<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.
EQUITY GROWTH PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting sustainable earnings growth.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 9.12% for the Class A shares and 8.51% for the Class B shares, as
compared to a total return of 5.36% for the S&P 500 Index. The average annual
total return for the twelve months ended March 31, 1996 and for the period from
inception on April 2, 1991 through March 31, 1996 was 43.96% and 15.57%
respectively for the Class A shares, as compared to 32.07% and 14.86%
respectively for the Index.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 9.12% 43.96% 15.57%
PORTFOLIO--CLASS B(3)............. 8.51 N/A N/A
INDEX............................. 5.36 32.07 14.86
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The Portfolio's performance in the first quarter compares favorably to the
overall market, based on the S&P 500 Index, and even more favorably to growth
managers in general. The Russell 1000 Growth Index gained 5.2% in the quarter,
while the Lipper Growth Fund Index gained only 4.5%. This strong relative
performance by the Equity Growth Portfolio marks a continuation of a trend
established in 1994 and 1995.
Our strong start to the year was achieved despite two important factors that
worked against us.
-First, there was a big shift into some of the laggards of
1995, particularly cyclicals, energy and basic materials. This made it
difficult for traditional growth Portfolios to keep up with the S&P 500. We
have no energy, no basic materials and our cyclical exposure is limited to
some "growth cyclicals" such as United Technologies, Allied Signal, Hercules,
Monsanto, Sunstrand, Boeing and Gannett.
-Second, the tobacco stocks were pounded on a new
wave of negative media coverage and investor concerns over litigation risk.
Combining our positions in Philip Morris, RJR Nabisco and Loews, we had 13% of
our Portfolio in tobacco stocks at December 31, 1995. Admittedly, all three of
these companies have non-tobacco businesses, so this overstates our exposure
somewhat. Nonetheless, the Portfolio's exposure was high versus the S&P weight
of 2%, and this hurt our performance significantly in the first quarter.
On the other hand, we made three strategic decisions in the first quarter which
worked very well.
1. We had substantially increased our weighting in
financials at year-end, nearly doubling our position and reaching an
all-time high of almost 23% of the Portfolio. Financial stocks began a
period of underperformance in October 1995 and this snowballed into December
and early January as investors began to fear that anecdotal evidence of
slowing loan growth and rising consumer delinquencies was the death knell
for the stocks. The pull back in the stocks actually occurred during a
period of declining interest rates. Our research showed
2
<PAGE>
very clearly that in many cases company fundamentals were strong or
extremely strong, and we aggressively purchased names like Wells Fargo,
Citicorp, Chase, American Express and Household International. We cut back
on this bet late in the quarter because the stocks had risen very sharply
and interest rates were moving up. While we still like some financials (23%
of the Portfolio at March 31), we are extremely selective, emphasizing
growth financials with strong franchises. Wells Fargo, our largest financial
holding and second largest overall holding (9.9% of Portfolio when combined
with First Interstate, which merged with Wells Fargo in early April), rose
21% in the first quarter and we continue to like it.
2. Our exposure to growth retailers was increased
during the quarter, in response to improving industry fundamentals. This
paid off as the group was finally strong, after sub par performance in 1994
and 1995. The major bets in this sector include Boston Chicken, Autozone,
Petsmart, Harcourt General (which owns a controlling stake in Neiman Marcus)
and Quality Dining.
3. We were underweight technology at quarter-end
with a 6% position versus 11% for the S&P 500. While we had less exposure in
the technology sector than most growth investors in 1995, we reduced this
exposure even further in late 1995 and early 1996, fearing downward earnings
revisions. Several technology stocks that did well for us last year, and
which we sold, have recently plunged on earnings disappointments. Examples
include Digital Equipment, Cabletron and Intuit. Our current technology
holdings include modest positions in Microsoft, IBM, Hewlett Packard and
Cisco.
Looking ahead to the remainder of 1996, the Portfolio reflects several themes.
