL COMMON STOCKS (Cost $599)............................... 506
--------
PREFERRED STOCKS (0.1%)
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A.................. --
--------
COAL, GAS & OIL (0.1%)
+925 Columbia Gas Systems, Inc., Series A, 7.89%....... 23
--------
TOTAL PREFERRED STOCKS (Cost $80)............................. 23
--------
CONVERTIBLE PREFERRED STOCKS (0.0%)
COAL, GAS & OIL (0.0%)
566 Columbia Gas Systems, Inc., Series B, 5.22%,
11/28/00 (Cost $23)............................. 22
--------
<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)........................................... 2
--------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.6%)
AEROSPACE & DEFENSE (0.0%)
+*500 Sabreliner Corp., expiring 4/15/03 (acquired
6/21/93, cost $10).............................. 3
--------
ELECTRICAL EQUIPMENT (0.4%)
+#28,000 Protection One Alarm, Inc., expiring 4/03/03...... 224
--------
GAMING & LODGING (0.0%)
+#2,700 Casino Magic Corp., expiring 10/14/96............. --
+1,725 Louisiana Casino Cruises, expiring 12/01/98....... 14
--------
14
--------
INSURANCE (0.0%)
+500 Horace Mann Educators Corp., expiring 4/3/99...... 7
--------
METALS (0.1%)
+8,250 Sheffield Steel Corp., expiring 11/01/01.......... 41
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
High Yield Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
------------------------------------------------------------
<C> <S> <C>
PACKAGING & CONTAINER (0.0%)
+1,000 Crown Packaging Holdings, expiring 11/01/03....... $ 8
--------
REAL ESTATE (0.1%)
+1,000 Petro PSC Properties L.P., expiring 6/01/97....... 34
--------
TELECOMMUNICATIONS (0.0%)
+3,000 Dial Page, Inc., expiring 4/25/99................. --
--------
TOTAL WARRANTS (Cost $228).................................... 331
--------
<CAPTION>
NO. OF
UNITS
- ----------
<C> <S> <C>
UNITS (4.7%)
BROADCAST-RADIO & TELEVISION (1.2%)
#/ /1,250 American Telecasting, 14.50%, 8/15/05............. 756
--------
GAMING & LODGING (2.0%)
++#2,208 Maritime Group Series A, 13.50%, 2/15/97.......... 309
964 Trump Taj Mahal Funding Inc., PIK, 9.375%,
11/15/99........................................ 928
--------
1,237
--------
METALS (1.5%)
1,000 Sheffield Steel Corp. (1st Mortgage Bond + 5
Common Stock Warrants), 12.00%, 11/01/01........ 940
--------
TOTAL UNITS (Cost $5,131)..................................... 2,933
--------
TOTAL INVESTMENTS (99.6%) (Cost $62,754)...................... 61,987
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.9%)
Interest Receivable............................. $1,144
Receivable for Portfolio Shares Sold............ 32
Other........................................... 7 1,183
-----------
LIABILITIES (-1.5%)
Bank Overdraft.................................. (598)
Payable for Portfolio Shares Redeemed........... (214)
Investment Advisory Fees Payable................ (70)
Administrative Fees Payable..................... (9)
Custodian Fees Payable.......................... (3)
Other Liabilities............................... (31) (925)
----------- --------
NET ASSETS (100.0%)............................................ $62,245
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 5,951,111 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $10.46
--------
--------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
<S> <C> <C>
+ -- Non-income producing security
++ -- Non-income producing security -- in default
* -- Restricted as to public resale. Total value of
restricted securities held at December 31, 1995 was
$231 or 0.4% of net assets (Total Cost $242).
# -- 144A Security -- Certain conditions for public sale
may exist.
/ / -- Step Bond -- Coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 1995.
Maturity date disclosed is the ultimate maturity.
PIK -- Payment-In-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
</TABLE>
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on December 31,
1995.
At December 31, 1995, approximately 99% of the Portfolio's net assets consisted
of high yield securities rated below investment grade. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
High Yield Portfolio
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Daily Variable Rate Bonds 1.5%
Fixed Rate Instruments 96.5%
Other 2%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LEHMAN 7 YR MUNICIPAL BOND INDEX (1) MUNICIPAL BOND PORTFOLIO
<S> <C> <C>
1/18/95* 500,000 500,000
12/31/95 560,150 544,000
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE LEHMAN
7YR MUNICIPAL BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
----------------
YTD
----------------
<S> <C>
PORTFOLIO.................................... 8.80%
INDEX........................................ 12.03
<FN>
1. The Lehman 7-year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better. All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 December 31, 1995 was 8.80% compared to 12.03% for the Lehman
7-Year Municipal Bond Index for the same period. As of December 31, 1995, the
Portfolio had an SEC 30-day yield of 4.17%.
The U.S. fixed income market finished up one of the best years on record by
pushing yields lower and prices higher right through the end of December.
Optimism in the belief that an eventual budget agreement and deficit reduction
plan were imminent, market sentiment that a Federal Reserve rate cut was going
to happen, and increased foreign purchases of U.S. Treasury securities all
helped to push the bond market higher. As the quarter came to a close, the
Federal Reserve rewarded the market on December 19 with a 25 basis point cut in
the Fed Funds rate. During the last few weeks of December, political budget
wrangling preoccupied the markets, with the markets going up with positive
developments and giving back when negotiations were unproductive.
During the fourth quarter, the municipal bond market took its cues from the U.S.
Treasury market, although municipals slightly underperformed across all
maturities. The municipal market was impacted by continued fear of tax reform
and the possible loss or reduction of the tax exemption for municipal bonds as
well as a very busy new issue calendar, making November and December the 2nd and
3rd busiest issuing months of the year. With municipal bond funds not seeing
much subscription activity, some pressure was put on the market from funds
purchasing new issues with more desirable coupons and call features and selling
less desirable securities on the other side to pay for these purchases.
The markets started out 1995 with the belief that the economy was going to
continue growing at the strong pace seen during the 4th quarter of 1994, that
- ------------------------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
inflation was a real threat and that the Federal Reserve was going to continue
on a severe tightening path all leading to dire consequences for the fixed
income markets. In reality, economic growth did continue, albeit at a moderate
pace, inflation remained in check, and the Fed actually ended the year with a
bias towards easing. Although there were volatile periods during the course of
the year, 1995 proved to be a spectacular year for the U.S. fixed income market.
The municipal bond market while performing very well did not quite keep pace
with the U.S. Treasury market. The municipal bond market started off the year
still feeling the effects of the Orange County, California bankruptcy.
Municipals were further constrained by fears related to talk of tax reform and
additional pressure was put on the municipal market as municipal bond funds saw
limited subscription activity while individual investors focused on the roaring
U.S. equity market. The year ended with municipal bonds trading at historically
attractive ratios compared to comparable maturity U.S. Treasuries.
1996 has started off with some of the same issues we left behind in 1995. The
markets will be closely watching the outcome and actual details if and when a
final deficit reduction agreement is reached. The first quarter of 1996 will be
scrutinized to determine what the current level of growth is in the U.S.
economy. If the Federal Reserve perceives growth to be slowing -- further Fed
Funds rate cuts will happen early on, fueling a continued bond market rally. If
the Fed perceives growth to be moderate to picking up some steam, the Fed's
easing bias will probably be put on hold, putting some pressure on the fixed
income markets. The bond market's performance during the 4th quarter of 1995 was
partially based on anticipated resolutions to developing situations. If in the
coming months actual outcomes differ significantly from perceptions, there
exists the risk of the markets giving back recent gains.
During 1996, the municipal bond market will continue to track the U.S. Treasury
market and will pay particular attention to the tax reform debate and prospects
for some version of a flat tax, election year politics on the local and federal
level, and individual investors enthusiasm for redeploying assets back into the
tax exempt market. During 1996, the level of new issuance is expected to keep
pace with 1995's level of $156 billion. At the currently attractive ratio of
municipal bonds as a percentage of U.S. Treasuries, demand for this new supply
should come from traditional municipal buyers, including property & casualty
insurance companies and individuals as well as crossover buyers following the
municipal/Treasury relationship. We will continue our investment focus on high
quality AA and AAA-rated premium coupon intermediate securities, with a
particular emphasis on AAA-rated prefunded bonds escrowed in U.S. Treasury
securities.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (98.0%)
DAILY VARIABLE RATE BONDS (1.5%)
$ 400 Platte County, Wyoming,
Pollution Control Revenue
Bonds, Series A, 6.00%,
7/01/14..................... $ 400
300 Port of Saint Helens, Oregon,
Pollution Control Revenue
Bonds, Series A, Portland
General Electric Co. 5.95%,
4/01/10..................... 300
--------
TOTAL DAILY VARIABLE RATE BONDS (Cost
$700)....................................... 700
--------
FIXED RATE INSTRUMENTS (96.5%)
1,000 Connecticut State Special
Obligation, Tax Revenue
Bonds, Transportation,
6.50%, 7/01/09, Prerefunded
7/01/99 at 102.............. 1,096
1,000 De Kalb County, Georgia,
General Obligation Bonds,
7.30%, 1/01/00, Prerefunded
1/01/97 at 102.............. 1,057
1,000 De Kalb County, Georgia, Water
& Sewer Revenue Bonds 7.00%,
10/01/06.................... 1,081
1,000 Delaware Transportation
Authority, Transportation
System Revenue Bonds, 6.50%,
7/01/11, Prerefunded 7/01/01
at 102...................... 1,122
2,000 Florida State General
Obligation Bonds, 5.88%,
6/01/24..................... 2,059
1,000 Georgia State, General
Obligation Bonds, Series E,
6.75%, 12/01/02............. 1,146
500 Hawaii State, General
Obligation Bonds, Series BS,
6.70%, 9/01/97.............. 523
1,000 Hawaii State, General
Obligation Bonds, Series CJ,
6.20%, 1/01/12.............. 1,079
1,000 Howard County, Maryland,
Consolidated Public
Improvement General
Obligation Bonds, Series A,
7.20%, 8/01/03, Prerefunded
8/01/96 at 102.............. 1,041
1,500 Intermountain Power Agency,
Utah, Power Supply Revenue
Bonds, Series D, 8.38%,
7/01/12..................... 1,621
1,000 Kentucky State Housing Corp.
Revenue Bonds, Series A,
6.00%, 7/01/10.............. 1,039
1,155 Maryland State Department of
Transportation, Construction
Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded
11/01/99 at 102............. 1,285
1,000 Massachusetts State
Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded
3/01/00 at 102.............. 1,141
500 Massachusetts State
Consolidated Loan, Series A,
7.63%, 6/01/08, Prerefunded
6/01/01 at 102.............. 588
2,000 Massachusetts State Special
Obligation Revenue Bonds,
Series A 6.00%, 6/01/13..... 2,083
1,625 Michigan State Housing
Development Authority
Revenue Bonds, Series A,
6.75%, 12/01/14............. 1,719
1,500 Minnesota State General
Obligation Bonds, 7.00%,
8/01/99, Prerefunded 8/01/96
at 100...................... 1,530
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
$ 1,590 Minnesota State Infrastructure
Development, General
Obligation Bonds, 6.80%,
8/01/03, Prerefunded 8/01/00
at 100...................... $ 1,762
1,400 Mississippi State General
Obligation Bonds, 6.00%,
2/01/09..................... 1,503
1,475 Montana State General
Obligation Bonds, Long Range
Building Program, Series C,
6.00%, 8/01/13.............. 1,571
1,000 New Castle County, Delaware,
General Obligation Bonds,
6.25%, 10/15/01............. 1,100
1,000 New York State Local
Government Assistance Corp.
Revenue Bonds, Series B,
7.50%, 4/01/20, Prerefunded
4/01/01 at 102.............. 1,170
500 Ohio State General Obligation
Bonds, 6.20%, 8/01/12....... 549
1,000 Ohio State Housing Finance
Agency, Residential Mortgage
Revenue Bonds, Series A-1,
6.20%, 9/01/14.............. 1,038
525 Pennsylvania State General
Obligation Bonds, Series A,
6.50%, 1/01/00.............. 568
1,000 Pennsylvania State Higher
Educational Facilities
Authority, Colleges &
Universities Revenue Bonds,
6.50%, 9/01/02.............. 1,118
1,000 Redmond, Washington, General
Obligation Bonds, 5.75%,
12/01/05.................... 1,082
1,000 Reedy Creek Improvement
District, Florida, Utility
Revenue Bonds, Series 91-1,
6.50%, 10/01/16, Prerefunded
10/01/01 at 101............. 1,124
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...................... 1,458
1,350 San Antonio, Texas, General
Obligation Bonds, 6.50%,
8/01/14..................... 1,484
1,000 Tulsa, Oklahoma, General
Obligation Bonds, 6.38%,
2/01/02..................... 1,106
1,000 Virginia Beach, Virginia,
General Obligation Bonds,
6.00%, 9/01/10.............. 1,075
500 Virginia State Housing
Development Authority,
Commonwealth Mortgage
Revenue Bonds, Series B,
6.60%, 1/01/12.............. 531
1,000 Virginia State Housing
Development Authority,
Commonwealth Mortgage
Revenue Bonds, Series B,
6.65%, 1/01/13.............. 1,066
1,000 Washington State General
Obligation Bonds, Series B,
6.20%, 6/01/01.............. 1,088
1,500 Washington State General
Obligation Bonds, Series
86-D, 8.00%, 9/01/09,
Prerefunded 9/01/96 at
100......................... 1,544
500 Washington Suburban Sanitary
District, General Obligation
Revenue Bonds, 6.50%,
11/01/05, Prerefunded
11/01/01 at 102............. 565
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- ------------------------------------------------------
<C> <S> <C>
$ 500 Washington Suburban Sanitary
District, General Obligation
Revenue Bonds, 6.30%,
1/01/07, Prerefunded 1/01/02
at 102...................... $ 557
--------
TOTAL FIXED RATE INSTRUMENTS (Cost
$42,634).................................... 44,269
--------
TOTAL TAX-EXEMPT INSTRUMENTS (98.0%) (Cost
$43,334).................................... 44,969
--------
TOTAL INVESTMENTS (98.0%) (Cost $43,334).... 44,969
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.1%)
Cash........................ $ 37
Interest Receivable......... 922
Other....................... 1 960
----------
LIABILITIES (-0.1%)
Investment Advisory Fees
Payable.................... (11)
Payable for Portfolio Shares
Redeemed................... (7)
Administrative Fees
Payable.................... (7)
Custodian Fees Payable...... (2)
Other Liabilities........... (33) (60)
---------- --------
NET ASSETS (100%)......................... $ 45,869
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,422,080 outstanding
$.001 par value shares (authorized
500,000,000 shares)..................... $10.37
--------
--------
</TABLE>
- ------------------------------------------------
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Prerefunded Bonds. Outstanding Bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the Treasury escrow.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 11.9%
Corporate Floating Rate Notes 3.0%
Certificates of Deposit 8.1%
US Treasury STRIPS 2.3%
US Government Agency Discount Notes 44.4%
US Government Agency Floating Rate Notes 23.8%
Other 6.5%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO DONOGHUE'S SEC FEDERAL FUNDS
30-Day Yields 30-Day Yields 30-day Yields
<S> <C> <C> <C>
Jan. 5.21 5.18 5.75
Feb. 5.51 5.35 6.13
Mar. 5.58 5.47 6.00
Apr. 5.58 5.49 6.19
May 5.58 5.47 6.19
June 5.52 5.43 6.25
July 5.38 5.29 5.94
August 5.30 5.22 5.88
Sept 5.23 5.18 5.75
Oct 5.20 5.18 5.94
Nov 5.21 5.17 6.00
Dec 5.21 5.14 5.25
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Money Market Portfolio's investment objectives are to maximize current
income and preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments which have effective
maturities of one year or less. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only
securities having a remaining maturity of one year or less. The Portfolio is
expected to maintain a net asset value of $1.00 per share. There can be no
assurance, however, that the Portfolio will be successful in maintaining a net
asset value of $1.00 per share.
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of December 31, 1995 were 5.21% and 5.34%, respectively. As with
all money market portfolios, the seven day yields are not necessarily indicative
of future performance.
During the first half of 1995 short term interest rates demonstrated
considerable volatility as the Federal Reserve shifted monetary policy from a
restrictive stance to an accommodative one. In February we saw the Fed execute
the final step (an increase of 50 basis points to 6%) in a year long campaign of
raising interest rates in its effort to halt what it perceived as excessive
growth in the American economy. The economic outlook was much different five
months later, however, and at the beginning of July the Fed eased rates 25 basis
points in an effort to provide more strength to an economy that had begun to
show signs of weakness. Those signs of weakness persisted, so the Fed acted
again during its last meeting of the year, in December, to lower the Fed Funds
target 25 more basis points back down to 5.5%.
