<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Frederick B. Whittemore Michael F. Klein
VICE-CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Joseph P. Stadler
John D. Barrett II VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Gerard E. Jones SECRETARY
DIRECTOR Karl O. Hartmann
Andrew McNally, IV ASSISTANT SECRETARY
DIRECTOR James R. Rooney
Samuel T. Reeves TREASURER
DIRECTOR Joanna M. Haigney
Fergus Reid ASSISTANT TREASURER
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
- --------------------------------------------------
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. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
GLOBAL FIXED INCOME PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Global Fixed Income Portfolio aims to produce an attractive rate of return
by investing in fixed income securities issued by governments, agencies,
supranational entities and corporations with varying maturities in various
currencies.
For the three month period ended March 31, 1996, the Portfolio had a total
return of -1.34% for the Class A shares and -1.60% for the Class B shares, as
compared to a total return of -1.75% for the J.P. Morgan Traded Global Bond
Index. The average annual total return for the twelve months ended March 31,
1996 and for the period from inception on May 1, 1991 through March 31, 1996 was
10.43% and 8.19%, respectively for the Class A shares, as compared to 6.59% and
10.06%, respectively for the Index. As of March 31, 1996, the Portfolio had an
SEC 30-day yield of 5.97% for the Class A shares and 5.80% for the Class B
shares.
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED GLOBAL BOND INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A............... -1.34% 10.43% 8.19%
PORTFOLIO--CLASS B(3)............ -1.60 N/A N/A
INDEX............................ -1.75 6.59 10.06
</TABLE>
1. The J.P. Morgan Traded Global Bond Index is an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, the United Kingdom and the United
States.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE 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.
Global bond markets continued last year's strong performance into February
before experiencing a sharp setback and increased volatility in the latter part
of the quarter. Overall local currency returns were mixed, ranging from negative
2.2% in the UK to positive 2.9% in Italy. The decline in bond prices was caused
by a significant reversal in interest rate expectations as markets began to
sense that a rebound in economic growth was appearing on the horizon. This
coincided with a heavy supply schedule and rising commodity prices, causing a
bout of profit taking and some reduction in leveraged positions.
The U.S. Treasury market produced an overall return of negative 1.9%. Very short
dated paper marginally outperformed cash over the quarter but both duration
effects and yield curve steepening caused longer dated issues to suffer
significant declines. The mortgage sector generally outperformed Treasuries and
corporate spreads remained tight. The benchmark long bond had rallied below the
psychological 6.0% yield level on several occasions in January, buoyed by
expectations of lower short rates, a sluggish economy with benign inflation and
continued hopes for an agreement to reduce the budget deficit. At month end, the
Federal Reserve fulfilled the market's hopes and cut the key Fed Funds rate by
another 0.25% to 5.25%, the third such move in their easing cycle. The U.S.
economy's profile over the first two months of the year was distorted by the
impact of winter storms and the government shutdown. However in February Fed
Chairman Greenspan unsettled the market by implying the recent weakness of the
economy was temporary, leading to speculation that monetary easing was at an
end. A far stronger than expected employment report in March then caused a very
sharp sell off. Concern over the impact of the presidential election on the
commitment to reducing the fiscal deficit was also a background negative factor.
Further evidence of economic strength over the next few quarters could trigger
another rise in bond yields. The Fed is now unlikely to ease policy this year
unless higher bond yields deliver weaker than expected activity in the second
half. Equally the market is probably overpessimistic in speculating about an
early tightening while inflation pressures remain quite weak. The Portfolio
maintained
2
<PAGE>
an underweight allocation to the market during the quarter, with a neutral to
slightly short duration position. Active use was made of the mortgage sector to
the benefit of performance.