-Our tobacco bet has increased from an already
substantial overweighting. At March 31, our positions in Philip Morris, RJR
Nabisco, Loews and UST represented 18% of the Portfolio. Like the financials
in December and January, the tobacco stocks plunged in March although earnings
estimates remained flat or rose. All four of these companies repurchase
shares, so, in a sense, the new litigation concerns enhance shareholder value,
allowing the companies to buy back more shares for the dollar. As an
illustration, Coca Cola and Philip Morris are using roughly the same
percentage of free cash flow to repurchase shares, but Coke is retiring only
2% of its total shares annually while Philip Morris is retiring 4%. All things
being equal, this gives Philip Morris a built-in EPS growth advantage over
Coke. To carry the comparison one step further, at quarter-end, Philip Morris
and Coca Cola closed at $87 and $31, respectively. Projected 5-year growth
rate estimates from Wall Street are similar. But Philip Morris will earn
$7.70/share in 1996 while Coke should earn $2.75. Is there enough of a
litigation discount priced into Philip Morris stock? However, we are growth
investors and would not buy on cheapness alone. Business at Philip Morris is
great. The dividend, in our view, will be raised to $4.80 in August and $5.60
in August 1997. Hence, if the yield remains 4.6% the stock could trade to $122
in 16 months.
-Cash at March 31 represented a higher than usual 9%,
up from 6% at December 31. We do not attempt to time the market, but the
combination of a big move up in most stocks and the recent rise in interest
rates is not positive. Still, rates are low by historical standards. The
outlook for corporate profits has worsened over the past year, and this should
benefit companies that possess true franchises and growth characteristics. We
hope to deploy our cash in the coming months.
-Besides tobacco, we continue to have solid
representation in the consumer staple area, including packaged food, beverage,
household products and pharmaceuticals. The best positioned companies in these
industries have decent top-line growth prospects, pricing flexibility, high
returns on invested capital, free cash flow generation and global growth
opportunities. If interest rates continue to rise and/or the economy weakens
significantly, these companies should not be meaningfully impacted. Our
positions here include PepsiCo, Ralston Purina, Coca Cola
3
<PAGE>
Enterprises, Procter and Gamble, Schering Plough, American Home Products and
Eastman Kodak. Including tobacco, our total consumer staple exposure totaled
27% at March 31.
-As mentioned, we have added to growth retailers. We
also have a number of higher beta consumer growth names, such as HFS, Amre,
AMC Entertainment, KIII Communications and Infinity Broadcasting. HFS is by
far our largest investment in this area representing 3.5% of the Portfolio at
March 31. Despite the stock's huge upward move (19% this year and about 200%
last year) and big valuation (44 and 34 times projected 1996 and 1997
earnings, respectively), we continue to find HFS compelling. HFS is the
largest franchiser of hotels in the country (Ramada, Howard Johnson, Super 8,
Days Inn, Travelodge) and the largest real estate broker (Century 21, ERA).
Management has built a cash-generating growth machine by selling preferred
access to all the consumer transactions it controls to scores of companies,
including giants like AT&T, PepsiCo, Eastman Kodak and Disney. After earning
$0.74 in 1995, we think HFS will beat consensus estimates and earn $1.25 this
year and $1.80-$1.90 in 1997. In addition to HFS, we have also increased our
exposure to other lodging companies, such as ITT, Hilton and La Quinta.
-As indicated, while we have cut back somewhat, our
financial industry bet remains large at 23% of the Portfolio, versus 13% for
the S&P 500. Investors are fixated on the notion that financial stocks are
interest-sensitive. All stocks are interest-sensitive. And clearly the biggest
risk for stocks currently would be rising interest rates. But we believe very
strongly that not all financials are created equal, and that some would
perform much better than the average stock in a rough market precipitated by
higher interest rates. Wells Fargo, for instance, at $266 trades at only 8
times next year's cash earnings estimate of $33/share. This low multiple
should prove defensive in a down market. Also, we expect Wells Fargo to
repurchase approximately 25% of total shares outstanding over the next three
years. This is an extremely defensive characteristic. Finally, the bank's net
interest margins actually widen when rates rise, as deposit rates lag. The
bottom line is that the best positioned financial service companies, such as
Wells Fargo and American Express, are looking increasingly like growth
companies, not pure interest-sensitive stocks.