The heightened level of market volatility required the implementation of several
different strategies at various times during the year. As the prospects for
further tightening by the Fed dimmed, the Portfolio's floating rate note
position was trimmed. When the market rallied strongly the treasury bill
positions were sold, and as spreads over treasuries became more attractive
commercial paper holdings were increased. For most of the second quarter the
Portfolio took advantage of the inversion of the treasury yield curve by
capitalizing on the high yields available in overnight and very short-term
investments. The percentage of the Portfolio held in repurchase agreements was
increased as was the commitment to short-term agency discount notes. Later, as
the economy slowed and the Fed
- --------------------------------------------------------------------------------
Money Market Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO (CONT.)
began to lower rates the weighted average maturity of the portfolio was extended
with Treasury STRIPS and longer dated agency discount notes.
We are pleased to report that the Portfolio continues to meet its goal of
providing as high a level of interest income as is consistent with maintaining
liquidity and stability of principal, and that the Portfolio holds only high
quality securities with over 90% invested in securities rated A1+/P1.
- --------------------------------------------------------------------------------
Money Market Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
MONEY MARKET INSTRUMENTS (93.5%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (70.5%)
AGENCY DISCOUNT NOTES (44.4%)
Federal Home Loan Bank
$ 50,000 6.10%, 1/02/96.................................... $ 49,991
10,000 5.47%, 1/22/96.................................... 9,968
15,000 5.56%, 1/24/96.................................... 14,947
10,000 5.56%, 2/01/96.................................... 9,952
25,000 5.47%, 3/06/96.................................... 24,753
Federal Home Loan Mortgage Corp.
25,000 5.59%, 1/16/96.................................... 24,942
Federal National Mortgage Corp.
25,000 5.61%, 1/05/96.................................... 24,984
25,000 5.67%, 1/09/96.................................... 24,969
15,000 5.56%, 1/10/96.................................... 14,979
25,000 5.55%, 1/19/96.................................... 24,931
30,000 5.63%, 1/24/96.................................... 29,892
20,000 5.58%, 1/26/96.................................... 19,923
20,000 5.57%, 2/08/96.................................... 19,882
25,000 5.57%, 2/14/96.................................... 24,830
18,000 5.50%, 2/28/96.................................... 17,841
20,000 5.45%, 4/05/96.................................... 19,712
15,000 5.37%, 4/30/96.................................... 14,731
----------
371,227
----------
AGENCY FLOATING RATE NOTES (23.8%)
Federal National Mortgage Association
25,000 5.53%, 11/20/96................................... 24,985
65,000 5.85%, 9/02/97.................................... 65,000
25,000 5.26%, 6/02/99.................................... 25,000
13,000 5.26%, 7/26/99.................................... 12,950
25,000 5.26%, 9/22/99.................................... 25,000
Student Loan Marketing Association
46,000 5.40%, 10/30/97................................... 46,053
----------
198,988
----------
U.S. TREASURY STRIPS (2.3%)
/\20,000 5/15/96, Principal Only........................... 19,587
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $589,802)............................................. 589,802
----------
COMMERCIAL PAPER (11.9%)
FINANCE (11.9%)
15,000 Abbey National North America 5.62%, 1/16/96....... 14,965
10,000 Commerzbank 5.58%, 1/31/96........................ 9,954
35,000 Koch Industries 5.65%, 1/19/96.................... 34,901
20,000 Pfizer, Inc., 5.70%, 1/17/96...................... 19,949
20,000 Pfizer, Inc., 5.70%, 1/19/96...................... 19,943
----------
TOTAL COMMERCIAL PAPER (Cost $99,712)......................... 99,712
----------
CORPORATE FLOATING RATE NOTES (3.0%)
FINANCE (3.0%)
15,000 General Electric Credit Corp. 5.85%, 2/09/96...... 15,000
10,000 General Electric Credit Corp. 5.85%,
2/15/96......................................... 10,000
----------
TOTAL CORPORATE FLOATING RATE NOTES (Cost $25,000)............ 25,000
----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CERTIFICATES OF DEPOSIT (8.1%)
$ 30,000 Deutsche Bank (Yankee) 5.64%, 3/08/96............. $ 30,000
30,000 Rabo Bank, New York (Yankee) 5.75%, 3/06/96....... 30,001
8,000 Rabo Bank New York (Yankee) 5.93%, 5/16/96........ 8,003
----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $68,004).................. 68,004
----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $782,518)................ 782,518
----------
<CAPTION>
AMOUNT
(000)
----------
<C> <S> <C>
SHORT TERM INVESTMENT (6.5%)
REPURCHASE AGREEMENT (6.5%)
53,913 Goldman Sachs 5.83%, dated 12/29/95, due 1/02/96,
to be repurchased at $53,948, collateralized by
$39,585, United States Treasury Bonds, 10.375%,
due 11/15/11, valued at $55,023 (Cost
$53,913)........................................ 53,913
----------
TOTAL INVESTMENTS (100.0%) (Cost $836,431).................... 836,431
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.3%)
Cash............................................ $ 1
Interest Receivable............................. 2,802
Other........................................... 57 2,860
----------
LIABILITIES (-0.3%)
Dividends Payable............................... (1,718)
Investment Advisory Fees Payable................ (638)
Administrative Fees Payable..................... (116)
Custodian Fees Payable.......................... (22)
Other Liabilities............................... (104) (2,598)
---------- ----------
NET ASSETS (100%)............................................. $ 836,693
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 836,710,488 outstanding
$.001 par value shares (authorized 4,000,000,000 shares)....
$1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
/\ -- Stripped securities represent the splitting of cash flows into several
classes which vary by the proportion of principal and interest paid.
Holders are entitled to the portion of the payments on the certificate
representing interest only or principal only.
Floating Rate -- The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at
December 31, 1995.
Maturity dates disclosed for Floating Rate Instruments are the ultimate maturity
dates. The effective maturity dates for such securities are the next interest
reset dates.
Interest rates disclosed for Commercial Paper and Agency Discount Notes
represent effective yields at December 31, 1995.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Money Market Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1995)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 43.9%
Variable/Floating Rate Instruments 52.5%
U.S. Government & Agency Obligations 3.3%
Other 0.3%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL MONEY
MARKET PORTFOLIO DONOGHUE'S SEC
30-DAY YIELDS 30-DAY YIELDS
<S> <C> <C>
Jan. 2.97 3.26
Feb. 3.38 3.19
Mar. 3.42 3.35
Apr. 3.62 3.53
May 3.72 3.81
June 3.48 3.31
July 3.28 3.19
Aug 3.29 3.21
Sept 3.30 3.41
Oct 3.27 3.32
Nov 3.34 3.33
Dec 3.48 3.74
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Money Market Portfolio's investment objectives are to maximize
current income that is exempt from Federal income tax and preserve capital while
maintaining high levels of liquidity through investing in high quality municipal
money market instruments which earn interest exempt from Federal income tax in
the opinion of bond counsel for the issuer. The Portfolio will purchase only
securities having a remaining maturity of one year or less. Under normal
circumstances, the Portfolio will invest at least 80% of its assets in
tax-exempt municipal securities. Additionally, the Portfolio will not purchase
private activity bonds, the interest from which is subject to alternative
minimum tax. Interest on tax-exempt municipal securities may be subject to state
and local taxes. The Portfolio's average maturity (on a dollar-weighted basis)
will not exceed 90 days. The Portfolio is expected to maintain a net asset value
of $1.00 per share. There can be no assurance, however, that the Portfolio will
be successful in maintaining a net asset value of $1.00 per share.
The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Portfolio as of
December 31, 1995 were 3.91% and 3.99%, respectively. The seven day taxable
equivalent yield and the seven day taxable equivalent effective yield for the
Portfolio at December 31, 1995, assuming Federal income tax rate of 39.6%
(maximum rate) were 6.47% and 6.61%, respectively. The seven day yields are not
necessarily indicative of future performance.
Much of the first half of 1995 in the municipal money market sector was clouded
by the Orange County, California bankruptcy which occurred in December 1994.
This crisis resulted in a general nervousness about and lack of confidence in
the tax-exempt market. As the months progressed, investors began to regain
confidence in the market turning their attention toward the annual tax-exempt
note refinancings that occur at the beginning of the third quarter each year.
Despite the improved sentiment, investors demanded a greater level of disclosure
from the issuers scrutinizing each deal with a new level of vigilance and in
some cases prompting issuers to seek more comprehensive levels of bank support.
Due to the yield curve's flat shape, the tax-exempt notes ultimately provided a
means to extend maturity but not an avenue by which to increase yield.
During the fourth quarter both the taxable and tax-exempt markets followed the
events surrounding the U.S. Government budget debate and related Government
shutdowns. Although the tax-exempt market did
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
not experience the same level of volatility as the taxable market, there were a
number of state and local governments that were forced back into the market as
result of lost Federal subsidies. This created additional municipal supply that
is not typical in the fourth quarter.
Despite most of these events, in 1995 the municipal money market yield curve,
like the taxable curve, maintained a flat shape. There were periods when the
curve did invert such as the end of December or steepen as was the case in
September. These shifts were the result of technicals (rather than events in the
taxable market) related to increased or decreased supply. Also, in periods of
excess supply dealers are often reluctant to hold inventory thus increasing the
rates of the particular sector for which there is over-supply significantly in
excess of other municipal money market securities. Although the municipal money
market sector does not tend to track the taxable market, levels did experience
an overall downward bias during the second half of the year coinciding with the
Federal Reserve decreasing the Federal Funds rate.
The Portfolio was managed to maximize the flat yield curve environment as well
as the outlook for the municipal money market sector. For the first half of the
year, the Portfolio maintained an allocation to tax-exempt notes that ranged
from 10-15%. As the notes matured at the end of the second quarter, this
position declined to approximately 5% where it remained for the balance of the
year. During periods of increased supply and therefore temporary periods of more
attractive yields, we increased the note position. Commercial paper ranged from
35% to 45%, and daily and weekly variable rate preferred issues fluctuated
between 40% and 55% of the Portfolio. The Portfolio finished 1995 with net
assets of $451.5 million. The weighted average maturity of the Portfolio ranged
from 30 to 45 days for the first five months and then dropped in the latter half
of the year to a range of 20 to 30 days ending the year with a weighted average
maturity of 23 days.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (96.4%)
FIXED RATE INSTRUMENTS (43.9%)
NOTES (2.0%)
$ 3,400 Charleston, South Carolina, Water & Sewer System
Revenue, 7.50%, 1/01/14
Prerefunded 1/01/96 at 102...................... $ 3,468
500 Du Page Water Commission, Illinois, 7.10%,
3/01/96......................................... 503
5,000 New York State Urban Development Correctional
Facilities, 8.00%, 1/01/15 Prerefunded 1/01/96
at 102.......................................... 5,100
----------
9,071
----------
PUT OPTION BONDS (0.4%)
1,000 York County, South Carolina, Series B-4, 3.75%,
9/15/14 (Putable 3/15/96)....................... 1,000
1,000 York County, South Carolina, Series E-2, 3.80%,
8/15/14 (Putable 2/15/96)....................... 1,000
----------
2,000
----------
TAX & REVENUE ANTICIPATION NOTES (1.6%)
4,000 Colorado State, 4.50%, 6/27/96, TRANS............. 4,012
3,000 Texas State, Series 95A, 4.75%, 8/30/96, TRANS.... 3,013
----------
7,025
----------
COMMERCIAL PAPER (39.9%)
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light, Series
90, 3.75%, 2/14/96.............................. 3,000
4,000 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.80%, 2/15/96.......... 4,000
2,000 Burlington, Kansas, Kansas City Power & Light Co.,
Series 87A, 3.70%, 2/20/96...................... 2,000
2,700 Burlington, Kansas, Kansas City Power & Light Co.,
Series 87B, 3.70%, 2/20/96...................... 2,700
3,500 City of Austin, Texas, Series A, 3.55%, 3/28/96... 3,500
4,530 City of Dallas, Texas, 3.80%, 2/05/96............. 4,530
6,000 City of Honolulu, Hawaii, 3.75%, 2/12/96.......... 6,000
1,900 City of San Antonio, Texas, 3.70%, 2/12/96........ 1,900
10,000 Commonwealth of Massachusetts, Series A, 3.70%,
1/09/96......................................... 10,000
5,000 Commonwealth of Virginia, 3.83%, 1/10/96.......... 5,000
1,200 Connecticut State Health & Education Facilities
Authority, Yale University, Series N, 3.70%,
1/12/96......................................... 1,200
2,525 Gainesville, Florida, Series C, 3.85%, 1/30/96.... 2,525
4,000 Georgia Municipal Gas Authority, 3.75%, 2/23/96... 4,000
2,000 Illinois Development Finance Authority, Series
93A, 3.65%, 2/16/96............................. 2,000
1,000 Illinois Health & Education, Series 89A, 3.75%,
2/22/96......................................... 1,000
4,000 Independence, Missouri, Water Utility Revenue,
3.75%, 2/12/96.................................. 4,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 3,100 Intermountain Power Agency, Utah, Series E 3.75%,
2/07/96......................................... $ 3,100
2,400 Intermountain Power Agency, Utah, Series E, 3.75%,
2/23/96......................................... 2,400
700 Intermountain Power Agency, Utah, Series F2,
3.90%, 1/11/96.................................. 700
1,500 Intermountain Power Agency, Utah, Series 85F,
3.90%, 1/11/96.................................. 1,500
3,100 Jacksonville, Florida, Electric Authority, Series
C-1, 3.50%, 3/07/96............................. 3,100
7,700 Jacksonville, Florida, Electric Authority, 3.65%,
2/16/96......................................... 7,700
3,600 Jasper County, Indiana, Series 88B, 3.75%,
2/06/96......................................... 3,600
2,000 Jasper County, Indiana, Series 88C, 3.75%,
2/06/96......................................... 2,000
1,100 Lehigh County, Pennsylvania, 3.85%, 1/30/96....... 1,100
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.80%,
2/09/96......................................... 6,600
6,020 Montgomery, Alabama, Industrial Development Board,
General Electric Series, 3.80%, 2/08/96......... 6,020
4,000 Mount Vernon, Indiana, Pollution Control & Solid
Waste Disposal Revenue Bonds, General Electric
Project, Series 89A, 3.70%, 2/27/96............. 4,000
4,000 Mount Vernon, Indiana, Pollution Control & Solid
Waste Disposal Revenue Bonds, General Electric
Project, Series 89A, 3.80%, 2/07/96............. 4,000
4,025 North Carolina Eastern Municipal Power, 3.75%,
2/26/96......................................... 4,025
300 Northeastern Pennsylvania Hospital Authority,
Series B, 3.85%, 2/07/96........................ 300
2,990 Omaha, Nebraska, Public Power District, 3.85%,
2/07/96......................................... 2,990
1,000 Peninsula Ports Authority, Virginia, Series 92,
3.75%, 2/12/96.................................. 1,000
3,000 Petersburg, Indiana, Indiana Power & Light, Series
91, 3.70%, 2/13/96.............................. 3,000
2,200 Platte River Authority, Colorado, 3.80%,
1/22/96......................................... 2,200
1,000 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series B, 3.80%, 2/08/96................ 1,000
1,500 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series C, 3.80%, 2/08/96................ 1,500
1,065 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series E, 3.80%, 2/08/96................ 1,065
1,500 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series F, 3.75%, 2/26/96................ 1,500
5,750 State of Louisiana, General Obligation Bond,
3.80%, 2/21/96.................................. 5,750
8,950 Sunshine State, Florida, Government Finance
Authority, Series 86, 3.50%, 3/08/96............ 8,950
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 5,000 Sweetwater County, Wyoming, Series 88A, 3.50%,
3/08/96......................................... $ 5,000
6,000 Salt River, Arizona, 3.90%, 1/17/96............... 6,000
2,000 Salt River, Arizona, 3.75%, 2/14/96............... 2,000
3,000 State of New York, General Obligation Bond, BAN,
Series Q, 3.75%, 2/05/96........................ 3,000
2,000 Sunshine State, Florida, Government Finance
Authority, Series 86, 3.85%, 1/30/96............ 2,000
6,600 Texas Municipal Power Agency, 3.65%, 2/15/96...... 6,600
2,000 Texas Municipal Power Agency, 3.75%, 2/22/96...... 2,000
1,000 Trimble County, Kentucky, Louisville Gas &
Electric Series, 3.70%, 2/13/96................. 1,000
5,000 Trimble County, Kentucky, Louisville Gas &
Electric Series, 3.80%, 3/07/96................. 5,000
5,500 University of Minnesota, Series A, 3.80%,
2/06/96......................................... 5,500
3,000 University of Texas, Series A, 3.80%, 2/05/96..... 3,000
2,500 Vanderbilt University, Tennessee, Series 89A,
3.75%, 2/22/96.................................. 2,500
----------
180,055
----------
TOTAL FIXED RATE INSTRUMENTS............................ 198,151
----------
VARIABLE/FLOATING RATE INSTRUMENTS (52.5%)
DAILY VARIABLE RATE BONDS (34.1%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 6.00%,
9/01/23......................................... 1,500
