<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.
EUROPEAN EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the European Equity Portfolio is to seek long-term
capital appreciation through investment in equity securities of European
issuers. Equity securities for this purpose include stocks and stock equivalents
such as securities convertible into common and preferred 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.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE
INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 5.24% 15.80% 19.02%
PORTFOLIO--CLASS B(3)............. 4.20 N/A N/A
INDEX............................. 3.71 18.80 16.14
</TABLE>
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.
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 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.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 5.24% for the Class A shares and 4.20% for the Class B shares, as
compared to a total return of 3.71% for the Morgan Stanley Capital International
(MSCI) Europe Index. The average annual total return for the twelve months ended
March 31, 1996 and for the period from inception on April 2, 1993 through March
31, 1996 was 15.80% and 19.02%, respectively, for the Class A shares, as
compared to 18.80% and 16.14% for the Index.
The first quarter of 1996 has been a better time for the value investor in
Europe following a disappointing year in 1995. We have seen a strong rally from
cyclical stocks, particularly chemicals. There has also been better returns from
small companies following an extended period of underperformance. We added to
our exposure to small caps in 1995 and this has continued this year. Export
sectors have largely done well helped by European currencies weakness especially
against the U.S. dollar. Growth in most domestic markets continues to
disappoint, as reflected in the poor performance of some sectors including
retail. Following a strong year in 1995 the financial sectors have been hurt by
the general economic environment and particularly the poor returns from bond
markets. The top performing markets over this period have been France and
Switzerland, the latter continuing its very strong run from last year. The
pharmaceutical stocks have continued to show good returns helped by the recent
merger between Ciba-Geigy and Sandoz. The pharmaceutical sector now represents
about 50% of the total Swiss market capitalization. The poorest performing
market was Italy, the only country to show a negative return. The U.K. was up
only 1.8% in sterling terms, and this remains a market where the Portfolio is
underweight.
The Portfolio has generally benefited from these trends. Specifically, however,
we have gained from our underweight position in the U.K. as well as having good
stock picking in this market. Our stock picking work has also led to good
returns from the Swiss, Italian and Finnish markets.
During the first three months of the year we have added the following new stocks
to the Portfolio:
2
<PAGE>
Boehler-Uddeholm (BUAG) is the result of an Austrian-Swedish merger in 1991 of
two steel companies; in 1995 the company was partially privatized. BUAG makes
speciality steel in Austria and Sweden which it sells worldwide. It operates in
niche markets and benefits from a global sales and servicing network. The high
quality management is currently restructuring the business which is expected to
generate substantial free cash flow in coming years.
Dyckerhoff is the leader in the German cement market with an 18% share. Its
plants are primarily located in Northwest Germany where the market is
disciplined due to the concentration of ownership. It also has plants in East
Germany and Luxembourg. A large part of Dyckerhoff's turnover is 'finishing
products' for the construction industry, an area in which they dominate specific
niches. The company has strong cash flow generating characteristics.
Gerresheimer Glas has changed its product profile in recent years from being a
general packaging producer to a pure glass packaging producer with emphasis on
speciality glass and tubular glass segments. The company is pursuing a strategy
of cutting costs in the high volume glass container business and investing in
the value added businesses. Gearing levels are high, however, strong free cash
flow should be able to pay down debt.
Uralita is Spain and Portugal's market leader in building materials as well as
Spain's leader in chlorine, caustic soda and PVC. The company is gradually
selling off the chemical business and using the proceeds to pay down debt and
consolidate its position as Iberia's leading building materials company. In
recent months the share price has been weak offering the long term investor
opportunities to buy the company at historically low levels.
Hornbach is a German retail chain of DIY, a garden and building material holding
company with a No. 4 market position domestically and a No. 9 in Europe. The
stock is oversold partly because there is negative sentiment towards the German
construction sector and partly due to Praktiker, Hornbach's competitor,
reporting disappointing results. We believe that Hornbach can face the
competitive environment and improve earnings despite pressure on margins.