-We continue to overweight the defense and
commercial aircraft sectors, which treated us well in 1994 and 1995. Our largest
two positions here are United Technologies and McDonnell Douglas. United
Technologies is really a conglomerate, but derives roughly one quarter of its
revenues from Pratt & Whitney, one of the leading jet engine manufacturers. In
our view, United Technologies is in a transition from low-return cyclical to
global industrial growth company. Management has engineered a quiet
restructuring which has led to extremely impressive earnings growth. Much the
same can be said of McDonnell Douglas, although this company is more of a pure
play in defense with a kicker being the potential turnaround of its commercial
aircraft business. Here again, earnings growth has been impressive, and this
should continue for at least the next three years.
In conclusion, despite the market's rise, we continue to find compelling growth
stock opportunities across a variety of sectors.
Kurt Feuerman
PORTFOLIO MANAGER
April 1996
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31 , 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (90.4%)
CAPITAL GOODS-CONSTRUCTION (6.9%)
AEROSPACE & DEFENSE (5.1%)
14,200 Boeing Co. $ 1,230
11,400 Lockheed Martin Corp. 865
35,400 McDonnell Douglas Corp. 3,243
12,800 Rohr, Inc. 230
30,900 United Technologies Corp. 3,469
---------
9,037
---------
BUILDING & CONSTRUCTION (0.9%)
81,600 AMRE, Inc. 1,520
---------
MACHINERY (0.9%)
38,600 Sundstrand Corp. 1,573
---------
TOTAL CAPITAL GOODS-CONSTRUCTION 12,130
---------
CONSUMER-CYCLICAL (18.4%)
AUTOMOTIVE (0.7%)
23,400 Goodyear Tire & Rubber Co. 1,193
---------
BROADCAST-RADIO & TELEVISION (0.9%)
16,200 Infinity Broadcasting, Class A 703
46,400 New World Communications Group,
Inc. 911
---------
1,614
---------
ENTERTAINMENT & LEISURE (1.6%)
54,100 AMC Entertainment, Inc. 1,312
24,600 Walt Disney Co. 1,571
---------
2,883
---------
FOOD SERVICE (2.8%)
94,300 Boston Chicken, Inc. 3,212
54,300 Quality Dining, Inc. 1,602
---------
4,814
---------
GAMING & LODGING (6.2%)
133,400 HFS, Inc. 6,487
13,700 Hilton Hotels Corp. 1,288
24,200 ITT Corp 1,452
32,200 La Quinta Inns, Inc. 946
26,700 Trump Hotels & Casino Resort 781
---------
10,954
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
LEISURE RELATED (0.0%)
2,600 Toy Biz, Inc. $ 46
---------
PHOTOGRAPHY & OPTICAL (0.8%)
19,300 Eastman Kodak Co. 1,370
---------
PUBLISHING (2.3%)
13,500 Gannett Co., Inc. 908
200,400 K-III Communications, Corp. 2,330
31,400 New York Times Co., Class A 911
---------
4,149
---------
RETAIL-GENERAL (3.1%)
55,300 AutoZone, Inc. 1,873
36,300 Harcourt General, Inc. 1,647
52,400 PetSmart, Inc. 1,900
---------
5,420
---------
TOTAL CONSUMER-CYCLICAL 32,443
---------
CONSUMER-STAPLES (27.4%)
BEVERAGES (2.6%)
85,800 Coca Cola Enterprises, Inc. 2,649
32,600 PepsiCo, Inc. 2,062
---------
4,711
---------
DRUGS (2.8%)
16,200 American Home Products Corp. 1,756
14,700 Pfizer, Inc. 985
37,500 Schering-Plough Corp. 2,180
---------
4,921
---------
FOOD (3.0%)
36,600 Interstate Bakeries Corp. 897
50,200 Ralston Purina Group 3,357
18,100 Wrigley (William) Jr. Co. 1,061
---------
5,315
---------
HEALTH CARE SUPPLIES & SERVICES (2.9%)
18,000 Aetna Life & Casualty Co. 1,359
22,600 Columbia/HCA Healthcare Corp. 1,305
21,900 OccuSystems Inc. 498
10,700 United Healthcare Corp. 658
29,000 US Healthcare, Inc. 1,330