2,400 Birmingham, Alabama, Medical Clinic Board Revenue,
University of Alabama Hospital Services Fund,
6.10%, 12/01/26................................. 2,400
5,500 Burke County, Georgia, Development Authority,
Series 94, 5.50%, 7/01/24....................... 5,500
6,300 Burke County, Georgia, Development Authority,
6.00%, 4/01/25.................................. 6,300
6,000 California Pollution Control Financing Authority,
Southern Edison, Series 86A, 5.40%, 2/28/08..... 6,000
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue, Erlanger Medical Center,
6.10%, 10/01/17................................. 4,000
4,200 Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Series A, 6.00%, 12/01/17............. 4,200
4,200 Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Series B, 6.00%, 12/01/17............. 4,200
700 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 6.00%,
12/01/09........................................ 700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,700 Delta County, Michigan, Pollution Control Revenue
Bonds, Mead Corp., 5.90%, 12/01/23.............. $ 1,700
700 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 5.90%,
11/01/19........................................ 700
1,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 6.00%, 11/01/15........... 1,000
3,700 Harris County, Texas, Health Facilities
Development Corp., St. Lukes Episcopal, Series
6.00%, 2/15/16.................................. 3,700
200 Harris County, Texas, Pollution Control Revenue
Bonds, Exxon Project, Series 84B, 6.00%,
3/01/24......................................... 200
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, 5.95%, 12/01/15.......................... 5,700
8,600 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 5.95%, 6/01/23...... 8,600
900 Kansas City, Kansas, Industrial Development
Authority, PQ Corp., 6.00%, 8/01/15............. 900
1,900 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 5.95%,
11/01/11........................................ 1,900
2,500 Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project, Series 84A, 5.90%,
11/01/14........................................ 2,500
4,400 Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project, Series 84A, 5.95%,
8/01/15......................................... 4,400
900 Lincoln County, Wyoming, Pollution Control Revenue
Bonds, Exxon Project, Series 84D, 5.90%,
11/01/14........................................ 900
1,620 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel Series, 6.00%,
12/01/15........................................ 1,620
4,500 Maricopa County, Arizona, Pollution Control
Revenue Bonds, Series 94B, 5.95%, 5/01/29....... 4,500
4,600 Maricopa County, Arizona, Public Services, Series
94C, 6.00%, 5/01/29............................. 4,600
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 6.00%,
12/01/20........................................ 1,000
6,700 Michigan State Strategic Fund, Consumers Power
Series 88A, 5.95%, 4/15/18...................... 6,700
1,570 Missouri State Health & Educational Facilities
Authority Revenue, Washington University, Series
89A, 6.00%, 3/01/17............................. 1,570
3,700 Monroe County, Georgia, Pollution Control Revenue
Bonds, Georgia Power Co., Series 2, 5.50%,
7/01/25......................................... 3,700
3,900 New York City, New York, Cultural Resources,
5.90%, 12/01/15................................. 3,900
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 2,100 New York City, New York, Water Finance Authority,
Water & Sewer System Revenue Bonds, Series 92C,
5.90%, 6/15/22.................................. $ 2,100
18,400 New York City, New York, Water Finance Authority,
Water & Sewer System Revenue Bonds, Series 94C,
5.90%, 6/15/23.................................. 18,400
2,900 New York State, Energy Research and Development
Authority, Pollution Control Revenue Bonds,
5.95%, 12/01/25................................. 2,900
1,000 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 6.10%, 12/01/99....... 1,000
3,000 Ohio State Air Quality Development Authority
Revenue Bonds, Series 85A, 5.50%, 12/01/15...... 3,000
1,400 Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas & Electric, Series
B, 5.95%, 9/01/30............................... 1,400
700 Peninsula Ports Authority, Virginia, Coal Revenue
Bonds, 5.95%, 7/01/16........................... 700
4,300 Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University, Series 95B,
6.00%, 11/01/27................................. 4,300
3,300 Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University, Series 95C,
6.00%, 11/01/29................................. 3,300
3,800 Platte County, Wyoming, Pollution Control Revenue
Bonds, Series A, 6.00%, 7/01/14................. 3,800
1,000 Platte County, Wyoming, Pollution Control Revenue
Bonds, Series B, 6.00%, 7/01/14................. 1,000
2,000 Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
Series A, 5.95%, 4/01/10........................ 2,000
1,600 Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
Series B, 5.95%, 6/01/10........................ 1,600
1,400 Saint Charles Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 5.95%,
10/01/22........................................ 1,400
5,000 Salt Lake County, Utah, Pollution Control Revenue
Bonds, British Petroleum Co., 5.95%, 2/01/08.... 5,000
2,700 Salt Lake County, Utah, Pollution Control Revenue
Bonds, SVC Station Holdings, 6.00%, 8/01/07..... 2,700
4,900 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
Series 85, 5.95%, 7/01/15....................... 4,900
----------
154,090
----------
WEEKLY VARIABLE RATE BONDS (18.4%)
1,000 Albuquerque, New Mexico, Revenue Bond, Series A,
5.15%, 7/01/22.................................. 1,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light Series,
4.95%, 8/01/09.................................. $ 1,000
1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light Series,
4.95%, 8/01/20.................................. 1,000
1,000 Brunswick & Glynn County, Georgia, Development
Authority, Series 85, 5.25%, 12/01/15........... 1,000
7,000 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 5.15%, 1/01/16.......... 7,000
5,800 Charlotte, North Carolina, Airport, Series 93A,
5.15%, 7/01/16.................................. 5,800
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 5.10%,
2/01/00......................................... 1,000
2,500 City of Columbia, Missouri, Special Revenue Bonds,
Series 88A, 5.15%, 6/01/08...................... 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 5.15%, 12/01/15...... 1,500
300 City of Forsyth, Montana, Pollution Control
Revenue Bonds, Series B, 5.00%, 6/01/13......... 300
700 City of Forsyth, Montana, Pollution Control
Revenue Bonds, Series D, 4.90%, 6/01/13......... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds, Box-Crow
Cement Co., 5.80%, 12/01/09..................... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily, Cliffs
Ridgedale, 5.20%, 9/15/25....................... 1,000
1,700 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 5.20%, 4/01/04... 1,700
7,800 Clark County, Nevada, Airport Revenue Bonds,
Series 93A, 5.15%, 7/01/12...................... 7,800
2,700 Clark County, Nevada, Airport Revenue Bonds,
Series 95-A1, 5.05%, 7/01/25.................... 2,700
4,000 Clark County, Nevada, Industrial Development Corp,
Nevada Power Co., Series C, 5.05%, 10/01/30..... 4,000
280 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, 5.15%, 6/01/98... 280
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue, Series 91C1, 5.05%,
8/01/00......................................... 600
7,200 Dade County, Florida, Water & Sewer Revenue Bonds,
4.90%, 10/05/22................................. 7,200
1,200 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper Series D,
5.00%, 12/01/18................................. 1,200
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 500 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper Series E,
5.00%, 12/01/18................................. $ 500
3,000 Foothill/Eastern California Toll Road Revenue,
Series 95C, 4.80%, 1/02/35...................... 3,000
5,000 Harris County, Texas, Series 94G, 5.10%,
8/01/20......................................... 5,000
5,000 Harris County, Texas, Series 94H, 5.10%,
8/01/20......................................... 5,000
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing Series 85, 5.05%,
12/01/05........................................ 300
1,000 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 5.25%, 12/01/15.................... 1,000
1,500 Louisiana Public Facilities Authority, Hospital
Revenue, Series 85, 6.40%, 12/01/00............. 1,500
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 4.75%, 1/01/19........... 1,000
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 5.20%, 7/01/15........... 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 5.20%, 11/01/19.......................... 1,500
235 Pinellas County, Florida, Health Facilities,
Bayfront Medical Center, Series 89, 4.90%,
6/01/98......................................... 235
450 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 5.15%, 12/01/05 . 450
800 Port Development Corporation Marine Terminal,
Texas, Series 89, 5.05%, 1/15/14................ 800
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 5.25%, 9/01/14..... 1,500
600 Putnam County, Florida, Development Authority,
Seminole Electric Series 84 H1, 4.65%,
3/15/14......................................... 600
1,000 Rapides Parish, Louisiana, Central Louisiana
Electric Series, 5.05%, 7/01/18 . 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Series, 5.25%, 8/01/14.......................... 700
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 5.10%,
10/01/09........................................ 1,100
2,000 Washington Public Power, Series 93-1A3, 4.95%,
7/01/17......................................... 2,000
----------
82,965
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................... 237,055
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $435,206).................. 435,206
----------
TAXABLE INSTRUMENT (3.3%)
U.S. GOVERNMENT & AGENCY OBLIGATION (3.3%)
14,820 Federal Home Loan Bank Discount Note, 5.57%,
1/05/96 (Cost $14,811).......................... 14,811
----------
TOTAL INVESTMENTS (99.7%) (Cost $450,017)..................... 450,017
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (0.6%)
Interest Receivable............................. $ 2,563
Other........................................... 29 $ 2,592
----------
LIABILITIES (-0.3%)
Dividends Payable............................... (607)
Investment Advisory Fees Payable................ (338)
Administrative Fees Payable..................... (63)
Custodian Fees Payable.......................... (12)
Payable to Custodian............................ (10)
Director's Fees & Expenses...................... (2)
Other Liabilities............................... (58) (1,090)
---------- ----------
NET ASSETS (100%)............................................. $ 451,519
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 451,502,422 outstanding $.001 par value shares
(authorized 4,000,000,000 shares)........................... $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C>
BAN -- Bond Anticipation Note
TRANS -- Tax & Revenue Anticipation Notes
</TABLE>
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based on changes in 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.
Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at December 31, 1995.
At December 31, 1995, approximately 12% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of it's
public bodies and municipalities may affect the ability of issuers to pay the
required principal and interest payments of the municipal securities.
The accompanying notes are an integral part of the financial statements. (Pages
150-156)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE EMERGING
COUNTRY ASIAN MARKETS EUROPEAN
ALLOCATION EQUITY PORTFOLIO EQUITY GLOBAL EQUITY
PORTFOLIO PORTFOLIO YEAR ENDED PORTFOLIO YEAR PORTFOLIO
YEAR ENDED YEAR ENDED DECEMBER ENDED DECEMBER YEAR ENDED
DECEMBER 31, DECEMBER 31, 31, 31, DECEMBER 31,
1995 1995 1995 1995 1995
(000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 3,730 $ 5,477 $ 19,196 $ 1,146 $ 1,896
Interest 179 711 4,215 245 48
Less: Foreign Taxes Withheld (519) (487) (1,993) (158) (168)
------------- ------------- ----------- ------ -------------
Total Income 3,390 5,701 21,418 1,233 1,776
------------- ------------- ----------- ------ -------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,068 2,301 11,563 416 653
Less: Fees Waived (618) (522) -- (130) (109)
------------- ------------- ----------- ------ -------------
Investment Advisory Fees -- Net 450 1,779 11,563 286 544
Administrative Fees 322 458 1,458 100 141
Sub-Administrative Fees 2 -- 173 -- --
Custodian Fees 403 474 2,073 51 44
Filing and Registration Fees 18 23 45 24 16
Insurance 15 21 69 2 4
Directors' Fees and Expenses 7 10 47 3 4
Legal Fees 8 13 39 3 5
Audit Fees 42 46 113 38 42
Shareholder Reports 37 25 81 9 11
Foreign Tax Expense -- 28 202 -- --
Other Expenses 12 28 42 3 5
------------- ------------- ----------- ------ -------------
Total Expenses 1,316 2,905 15,905 519 816
------------- ------------- ----------- ------ -------------
NET INVESTMENT INCOME 2,074 2,796 5,513 714 960
------------- ------------- ----------- ------ -------------
NET REALIZED GAIN (LOSS):
Investments sold 5,468 12,299 (33,253)* 604 5,893
Foreign Currency Transactions (6,591) 160 (981) 39 (86)
------------- ------------- ----------- ------ -------------
Total Net Realized Gain (Loss) (1,123) 12,459 (34,234) 643 5,807
------------- ------------- ----------- ------ -------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 5,557 7,840 (101,142) 3,003 7,313
Foreign Currency Translations 10,118 12 4,125 39 (118)
------------- ------------- ----------- ------ -------------
Total Net Change in Unrealized
Appreciation (Depreciation) 15,675 7,852 (97,017) 3,042 7,195
------------- ------------- ----------- ------ -------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 14,552 20,311 (131,251) 3,685 13,002
------------- ------------- ----------- ------ -------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 16,626 $ 23,107 $(125,738) $ 4,399 $ 13,962
------------- ------------- ----------- ------ -------------
------------- ------------- ----------- ------ -------------
</TABLE>
- ---------------
*Net of foreign tax of $650,000 on net realized gains.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL LATIN AMERICAN
EQUITY INTERNATIONAL JAPANESE PORTFOLIO
GOLD PORTFOLIO PORTFOLIO SMALL CAP EQUITY JANUARY 18,
YEAR ENDED YEAR ENDED PORTFOLIO YEAR PORTFOLIO YEAR 1995* TO
DECEMBER 31, DECEMBER 31, ENDED DECEMBER ENDED DECEMBER DECEMBER 31,
1995 1995 31, 1995 31, 1995 1995
(000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 84 $ 34,103 $ 5,511 $ 524 $ 263
Interest 92 4,293 549 229 108
Less: Foreign Taxes Withheld (6) (4,270) (630) (78) (19)
------ ------------- ------- ------- -----
Total Income 170 34,126 5,430 675 352
------ ------------- ------- ------- -----
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 109 11,452 1,796 469 146
Basic Fees -- Sub Adviser 73 -- -- -- --
Less: Fees Waived -- Adviser (55) (424) (181) (118) (146)
Fees Waived -- Sub Adviser (37) -- -- -- --
------ ------------- ------- ------- -----
Investment Advisory Fees -- Net 90 11,028 1,615 351 --
Administrative Fees 35 2,252 309 101 27
Sub-Administrative Fees -- -- -- -- 9
Custodian Fees 19 545 126 38 111
Filing and Registration Fees 18 47 24 35 17
Insurance 1 100 11 4 --
Directors' Fees and Expenses 3 43 7 3 2
Legal Fees 2 57 9 3 5
Audit Fees 37 61 46 37 39
Shareholder Reports 19 99 17 9 11
Foreign Tax Expense -- -- -- -- 45
Other Expenses 3 81 10 4 4
------ ------------- ------- ------- -----
Total Expenses 227 14,313 2,174 585 270
------ ------------- ------- ------- -----
NET INVESTMENT INCOME (LOSS) (57) 19,813 3,256 90 82
------ ------------- ------- ------- -----
NET REALIZED GAIN (LOSS):
Investments Sold 880 108,572 7,974 (2,999) (530)
Foreign Currency Transactions (4) (20,102) (297) -- (13)
------ ------------- ------- ------- -----
Total Net Realized Gain (Loss) 876 88,470 7,677 (2,999) (543)
------ ------------- ------- ------- -----
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments Sold 2,423 44,604 (6,040) 2,624 208
Foreign Currency Translations -- 6,374 (771) 3,310 --
------ ------------- ------- ------- -----
Total Net Change in Unrealized
Appreciation (Depreciation) 2,423 50,978 (6,811) 5,934 208
------ ------------- ------- ------- -----
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED
APPRECIATION (DEPRECIATION) 3,299 139,448 866 2,935 (335)
------ ------------- ------- ------- -----
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 3,242 $ 159,261 $ 4,122 $ 3,025 $ (253)
------ ------------- ------- ------- -----
------ ------------- ------- ------- -----
</TABLE>
- ---------------
*Commencement of operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE SMALL CAP U.S. REAL
EQUITY EMERGING EQUITY VALUE ESTATE VALUE
PORTFOLIO GROWTH GROWTH EQUITY PORTFOLIO EQUITY BALANCED
MARCH 8, PORTFOLIO PORTFOLIO PORTFOLIO FEBRUARY PORTFOLIO PORTFOLIO
1995* TO YEAR ENDED YEAR ENDED YEAR ENDED 24, 1995* YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER TO DECEMBER DECEMBER DECEMBER
31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995
(000) (000) (000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 338 $ 203 $ 2,580 $ 1,575 $ 1,796 $ 3,986 $ 374
Interest 88 445 694 118 103 245 642
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Income 426 648 3,274 1,693 1,899 4,231 1,016
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 128 1,325 830 400 299 570 106
Less: Fees Waived (96) (18) (105) (97) (129) (85) (68)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Investment Advisory
Fees -- Net 32 1,307 725 303 170 485 38
Administrative Fees 28 214 223 82 61 183 42
Custodian Fees 19 29 46 19 36 30 12
Filing and Registration Fees 18 22 23 14 29 27 13
Insurance 1 9 8 3 1 7 2
Directors' Fees and Expenses 2 6 6 4 2 5 3
Legal Fees 24 6 6 3 25 5 2
Audit Fees 22 27 32 25 22 27 25
Shareholder Reports 12 28 28 13 25 21 8
Other Expenses 2 9 8 4 2 7 3
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 160 1,657 1,105 470 373 797 148
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 266 (1,009) 2,169 1,223 1,526 3,434 868
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS):
Investments Sold 4,082 11,225 32,477 1,546 3,495 10,276 1,158