Hornbach has a good store format and product range and generally has the better
store site than their competitors. The company has a very strong financial
position with net cash of DM 240 million.
Skandia is an international insurance and financial services group with Nordic
countries as its home market. Skandia is well placed to increase the
profitability of its Nordic operations through improved integration and a wider
assortment of services. Internationally, Skandia is well positioned to ride
growth in the savings market through its fast growing, unit-linked operations.
Repsol is a fully integrated Spanish oil and gas company which, unlike many of
its peers, enjoys goods margins from its downstream refining business. An added
attraction is its 45% stake in Gas Natural, which will benefit from Spanish
energy policy which is likely to increase natural gas consumption by 15% per
annum.
Robert Sargent
PORTFOLIO MANAGER
April 1996
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (83.8%)
AUSTRIA (0.3%)
4,050 Boehler-Uddeholm AG $ 315
---------
BELGIUM (2.2%)
9,000 Arbed S.A. 1,009
13,000 Delhaize Freres et Cie, 'Le Lion'
S.A. 551
12,000 G.I.B. Holdings Ltd. 536
55 G.I.B. Holdings Ltd. VVPR (New) 3
---------
2,099
---------
DENMARK (1.3%)
27,300 Unidanmark A/S, Class A
(Registered) 1,236
---------
FINLAND (2.7%)
66,000 Amer-Yhtymae Oy, Class A 1,054
35,700 Huhtamaki Oy, Series 1 1,140
13,533 Merita, Ltd., Class A 31
10,500 Nokia AB Oy, Series A 362
---------
2,587
---------
FRANCE (11.4%)
23,500 Banque Nationale de Paris 920
1,860 Bongrain S.A. 990
8,400 Cie de Saint Gobain 1,091
10,000 Credit Lyonnaise CDI 421
15,000 Elf Aquitaine 1,017
8,000 Eridania Beghin-Say S.A. 1,359
3,180 Labinal S.A. 456
2,600 Lafarge Coppee S.A. 172
21,405 Legris Industries S.A. 1,100
8,100 Peugeot S.A. 1,236
45,452 Thomson CSF 1,142
14,000 Total S.A., Class B 945
---------
10,849
---------
GERMANY (8.9%)
6,000 BASF AG 1,617
5,000 Bayer AG 1,695
2,300 Gerresheimer Glas AG 432
2,400 Karstadt AG 902
2,500 Mannesmann AG 913
4,160 Varta AG 755
22,000 Veba AG 1,069
3,000 Volkswagen AG 1,048
---------
8,431
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
ITALY (5.8%)
518,000 Editoriale L'Expresso S.p.A. $ 1,222
520,000 Impregilo S.p.A. 444
890,000 Olivetti S.p.A. 457
247,500 Sogefi S.p.A. 568
540,000 Stet Di Risp (NCS) 1,074
205,500 Telecom Italia S.p.A. 326
410,000 Telecom Italia S.p.A. Di Risp
(NCS) 579
292,200 Unicem Di Risp (NCS) 840
---------
5,510
---------
NETHERLANDS (10.5%)
29,674 ABN Amro Holdings N.V. 1,476
13,000 Akzo Nobel N.V. 1,445
2,950 DSM N.V. 280
7,599 Hollandsche Beton Groep N.V. 1,274
18,184 Internationale Nederlanden Groep
N.V. 1,321
13,000 Koninklijke Bijenkorf Beheer N.V. 836
30,468 Koninklijke PTT Nederland N.V. 1,199
27,000 Koninklijke Van Ommeren N.V. 935
34,000 Philips Electronics N.V. 1,237
---------
10,003
---------
NORWAY (2.5%)
380,000 Den Norske Bank A/S 1,179
98,600 Saga Petroleum A/S, Class B 1,145
---------
2,324
---------
PORTUGAL (0.0%)
94 Portuguese Investment Fund 7
---------
SPAIN (9.5%)
360,579 Asturiana del Zinc S.A. 2,527