---------
5,150
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
PERSONAL CARE PRODUCTS (1.1%)
12,300 Procter & Gamble Co. $ 1,042
19,600 Tambrands Inc. 916
---------
1,958
---------
TOBACCO (15.0%)
210,000 Philip Morris Cos., Inc. 18,427
234,500 RJR Nabisco Holdings Corp. 7,094
27,000 UST, Inc. 861
---------
26,382
---------
TOTAL CONSUMER-STAPLES 48,437
---------
DIVERSIFIED (4.2%)
33,800 AlliedSignal, Inc. 1,998
70,900 Loews Corp. 5,362
---------
TOTAL DIVERSIFIED 7,360
---------
FINANCE (23.1%)
BANKING (12.3%)
21,700 Chase Manhattan Corp. 1,595
9,600 Citicorp 768
18,800 First Interstate Bancorp 3,262
21,100 Morgan (J.P.) & Co., Inc. 1,751
54,400 Wells Fargo & Co. 14,198
---------
21,574
---------
FINANCIAL SERVICES (6.4%)
62,500 American Express Co. 3,086
22,100 CIGNA Corp. 2,525
11,700 Dean Witter Discover & Co. 670
16,000 Federal Home Loan Mortgage Corp. 1,364
27,600 Franklin Resources, Inc. 1,573
18,800 Household International, Inc. 1,264
11,100 Student Loan Marketing Association 849
---------
11,331
---------
INSURANCE (4.4%)
36,300 Ace Ltd. 1,620
30,200 CMAC Investment Corp 1,706
15,400 Exel Ltd. 1,063
27,700 Partnerre Ltd. 824
51,300 PMI Group (The), Inc. 2,238
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
9,000 RenaissanceRe Holdings $ 248
---------
7,699
---------
TOTAL FINANCE 40,604
---------
MATERIALS (2.4%)
CHEMICALS (2.4%)
22,400 Hercules, Inc. 1,389
9,600 Monsanto Co. 1,474
16,300 Olin Corp. 1,418
---------
TOTAL MATERIALS 4,281
---------
SERVICES (1.8%)
PROFESSIONAL SERVICES (1.8%)
16,000 Bell & Howell Holding Co. 524
40,650 CUC International, Inc. 1,189
21,500 First Data Corp. 1,516
---------
TOTAL SERVICES 3,229
---------
TECHNOLOGY (6.2%)
COMPUTERS (0.5%)
19,500 Cisco Systems, Inc. 904
---------
ELECTRONICS (1.0%)
49,200 American Standard Co. 1,439
10,700 Watkins-Johnson Co. 383
---------
1,822
---------
OFFICE EQUIPMENT (1.6%)
10,100 Hewlett Packard Co. 949
10,600 International Business Machines
Corp. 1,178
14,900 Reynolds & Reynolds, Class A 611
---------
2,738
---------
SOFTWARE SERVICES (1.8%)
17,300 Microsoft Corp. 1,784
14,600 Oracle System Corp. 688
13,100 Seagate Technology, Inc. 717
---------
3,189
---------
TELECOMMUNICATIONS (1.3%)
27,600 AirTouch Communications, Inc. 859
17,600 American Telephone & Telegraph
Corp. 1,078
14,100 Orange-plc ADR 241
---------
2,178
---------
TOTAL TECHNOLOGY 10,831
---------
TOTAL COMMON STOCKS (Cost $142,297) 159,315
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.3%)
REPURCHASE AGREEMENT (8.3%)
$ 14,539 Goldman Sachs, 5.35%, dated
3/29/96, due 4/01/96, to be
repurchased at $14,545,
collateralized by $11,585 United
States Treasury Bonds, 10.75%,
due 2/15/03, valued at $14,840
(Cost $14,539) $ 14,539
---------
TOTAL INVESTMENTS (98.7%) (Cost $156,836) 173,854
---------
OTHER ASSETS AND LIABILITIES (1.3%)
Other Assets 5,572
Liabilities (3,287)
---------
2,285
---------
NET ASSETS (100%) $176,139
---------
---------
CLASS SHARES:
Net Assets $171,961
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 11,143
Net Asset Value, Offering and Redemption
Price Per Share $15.43
---------
---------
CLASS B SHARES:
Net Assets $4,178
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 271
Net Asset Value, Offering and Redemption Price
Per Share $15.43
---------
---------
</TABLE>
- ----------------------------------
ADR -- American Depositary Receipt
7