Written Options (22) -- -- -- -- -- --
Securities Sold Short (19) -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Net Realized Gain 4,041 11,225 32,477 1,546 3,495 10,276 1,158
----------- ----------- ----------- ----------- ----------- ----------- -----------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 1,860 27,942 15,685 5,880 3,896 17,116 2,413
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL NET REALIZED GAIN AND
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 5,901 39,167 48,162 7,426 7,391 27,392 3,571
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $ 6,167 $ 38,158 $ 50,331 $ 8,649 $ 8,917 $ 30,826 $ 4,439
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------------
*Commencement of operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL MUNICIPAL
MARKETS FIXED FIXED BOND MONEY MONEY
DEBT INCOME INCOME HIGH YIELD PORTFOLIO MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO JANUARY 18, PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1995* TO YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995
(000) (000) (000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 53 $ -- $ -- $ --
Interest 28,018 13,011 6,987 7,927 2,154 48,910 15,686
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Income 28,018 13,011 6,987 7,980 2,154 48,910 15,686
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,702 624 383 335 149 2,500 1,210
Less: Fees Waived -- (247) (204) (55) (119) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Investment Advisory
Fees -- Net 1,702 377 179 280 30 2,500 1,210
Administrative Fees 275 288 157 118 72 1,307 635
Custodian Fees 204 27 46 20 9 119 72
Filing and Registration Fees 18 17 19 18 23 58 54
Insurance 10 14 9 7 1 67 31
Interest Expense 616 -- -- -- -- -- --
Directors' Fees and Expenses 25 7 5 4 3 29 14
Legal Fees 9 8 5 4 14 25 13
Audit Fees 72 26 35 32 22 23 27
Shareholder Reports 23 18 15 13 14 57 26
Other Expenses 44 21 9 7 3 68 25
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 2,998 803 479 503 191 4,253 2,107
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME 25,020 12,208 6,508 7,477 1,963 44,657 13,579
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED GAIN (LOSS):
Investments Sold 9,470 5,823 1,542 (3,145) 193 79 (1)
Foreign Currency
Transactions (2,072) 98 (1,527) -- -- -- --
Securities Sold Short 1,116 -- -- -- -- -- --
Written Options 673 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Net Realized Gain
(Loss) 9,187 5,921 15 (3,145) 193 79 (1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION):
Investments Sold 15,093 12,945 9,810 9,886 1,635 -- --
Foreign Currency
Translations 197 180 381 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Net Change in
Unrealized
Appreciation
(Depreciation) 15,290 13,125 10,191 9,886 1,635 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL NET REALIZED GAIN (LOSS)
AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 24,477 19,046 10,206 6,741 1,828 79 (1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $ 49,497 $ 31,254 $ 16,714 $ 14,218 $ 3,791 $ 44,736 $ 13,578
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------------
*Commencement of operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,652 $ 2,074
Net Realized Gain (Loss) 8,147 (1,123)
Change in Unrealized Appreciation (Depreciation) (12,455) 15,675
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (1,656) 16,626
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (1,773) (3,492)
In Excess of Net Investment Income - (1,308)
Net Realized Gain (4,419) (12,502)
-------------- --------------
Total Distributions (6,192) (17,302)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 169,994 88,081
Distributions Reinvested 5,395 15,283
Redeemed (135,418) (115,002)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 39,971 (11,638)
-------------- --------------
Total Increase (Decrease) in Net Assets 32,123 (12,314)
NET ASSETS:
Beginning of Period 150,854 182,977
-------------- --------------
End of Period (2) $ 182,977 $ 170,663
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 14,259 7,883
Shares Issued on Distributions Reinvested 458 1,346
Shares Redeemed (11,357) (10,268)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,360 (1,039)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 168,882 $ 157,244
Undistributed (Distributions in Excess of) Net Investment
Income 1,418 (7,782)
Accumulated Net Realized Gain 7,989 838
Unrealized Appreciation (Net of accrual for foreign tax of
$4 on unrealized appreciation on investments at December
31, 1995) 4,688 20,363
-------------- --------------
$ 182,977 $ 170,663
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,397 $ 2,796
Net Realized Gain 32,848 12,459
Change in Unrealized Appreciation (Depreciation) (80,975) 7,852
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (46,730) 23,107
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (972) (4,866)
In Excess of Net Investment Income -- (3)
Net Realized Gain (5,840) (40,469)
-------------- --------------
Total Distributions (6,812) (45,338)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 213,200 472,587
Distributions Reinvested 6,036 41,003
Redeemed (175,924) (453,381)
-------------- --------------
Net Increase from Capital Share Transactions 43,312 60,209
-------------- --------------
Total Increase (Decrease) in Net Assets (10,230) 37,978
NET ASSETS:
Beginning of Period 287,136 276,906
-------------- --------------
End of Period (2) $ 276,906 $ 314,884
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 9,345 24,613
Shares Issued on Distributions Reinvested 233 2,138
Shares Redeemed (7,685) (23,439)
-------------- --------------
Net Increase in Capital Shares Outstanding 1,893 3,312
-------------- --------------
-------------- --------------
(2) Net Assets were Comprised of:
Paid in Capital $ 207,594 $ 268,221
Undistributed (Distributions in Excess of) Net Investment
Income 1,886 (3)
Accumulated Net Realized Gain 32,350 3,738
Unrealized Appreciation 35,076 42,928
-------------- --------------
$ 276,906 $ 314,884
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (2,302) $ 5,513
Net Realized Gain (Loss) 66,824 (34,234)
Change in Unrealized Appreciation (Depreciation) (168,042) (97,017)
-------------- --------------
Net Decrease in Net Assets Resulting from Operations (103,520) (125,738)
-------------- --------------
DISTRIBUTIONS:
Net Investment Income -- (3,978)
Net Realized Gain (37,393) (66,711)
-------------- --------------
Total Distributions (37,393) (70,689)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 579,390 379,789
Distributions Reinvested 35,730 67,401
Redeemed (279,921) (303,810)
-------------- --------------
Net Increase from Capital Share Transactions 335,199 143,380
-------------- --------------
Total Increase (Decrease) in Net Assets 194,286 (53,047)
NET ASSETS:
Beginning of Period 735,352 929,638
-------------- --------------
End of Period (2) $ 929,638 $ 876,591
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 32,685 27,709
Shares Issued on Distributions Reinvested 1,974 4,586
Shares Redeemed (16,342) (22,595)
-------------- --------------
Net Increase in Capital Shares Outstanding 18,317 9,700
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 818,267 $ 962,160
Accumulated Net Investment Loss/Undistributed Net
Investment Income (785) 167
Accumulated Net Realized Gain (Loss) 65,253 (35,622)
Unrealized Appreciation (Depreciation) (Net of accrual for
India tax of $4,779 and $308, respectively on unrealized
appreciation on investments.) 46,903 (50,114)
-------------- --------------
$ 929,638 $ 876,591
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 159 $ 714
Net Realized Gain 2,606 643
Change in Unrealized Appreciation (Depreciation) (1,886) 3,042
-------------- --------------
Net Increase in Net Assets Resulting from Operations 879 4,399
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (87) (738)
Net Realized Gain (251) (3,017)
-------------- --------------
Total Distributions (338) (3,755)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 39,425 56,209
Distributions Reinvested 337 3,468
Redeemed (25,350) (18,372)
-------------- --------------
Net Increase from Capital Share Transactions 14,412 41,305
-------------- --------------
Total Increase in Net Assets 14,953 41,949
NET ASSETS:
Beginning of Period 12,681 27,634
-------------- --------------
End of Period (2) $ 27,634 $ 69,583
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,791 4,104
Shares Issued on Distributions Reinvested 27 264
Shares Redeemed (1,818) (1,350)
-------------- --------------
Net Increase in Capital Shares Outstanding 1,000 3,018
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 25,071 $ 66,433
Undistributed Net Investment Income 31 24
Accumulated Net Realized Gain 2,731 283
Unrealized Appreciation (Depreciation) (199) 2,843
-------------- --------------
$ 27,634 $ 69,583
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 450 $ 960
Net Realized Gain 1,493 5,807
Change in Unrealized Appreciation (Depreciation) (1,816) 7,195
-------------- --------------
Net Increase in Net Assets Resulting from Operations 127 13,962
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (170) (1,202)
Net Realized Gain (1,756) (7,032)
-------------- --------------
Total Distributions (1,926) (8,234)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 72,166 30,429
Distributions Reinvested 1,926 8,198
Redeemed (13,276) (31,615)
-------------- --------------
Net Increase from Capital Share Transactions 60,816 7,012
-------------- --------------
Total Increase in Net Assets 59,017 12,740
NET ASSETS:
Beginning of Period 19,918 78,935
-------------- --------------
End of Period (2) $ 78,935 $ 91,675
-------------- --------------
-------------- --------------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,281 2,175
Shares Issued on Distributions Reinvested 154 583
Shares Redeemed (982) (2,239)
-------------- --------------
Net Increase in Capital Shares Outstanding 4,453 519
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 75,435 $ 82,447
Undistributed Net Investment Income 373 --
Accumulated Net Realized Gain 1,568 474
Unrealized Appreciation 1,559 8,754
-------------- --------------
$ 78,935 $ 91,675
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 77 $ (57)
Net Realized Gain 971 876
Change in Unrealized Appreciation (Depreciation) (2,809) 2,423
------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (1,761) 3,242
------- --------------
DISTRIBUTIONS:
Net Investment Income (38) (37)
Net Realized Gain -- (2,066)
------- --------------
Total Distributions (38) (2,103)
------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 40,892 21,820
Distributions Reinvested 32 1,913
Redeemed (8,882) (47,706)
------- --------------
Net Increase (Decrease) from Capital Share Transactions 32,042 (23,973)
------- --------------
Total Increase (Decrease) in Net Assets 30,243 (22,834)
NET ASSETS:
Beginning of Period -- 30,243
------- --------------
End of Period (2) $ 30,243 $ 7,409
------- --------------
------- --------------
<FN>
- --------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,264 2,403
Shares Issued on Distributions Reinvested 3 222
Shares Redeemed (954) (5,071)
------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,313 (2,446)
------- --------------
------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 32,042 $ 7,817
Undistributed Net Investment Income 36 --
Accumulated Net Realized Gain (Loss) 974 (22)
Unrealized Depreciation (2,809) (386)
------- --------------
$ 30,243 $ 7,409
------- --------------
------- --------------
- -----------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,406 $ 19,813
Net Realized Gain 64,532 88,470
Change in Unrealized Appreciation (Depreciation) 46,399 50,978
------------ ------------
Net Increase in Net Assets Resulting from Operations 124,337 159,261
------------ ------------
DISTRIBUTIONS:
Net Investment Income (11,956) (5,969)
Net Realized Gain (18,019) (168,582)
------------ ------------
Total Distributions (29,975) (174,551)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 330,843 276,622
Distributions Reinvested 25,762 167,795
Redeemed (93,242) (135,367)
------------ ------------
Net Increase from Capital Share Transactions 263,363 309,050
------------ ------------
Total Increase in Net Assets 357,725 293,760
NET ASSETS:
Beginning of Period 947,045 1,304,770
------------ ------------
End of Period (2) $ 1,304,770 $ 1,598,530
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 22,148 18,165
Shares issued on Distributions Reinvested 1,872 11,272
Shares Redeemed (6,156) (8,961)
------------ ------------
Net Increase in Capital Shares Outstanding 17,864 20,476
------------ ------------
------------ ------------
(2) Net Assets were Comprised of:
Paid in Capital $ 1,001,514 $ 1,310,630
Undistributed Net Investment Income 7,083 13,219
Accumulated Net Realized Gain (Loss) 70,335 (2,135)
Unrealized Appreciation 225,838 276,816
------------ ------------
$ 1,304,770 $ 1,598,530
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,413 $ 3,256
Net Realized Gain (Loss) (2,342) 7,677
Change in Unrealized Appreciation (Depreciation) (5,180) (6,811)
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (6,109) 4,122
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (96) (2,947)
Net Realized Gain (794) (4,763)
-------------- --------------
Total Distributions (890) (7,710)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 132,287 59,699
Distributions Reinvested 763 6,777
Redeemed (18,784) (24,320)
-------------- --------------
Net Increase from Capital Share Transactions 114,266 42,156
-------------- --------------
Total Increase in Net Assets 107,267 38,568
NET ASSETS:
Beginning of Period 52,834 160,101
-------------- --------------
End of Period (2) $ 160,101 $ 198,669
-------------- --------------
-------------- --------------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 8,068 3,865
Shares Issued on Distributions Reinvested 52 453
Shares Redeemed (1,164) (1,584)
-------------- --------------
Net Increase in Capital Shares Outstanding 6,956 2,734
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 162,928 $ 205,084
Undistributed Net Investment Income 703 715
Accumulated Net Realized Gain (Loss) (1,989) 1,222
Unrealized Depreciation (1,541) (8,352)
-------------- --------------
$ 160,101 $ 198,669
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25,
1994* TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (31) $ 90
Net Realized Loss (527) (2,999)
Change in Unrealized Appreciation (Depreciation) (215) 5,934
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (773) 3,025
-------------- --------------
DISTRIBUTIONS:
In Excess of Net Investment Income -- (2,539)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 69,015 132,973
Distributions Reinvested -- 2,277
Redeemed (17,910) (66,790)
-------------- --------------
Net Increase from Capital Share Transactions 51,105 68,460
-------------- --------------
Total Increase in Net Assets 50,332 68,946
NET ASSETS:
Beginning of Period -- 50,332
-------------- --------------
End of Period (2) $ 50,332 $ 119,278
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,910 15,121
Shares Issued on Distributions Reinvested -- 245
Shares Redeemed (1,789) (7,618)
-------------- --------------
Net Increase in Capital Shares Outstanding 5,121 7,748
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 50,808 $ 119,268
Accumulated Net Investment Loss/Distributions in Excess of Net
Investment Income (261) (2,710)
Accumulated Net Realized Loss -- (2,999)
Unrealized Appreciation (Depreciation) (215) 5,719
-------------- --------------
$ 50,332 $ 119,278
-------------- --------------
-------------- --------------
- -----------------
* Commencement of operations
</TABLE>
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO DECEMBER 31,
1995
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 82
Net Realized Loss (543)
Change in Unrealized Appreciation 208
-------
Net Decrease in Net Assets Resulting from Operations (253)
-------
DISTRIBUTIONS:
Net Investment Income (74)
Return of Capital (49)
-------
Total Distributions (123)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 21,860
Distributions Reinvested 108
Redeemed (6,216)
-------
Net Increase from Capital Share Transactions 15,752
-------
Total Increase in Net Assets 15,376
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 15,376
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,375
Shares Issued on Distributions Reinvested 12
Shares Redeemed (690)
-------
Net Increase in Capital Shares Outstanding 1,697
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 15,698
Accumulated Net Realized Loss (530)
Unrealized Appreciation 208
-------
$ 15,376
-------
-------
- -----------------
*Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 8, 1995*
TO DECEMBER 31,
1995
(000)
- ------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 266
Net Realized Gain 4,041
Change in Unrealized Appreciation 1,860
-------
Net Increase in Net Assets Resulting from Operations 6,167
-------
DISTRIBUTIONS:
Net Investment Income (268)
Net Realized Gain (3,617)
-------
Total Distributions (3,885)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 26,611
Distributions Reinvested 3,556
Redeemed (3,901)
-------
Net Increase from Capital Share Transactions 26,266
-------
Total Increase in Net Assets 28,548
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 28,548
-------
-------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,360
Shares Issued on Distributions Reinvested 293
Shares Redeemed (308)
-------
Net Increase in Capital Shares Outstanding 2,345
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 26,266
Accumulated Net Realized Gain 422
Unrealized Appreciation 1,860
-------
$ 28,548
-------
-------
- -----------------
*Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (673) $ (1,009)
Net Realized Gain 1,331 11,225
Change in Unrealized Appreciation (Depreciation) (891) 27,942
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (233) 38,158
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 85,970 100,167
Redeemed (71,689) (136,616)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 14,281 (36,449)
-------------- --------------
Total Increase in Net Assets 14,048 1,709
NET ASSETS:
Beginning of Period 103,621 117,669
-------------- --------------
End of Period (2) $ 117,669 $ 119,378
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,433 5,737
Shares Redeemed (4,522) (7,483)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 911 (1,746)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 103,598 $ 66,140
Accumulated Net Realized Gain (Loss) (10,925) 300
Unrealized Appreciation 24,996 52,938