1,400 Banco de Santander S.A. 67
11,518 Bodegas y Bebidas S.A. 290
200,000 Grupo Duro Felguera S.A. 1,076
110,000 Iberdrola S.A. 1,015
22,800 Repsol S.A. 860
117,000 Sevillana de Electricidad S.A. 843
125,000 Telefonica Nacional de Espana S.A. 1,984
41,100 Uralita S.A. 391
---------
9,053
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
SWEDEN (4.0%)
10,000 Electrolux AB, Series B $ 488
70,000 Nordbanken AB 1,156
18,400 Skandia Forsakrings AB 406
59,000 S.K.F. AB, Class B 1,301
41,200 Sparbenken Sverige AB, Class A 462
---------
3,813
---------
SWITZERLAND (12.9%)
1,200 Ascom Holdings AG (Bearer) 1,341
520 Bobst AG (Bearer) 856
700 Ciba-Geigy AG (Bearer) 867
800 Ciba-Geigy AG (Registered) 1,001
2,600 Forbo Holding AG (Registered) 1,061
1,030 Hero Lenzburg AG (Bearer) 437
2,130 Magazine Globus (Participating
Certificates) 1,132
1,200 Nestle S.A. (Registered) 1,353
16,100 Oerlikon-Buehrle Holding AG
(Registered) 1,704
1,200 Schweizerische Industrie-
Gesellschaft Holdings
(Registered) 1,330
1,800 Sulzer AG (Participating
Certificates) 1,134
---------
12,216
---------
UNITED KINGDOM (11.8%)
140,000 Associated British Foods plc 859
20,000 Bass plc 228
70,000 BSM Group plc 196
48,600 Calor Group plc 194
350,000 Christian Salvesen plc 1,368
38,900 Courtaulds Textiles plc 232
188,491 John Mowlem & Co. plc 247
143,700 Kwik Save Group plc 1,031
24,895 McAlpine (Alfred) plc 63
109,075 Reckitt & Colman plc 1,109
298,566 Rolls-Royce plc 982
202,527 Royal Insurance Holdings plc 1,094
145,000 Tate & Lyle plc 1,079
87,000 Unilever plc 1,620
300,000 WPP Group plc 916
---------
11,218
---------
TOTAL COMMON STOCKS (Cost $73,416) 79,661
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
PREFERRED STOCKS (3.1%)
GERMANY (3.1%)
1,260 Dyckerhoff AG $ 295
7,800 Hornbach Holding AG 445
28,000 RWE AG 848
3,000 Spar Handels AG 589
3,200 Volkswagen AG 821
---------
TOTAL PREFERRED STOCKS (Cost $2,890) 2,998
---------
<CAPTION>
FACE
AMOUNT
--------
(000)
<C> <S> <C>
SHORT-TERM INVESTMENT (7.0%)
REPURCHASE AGREEMENT (7.0%)
$ 6,607 The Chase Manhattan Bank, N.A.,
5.15%, dated 3/29/96, due
4/01/96, to be repurchased at
$6,610, collateralized by $6,700
United States Treasury Notes,
6.00%, due 8/31/97, valued at
$6,742 (Cost $6,607) 6,607
---------
FOREIGN CURRENCY (6.6%)
GBP 1,109 British Pound 1,692
DEM 6,722 Deutsche Mark 4,552
FIM 142 Finnish Markka 31
---------
TOTAL FOREIGN CURRENCY (Cost $6,282) 6,275
---------
TOTAL INVESTMENTS (100.5%) (Cost $89,195) 95,541
---------
OTHER ASSETS AND LIABILITIES (-0.5%)
Other Assets 11,160
Liabilities (11,667)
---------
(507)
---------
NET ASSETS (100%) $ 95,034
---------
---------
CLASS A SHARES:
Net Assets $93,996
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 6,416
Net Asset Value, Offering and Redemption
Price Per Share $14.65
---------
---------
CLASS B SHARES:
Net Assets $1,038
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 71
Net Asset Value, Offering and Redemption
Price Per Share $14.64
---------
---------
</TABLE>
- ----------------------------------
CDI -- Certificate of Investment
NCS -- Non Convertible Shares
5
