<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.
HIGH YIELD PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- --------
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of fixed income securities that offer a higher yield than
that offered by debt securities in the three highest rating categories.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 3.15% for the Class A shares and 2.66% for the Class B shares, as
compared to a total return of 2.16% for the CS First Boston High Yield Index.
The average annual total return for the twelve months ended March 31, 1996 and
for the period from inception on September 28, 1992 through March 31, 1996 was
19.89% and 12.34%, respectively, for the Class A shares, as compared to 14.53%
and 10.84%, respectively, for the Index. As of March 31, 1996, the Portfolio had
an SEC 30-day yield of 9.87% for the Class A shares and 9.67% for the Class B
shares.
The high yield market performed well in the face of a sharp rise in Treasury
yields during the first quarter of 1996. Once again, this performance
demonstrates the high yield market's resiliency and that it does not correlate
well with general interest rate movements. The latter points out the
diversification benefits and value-added that high yield bonds can provide an
investor.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
----- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................. 3.15% 19.89% 12.34%
PORTFOLIO--CLASS B(3).............. 2.66 N/A N/A
INDEX.............................. 2.16 14.53 10.84
</TABLE>
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.
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
While the quarter was good for high yield, some pressure became evident by
mid-March. Mutual fund inflows began to slow a bit yet new issuance continued at
a strong pace. Spreads had narrowed considerably through February as ten-year
Treasury bonds had already risen fifty basis points since the beginning of the
year, on their way to a seventy basis point widening by the end of the quarter.
This rate rise finally caused a negative return for the month of March but still
less than the loss incurred by the Treasury market. At the end of March, the
spread of the First Boston High Yield index was 418 basis points over Treasuries
versus a spread of 484 basis points at the beginning of the year.
Lower rated credits, traditionally less interest rate sensitive than better
quality bonds, did best in this environment. The spread between BB and B rated
bonds narrowed at least twenty basis points. Even lower rated bonds tightened to
a greater extent. Gaming continued to be a strong sector.
Earnings momentum in the casinos is good and enabled Donald Trump to consolidate
and refinance two of his Atlantic City properties.
The restaurant sector also performed well. A few distressed issues rallied
sharply and others held their price while accruing interest at very high levels.
Underperformers tended to be longer duration, better quality bonds. Fitting into
this category were airlines, utilities and media bonds.
Looking forward, we see value in some of the cyclical issues in the marketplace.
Issuers in the steel, paper and auto sectors represent intriguing opportunities.
While the earnings outlook in these sectors is either poor or at best uncertain,
bond prices reflect much if not more than the anticipated problems. We also
continue to like the cable and communications sectors and will maintain an
exposure to emerging markets.
Robert Angevine
PORTFOLIO MANAGER
April 1996
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------- ---------
<C> <S> <C>
CORPORATE BONDS AND NOTES (85.1%)
BANKING (1.2%)
$ 775 United Savings Texas, 8.55%, 5/15/98 $ 776
---------
BROADCAST-RADIO & TELEVISION (16.4%)
1,000 Ackerley Communications, Inc., Series
A, 10.75%, 10/01/03 1,060
1,000 Cablevision Systems Corp., 10.75%,
4/01/04 1,044
1,250 Continental Cablevision, Inc., 9.50%,
8/01/13 1,394
400 Heritage Media, 11.00%, 10/01/02 428
1,590 Lenfest Communications, 8.375%,
11/01/05 1,534
2,400 Marcus Cable Co., (Step Bond), 0.00%,
12/15/05 1,524