-------------- --------------
$ 117,669 $ 119,378
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 1,293 $ 2,169
Net Realized Gain 3,710 32,477
Change in Unrealized Appreciation (Depreciation) (2,690) 15,685
-------------- --------------
Net Increase in Net Assets Resulting from Operations 2,313 50,331
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (952) (2,636)
Net Realized Gain (2,220) (26,092)
-------------- --------------
Total Distributions (3,172) (28,728)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 47,456 78,470
Distributions Reinvested 3,096 26,785
Redeemed (26,223) (66,005)
-------------- --------------
Net Increase from Capital Share Transactions 24,329 39,250
-------------- --------------
Total Increase in Net Assets 23,470 60,853
NET ASSETS:
Beginning of Period 73,789 97,259
-------------- --------------
End of Period (2) $ 97,259 $ 158,112
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,964 5,794
Shares Issued on Distributions Reinvested 267 1,955
Shares Redeemed (2,218) (4,657)
-------------- --------------
Net Increase in Capital Shares Outstanding 2,013 3,092
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 92,584 $ 131,834
Undistributed Net Investment Income 461 --
Accumulated Net Realized Gain 3,459 9,838
Unrealized Appreciation 755 16,440
-------------- --------------
$ 97,259 $ 158,112
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER DECEMBER 31,
31, 1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 951 $ 1,223
Net Realized Gain 1,484 1,546
Change in Unrealized Appreciation (Depreciation) (1,598) 5,880
----------- --------------
Net Increase in Net Assets Resulting from Operations 837 8,649
----------- --------------
DISTRIBUTIONS:
Net Investment Income (831) (1,519)
Net Realized Gain (720) (2,511)
----------- --------------
Total Distributions (1,551) (4,030)
----------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 25,447 18,293
Distributions Reinvested 1,464 3,611
Redeemed (12,939) (14,637)
----------- --------------
Net Increase from Capital Share Transactions 13,972 7,267
----------- --------------
Total Increase in Net Assets 13,258 11,886
NET ASSETS:
Beginning of Period 26,775 40,033
----------- --------------
End of Period (2) $ 40,033 $ 51,919
----------- --------------
----------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,358 1,631
Shares Issued on Distributions Reinvested 137 324
Shares Redeemed (1,200) (1,304)
----------- --------------
Net Increase in Capital Shares Outstanding 1,295 651
----------- --------------
----------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 39,194 $ 46,460
Undistributed Net Investment Income 281 --
Accumulated Net Realized Gain 1,484 505
Unrealized Appreciation (Depreciation) (926) 4,954
----------- --------------
$ 40,033 $ 51,919
----------- --------------
----------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24,
1995* TO
DECEMBER 31, 1995
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,526
Net Realized Gain 3,495
Change in Unrealized Appreciation 3,896
-------
Net Increase in Net Assets Resulting from Operations 8,917
-------
DISTRIBUTIONS:
Net Investment Income (1,405)
Net Realized Gain (2,504)
-------
Total Distributions (3,909)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 67,651
Distributions Reinvested 3,148
Redeemed (6,298)
-------
Net Increase from Capital Share Transactions 64,501
-------
Total Increase in Net Assets 69,509
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 69,509
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,381
Shares Issued on Distributions Reinvested 279
Shares Redeemed (573)
-------
Net Increase in Capital Shares Outstanding 6,087
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 64,501
Undistributed Net Investment Income 121
Accumulated Net Realized Gain 991
Unrealized Appreciation 3,896
-------
$ 69,509
-------
-------
- -----------------
*Commencement of operations
</TABLE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 2,376 $ 3,434
Net Realized Gain 2,378 10,276
Change in Unrealized Appreciation (Depreciation) (6,089) 17,116
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (1,335) 30,826
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (2,189) (4,042)
Net Realized Gain (2,504) (6,330)
-------------- --------------
Total Distributions (4,693) (10,372)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 45,372 70,393
Distributions Reinvested 4,395 9,289
Redeemed (24,931) (26,177)
-------------- --------------
Net Increase from Capital Share Transactions 24,836 53,505
-------------- --------------
Total Increase in Net Assets 18,808 73,959
NET ASSETS:
Beginning of Period 54,598 73,406
-------------- --------------
End of Period (2) $ 73,406 $ 147,365
-------------- --------------
-------------- --------------
<FN>
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,798 5,522
Shares Issued on Distributions Reinvested 372 731
Shares Redeemed (2,109) (2,068)
-------------- --------------
Net Increase in Capital Shares Outstanding 2,061 4,185
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 72,751 $ 126,256
Undistributed Net Investment Income 643 8
Accumulated Net Realized Gain 2,307 6,280
Unrealized Appreciation (Depreciation) (2,295) 14,821
-------------- --------------
$ 73,406 $ 147,365
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 987 $ 868
Net Realized Gain 496 1,158
Change in Unrealized Appreciation (Depreciation) (1,998) 2,413
-------------- -------
Net Increase (Decrease) in Net Assets Resulting from Operations (515) 4,439
-------------- -------
DISTRIBUTIONS:
Net Investment Income (1,257) (1,080)
Net Realized Gain (3,880) (1,047)
-------------- -------
Total Distributions (5,137) (2,127)
-------------- -------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,396 3,530
Distributions Reinvested 4,725 1,695
Redeemed (14,661) (3,387)
-------------- -------
Net Increase (Decrease) from Capital Share Transactions (5,540) 1,838
-------------- -------
Total Increase (Decrease) in Net Assets (11,192) 4,150
NET ASSETS:
Beginning of Period 29,684 18,492
-------------- -------
End of Period (2) $ 18,492 $ 22,642
-------------- -------
-------------- -------
<FN>
- --------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 470 380
Shares Issued on Distributions Reinvested 502 182
Shares Redeemed (1,574) (358)
-------------- -------
Net Increase (Decrease) in Capital Shares Outstanding (602) 204
-------------- -------
-------------- -------
(2) Net Assets were comprised of:
Paid in Capital $ 18,279 $ 20,117
Undistributed Net Investment Income 214 2
Accumulated Net Realized Gain 495 606
Unrealized Appreciation (Depreciation) (496) 1,917
-------------- -------
$ 18,492 $ 22,642
-------------- -------
-------------- -------
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,511 $ 25,020
Net Realized Gain (Loss) (2,516) 9,187
Change in Unrealized Appreciation (Depreciation) (9,457) 15,290
-------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (3,462) 49,497
-------- --------------
DISTRIBUTIONS:
Net Investment Income -- (33,418)
Net Realized Gain -- (7,508)
-------- --------------
Total Distributions -- (40,926)
-------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 190,661 147,278
Distributions Reinvested -- 29,155
Redeemed (42,250) (148,075)
-------- --------------
Net Increase from Capital Share Transactions 148,411 28,358
-------- --------------
Total Increase in Net Assets 144,949 36,929
NET ASSETS:
Beginning of Period -- 144,949
-------- --------------
End of Period (2) $ 144,949 $ 181,878
-------- --------------
-------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 21,753 18,475
Shares issued on Distributions Reinvested -- 3,468
Shares Redeemed (4,872) (17,651)
-------- --------------
Net Increase in Capital Shares Outstanding 16,881 4,292
-------- --------------
-------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 148,411 $ 176,769
Undistributed (Distributions in Excess of) Net Investment
Income 8,322 (1,501)
Accumulated Net Realized Gain (Loss) (2,327) 777
Unrealized Appreciation (Depreciation) (9,457) 5,833
-------- --------------
$ 144,949 $ 181,878
-------- --------------
-------- --------------
- -----------------
* Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 12,421 $ 12,208
Net Realized Gain (Loss) (14,879) 5,921
Change in Unrealized Appreciation (Depreciation) (5,219) 13,125
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (7,677) 31,254
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (11,181) (13,570)
Net Realized Gain (8,092) --
In Excess of Net Realized Gain (22) --
-------------- --------------
Total Distributions (19,295) (13,570)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 91,618 67,883
Distributions Reinvested 16,756 10,529
Redeemed (112,739) (139,900)
-------------- --------------
Net Decrease from Capital Share Transactions (4,365) (61,488)
-------------- --------------
Total Decrease in Net Assets (31,337) (43,804)
NET ASSETS:
Beginning of Period 240,668 209,331
-------------- --------------
End of Period (2) $ 209,331 $ 165,527
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscriptions 9,049 6,668
Shares Issued on Distributions Reinvested 1,625 1,022
Shares Redeemed (11,150) (13,696)
-------------- --------------
Net Decrease in Capital Shares Outstanding (476) (6,006)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 227,051 $ 165,563
Undistributed Net Investment Income 1,274 10
Accumulated Net Realized Loss (14,154) (8,331)
Unrealized Appreciation (Depreciation) (4,840) 8,285
-------------- --------------
$ 209,331 $ 165,527
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,291 $ 6,508
Net Realized Gain (Loss) (9,075) 15
Change in Unrealized Appreciation (Depreciation) (10,682) 10,191
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (10,466) 16,714
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (5,595) (9,003)
Net Realized Gain (4,564) --
-------------- --------------
Total Distributions (10,159) (9,003)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 96,510 36,622
Distributions Reinvested 9,111 7,887
Redeemed (126,789) (80,043)
-------------- --------------
Net Decrease from Capital Share Transactions (21,168) (35,534)
-------------- --------------
Total Decrease in Net Assets (41,793) (27,823)
NET ASSETS:
Beginning of Period 172,468 130,675
-------------- --------------
End of Period (2) $ 130,675 $ 102,852
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 8,912 3,346
Shares Issued on Distributions Reinvested 833 737
Shares Redeemed (11,801) (7,623)
-------------- --------------
Net Decrease in Capital Shares Outstanding (2,056) (3,540)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 141,657 $ 106,123
Undistributed Net Investment Income 1,613 309
Accumulated Net Realized Loss (5,933) (7,109)
Unrealized Appreciation (Depreciation) (6,662) 3,529
-------------- --------------
$ 130,675 $ 102,852
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,341 $ 7,477
Net Realized Loss (1,581) (3,145)
Change in Unrealized Appreciation (Depreciation) (12,785) 9,886
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (5,025) 14,218
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (9,097) (8,122)
Net Realized Gain (1,413) --
-------------- --------------
Total Distributions (10,510) (8,122)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 72,764 59,247
Distributions Reinvested 8,869 6,088
Redeemed (43,375) (106,409)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 38,258 (41,074)
-------------- --------------
Total Increase (Decrease) in Net Assets 22,723 (34,978)
NET ASSETS:
Beginning of Period 74,500 97,223
-------------- --------------
End of Period (2) $ 97,223 $ 62,245
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,882 5,865
Shares Issued on Distributions Reinvested 858 609
Shares Redeemed (4,235) (10,704)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,505 (4,230)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 108,726 $ 67,652
Undistributed Net Investment Income 731 86
Accumulated Net Realized Loss (1,581) (4,726)
Unrealized Depreciation (10,653) (767)
-------------- --------------
$ 97,223 $ 62,245
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO DECEMBER 31,
1995
(000)
- ------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,963
Net Realized Gain 193
Change in Unrealized Appreciation 1,635
--------
Net Increase in Net Assets Resulting from Operations 3,791
--------
DISTRIBUTIONS:
Net Investment Income (1,963)
In Excess of Net Investment Income (15)
Net Realized Gain (193)
--------
Total Distributions (2,171)
--------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 61,800
Distributions Reinvested 2,060
Redeemed (19,611)
--------
Net Increase from Capital Share Transactions 44,249
--------
Total Increase in Net Assets 45,869
NET ASSETS:
Beginning of Period --
--------
End of Period (2) $ 45,869
--------
--------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,134
Shares Issued on Distributions Reinvested 200
Shares Redeemed (1,912)
--------
Net Increase in Capital Shares Outstanding 4,422
--------
--------
(2) Net Assets were comprised of:
Paid in Capital $ 44,249
Distributions in Excess of Net Investment Income (15)
Unrealized Appreciation 1,635
--------
$ 45,869
--------
--------
- -----------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 26,880 $ 44,657
Net Realized Gain (Loss) (26) 79
------------- -------------
Net Increase in Net Assets Resulting from Operations 26,854 44,736
------------- -------------
DISTRIBUTIONS:
Net Investment Income (26,888) (44,657)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,547,025 8,093,985
Distributions Reinvested 24,451 41,765
Redeemed (4,538,102) (7,989,639)
------------- -------------
Net Increase from Capital Share Transactions 33,374 146,111
------------- -------------
Total Increase in Net Assets 33,340 146,190
NET ASSETS:
Beginning of Period 657,163 690,503
------------- -------------
End of Period (2) $ 690,503 $ 836,693
------------- -------------
------------- -------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,547,025 8,093,987
Shares Issued on Distributions Reinvested 24,451 41,765
Shares Redeemed (4,538,102) (7,989,639)
------------- -------------
Net Increase in Capital Shares Outstanding 33,374 146,113
------------- -------------
------------- -------------
(2) Net Assets were comprised of:
Paid in Capital $ 690,595 $ 836,706
Accumulated Net Realized Loss (92) (13)
------------- -------------
$ 690,503 $ 836,693
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,186 $ 13,579
Net Realized Loss (6) (1)
------------- -------------
Net Increase in Net Assets Resulting from Operations 8,180 13,578
------------- -------------
DISTRIBUTIONS:
Net Investment Income (8,186) (13,579)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 2,267,352 3,169,110
Distributions Reinvested 7,587 13,182
Redeemed (2,182,013) (3,090,216)
------------- -------------
Net Increase from Capital Share Transactions 92,926 92,076
------------- -------------
Total Increase in Net Assets 92,920 92,075
NET ASSETS:
Beginning of Period 266,524 359,444
------------- -------------
End of Period (2) $ 359,444 $ 451,519
------------- -------------
------------- -------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,267,352 3,169,110
Shares Issued on Distributions Reinvested 7,587 13,182
Shares Redeemed (2,182,013) (3,090,216)
------------- -------------
Net Increase in Capital Shares Outstanding 92,926 92,076
------------- -------------
------------- -------------
(2) Net Assets were comprised of:
Paid in Capital $ 359,452 $ 451,528
Accumulated Net Realized Loss (8) (9)
------------- -------------
$ 359,444 $ 451,519
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1992* TWO MONTHS
TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.37 $ 9.59 $ 12.21 $ 11.65
------ ----- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.02 0.13 0.19 0.17
Net Realized and Unrealized Gain
(Loss) on Investments (0.74) 0.20 2.75 (0.25) 1.00
------ ----- ------ ------ ------
Total from Investment Operations (0.63) 0.22 2.88 (0.06) 1.17
------ ----- ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- -- (0.09) (0.14) (0.25)
In Excess of Net Investment Income -- -- (0.08) -- (0.10)
Net Realized Gain -- -- -- (0.36) (0.84)
In Excess of Net Realized Gain -- -- (0.09) -- --
------ ----- ------ ------ ------
Total Distributions -- -- (0.26) (0.50) (1.19)
------ ----- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.63
------ ----- ------ ------ ------
------ ----- ------ ------ ------
TOTAL RETURN (6.30)% 2.35% 30.72% (0.52)% 10.57%
------ ----- ------ ------ ------
------ ----- ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $47,534 $50,234 $150,854 $182,977 $170,663
Ratio of Expenses to Average Net
Assets 0.88%** 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets 2.32%** 1.22%** 1.29% 1.43% 1.26%
Portfolio Turnover Rate 62% 2% 53% 51% 72%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.03 $ 0.01 $ 0.05 $ 0.03 $ 0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.58%** 1.70%** 1.33% 1.00% 1.18%
Net Investment Income to Average
Net Assets 1.62%** 0.32%** 0.76% 1.23% 0.88%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, TWO MONTHS
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54
----- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.14 0.01 0.10 0.11 0.18
Net Realized and Unrealized Gain
(Loss) on Investments (0.36) 3.86 (0.53) 13.38 (4.15) 1.11
----- ------ ------ ------ ------ ------
Total from Investment
Operations (0.33) 4.00 (0.52) 13.48 (4.04) 1.29
----- ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- (0.01) (0.09) (0.34)
In Excess of Net Investment
Income -- -- -- (0.13) -- (0.00)+
Net Realized Gain -- -- -- (0.12) (0.53) (3.01)
In Excess of Net Realized Gain -- -- -- (0.13) -- --
----- ------ ------ ------ ------ ------
Total Distributions -- (0.04) -- (0.39) (0.62) (3.35)
----- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 $ 19.48
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
TOTAL RETURN (3.30)% 41.50% (3.82)% 105.71% (15.81)% 6.87%
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $10,719 $41,017 $41,978 $287,136 $276,906 $314,884
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00% 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.13%** 1.53% 0.61%** 0.83% 0.52% 0.97%
Portfolio Turnover Rate 2% 33% 10% 18% 47% 42%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.02 $ 0.06 $ 0.02 $ 0.05 $ 0.04 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.18%
Net Investment Income (Loss) to
Average
Net Assets (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 0.79%
*Commencement of operations.