The Portfolio was overweight in Canadian bonds which outperformed their U.S.
counterparts across the maturity spectrum and produced an average return of
negative 0.7%. The Bank of Canada remained very accommodative, reducing loan
rates by 0.5%, with the second cut independent of the U.S. Falling inflation and
increasingly credible policies for cutting the fiscal deficit were the main
positives. The Portfolio's small holding of Australian bonds also outperformed
the U.S. The Australian dollar rallied strongly due to rising commodity prices
and an attractive yield. Following strong currency gains, holdings of New
Zealand bonds were liquidated.
Japanese bonds largely avoided the correction in U.S. and European bonds as
foreign investors were already significantly underweight the market and domestic
investors remained attracted to the steepness of the yield curve. However
overall returns for the whole quarter were a meager 0.3% as the market labored
under the negative influences of a low running yield, a buoyant stock market, a
weaker yen and the ongoing efforts to stimulate the economy. The market remained
fickle in its attitude towards the outlook for official interest rates. In
February, it sold off when comments from the Finance Minister implying savers
were suffering from low rates were seen as signalling a turn in policy. A weaker
than expected Tankan industrial survey later corrected some of this short rate
pessimism. The Portfolio maintained a low exposure to the market due to
expectations of a weak yen and because the impact of an extremely lax fiscal and
monetary stance implied further upward pressure on bond yields. However, the
exposure was increased slightly as the market and currency declined. This was
designed to lock in relative gains and reduce risk relative to the benchmark.
The very subdued inflation background and fragile banking system suggest
Japanese rates will stay low for some time.
The fundamental background for European bonds remained constructive, as
continued slow growth and low or falling inflation encouraged further monetary
easing in most countries. As a whole European markets produced the best relative
returns for the quarter. However, with much good news already factored into
yields, they were not immune from developments overseas. After hitting a yield
low of 5.78% on 10-year bonds in January, the German market weakened, leaving
overall quarterly returns near zero. Modest gains on short dated bonds were
offset by losses on longer issues. Official interest rates were left unchanged
but the Bundesbank lowered the repurchase rate by 0.45% to 3.30%. Since the
Bundesbank had centered its easing argument on weak M3 money supply growth in
1995, the sudden acceleration of M3 from December then cooled further rate cut
hopes and had a negative impact on bond yields.
Significant yield spread narrowing of France over Germany reflected domestic
investor support of the market and more optimism that France would eventually
achieve monetary union with Germany. Renewed stability of the franc allowed
French rates to be steadily lowered. In the U.K. an improving inflation
performance was used to justify another cut in base rates. However the market
suffered from the government's precarious parliamentary circumstances, the more
advanced economic position relative to the continent, and the possible
consequences of the current BSE beef scare. The higher yielding markets produced
the best returns over the quarter, significantly reducing their yield spread
over German bonds. The Swedish market returned 2.4%, as interest rates were
lowered 1.5%, inflation fell below central bank targets and fiscal policy was
tightened. Italian bonds weathered political uncertainties as a markedly
improved inflation background, currency strength and some fiscal consolidation
increased the likelihood of monetary easing. Spanish bonds also did well,
returning 2.8%. The inconclusive result of the general election did little to
hold back the market as it also focused on improving inflation data and rate
cuts. Future yield-spread performance within Europe will remain hostage to
perceptions of how, when, and if Monetary Union is to take place. Portfolio
performance was aided by the general overweighting of European markets and the
specific overweighting of the higher yielders.
On the foreign exchanges the U.S. dollar maintained a positive tone during the
quarter but was confined to fairly narrow ranges. It ended over 3.0% higher
against the deutschesmark and the yen. This general appreciation bucked the
pattern of first quarter dollar weakness that has occurred in the last three
years. The dollar was aided by the wide nominal interest rate differentials
3
<PAGE>
existing between the U.S. and Japan/core European countries. The apparent
divergence of the U.S. economic cycle from the rest of the world, the sharp
reversal in U.S. interest rate expectations, the collapse in the Japanese trade
surplus, tensions in Taiwan and periodic optimism about European Monetary Union
were all dollar positive. Official Bank of Japan intervention, selling yen when
it strengthened, confirmed their desire to keep it at the softer end of recent
ranges. The yen's decline against the dollar was hastened at month end by more
reported difficulties in the Japanese banking system and optimism that Japanese
investors would increase foreign investment in the new financial year.