950 MFS Communications Co., Inc. (Step
Bond), 0.00%, 1/15/06 594
1,350 New World Communications Group Holding
Corp., Zero Coupon, Series B, 6/15/99 977
900 Rogers Cablesystems Ltd., 11.00%,
12/01/15 967
1,500 Viacom Inc., 8.00%, 7/07/06 1,421
---------
10,943
---------
BUILDING MATERIALS & COMPONENTS (0.9%)
550 APS, Inc., 11.875%, 1/15/06 565
---------
CHEMICALS (2.9%)
750 Harris Chemical, 10.25%, 7/15/01 739
1,000 Plastic Specialties & Technologies,
Inc., 11.25%, 12/01/03 930
250 Sherritt, Inc., 10.50%, 3/31/14 275
---------
1,944
---------
CONSTRUCTION (1.0%)
1,160 Echostar Satellite Broadcast, (Step
Bond), 0.00%, 3/15/04 699
---------
ENTERTAINMENT & LEISURE (4.2%)
886 Kloster Cruise Ltd., 13.00%, 5/01/03 678
2,000 Six Flags Theme Park, Inc., (Step
Bond), 12.25%, 6/15/05 1,640
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------- ---------
<C> <S> <C>
$ 500 Stena AB, 10.50%, 12/15/05 $ 505
---------
2,823
---------
ENVIRONMENTAL CONTROLS (1.9%)
1,200 Norcal Waste Systems, 12.50%, 11/15/05 1,239
---------
FINANCIAL SERVICES (6.5%)
925 APP International Finance, 11.75%,
10/01/05 911
550 GPA Investments, 6.40%, 11/19/98 510
940 Reliance Group Holdings Inc., 9.00%,
11/15/00 954
1,000 Terra Nova Holdings, 10.75%, 7/01/05 1,110
1,189 Tiphook Finance Corp., 8.00%, 3/15/00 877
---------
4,362
---------
FOOD (3.1%)
1,150 Pilgrim's Pride Corp., 10.875%, 8/01/03 1,090
975 RJR Nabisco, Inc., 8.75%, 8/15/05 951
---------
2,041
---------
FOOD SERVICE & LODGING (1.5%)
435 La Quinta Inns, Inc., 9.25%, 5/15/03 463
500 United Meridian Corp., 10.375%,
10/15/05 525
---------
988
---------
GAMING & LODGING (1.5%)
500 Casino America, 11.50%, 11/15/01 500
522 Louisiana Casino Cruises, 11.50%,
12/01/98 502
---------
1,002
---------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
500 Tenet Healthcare Corp., 10.125%,
3/01/05 538
---------
MACHINERY (1.2%)
745 SD Warren Co., 12.00%, 12/15/04 788
---------
MATERIALS (3.2%)
500 IMC Fertilizer, 9.25%, 10/01/00 530
1,500 IMC Fertilizer, 9.45%, 12/15/11 1,641
---------
2,171
---------
METALS (2.8%)
750 Algoma Steel, Inc., (Yankee Bond),
12.375%, 7/15/05 738
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------- ---------
<C> <S> <C>
METALS (CONTINUED)
$ 525 Jet Equipment Trust, Series 95-D,
11.44%, 11/01/14 $ 577
650 Sheffield Steel Corp., 12.00%, 11/01/01 580
---------
1,895
---------
MISCELLANEOUS MATERIALS & COMMODITIES (0.6%)
420 Beverly Enterprises, Inc., 9.00%,
2/15/06 404
---------
MULTI-INDUSTRY (4.1%)
695 AMF Group, Inc., (Step Bond), 0.00%,
3/15/06 381
250 Howmet Corp., 10.00%, 12/01/03 263
350 Riverwood International, 10.25%,
4/01/06 351
565 TLC Beatrice International Holdings,
11.50%, 10/01/05 573
1,195 Unisys Corp., 12.00%, 4/15/03 1,189
---------
2,757
---------
PACKAGING & CONTAINER (4.6%)
500 Owens-Illinois, Inc., 10.50%, 6/15/02 522
1,500 Owens-Illinois, Inc., 9.95%, 10/15/04 1,553
1,000 Stone Container Corp., 10.75%, 10/01/02 1,000
---------
3,075
---------
PUBLISHING (1.5%)
690 Crown Paper Co., 11.00%, 9/01/05 638
500 Marvel Parent Holdings, Zero Coupon,
4/15/98 373
---------
1,011
---------
REAL ESTATE (0.7%)
500 HMC Acquisition Properties, 9.00%,
12/15/07 477
---------
RETAIL -- GENERAL (3.9%)
800 Host Marriot Travel Plaza, Series B,
9.50%, 5/15/05 776
840 Revlon Worldwide, Series B, Zero
Coupon, 3/15/98 660
1,500 Southland Corp., 5.00%, 12/15/03 1,208
---------
2,644
---------
TELECOMMUNICATIONS (9.4%)
3,000 Dial Call Communications, (Step Bond),
0.00%, 4/15/04 1,890
2,250 Nextel Communications, (Step Bond),
0.00%, 8/15/04 1,316
400 Paging Network, 10.125%, 8/01/07 422
500 Rogers Communications, Inc., 10.875%,
4/15/04 520
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------- ---------
<C> <S> <C>
$ 1,500 Telefonica de Argentina, (Yankee Bond),
11.875%, 11/01/04 $ 1,568
940 Telewest PLC, (Step Bond), 0.00%,
10/01/07 569
---------
6,285
---------
TEXTILES & APPAREL (3.1%)
1,000 Polysindo Eka Perkasa, (Yankee Bond),
13.00%, 6/15/01 1,055
1,000 Westpoint Stevens, Inc., 9.375%,
12/15/05 995
---------
2,050
---------
TRANSPORTATION (2.1%)
204 America West Airlines, 6.00%, 3/31/97 191