**Annualized
+Amount is less than $0.01 per
share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25, 1992* TWO MONTHS
TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.11 $ 10.22 $ 19.00 $ 16.30
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss)
(1) -- -- (0.01) (0.04) 0.08
Net Realized and Unrealized
Gain (Loss) on Investments 0.11 0.11 8.79 (1.69) (2.05)
------ ------ ------ ------ ------
Total from Investment
Operations 0.11 0.11 8.78 (1.73) (1.97)
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment income -- -- -- -- (0.06)
Net Realized Gain -- -- -- (0.97) (1.13)
------ ------ ------ ------ ------
Total Distributions -- -- -- (0.97) (1.19)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 13.14
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 1.10% 1.09% 85.91% (9.63)% (12.77)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,806 $74,219 $735,352 $929,638 $876,591
Ratio of Expenses to Average Net
Assets (1) 1.75%** 1.75%** 1.75% 1.75% 1.72%
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.53)%** (0.33)%** (0.06)% (0.26)% 0.60%
Portfolio Turnover Rate 0% 2% 52% 32% 54%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.02 $ 0.00 $ 0.01 N/A N/A
Ratios before expense
limitation:
Expenses to Average Net
Assets 4.82%** 2.48%** 1.79% N/A N/A
Net Investment Loss to
Average Net Assets (3.60)%** (1.06)%** (0.10)% N/A N/A
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1993*
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 12.91 $ 13.94
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.08 0.08 0.14
Net Realized and Unrealized Gain on Investments 2.83 1.29 1.37
------ ------ ------
Total from Investment Operations 2.91 1.37 1.51
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.09) (0.15)
Net Realized Gain -- (0.25) (1.38)
------ ------ ------
Total Distributions -- (0.34) (1.53)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.94 $ 13.92
------ ------ ------
------ ------ ------
TOTAL RETURN 29.10% 10.88% 11.85%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,681 $27,634 $69,583
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets (1) 1.23%** 0.87% 1.37%
Portfolio Turnover Rate 15% 79% 13%
<FN>
- -----------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income $ 0.09 $ 0.06 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 2.43%** 1.62% 1.25%
Net Investment Income (Loss) to Average Net Assets (0.21)%** 0.25% 1.12%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM TWO MONTHS
JULY 15, 1992* ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 9.35 $ 9.75 $ 13.87 $ 13.40
------- ----- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.02 0.01 0.08 0.08 0.18
Net Realized and Unrealized Gain
(Loss) on Investments (0.67) 0.39 4.18 0.79 2.26
------- ----- ------------- ------------- -------------
Total from Investment
Operations (0.65) 0.40 4.26 0.87 2.44
------- ----- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income -- -- (0.02) (0.12) (0.22)
In Excess of Net Investment
Income -- -- (0.03) -- --
Net Realized Gain -- -- (0.09) (1.22) (1.31)
------- ----- ------------- ------------- -------------
Total Distributions -- -- (0.14) (1.34) (1.53)
------- ----- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.31
------- ----- ------------- ------------- -------------
------- ----- ------------- ------------- -------------
TOTAL RETURN (6.50)% 4.28% 44.24% 6.95% 18.66%
------- ----- ------------- ------------- -------------
------- ----- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $11,257 $11,739 $19,918 $78,935 $91,675
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.00%** 0.69%** 0.84% 0.87% 1.17%
Portfolio Turnover Rate 10% 5% 42% 12% 28%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.08 $ 0.02 $ 0.01 $ 0.02 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 5.22%** 2.49%** 1.66% 1.24% 1.13%
Net Investment Income (Loss) to
Average Net Assets (3.22)%** (0.80)%** 0.18% 0.63% 1.04%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.13
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.03 (0.07)
Net Realized and Unrealized Gain
(Loss) on Investments (0.88) 1.22
------- -------
Total from Investment Operations (0.85) 1.15
------- -------
DISTRIBUTIONS
Net Investment Income (0.02) (0.01)
Net Realized Gain -- (1.72)
------- -------
Total Distributions (0.02) (1.73)
------- -------
NET ASSET VALUE, END OF PERIOD $9.13 $8.55
------- -------
------- -------
TOTAL RETURN (8.49)% 13.21%
------- -------
------- -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $30,243 $7,409
Ratio of Expenses to Average Net Assets
(1) 1.25%** 1.25%
Ratio of Net Investment Income (Loss) to
Average Net Assets (1) 0.41%** (0.31)%
Portfolio Turnover Rate 56% 47%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net investment
income $ 0.04 $ 0.11
Ratios before expense limitation:
Expenses to Average Net Assets 1.72%** 1.76%
Net Investment Loss to Average Net
Assets (0.06)%** (0.82)%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER
OCTOBER 31, OCTOBER 31, 31, 31, 31, 31,
1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34
----------- ----------- ----------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.12 0.12 0.01 0.15 0.16 0.16
Net Realized and Unrealized Gain
(Loss) on Investments 0.58 (0.59) 0.14 4.36 1.54 1.55
----------- ----------- ----------- ---------- ---------- ----------
Total from Investment
Operations 0.70 (0.47) 0.15 4.51 1.70 1.71
----------- ----------- ----------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income (0.15) (0.17) -- (0.01) (0.18) (0.06)
In Excess of Net Investment
Income -- -- -- (0.13) -- --
Net Realized Gain (0.08) (0.05) -- (0.26) (0.27) (1.84)
----------- ----------- ----------- ---------- ---------- ----------
Total Distributions (0.23) (0.22) -- (0.40) (0.45) (1.90)
----------- ----------- ----------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34 $ 15.15
----------- ----------- ----------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ----------
TOTAL RETURN 7.17% (4.56)% 1.53% 46.50% 12.39% 11.77%
----------- ----------- ----------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $283,776 $486,836 $510,727 $947,045 $1,304,770 $1,598,530
Ratio of Expenses to Average Net
Assets (1) 1.00% 1.00% 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 2.27% 1.46% 0.68%** 1.25% 1.12% 1.38%
Portfolio Turnover Rate 22% 12% 5% 23% 16% 27%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.01 $ 0.00 $ 0.00 $ 0.01 $0.004 $0.003
Ratios before expense limitation:
Expenses to Average Net Assets 1.09% 1.02% 1.14%** 1.06% 1.03% 1.03%
Net Investment Income to
Average Net Assets 2.18% 1.44% 0.54%** 1.19% 1.09% 1.35%
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15, 1992* YEAR ENDED YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993++ 1994 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.09 $ 14.64 $ 15.15
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.09 0.14 0.24
Net Realized and Unrealized Gain
on Investments (2) 0.08 4.48 0.62 0.15
------ ------ ------ ------
Total from Investment
Operations 0.09 4.57 0.76 0.39
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- 0.00 (0.03) (0.23)
In Excess of Net Investment
Income -- (0.02) -- --
Net Realized Gain -- -- (0.22) (0.37)
------ ------ ------ ------
Total Distributions -- (0.02) (0.25) (0.60)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15 $ 14.94
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 0.90% 45.34% 5.25% 2.60%
------ ------ ------ ------
------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $3,824 $52,834 $160,101 $198,669
Ratio of Expenses to Average Net
Assets (1) 1.15%** 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets (1) 1.37%** 0.66% 1.18% 1.72%
Portfolio Turnover Rate 0% 14% 8% 24%
<FN>
- -----------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.16 $ 0.10 $ 0.02 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 21.67%** 1.86% 1.29% 1.24%
Net Investment Income (Loss) to
Average Net Assets (19.15)%** (0.05)% 1.04% 1.63%
(2) Includes a 1% transaction fee on purchases and redemptions of capital shares.
++Per share amounts for the year ended December 31, 1993 are based on average outstanding
shares.
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25, 1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.83
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) (0.01) 0.04
Net Realized and Unrealized Loss on Investments++ (0.16) (0.40)
------ ------
Total from Investment Operations (0.17) (0.36)
------ ------
DISTRIBUTIONS
In Excess of Net Investment Income -- (0.20)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.27
------ ------
------ ------
TOTAL RETURN (1.70)% (3.64)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $50,332 $119,278
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%
Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.10)%** 0.15%
Portfolio Turnover Rate 1% 52%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.02 $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.27%** 1.20%
Net Investment Loss to Average Net Assets (0.37)%** (0.05)%
*Commencement of operations.
**Annualized
++The amount shown for the year ended December 31, 1995 for a share outstanding
throughout the year does not accord with aggregate net gains on investments
for the year because of the timing of sales and repurchases of the Portfolio
shares in relation to fluctuating market value of the investments in the
Portfolio.
</TABLE>
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO DECEMBER 31,
1995
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05
Net Realized and Unrealized Loss on Investments (0.92)
------
Total from Investment Operations (0.87)
------
DISTRIBUTIONS
Net Investment Income (0.04)
Return of Capital (0.03)
------
Total Distributions (0.07)
------
NET ASSET VALUE, END OF PERIOD $ 9.06
------
------
TOTAL RETURN (8.68)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $15,376
Ratio of Expenses to Average Net Assets (1) 1.70%**
Ratio of Net Investment Income to Average Net Assets (1) 0.62%**
Portfolio Turnover Rate 137%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.09
Ratios before expense limitation:
Expenses to Average Net Assets 3.13%**
Net Investment Loss to Average Net Assets (0.48)%**
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 8, 1995*
TO
DECEMBER 31,
1995
<S> <C>
- --------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.15
Net Realized and Unrealized Gain on Investments 3.95
------
Total from Investment Operations 4.10
------
DISTRIBUTIONS
Net Investment Income (0.15)
Net Realized Gain (1.78)
------
Total Distributions (1.93)
------
NET ASSET VALUE, END OF PERIOD $ 12.17
------
------
TOTAL RETURN 41.25%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $28,548
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 1.64%**
Portfolio Turnover Rate 309%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.59%**
Net Investment Income to Average Net Assets 1.05%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991++ 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (1) -- (0.09) (0.01) (0.11) (0.09) (0.18)
Net Realized and
Unrealized Gain (Loss)
on Investments 7.19 (1.12) 1.26 0.11 (0.01) 5.55
------ ------ ------ ------ ------ ------
Total from Investment
Operations 7.19 (1.21) 1.25 0.00 (0.10) 5.37
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.04) -- -- -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 $ 21.49
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 79.84% (7.48)% 8.35% 0.00% (0.62)% 33.31%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $54,364 $80,156 $94,161 $103,621 $117,669 $119,378
Ratio of Expenses to
Average Net Assets (1) 1.25% 1.25% 1.25%** 1.25% 1.25% 1.25%
Ratio of Net Investment
Loss to
Average Net Assets (1) 0.00% (0.66)% (0.68)%** (0.77)% (0.61)% (0.76)%
Portfolio Turnover Rate 2% 17% 1% 25% 24% 25%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment loss $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002 $ 0.003
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.39% 1.29% 1.36%** 1.31% 1.26% 1.26%
Net Investment Loss
to Average Net
Assets (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)% (0.77)%
++Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2,
1991* TWO MONTHS YEAR ENDED
TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER
31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31,
1991 1992 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02
----------- ----------- ------ ------ ------ -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05 0.16 0.03 0.22 0.17 0.22
Net Realized and Unrealized Gain
on Investments 0.61 0.82 0.41 0.28 0.21 4.93
----------- ----------- ------ ------ ------ -----------
Total from Investment
Operations 0.66 0.98 0.44 0.50 0.38 5.15
----------- ----------- ------ ------ ------ -----------
DISTRIBUTIONS
Net Investment Income -- (0.20) -- (0.23) (0.13) (0.28)
In Excess of Net Investment
Income -- -- -- (0.01) -- --
Net Realized Gain -- -- -- -- (0.37) (2.75)
----------- ----------- ------ ------ ------ -----------
Total Distributions -- (0.20) -- (0.24) (0.50) (3.03)
----------- ----------- ------ ------ ------ -----------
NET ASSET VALUE, END OF PERIOD $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.14
----------- ----------- ------ ------ ------ -----------
----------- ----------- ------ ------ ------ -----------
TOTAL RETURN 6.60% 9.26% 3.85% 4.33% 3.26% 45.02%
----------- ----------- ------ ------ ------ -----------
----------- ----------- ------ ------ ------ -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $18,139 $36,558 $45,985 $73,789 $97,259 $158,112
Ratio of Expenses to Average Net
Assets (1) 0.80%** 0.80% 0.80%** 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 2.34%** 1.73% 1.93%** 1.59% 1.44% 1.57%
Portfolio Turnover Rate 3% 38% 1% 172% 146% 186%
<FN>
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment
income $ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%** 1.01% 1.11%** 0.93% 0.89% 0.88%
Net Investment Income to
Average
Net Assets 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.49%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17,
1992*
TO DECEMBER YEAR ENDED YEAR ENDED YEAR ENDED
31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.14 $ 11.10 $ 10.80
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.24 0.28 0.30
Net Realized and Unrealized Gain (Loss) on
Investments 0.13 0.90 (0.01) 1.82
------ ------ ------ ------
Total from Investment Operations 0.14 1.14 0.27 2.12
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.18) (0.27) (0.38)
Net Realized Gain -- -- (0.30) (0.63)
------ ------ ------ ------
Total Distributions -- (0.18) (0.57) (1.01)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.14 $ 11.10 $ 10.80 $ 11.91
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 1.40% 11.33% 2.53% 20.63%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,974 $26,775 $40,033 $51,919
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1) 1.64%** 2.56% 2.67% 2.60%
Portfolio Turnover Rate 0% 29% 22% 36%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.13 $ 0.06 $ 0.03 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 23.14%** 1.68% 1.26% 1.21%
Net Investment Income (Loss) to Average Net
Assets (20.50)%** 1.88% 2.41% 2.39%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24, 1995*
TO DECEMBER 31, 1995
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.26
Net Realized and Unrealized Gain on Investments 1.84
------
Total from Investment Operations 2.10
------
DISTRIBUTIONS
Net Investment Income (0.24)
Net Realized Gain (0.44)
------
Total Distributions (0.68)
------
NET ASSETS, END OF PERIOD $11.42
------
------
TOTAL RETURN 21.07%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $69,509
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 4.04%**
Portfolio Turnover Rate 158%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.33%**
Net Investment Income to Average Net Assets 3.71%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.46 0.38 0.08 0.37 0.40 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments 1.67 0.48 0.52 1.31 (0.55) 3.30
------ ------ ------ ------ ------ ------
Total from Investment
Operations 2.13 0.86 0.60 1.68 (0.15) 3.68
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.48) (0.39) -- (0.36) (0.40) (0.47)
Net Realized Gain -- -- -- -- (0.58) (0.77)
------ ------ ------ ------ ------ ------
Total Distributions (0.48) (0.39) -- (0.36) (0.98) (1.24)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 $ 13.94
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 25.34% 8.51% 5.60% 15.14% (1.29)% 33.69%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $16,304 $25,013 $27,541 $54,598 $73,406 $147,365
Ratio of Expenses to
Average Net Assets (1) 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1) 4.57% 3.72% 4.41%** 3.23% 3.37% 3.01%
Portfolio Turnover Rate 90% 56% 9% 51% 33% 43%
<FN>
- ---------------
(1) Effect of voluntary
expense
limitation during the
period:
Per share benefit to
net investment income $ 0.02 $ 0.01 $ 0.01 $ 0.03 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.87% 0.84% 1.20%** 0.95% 0.80% 0.77%
Net Investment Income
to
Average Net Assets 4.40% 3.58% 3.91%** 2.98% 3.27% 2.94%
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 31, 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96
------ ----------- ----------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.59 0.58 0.10 0.44 0.42 0.39
Net Realized and
Unrealized Gain (Loss)
on Investments 1.03 0.42 0.21 0.79 (0.64) 1.62
------ ----------- ----------- ------ ------ ------
Total from Investment
Operations 1.62 1.00 0.31 1.23 (0.22) 2.01
------ ----------- ----------- ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.63) (0.58) -- (0.41) (0.49) (0.50)
In Excess of Net
Investment Income -- -- -- (0.08) -- --
Net Realized Gain -- (0.03) -- (0.06) (1.46) (0.49)
In Excess of Net
Realized Gain -- -- -- (0.86) -- --
------ ----------- ----------- ------ ------ ------
Total Distributions (0.63) (0.61) -- (1.41) (1.95) (0.99)
------ ----------- ----------- ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 $ 9.98
------ ----------- ----------- ------ ------ ------
------ ----------- ----------- ------ ------ ------
TOTAL RETURN 17.31% 9.57% 2.82% 12.09% (2.32)% 23.63%
------ ----------- ----------- ------ ------ ------
------ ----------- ----------- ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $51,334 $40,332 $39,984 $29,684 $18,492 $22,642
Ratio of Expenses to
Average Net Assets (1) 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average
Net Assets (1) 5.99% 5.21% 5.29%** 3.88% 4.13% 4.10%
Portfolio Turnover Rate 67% 40% 4% 136% 44% 26%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03 $ 0.03
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.78% 0.79% 1.00%** 1.02% 0.95% 1.02%
Net Investment Income
to Average Net
Assets 5.91% 5.12% 4.99%** 3.56% 3.88% 3.78%
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 8.59
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50 1.36
Net Realized and Unrealized Gain (Loss) on Investments (1.91) 0.91
------ ------
Total from Investment Operations (1.41) 2.27
------ ------
DISTRIBUTIONS
Net Investment Income -- (1.86)
Net Realized Gain -- (0.41)
------ ------
Total Distributions -- (2.27)
------ ------
NET ASSET VALUE, END OF PERIOD $ 8.59 $ 8.59
------ ------
------ ------
TOTAL RETURN (14.10)% 28.23%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $144,949 $181,878
Ratio of Expenses to Average Net Assets 1.49%** 1.75%
Ratio of Net Investment Income to Average Net Assets 9.97%** 14.70%
Portfolio Turnover Rate 273% 406%
<FN>
- ---------------
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 15, TWO MONTHS
1991* YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
31, 1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.22 0.69 0.10 0.54 0.59 0.72
Net Realized and Unrealized Gain
(Loss) on Investments 0.49 0.39 0.01 0.41 (0.92) 1.06
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.71 1.08 0.11 0.95 (0.33) 1.78
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.69) (0.10) (0.56) (0.53) (0.79)
In Excess of Net Investment
Income -- -- -- (0.01) -- --
Net Realized Gain -- (0.02) -- (0.26) (0.37) --
In Excess of Net Realized Gain -- -- -- -- (0.00)+ --
------ ------ ------ ------ ------ ------
Total Distributions (0.16) (0.71) (0.10) (0.83) (0.90) (0.79)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.81
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 7.12% 10.61% 1.02% 9.07% (3.10)% 18.76%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $72,326 $146,546 $154,210 $240,668 $209,331 $165,527
Ratio of Expenses to Average Net
Assets (1) 0.45%** 0.45% 0.45%** 0.45% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets (1) 7.29%** 6.59% 5.56%** 4.97% 5.73% 6.85%
Portfolio Turnover Rate 48% 105% 15% 240% 388% 172%
<FN>
- ---------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.01 $ 0.02 $ 0.01 $ 0.02 $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.81%** 0.59% 0.75%** 0.60% 0.58% 0.59%
Net Investment Income to
Average Net Assets 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.71%
*Commencement of operations.