On the European cross rates, the deutschemark ended the quarter lower against
other currencies, reflecting the usual pattern during periods of dollar
strength. The Italian lira rallied 4.0% from its depressed year end levels
helped by widening interest rate differentials and improving economic
fundamentals. Sterling rose 1.4% but was held back by political uncertainty and
worries that further rate cuts would be politically inspired. The Swiss franc
ended little changed against the deutschemark as it's status as a haven from
Monetary Union uncertainties was counteracted by meager deposit rates.
The Portfolio maintained an overweight exposure to the dollar bloc currencies
through hedging from the yen and core European currencies. This aided
performance while the forward premiums increased overall yield.
As the year progresses the current bountiful liquidity conditions that have
supported bond prices are likely to stimulate stronger growth, implying weaker
bond prices as investors adjust inflation risk premia upwards. However the
correction in February/March has already gone a long way toward positioning
markets for the reality of improving economies. So long as actual inflation
stays subdued, the eventual turn in monetary policy should not reverberate
strongly along the yield curve. In relative terms the European markets offer the
best protection given their poor economic backdrops. The extent of the dollar's
rise in reaction to recent events has arguably been rather disappointing and
probably signifies that the market is already long of dollars and that much good
news is priced in. However, the currency remains very competitive and the
international desire to avoid a renewed fall in the dollar remains intact. An
improving trade position, relative growth prospects and interest rate
differentials suggest further upside potential.
Michael J. Smith
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
April 1996
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FIXED INCOME SECURITIES (91.8%)
AUSTRALIAN DOLLAR (1.4%)
GOVERNMENT BONDS (1.4%)
AUD 1,000 Government of Australia 8.75%,
1/15/01 $ 786
850 Government of Australia 7.50%,
7/15/05 609
---------
1,395
---------
BRITISH POUND (6.1%)
GOVERNMENT BONDS (6.1%)
GBP 500 United Kingdom Treasury 10.00%,
2/26/01 835
1,900 United Kingdom Treasury GILT
9.75%, 8/27/02 3,171
1,500 United Kingdom Treasury 6.75%,
11/26/04 2,100
---------
6,106
---------
CANADIAN DOLLAR (3.7%)
GOVERNMENT BONDS (3.7%)
CAD 3,600 Government of Canada 7.50%,
12/01/03 2,646
1,300 Government of Canada 9.75%,
6/01/21 1,118
---------
3,764
---------
DANISH KRONE (6.3%)
GOVERNMENT BONDS (6.3%)
DKK 17,500 Kingdom of Denmark 8.00%, 11/15/01 3,270
15,500 Kingdom of Denmark 7.00%, 12/15/04 2,676
2,000 Kingdom of Denmark 8.00%, 3/15/06 362
---------
6,308
---------
DEUTSCHE MARK (15.7%)
GOVERNMENT BONDS (15.7%)
DEM 7,300 German Unity Bond 8.00%, 1/21/02 5,474
6,350 Treuhandanstalt 6.875%, 6/11/03 4,473
8,325 Treuhandanstalt 6.75%, 5/13/04 5,784
---------
15,731
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
ITALIAN LIRA (8.0%)
GOVERNMENT BONDS (8.0%)
ITL 1,000,000 Buoni Poliennali Del Tes 8.50%,
8/01/04 $ 567
2,750,000 Republic of Italy 9.50%, 2/01/99 1,719