1,500 Venture Holdings, 9.75%, 4/01/04 1,200
---------
1,391
---------
UTILITIES (6.0%)
1,478 Beaver Valley Funding Corp., (Lease
Obligation Bond), 9.00%, 6/01/17 1,245
1,250 California Energy Co., Inc., 9.875%,
6/30/03 1,281
1,400 First PV Funding Corp., (Lease
Obligation Bond), Series 1986B,
10.15%, 1/15/16 1,460
---------
3,986
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $56,005) 56,854
---------
ASSET BACKED SECURITIES (1.7%)
AEROSPACE & DEFENSE (0.5%)
365 Airplanes Pass Through Trust, Series 1,
Class D, 10.875%, 3/15/19 372
---------
BANKING (0.4%)
349 PNC Mortgage Securities Corp., Series
1995-2, Class B4, REMIC, 7.50%,
9/25/25 273
---------
FINANCIAL SERVICES (0.8%)
311 GE Capital Mortgage Services Inc.,
Series 1995-12, Class B3, REMIC,
7.91%, 8/25/25 244
350 Prudential Home Mortgage Securities,
Series 1996-4, Class B3, REMIC, 6.50%,
4/25/26 262
---------
506
---------
TOTAL ASSET BACKED SECURITIES (Cost $1,172) 1,151
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------- ---------
<C> <S> <C>
FOREIGN GOVERNMENT BONDS (5.3%)
BONDS (5.3%)
$ 3,710 Federative Republic of Brazil, Par
Bond, Series Z-L, (Step Bond), 4.25%,
4/15/24 $ 1,887
1,500 Republic of Argentina, Series L,
"Euro" (Floating Rate), 6.313%,
3/31/05 1,082
1,145 Republic of Argentina, Series L, "Euro"
(Floating Rate), 5.25%, 3/31/23 595
---------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $3,323) 3,564
---------
<CAPTION>
SHARES
- -------------
<C> <S> <C>
COMMON STOCKS (0.8%)
BUILDING MATERIALS & COMPONENTS (0.6%)
30,331 Walter Industries, Inc. 417
---------
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 13
---------
TOTAL COMMON STOCKS (Cost $600) 528
---------
PREFERRED STOCKS (0.0%)
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A (Cost
$56) --
---------
<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 (0.8%)
AEROSPACE & DEFENSE (0.0%)
500 Sabreliner Corp., expiring 4/15/03 2
---------
ELECTRICAL EQUIPMENT (0.6%)
28,000 Protection One Alarm, Inc., expiring
4/03/03 402
---------
GAMING & LODGING (0.0%)
2,700 Casino Magic Corp., expiring 10/14/96 --
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- ------------- ---------
<C> <S> <C>
1,725 Louisiana Casino Cruises, expiring
12/01/98 $ 17
---------
17
---------
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 25
---------
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 33
---------
TELECOMMUNICATIONS (0.0%)
3,000 Dial Page, Inc., expiring 4/25/99 --
---------
TOTAL WARRANTS (Cost $228) 494
---------
<CAPTION>
NO. OF
UNITS
- -------------
<C> <S> <C>
UNITS (2.1%)
BROADCAST-RADIO & TELEVISION (0.1%)
1,250 American Telecasting, (Step Bond),
14.50%, 8/15/05 42
---------
GAMING & LODGING (0.7%)
2,207,906 Maritime Group, Series A, 13.50%,
2/15/97 487
---------
METALS (1.3%)
1,000 Sheffield Steel Corp. (1st Mortgage
bond + 5 Common Stock Warrants),
12.00%, 11/01/01 895
---------
TOTAL UNITS (Cost $3,453) 1,424
---------
<CAPTION>
FACE
AMOUNT
(000)
- -------------
<C> <S> <C>
SHORT-TERM INVESTMENT (0.9%)
REPURCHASE AGREEMENT (0.9%)
$ 624 The Chase Manhattan Bank, N.A., 5.15%,
dated 3/29/96, due 4/01/96, to be
repurchased at $624, collateralized by
$624 United States Treasury Bonds,
11.25%, due 02/15/15, valued at $639
(Cost $624) 624
---------
TOTAL INVESTMENTS (96.7%) (Cost $65,594) 64,641
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
OTHER ASSETS AND LIABILITIES (3.3%)
Other Assets $ 2,663
Liabilities (472)
---------
2,191
---------
NET ASSETS (100%) $ 66,832
---------
---------
CLASS A SHARES:
Net Assets $ 65,437
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 6,175
Net Asset Value, Offering and Redemption Price
Per Share $ 10.60
---------
---------
CLASS B SHARES:
Net Assets $ 1,395
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 132
Net Asset Value, Offering and Redemption Price
Per Share $ 10.58
---------
---------
</TABLE>
- ----------------------------------
REMIC -- Real Estate Mortgage Investment Conduit
Step bond-coupon rate increases in increments to maturity. Rate disclosed is as
of March 31, 1996. Maturity date disclosed is the ultimate maturity date.
6