**Annualized
+Amount is less than $0.01 per
share
</TABLE>
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991* TWO MONTHS
TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.16 0.53 0.14 0.69 0.70 0.76
Net Realized and Unrealized Gain
(Loss) on Investments 0.45 0.55 (0.29) 0.90 (1.38) 1.15
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.61 1.08 (0.15) 1.59 (0.68) 1.91
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.27) -- (0.79) (0.40) (0.98)
In Excess of Net Investment
Income -- -- -- (0.22) -- --
Net Realized Gain -- (0.01) -- (0.16) (0.31) --
------ ------ ------ ------ ------ ------
Total Distributions -- (0.28) -- (1.17) (0.71) (0.98)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 $ 11.22
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 6.10% 10.29% (1.31)% 15.34% (6.08)% 19.32%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,236 $94,847 $92,897 $172,468 $130,675 $102,852
Ratio of Expenses to Average Net
Assets (1) 0.50%** 0.50% 0.50%** 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets (1) 7.24%** 6.92% 6.99%** 5.99% 6.34% 6.79%
Portfolio Turnover Rate 20% 144% 9% 108% 171% 207%
<FN>
- ---------------
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment income $ 0.02 $ 0.03 $ 0.01 $ 0.02 $ 0.02 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.62%** 0.86% 0.90%** 0.70% 0.66% 0.71%
Net Investment Income to
Average Net Assets 6.12%** 6.56% 6.59%** 5.79% 6.18% 6.58%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM TWO MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 28, 1992* DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
TO OCTOBER 31, 1992 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 9.77 $ 9.95 $ 11.16 $ 9.55
------- ------ ------------ ------------ -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.08 0.14 0.90 0.97 1.14
Net Realized and Unrealized
Gain (Loss)
on Investments (0.31) 0.19 1.21 (1.40) 0.97
------- ------ ------------ ------------ -------
Total from Investment
Operations (0.23) 0.33 2.11 (0.43) 2.11
------- ------ ------------ ------------ -------
DISTRIBUTIONS
Net Investment Income -- (0.15) (0.90) (0.97) (1.20)
Net Realized Gain -- -- -- (0.21) --
------- ------ ------------ ------------ -------
Total Distributions -- (0.15) (0.90) (1.18) (1.20)
------- ------ ------------ ------------ -------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.46
------- ------ ------------ ------------ -------
------- ------ ------------ ------------ -------
TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)% 23.35%
------- ------ ------------ ------------ -------
------- ------ ------------ ------------ -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $16,950 $20,194 $74,500 $97,223 $62,245
Ratio of Expenses to Average
Net Assets (1) 0.75%** 0.75%** 0.75% 0.75% 0.75%
Ratio of Net Investment Income
to Average Net Assets (1) 9.89%** 8.96%** 8.70% 9.42% 11.09%
Portfolio Turnover Rate 9% 24% 104% 74% 90%
<FN>
- -----------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to net
investment income $ 0.01 $ 0.01 $ 0.02 $0.001 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.23%** 1.62%** 0.96% 0.76% 0.83%
Net Investment Income to
Average Net Assets 9.41%** 8.09%** 8.49% 9.41% 11.01%
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18, 1995*
TO DECEMBER 31, 1995
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.44
Net Realized and Unrealized Gain on Investments 0.42
-------
Total from Investment Operations 0.86
-------
DISTRIBUTIONS
Net Investment Income (0.45)
In Excess of Net Investment Income (0.00)+
Net Realized Gain (0.04)
-------
TOTAL DISTRIBUTIONS (0.49)
-------
Net Asset Value, End of Period $10.37
-------
-------
TOTAL RETURN 8.80%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $45,869
Ratio of Expenses to Average Net Assets (1) 0.45%**
Ratio of Net Investment Income to Average Net
Assets (1) 4.61%**
Portfolio Turnover Rate 180%
<FN>
- -----------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.73%**
Net Investment Income to Average Net Assets 4.33%**
*Commencement of operations.
**Annualized
+Amount is less than $0.01 per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER
OCTOBER 31, OCTOBER 31, 31, 31, 31, 31,
1991 1992 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.062 0.039 0.005 0.027 0.040 0.054
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.062) (0.039) (0.005) (0.027) (0.040) (0.054)
In Excess of Net
Investment Income -- -- -- 0.000+ -- --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.062) (0.039) (0.005) (0.027) (0.040) (0.054)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 6.37% 3.77% 0.50% 2.76% 3.84% 5.51%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $607,087 $612,968 $599,172 $657,163 $690,503 $836,693
Ratio of Expenses to
Average Net Assets (1) 0.53% 0.52% 0.55%** 0.53% 0.49% 0.51%
Ratio of Net Investment
Income to Average Net
Assets (1) 6.11% 3.74% 3.11%** 2.71% 3.77% 5.37%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets N/A N/A 0.59%** 0.54% N/A N/A
Net Investment Income
to Average Net
Assets N/A N/A 3.07%** 2.70% N/A N/A
**Annualized
+Amount is less than
$0.001 per share.
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER
OCTOBER 31, OCTOBER 31, 31, 31, 31, 31,
1991 1992 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.043 0.026 0.004 0.019 0.020 0.034
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.043) (0.026) (0.004) (0.019) (0.020) (0.034)
In Excess of Net
Investment Income -- -- -- (0.000)+ -- --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.043) (0.026) (0.004) (0.019) (0.020) (0.034)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 4.35% 2.74% 0.37% 1.91% 2.44% 3.44%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $166,953 $206,691 $208,866 $266,524 $359,444 $451,519
Ratio of Expenses to
Average Net Assets (1) 0.56% 0.55% 0.57%** 0.54% 0.51% 0.52%
Ratio of Net Investment
Income to Average Net
Assets (1) 4.18% 2.66% 2.31%** 1.89% 2.42% 3.38%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income N/A N/A $ 0.000+ $ 0.000+ N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets N/A N/A 0.67%** 0.56% N/A N/A
Net Investment Income
to Average Net
Assets N/A N/A 2.21%** 1.87% N/A N/A
**Annualized
+Amount is less than
$0.001 per share.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as an open-end management investment company. As
of December 31, 1995, the Fund was comprised of 24 separate active, diversified
and non-diversified portfolios (each referred to as the "Portfolio"). During the
year ended December 31, 1995, the following Portfolios commenced operations:
Latin American Portfolio and Municipal Bond Portfolio on January 18, 1995, the
U.S. Real Estate Portfolio on February 24, 1995, and the Aggressive Equity
Portfolio on March 8, 1995. Please refer to the manager's reports included
elsewhere in this annual report for a description of each Portfolio's investment
objectives.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of the financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates. The
U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price.
Securities listed on a foreign exchange are valued at their closing price.
Unlisted securities and listed securities not traded on the valuation date for
which market quotations are readily available are valued at the mean between the
current bid and asked prices obtained from reputable brokers. Bonds and other
fixed income securities may be valued according to the broadest and most
representative market. In addition, bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service which are based
primarily on institutional size trading in similar groups of securities. Debt
securities purchased with remaining maturities of 60 days or less are valued at
amortized cost, if it approximates market value. Securities owned by the Money
Market and Municipal Money Market Portfolios are stated at amortized cost, which
approximates market value. All other securities and assets for which market
values are not readily available, including restricted securities, are valued at
fair value as determined in good faith by the Board of Directors, although the
actual calculations may be done by others.
2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on either income or gains earned or repatriated.
The Portfolio accrues such taxes when the related income is earned. For
investments in securities subject to a capital gains tax, such taxes are accrued
based on the relative amounts of net realized gains and net unrealized
appreciation of such securities. Prior to March 10, 1995, the Brazilian
government assessed a 1% tax on all settlements of foreign currency used to
purchase listed equity securities. The Brazilian government repealed this tax on
March 10, 1995.
Paid in capital, undistributed (distributions in excess of) net investment
income/accumulated net investment loss and accumulated gain (loss) have been
adjusted for permanent book-tax differences, if any, for the Portfolios. These
differences are primarily due to differing book-tax treatments for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment companies".
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counter party to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter
into reverse repurchase agreements with institutions that the Portfolio's
investment adviser has determined are creditworthy. Under a reverse repurchase
agreement, the Portfolio sells securities and agrees to repurchase them at a
mutually agreed upon date and price. Reverse repurchase agreements involve the
risk that the market value of the securities purchased with the proceeds from
the sale of securities received by the Portfolio may decline below the price of
the securities the Portfolio is
- --------------------------------------------------------------------------------
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
obligated to repurchase. Securities subject to repurchase under reverse
repurchase agreements are designated as such in the Statement of Net Assets.
At December 31, 1995 the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Maturity Amount................................. $12,225,000
------------
Market Value of Assets Sold Under
Agreements..................................... 14,250,000
Weighted Average Interest Rate.................. 6.503%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the year ended December 31, 1995 was
approximately $1,952,000, at a weighted average interest rate of 5.820%.
5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in United States dollars. Foreign currency amounts
are translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major U.S. or foreign bank.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions balances. However, pursuant to U.S. Federal income tax
regulations, gains and losses from certain foreign currency transactions are
treated as ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Changes in Net Assets. The change in net unrealized currency gains
(losses) for the period is reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Each Portfolio, except the
Equity Growth, U.S. Real Estate, Municipal Bond, Money Market and Municipal
Money Market Portfolios, may enter into forward currency exchange contracts to
attempt to protect securities and related receivables and payables against
changes in future foreign currency exchange rates. A forward currency exchange
contract is an agreement between two parties to buy or sell currency at a set
price on a future date. The market value of the contract will fluctuate with
changes in currency exchange rates. The contract is marked-to-market daily using
the forward rate and the change in market value is recorded by the Fund as
unrealized gain or loss. The Fund records realized gains or losses when the
contract is closed equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed. Risk may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and is generally limited to
the amount of the unrealized gain on the contracts (if any) at the date of
default. Risks may also arise from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, certain Portfolios may purchase
securities on a when-issued or delayed-delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
a segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase such securities.
Purchasing
- --------------------------------------------------------------------------------
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
securities on a forward commitment or when-issued or delayed-delivery basis may
involve a risk that the market price at the time of delivery may be lower than
the agreed-upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
8. LOAN AGREEMENTS: The Emerging Markets, Emerging Markets Debt and High Yield
Portfolios may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer of sovereign debt obligations and
one or more financial institutions ("Lenders") deemed to be creditworthy by the
investment adviser. The Portfolio's investments in Loans may be in the form of
participations in Loans ("Participations") or assignments of all or a portion of
Loans ("Assignments") from third parties. The Portfolio's investment in
Participations typically results in the Portfolio having a contractual
relationship with only the Lender and not with the borrower. The Portfolio has
the right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Portfolio generally has no
right to enforce compliance by the borrower with the terms of the loan
agreement. As a result, the Portfolio may be subject to the credit risk of both
the borrower and the Lender that is selling the Participation. When the
Portfolio purchases Assignments from Lenders, it acquires direct rights against
the borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Portfolio as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
9. SHORT SALES: The Aggressive Equity and Emerging Markets Debt Portfolios may
sell securities short. A short sale is a transaction in which the Portfolio
sells securities it does not own, but has borrowed, in anticipation of a decline
in the market price of the securities. The Portfolio is obligated to replace the
borrowed securities at the market price at the time of replacement. The
Portfolio may have to pay a premium to borrow the securities as well as pay any
dividends or interest payable on the securities until they are replaced. The
Portfolio's obligation to replace the securities borrowed in connection with a
short sale will generally be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid, high grade
debt obligations. In addition, the Portfolio will place in a segregated account
with its Custodian an amount of cash, U.S. government securities or other liquid
high grade debt obligations equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
cash, U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Short sales by the Portfolio involve
certain risks and special considerations. Possible losses from short sales
differ from losses that could be incurred from a purchase of a security, because
losses from short sales may be unlimited, whereas losses from purchases cannot
exceed the total amount invested.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their securities. Premiums are received and are recorded as
liabilities, and subsequently adjusted to the current value of the options
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised or
are canceled in closing purchase transactions are offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss. By
writing a covered call option, a Portfolio foregoes in exchange for the premium
the opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase. By writing a covered put
option, a Portfolio, in exchange for the premium, accepts the risk of a decline
in the market value of the underlying security below the exercise price.
Certain Portfolios may purchase call and put options on their portfolio
securities. Each Portfolio may purchase call options to close out covered
written call positions or to protect against an increase in the price of the
security it anticipates purchasing. Each Portfolio may purchase put options on
their securities to protect against a decline in the value of the security or to
close out covered written put positions. Possible losses from purchased options
cannot exceed the total amount invested.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses on
the sale of investment securities are those of specific securities sold.
Dividend income is recorded on the ex-dividend date. Interest income is
recognized on the accrual basis except where collection is in doubt. Discounts
and premiums on securities purchased (other than mortgage-backed securities) are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses which cannot be directly attributed are apportioned among
- --------------------------------------------------------------------------------
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
the Portfolios based upon relative average net assets. Dividends to the
shareholders of the Money Market and the Municipal Money Market Portfolios are
accrued daily and are distributed on or about the 15th of each month.
Distributions from the remaining Portfolios are recorded on the ex-date.
Income distributions and capital gain distributions are determined in accordance
with U.S. Federal income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
timing of the recognition of gains or losses on securities and forward currency
exchange contracts, the timing of the deductibility of certain foreign taxes,
dividends received from real estate investment trusts and permanent differences
as presented in Note A-2.
Current period permanent book-tax differences, if any, are not included in
ending undistributed (distributions in excess of) net investment
income/accumulated net investment loss for the purpose of calculating net
investment income (loss) per share in the Financial Highlights.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other emerging
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in emerging countries to prevent, among other concerns,
violation of foreign investment limitations. As a result, an additional class of
shares (identified as "Foreign" in the Statement of Net Assets) may be created
and offered for investment. The "local" and "foreign" shares' market values may
differ.
A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio. Such fees are paid to
or retained by the Portfolio and included in paid in capital. During the year
ended December 31, 1995, such transaction fees totaled approximately $827,000.
B. Morgan Stanley Asset Management Inc. ("MSAM") (the "Adviser") provides the
Fund with investment advisory services at a fee calculated at the annual rates
of average daily net assets indicated below. MSAM has agreed to reduce fees
payable to it and to reimburse the Portfolios, if necessary, if the annual
operating expenses, as defined, expressed as a percentage of average daily net
assets, exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
ADVISORY MAXIMUM
PORTFOLIO FEE EXPENSE RATIO
------------ -------------
<S> <C> <C>
Active Country Allocation............. .65% .80%
Asian Equity.......................... .80 1.00
Emerging Markets...................... 1.25 1.75
European Equity....................... .80 1.00
Global Equity......................... .80 1.00
Gold.................................. 1.00 1.25
International Equity.................. .80 1.00
International Small Cap............... .95 1.15
Japanese Equity....................... .80 1.00
Latin American........................ 1.10 1.70
Aggressive Equity..................... .80 1.00
Emerging Growth....................... 1.00 1.25
Equity Growth......................... .60 .80
Small Cap Value Equity................ .85 1.00
U.S. Real Estate...................... .80 1.00
Value Equity.......................... .50 .70
Balanced.............................. .50 .70
Emerging Markets Debt................. 1.00 1.75
Fixed Income.......................... .35 .45
Global Fixed Income................... .40 .50
High Yield............................ .50 .75
Municipal Bond........................ .35 .45
Money Market.......................... .30 .55
Municipal Money Market................ .30 .57
</TABLE>
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to .40% of the average daily net assets of the Portfolio. The
Sub-Adviser has agreed to a proportionate reduction in its fees if the Adviser
is required to waive its fees or to reimburse the Portfolio.