8,990,000 Republic of Italy Treasury Bond
10.50%, 11/01/00 5,812
---------
8,098
---------
JAPANESE YEN (9.8%)
EUROBONDS (6.5%)
JPY 200,000 Export Import Bank of Japan
4.375%, 10/01/03 2,031
425,000 International Bank for
Reconstruction & Development
4.75%, 12/20/04 4,465
---------
6,496
---------
GOVERNMENT BONDS (3.3%)
300,000 Japan Development Bank 6.50%,
9/20/01 3,364
---------
9,860
---------
NETHERLANDS GUILDER (4.0%)
GOVERNMENT BONDS (4.0%)
NLG 3,650 Netherlands Government 9.00%,
1/15/01 2,536
2,550 Netherlands Government 5.75%,
1/15/04 1,502
---------
4,038
---------
SPANISH PESETA (5.1%)
GOVERNMENT BONDS (5.1%)
ESP 50,000 Spanish Government 12.25%, 3/25/00 443
562,000 Spanish Government 10.30%, 6/15/02 4,697
---------
5,140
---------
SWEDISH KRONA (1.9%)
GOVERNMENT BONDS (1.9%)
SEK 10,500 Swedish Government 13.00%, 6/15/01 1,895
---------
UNITED STATES DOLLAR (29.8%)
CORPORATE BONDS AND NOTES (6.0%)
U.S.$ 995 Asset Securitization Corp. 7.10%,
8/13/29 995
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
UNITED STATES DOLLAR (CONTINUED)
U.S.$ 385 Goldman Sachs Group 6.25%, 2/01/03 $ 368
700 John Hancock 7.375%, 2/15/24 661
895 LB Commercial Conduit Mortgage
Trust 7.144%, 8/25/04 903
600 Metropolitan Life Insurance 7.45%,
11/01/23 550
600 Prudential Insurance Co., 8.30%,
7/01/25 607
2,000 UCFC CMO, Series 1995-C1, Class
A3, 6.775%, 9/10/17 1,974
---------
6,058
---------
EUROBOND (0.5%)
500 Statens Bostads 8.50%, 5/30/97 513
---------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.3%)
U.S. TREASURY BONDS
545 10.75%, 8/15/05 708
1,280 8.125%, 8/15/19 1,464
1,000 8.75%, 5/15/20 1,218
---------
3,390
---------
U.S. TREASURY NOTES
6,450 8.50%, 7/15/97 6,680
250 5.25%, 12/31/97 248
625 6.75%, 4/30/00 640
8,100 7.50%, 11/15/01 8,596
---------
16,164
---------
U.S. TREASURY STRIPS
1,600 2/15/98, Principal Only 1,437
---------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
2,485 7.00%, 2/15/26 2,422
---------
23,413
---------
29,984
---------
TOTAL FIXED INCOME SECURITIES (Cost $93,437) 92,319
---------
SHORT-TERM INVESTMENTS (3.5%)
FRENCH FRANC (2.4%)
GOVERNMENT BOND (2.4%)
FRF 11,400 French Treasury Bill 7.75%,
4/12/00 (Cost $2,384) 2,445
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
UNITED STATES (1.1%)
REPURCHASE AGREEMENT (1.1%)
U.S.$ 1,093 The Chase Manhattan Bank, N.A.,
5.15%, dated 3/29/96, due
4/01/96, to be repurchased at
$1,093, collateralized by $735
United States Treasury Bonds,
11.25%, due 2/15/15, valued at
$1,118 (Cost $1,093) $ 1,093
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,477) 3,538
---------
TOTAL INVESTMENTS (95.3%) (Cost $96,914) 95,857
---------
OTHER ASSETS AND LIABILITIES (4.7%)
Other Assets 42,363
Liabilities (37,585)
---------
4,778
---------
NET ASSETS (100%) $100,635
---------
---------
CLASS A SHARES:
Net Assets $98,825
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 8,929
Net Asset Value, Offering and Redemption Price
Per Share $11.07
---------
---------
CLASS B SHARES:
Net Assets $1,810
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 164
Net Asset Value, Offering and Redemption Price
Per Share $11.05
---------
---------
</TABLE>
- ----------------------------------
CMO -- Collateralized Mortgage Obligation
6