C. MSAM also provides the Fund with administrative services pursuant to an
administrative agreement, for a monthly fee which on an annual basis equals
0.15% of the average daily net assets of each Portfolio plus reimbursement of
out-of-pocket expenses. Under an agreement between MSAM and The Chase Manhattan
Bank, N.A. ("Chase"), effective September 1, 1995, Chase, through its affiliate
Chase Global Funds Services Company, formerly Mutual Funds Service Company
("MFSC"), provides certain administrative services to the Fund. For such
services, MSAM pays Chase a portion of the fee MSAM receives from the Fund.
Prior to September 1, 1995, MFSC was an affiliate of United States Trust Company
of New York ("UST") and provided certain administrative services to the Fund
under the same terms as stated above.
D. Morgan Stanley Trust Company ("MSTC") acts as custodian for the Fund's assets
held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on securities held,
investment purchases and sales activity, an account maintenance fee, plus
reimbursement for certain out-of-pocket expenses. MSTC and the Adviser are
wholly-owned subsidiaries of Morgan Stanley Group, Inc.
- --------------------------------------------------------------------------------
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Effective September 1, 1995, Chase replaced UST as custodian for the Fund's
assets held in the United States.
For the year ended December 31, 1995, the following Portfolios incurred custody
fees and had amounts due to MSTC at December 31, 1995 totaling:
<TABLE>
<CAPTION>
MSTC CUSTODY
FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
------------- -----------------
<S> <C> <C>
Active Country Allocation..... $ 397 $ 70
Asian Equity.................. 466 111
Emerging Markets.............. 2,062 399
European Equity............... 44 11
Global Equity................. 40 11
Gold.......................... 9 1
International Equity.......... 532 141
International Small Cap....... 117 29
Japanese Equity............... 33 11
Latin American................ 104 27
Emerging Markets Debt......... 197 49
Global Fixed Income........... 36 9
</TABLE>
In addition, for the year ended December 31, 1995, the following Portfolios have
earned interest income and incurred interest expense on balances with MSTC as
follows:
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
----------------- -------------------
<S> <C> <C>
Active Country
Allocation................ $ 29 $ 53
Asian Equity............... 58 17
Emerging Markets........... 42 69
European Equity............ 156 3
Global Equity.............. 9 1
International Equity....... 1,644 39
International Small Cap.... 84 6
Japanese Equity............ 2 13
Latin American............. 1 3
Emerging Markets Debt...... 38 94
Global Fixed Income........ 87 3
</TABLE>
At December 31, 1995, the Emerging Markets Portfolio owned shares of an
affiliated fund for which the Portfolio earned dividend income of $219,000.
E. During the year ended December 31, 1995, purchases and sales of investment
securities other than long-term U.S. Government securities and short-term
investments were:
<TABLE>
<CAPTION>
(000)
----------------------
PORTFOLIO PURCHASES SALES
- ---------------------------------------- ----------- ---------
<S> <C> <C>
Active Country Allocation............... $ 115,608 $ 155,753
Asian Equity............................ 116,591 114,296
Emerging Markets........................ 536,860 475,065
European Equity......................... 42,814 6,125
Global Equity........................... 22,401 38,489
Gold.................................... 8,137 32,525
International Equity.................... 472,776 364,466
International Small Cap................. 79,415 43,618
Japanese Equity......................... 88,100 29,619
Latin American.......................... 32,425 16,689
Aggressive Equity....................... 75,727 52,711
Emerging Growth......................... 31,159 66,673
Equity Growth........................... 246,443 231,522
Small Cap Value Equity.................. 19,861 16,332
U.S. Real Estate........................ 122,466 62,011
Value Equity............................ 92,679 46,530
Balanced................................ 4,611 5,122
Emerging Markets Debt................... 616,750 637,624
Fixed Income............................ 173,429 182,202
Global Fixed Income..................... 159,473 175,658
High Yield.............................. 58,042 95,389
Municipal Bond.......................... 118,467 74,955
</TABLE>
Purchases and sales during the year ended December 31, 1995 of long-term U.S.
Government securities occurred only in the Balanced, Fixed Income and Global
Fixed Income Portfolios and amounted to:
<TABLE>
<CAPTION>
(000)
----------------------
PORTFOLIO PURCHASES SALES
- ---------------------------------------- ----------- ---------
<S> <C> <C>
Balanced................................ $ 1,113 $ --
Fixed Income............................ 112,464 151,037
Global Fixed Income..................... 24,602 32,115
</TABLE>
During the year ended December 31, 1995, the following Portfolios incurred
brokerage commissions related to Morgan Stanley & Co., Incorporated, an
affiliated broker/dealer, of approximately:
<TABLE>
<CAPTION>
(000)
---------------
BROKERAGE
PORTFOLIO COMMISSION
- ----------------------------------------------- ---------------
<S> <C>
Asian Equity................................... $ 99
Emerging Markets............................... 69
European Equity................................ 4
Global Equity.................................. 3
Gold........................................... 1
International Equity........................... 69
International Small Cap........................ 1
Japanese Equity................................ 121
Latin American................................. 4
Equity Growth.................................. 1
U.S. Real Estate............................... 6
</TABLE>
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154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
F. At December 31, 1995, cost and unrealized appreciation (depreciation) for
U.S. Federal income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
(000)
--------------------------------------------
NET
APPREC.
PORTFOLIO COST APPREC. DEPREC. (DEPREC.)
- -------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active Country
Allocation............... $ 150,104 $ 14,780 $ (4,620) $ 10,160
Asian Equity.............. 270,401 58,854 (16,312) 42,542
Emerging Markets.......... 915,174 97,063 (150,829) (53,766)
European Equity........... 65,638 5,746 (2,983) 2,763
Global Equity............. 68,989 11,625 (2,744) 8,881
Gold...................... 7,729 246 (651) (405)
International Equity...... 1,265,148 305,267 (31,924) 273,343
International Small Cap... 202,263 16,894 (24,355) (7,461)
Japanese Equity........... 114,012 4,851 (3,036) 1,815
Latin American............ 15,535 1,098 (1,194) (96)
Aggressive Equity......... 28,800 2,001 (314) 1,687
Emerging Growth........... 66,320 53,480 (542) 52,938
Equity Growth............. 142,804 17,849 (1,941) 15,908
Small Cap Value Equity.... 46,841 6,840 (1,886) 4,954
U.S. Real Estate.......... 65,257 5,625 (1,810) 3,815
Value Equity.............. 132,222 20,118 (5,352) 14,766
Balanced.................. 20,531 2,426 (526) 1,900
Emerging Markets Debt..... 173,477 12,534 (5,407) 7,127
Fixed Income.............. 155,055 8,025 (5) 8,020
Global Fixed Income....... 109,218 3,611 (262) 3,349
High Yield................ 62,766 2,929 (3,708) (779)
Municipal Bond............ 43,334 1,635 -- 1,635
Money Market.............. 836,431 -- -- --
Municipal Money Market.... 450,017 -- -- --
</TABLE>
At December 31, 1995, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
-------------------------------
PORTFOLIO 2001 2002 2003 TOTAL
- ------------------------------- --- --------- --------- ---------
<S> <C> <C> <C> <C>
Emerging Markets............... $ -- $ -- $ 33,313 $ 33,313
Japanese Equity................ -- -- 2,666 2,666
Latin American................. -- -- 224 224
Fixed Income................... -- 8,291 -- 8,291
Global Fixed Income............ -- 5,293 1,780 7,073
High Yield..................... -- 497 4,145 4,642
Money Market................... -- 13 -- 13
Municipal Money Market......... 1 7 1 9
</TABLE>
During the year ended December 31, 1995, the International Small Cap, Emerging
Growth, Fixed Income and Money Market Portfolios utilized capital loss
carryforwards for U.S. Federal income tax purposes of approximately $1,764,000,
$10,861,000, $5,579,000 and $79,000, respectively.
To the extent that capital loss carryovers are used to offset any future net
capital gains realized during the carryover period as provided by U.S. Federal
income tax regulations, no capital gains tax liability will be incurred by a
Portfolio for gains realized and not distributed. It is unlikely that the gains
so offset would be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1995 to December 31, 1995
certain Portfolios incurred and elected to defer until January 1, 1996 for U.S.
Federal income tax purposes net capital and net currency losses of
approximately:
<TABLE>
<CAPTION>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ------------------------------------------- ----------- -----------
<S> <C> <C>
Emerging Markets........................... $ -- $ 64
Global Equity.............................. -- 2
Latin American............................. 2 6
Emerging Markets Debt...................... 245 1,501
High Yield................................. 73 --
Municipal Money Market..................... 1 --
</TABLE>
G. During the year ended December 31, 1995, the following Portfolios wrote
covered call and put options as follows:
COVERED CALL OPTIONS
<TABLE>
<CAPTION>
NUMBER OF PREMIUM
AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000)
- ------------------------------------- ------------- -------------
<S> <C> <C>
Options outstanding at December 31,
1994................................ -- $ --
Options written during the period.... 386 39
Options cancelled in closing
transactions during the period...... (386) (39)
----- ---
Options outstanding at December 31,
1995................................ -- $ --
----- ---
----- ---
</TABLE>
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- ----------------------------------- ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1994.............................. $ 15,000 $ 105
Options written during the
period............................ 69,900 1,281
Options cancelled in closing
transactions during the period.... (11,000) (240)
Options expired during the
period............................ (43,900) (508)
Options exercised during the
period............................ (30,000) (638)
------------- -----------
Options outstanding at December 31,
1995.............................. $ -- $ --
------------- -----------
------------- -----------
</TABLE>
COVERED PUT OPTIONS
<TABLE>
<CAPTION>
NUMBER OF PREMIUM
AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000)
- ------------------------------------- ------------- -------------
<S> <C> <C>
Options outstanding at December 31,
1994................................ -- $ --
Options written during the period.... 60 10
Options cancelled in closing
transactions during the period...... (60) (10)
--- ---
Options outstanding at December 31,
1995................................ -- $ --
--- ---
--- ---
</TABLE>
H. OTHER. At December 31, 1995, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of and investment
income from such securities.
- --------------------------------------------------------------------------------
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
During the year ended December 31, 1995, the Gold Portfolio realized losses from
in-kind redemptions of approximately $252,000.
Portfolio securities and foreign currency holdings were translated at the
following exchange rates as of December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Argentine Peso........................ 1.00015 = $ 1.00
Australian Dollar..................... 1.34544 = $ 1.00
Belgian Franc......................... 29.43000 = $ 1.00
Brazilian Real........................ 0.97190 = $ 1.00
British Pound......................... 0.64412 = $ 1.00
Canadian Dollar....................... 1.36505 = $ 1.00
Colombian Peso........................ 990.75000 = $ 1.00
Danish Krone.......................... 5.55680 = $ 1.00
Deutsche Mark......................... 1.43390 = $ 1.00
Finnish Markka........................ 4.34955 = $ 1.00
French Franc.......................... 4.89700 = $ 1.00
Greek Drachma......................... 236.99000 = $ 1.00
Hong Kong Dollar...................... 7.73250 = $ 1.00
Hungarian Forint...................... 136.63000 = $ 1.00
Indonesian Rupiah..................... 2,286.50000 = $ 1.00
Irish Pound........................... 0.62441 = $ 1.00
Italian Lira.......................... 1,588.25000 = $ 1.00
Japanese Yen.......................... 103.25000 = $ 1.00
Korean Won............................ 775.75000 = $ 1.00
Malaysian Ringgit..................... 2.53970 = $ 1.00
Mexican Peso.......................... 7.69500 = $ 1.00
Moroccan Dirham....................... 8.46890 = $ 1.00
Netherlands Guilder................... 1.60470 = $ 1.00
New Zealand Dollar.................... 1.52964 = $ 1.00
Norwegian Krone....................... 6.32905 = $ 1.00
Pakistani Rupee....................... 34.21580 = $ 1.00
Peruvian New Sol...................... 2.31000 = $ 1.00
Philippine Peso....................... 26.23000 = $ 1.00
Polish Zloty.......................... 2.46550 = $ 1.00
Portuguese Escudo..................... 149.67500 = $ 1.00
Singapore Dollar...................... 1.41450 = $ 1.00
Spanish Peseta........................ 121.30000 = $ 1.00
Sri Lanka Rupee....................... 53.65000 = $ 1.00
Swedish Krona......................... 6.63965 = $ 1.00
Swiss Franc........................... 1.15350 = $ 1.00
Taiwan Dollar......................... 27.28700 = $ 1.00
Thai Baht............................. 25.19000 = $ 1.00
Turkish Lira.......................... 60,900.00000 = $ 1.00
</TABLE>
From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
I. SUBSEQUENT EVENT. On January 2, 1996, each Portfolio (with the exception of
the International Small Cap, Money Market and Municipal Money Market Portfolios)
began offering two classes of shares -- Class A and Class B. All the shares of
these Portfolios outstanding prior to January 2, 1996, were redesignated Class A
shares on January 2, 1996.
- --------------------------------------------------------------------------------
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Institutional Fund, Inc.
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Active Country Allocation Portfolio, Asian Equity Portfolio, Emerging
Markets Portfolio, European Equity Portfolio, Global Equity Portfolio, Gold
Portfolio, International Equity Portfolio, International Small Cap Portfolio,
Japanese Equity Portfolio, Latin American Portfolio, Aggressive Equity
Portfolio, Emerging Growth Portfolio, Equity Growth Portfolio, Small Cap Value
Equity Portfolio, U.S. Real Estate Portfolio, Value Equity Portfolio, Balanced
Portfolio, Emerging Markets Debt Portfolio, Fixed Income Portfolio, Global Fixed
Income Portfolio, High Yield Portfolio, Municipal Bond Portfolio, Money Market
Portfolio and Municipal Money Market Portfolio (constituting the Morgan Stanley
Institutional Fund, Inc., hereafter referred to as the "Fund") at December 31,
1995, the results of each of their operations, the changes in each of their net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodians and counterparties and the application of
alternative auditing procedures where confirmations from counterparties were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 9, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
- --------------------------------------------------------------------------------
For the year ended December 31, 1995, the percentage of dividends paid that
qualify for the 70% dividend received deduction for corporate shareholders of
the Global Equity, Gold, Aggressive Equity, Equity Growth, Small Cap Value
Equity, Value Equity, Balanced and High Yield Portfolios are 24.6%, 2.9%, 6.8%,
9.5%, 86.5%, 63.5%, 37.9% and 0.8%, respectively.
For the year ended December 31, 1995, the percentage of exempt interest
dividends paid by the Municipal Bond and Municipal Money Market Portfolios are
100% and 96%, respectively.
For the year ended December 31, 1995, the following Portfolios intend to pass
through foreign tax credits and intend to distribute long-term capital gains
totaling:
<TABLE>
<CAPTION>
FOREIGN TAX
CREDIT LONG-TERM
PASS-THROUGH CAPITAL GAINS
(000) (000)
----------------- ------------------
<S> <C> <C>
Active Country Allocation............................................................ $ 519 $ 5,343
Asian Equity......................................................................... 487 10,276
Emerging Markets..................................................................... 2,746 13,069
European Equity...................................................................... 158 333
Global Equity........................................................................ 168 4,228
International Small Cap.............................................................. 630 4,763
Latin American....................................................................... 19 --
Equity Growth........................................................................ -- 5,719
Small Cap Value Equity............................................................... -- 927
Value Equity......................................................................... -- 2,976
Balanced............................................................................. -- 517
Emerging Markets Debt................................................................ -- 364
</TABLE>
- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Warren J. Olsen
PRESIDENT AND DIRECTOR
John D. Barrett II
DIRECTOR
Gerard E. Jones
DIRECTOR
Andrew McNally, IV
DIRECTOR
Samuel T. Reeves
DIRECTOR
Fergus Reid
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
Frederick B. Whittemore
DIRECTOR
James W. Grisham
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Karl Hartmann
ASSISTANT SECRETARY
James R. Rooney
TREASURER
Joanna M. Haigney
ASSISTANT TREASURER
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
DISTRIBUTOR
Morgan Stanley & Co., Incorporated
1251 Avenue of the Americas
New York, New York 10020
CUSTODIANS
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
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.
- --------------------------------------------------------------------------------
159
